Case Study 2 - After stumbling, Mattel cracks down in China.doc

7/29/2019 Case Study 2 - After stumbling, Mattel cracks down in China.doc

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August 29, 2007

After Stumbling, Mattel Cracks Down in

China

By LOUISE STORY

The alarm bell went off forMattel just as it was preparing to announce that it wouldrecall 1.5 million Chinese-made toys tainted with lead paint.

Surrounded by boxes of Barbie dolls, Hot Wheels cars and other sample toys, Thomas A.

Debrowski, Mattels executive vice president for worldwide operations, was leading atense early morning trans-Pacific telephone conference with his team in Hong Kong,where it was 9 p.m. At the time, recalled Mr. Debrowski, Mattel thought it was dealing

with at most a single failure, from a single vendor who made a big mistake.

But in the middle of the meeting on July 30, Mattel learned otherwise.

Ive got bad news, interrupted David Lewis, senior vice president for Asian operations,who had just taken a call from the companys safety lab in Shenzhen, China, where toys

made by outside companies are tested. Weve had another failure. It was one of the toys

in the Pixar cars.

That was the moment that threw Mattel into turmoil, forcing the company longconsidered one of the more successful Western manufacturers in China to recognize

that it had more of a systemic problem than simply an isolated case of one bad paint

supplier.

Now Mattel, which appears to have stumbled in part because it had becomeoverconfident about its ability to operate in China without major problems, is in crisis

mode. Toys for the coming holiday shopping season are already shipping across the

Pacific, and Mattel wants to catch any other problems that may have slipped through before those toys land on store shelves and cause even greater damage to its reputation.

A big problem was that some of Mattels trusted vendors had turned to cheaper paint

suppliers outside the companys approved list. Mattel is now racing to increase its supply

and product testing, no longer giving local contractors several months at a time to do thetests themselves.

Mattel executives are openly saying that there may be more recalls, if the company finds

more problems in its investigation. And Mattel has quietly carted loads of toys and dolls
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to its own factories in Mexico to recheck the ones that have arrived from Chinese

contractors in recent weeks.

We have had recalls every year since Ive been here, Robert A. Eckert, Mattels chiefexecutive, said in an interview at corporate headquarters here. But the second recall was

different; it was going to receive a different level of scrutiny.

With its back-to-back recalls, Mattel the worlds largest toy maker and the home,

among others, of Fisher-Price toys, American Girls dolls, Matchbox cars and, of course,Barbie has been pitched into the center of a boiling debate over the safety of products

made in China.

The ever-growing pile of products recalled this year has sent consumers digging through

their pantries and toy chests, scouting for everything from Thomas & Friends toy trainsand childrens jewelry to toothpaste, dog food and, most recently, SpongeBob

SquarePants journals. Wal-Martrecently disclosed that one of the biggest concerns of its

shoppers is the safety of toys from China.

One mother was so infuriated by the recalls that she brought her children to Mattelheadquarters this month with a car full of Mattel toys demanding that the company sort

through them to tell her which ones were safe. (Mattel found that all of her toys were

fine.)

Mattel is very vulnerable in the short term, said Allen P. Adamson, managing directorat Landor Associates, a brand-management firm, because the spotlight is on them and

the China issue is such a hot issue.

Mattel has been manufacturing in Asia far longer than many companies (the first Barbiewas made there in 1959). That led to long-term relationships with certain Chinesecontractors, many spanning decades. Paradoxically, that appears to have contributed to

Mattels problems: the longer it outsourced to a factory supplier with good results, the

looser the leash became.

During Mr. Eckerts tenure, the company has scaled back the number of companies it

uses and the fraction of Mattel toys that they make, but it allowed its more reliable

suppliers to do their own regular toy testing with spot tests by Mattel only every three

months.

The two contractors that caused this months recalls were among the most trusted. LeeDer Industrial, the supplier involved in the first recall, had worked with Mattel for 15

years. The Early Light Industrial Company, the contractor that made the Sarge cars in the

second recall, has supplied toys for 20 years.

Mattel first got wind of its China problem in early July when a European retailer

discovered lead paint on a toy, leading to Mattels first recall of 1.5 million toys globally
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on Aug. 2. Mattel shut its production at Lee Der, which made the 83 different recalled

toys.

The recall on Aug. 14 was not as large, affecting 436,000 Pixar toy cars, but, combinedwith a separate recall of millions of toys with tiny magnets that had harmed some

children who swallowed them, the blow to Mattels public reputation was substantial.The Pixar toys were made by yet another contractor, Early Light, which had

subcontracted production of the cars roof and tires to a company called Hong Li Da.

In both cases, the Chinese companies broke Mattels rules on what paint they were

allowed to use. Mattel has certified only eight paint suppliers. Lee Der bought lead-

tainted paint from an uncertified company. Hong Li Da, the subcontractor, useduncertified paint when a tub provided by Early Light ran out.

I think its the fault of the vendor who didnt follow the procedures that weve been

living with for a long time, Mr. Debrowski said.

He readily acknowledges the rising costs that companies in China are facing.

In the last three or five years, youve seen labor prices more than double, raw materialprices double or triple, he said, and I think that theres a lot of pressure on guys that are

working at the margin to try to save money.

But isnt Mattel putting pressure on its vendors to save money?

No, absolutely not, he replied. We insist that they continue to use certified paint from

certified vendors, and we pay for that, and were perfectly willing to pay for that.

On the day of the second recall, Mattel announced a three-point plan that tightened its

control of production, cracked down on the unauthorized use of subcontractors and

provided for Mattel to test products itself, rather than rely on its contractors. The plan

also included testing every batch of paint.

We do realize the need for increased vigilance, increased surveillance, Jim Walter, who

reports to Mr. Debrowski on quality assurance, said on the day of the announcement.

Mattel makes its best-known toys, like Barbie dolls, in its own 12 factories. But even as it

has increased the share of toys it makes itself to about half, it still relies on roughly 30 to

40 vendors to make the other half. Mattel now realizes it was not watching thosecompanies closely enough, executives here said.

Mattel vetted the contractors, but it did not fully understand the extent to which some had

in turn subcontracted to other companies which in turn had subcontracted to evenmore. Mattel required its vendors to list subcontractors, so Mattel could visit them, but

Mattel is investigating whether that procedure has been followed. A number of


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companies whose factories Mattel had never visited may have had a hand in making the

toys that were shipped around the world.

Out of the public eye, Mattel is cleaning house. The company has fired foursubcontractors and is evaluating more. Mattel also moved to enforce a rule that

subcontractors cannot hire two and three layers of suppliers below them.

Mattel executives in Hong Kong are trying to figure out how many subcontractors

became part of its lineup. Mattels Hong Kong office is also investigating to find acommon thread among the lead recalls in China. Mattel has 200 full-time employees

devoted to supervising and training Chinese contractors but the Mattel employees are

not stationed permanently at those factories.

As part of its effort to rebuild its image, Mattel is emphasizing that it is less dependent onChinese contractors than most toy makers. It has run ads around the world featuring Mr.

Eckerts vow to do better.

There arent many companies that own their own factories, Mr. Eckert said in an

interview in his office, and there arent many companies that manufacture outside ofChina.

Mattel closed its last American factory, originally part of the Fisher-Price division, in

2002. The bulk of its products have long been made in Asia. In the 1980s, Mattel decided

to take more control of its core products, like Barbie and Hot Wheels cars, and built andpurchased several factories. About 65 percent of Mattel products are made in China now.

Or, as a Mattel executive rephrased it, more than a third of Mattel toys are made outside

of China. Many Barbie dolls, for example, are produced in Indonesia.

Mattel executives showed off a factory in Tijuana, Mexico, escorting a reporter todemonstrate a safety lab with drop machines, temperature checks, not to mention tests for

lead in paint. Fisher-Prices Little People houses as well as Barbie playhouses are made

there, largely because shipping costs from Asia for larger products add too much to thecost.

Mattel plans to buy large numbers of a portable lead detector that can be used in all its

factories as well as those of its contractors. In the last few weeks, the safety lab in

Tijuana has been used to double-check the work of Mattels Chinese suppliers.

Its to make absolutely sure this issue is behind us, Mr. Eckert said in his office,surrounded by portraits of Barbie by artists likeAndy Warholand Peter Max.

Mr. Eckert has improved the companys financial performance, but, looking back, he is

happy that he resisted calls from analysts early in his tenure to sell off Mattels 12factories and outsource all production.
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When he lectures at business schools, Mr. Eckert often cites Johnson & Johnsons 1982

recall of Tylenol as an example of how to do things right and recover from an initial

disaster.

It is a great example of building trust, he said. It became kind of a personal mission of

the C.E.O. at the time, saying, Here is the problem, here is what were doing. And itwas clear that it really was not about the money.

Mattels costs of doing business, he acknowledges, will go up with the additional level oftesting. But the price, he says, will be worth it.

Mr. Eckert also has a new addition to the shelf behind his desk. Next to a portrait of his

16-year-old daughter is Sarge, the army-green toy jeep that Mattel recalled last week.

Mr. Debrowski, Mattels head of manufacturing, also keeps Sarge on his desk.

Just to remember, you know, he said.

Copyright 2007The New York Times Company

1. Discuss the issues of product safety and liability with materials presented in the

article (e.g. causes and effects, Mattels actions, scope of the problems)

2. Why did Mattel respond the way described in the text? What are the advantagesand disadvantages of such moves?

3. What are the lessons learned from the case to Mattel and other international giants

in general? And to the host countries?4. Should Vietnam adopt strict rules/international standards on product safety andliability to regulate domestic companies processing products for MNCs? Explain.
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Case Study 2 - After stumbling, Mattel cracks down in China.doc