http://www.businessweek.com/stories/2007-08-14/what-went-wrong-at-mattelbusinessweek-business-news-stock-market-and-financial-advice

What Went Wrong at Mattel


The toymaker is recalling more dangerous toys made in China. Its troubles may be a warning sign for other multinationals

Elmo, Barbie, Big Bird, and Dora. They are some of the most familiar and best-loved children's characters. Now they're caught up in the global debate about the safety of Chinese-made products.

Mattel (MAT), the world's largest toymaker, announced on Aug. 14 an expanded product recall, involving vehicles based on the hit movie Cars that had lead paint on them, as well as Barbie, Polly Pocket, and Batman toys that had small, powerful magnets that could harm children if swallowed. The move follows the Aug. 2 announcement of a similar recall of Fisher-Price toys with lead paint.

Policing Subcontractors Is Hard

Chinese-made products have come under increasing fire in recent months, as recalls have been announced in everything from dog food to tires (see BusinessWeek.com, 7/23/07, "Broken China"). In July, the former head of China's food and drug administration was executed for taking bribes from an antibiotics manufacturer that lead to the deaths of consumers. On Aug. 13 news reports surfaced that the head of the company that made the lead-contaminated Fisher-Price toys had committed suicide at his plant over the weekend.

But Mattel is not just another company suffering because it uses low-cost Chinese suppliers. The company goes to great lengths to try to ensure that the companies it does business with operate properly and ethically, even subjecting them to outside audits. Mattel's recalls illustrate how difficult it is for a multinational company, despite its best efforts, to keep tabs on all sorts of suppliers around the globe. The company has had at least 15 product recalls in the past five years, from jewelry at its American Girl doll business that contained lead to a Batmobile with dangerously pointy tail wings.

For the latest recall, Mattel took out ads in national newspapers such as the The New York Times to reassure parents that it was doing everything it could to keep children safe. A new Web site, www.mattel.com/safety, features a video of Chief Executive Robert Eckert in what looks like a tiny Etch A Sketch screen explaining the recall. "As a parent of four children myself I know that nothing is more important than the safety of our children," he says in the video. "I want to ensure that every parent hears about these issues and returns these products to us. I can't change what's happened in the past, but I can change how we work in the future."

A Promise of Renewed Scrutiny

In a press teleconference on Aug. 14, Eckert and Jim Walter, Mattel's senior vice-president for worldwide quality assurance, announced a number of steps they were taking to prevent further recalls. Mattel said the lead paint on the latest products resulted from malfeasance in the company's supply chain. Mattel's main supplier of the Cars products, Early Light Industrial, had subcontracted out the painting to another company, Hong Li Da. While the subcontractor was supposed to use paint supplied by Early Light, it instead used paint that contained potentially poisonous lead. "Early Light, the vendor, is every much a victim as Mattel is," Eckert said. "The subcontractor chose to violate the rules."

Mattel does more than many companies to make sure its Chinese suppliers operate ethically, including treating their workers fairly. The company relies on the International Center for Corporate Accountability to monitor its plants and publishes the sometimes critical reports on its Web site for review. About 65% of Mattel's toys are made in China. The rest come from Thailand, Malaysia, Indonesia, and Mexico.

Whereas Mattel used to randomly test finished toys, Eckert say it will now test every single batch of toys produced. Safety checks will also get beefed up at the supplier and subcontractor level prior to the finishing of the product. The recalls today involved 436,000 toy cars contaminated with lead paint and 18.2 million magnetic toys manufactured between 2002 and January of this year.

Not all recalls are due to suppliers cutting corners. In the case of the recalled magnetic toys, technology advanced faster than toymakers' perceived risk. Mattel's quality guru Walter noted in an interview with BusinessWeek in late July that the company puts products through rigorous stress tests. The industry didn't anticipate, however, that if two or more of the high-powered magnets were ingested at once they could close off the intestines of small children. In newer versions of the toys the magnets will be locked into the products in such a way that a child cannot break them free.

Will Holiday Toy Sales Suffer?

On Aug. 2 Mattel announced that it had taken a charge of $29 million to cover the cost of product recalls this year. That amount is unlikely to have a major impact on the company. Mattel earned $592 million on sales of $5.6 billion last year. But BMO Capital Markets analyst Gerrick Johnson said Aug. 13 in a report that he expected the recalls to have an ongoing impact on the company's sales. He adjusted his estimates for the company's revenues down by $25 million this year and by $40 million in 2008.

It's still unclear to what extent parents will shun toys this holiday season as repeated recalls of products undermine consumer confidence. "They have to prove they can manufacture these products safely or parents will stay away," says Dr. Stevanne Auerbach, author of The Toy Chest, a guide to toys.

Other toymakers and retailers have already begun promoting the fact that their toys are made in the U.S. Kidbeam.com, of Asheville, N.C., says its plush dolls are not only made locally, but manufactured from organic cotton. Green Toys says its line of gardening kits and pretend cookware are made from bioplastics derived from corn (see BusinessWeek.com, 7/31/07, "Not Made in China").

Eckert told reporters he was not pushing for any kind of federal safety standards. "I don't rely on anyone else to ensure the safety of our products," he said. "This is our concern." He also said he's hoping his ads and Web site will ease parental concerns. "I think it's important to establish a dialog with parents," he said. "I want to make sure they hear from me."


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