Mattel Recall Highlights Quality Fade and Hidden Costs of Outsourcing

Just shortly after the New York Times held up Mattel as an example of quality control done right in China (free registration required), the company’s Fisher-Price division has announced a product recall of 1.5 million toys made in China because of high lead content in the paint. The toys include Sesame Street and Nickelodeon characters including the Elmo Tub Sub, Dora the Explorer Backpack and the Giggle Gabber, all made for tots. The toys were painted with paint which included high quantities of lead, and were made by a contract manufacturer.

On July 26, the New York Times published an article praising Mattel, saying it “may be the best role model of how to operate prudently in China.” The article praised the testing labs Mattel has set up in Shenzhen, and its ownership of most factories in China. The article closely followed the release of Paul Midler’s article “Quality Fade”: China’s Great Business Challenge.

Following the Mattel recall, the New York Times article of July 26 has been removed from the New York Times website. It was replaced by a new article about the Mattel recall titled “Lead Paint Prompts Mattel to Recall 967,000 Toys” (free registration required).

The Mattel recall raises some questions:

  • Why weren’t the lead painted products caught in China, before they found their way out of China?
  • Does Mattel test each production run made by contract manufacturers before they are shipped from China?
  • Lead paint is banned in China; who made the decision to use lead paint and to find it?
  • Where did they get the lead paint, which is illegal in China, from?

These questions show that someone made a deliberate decision to make faulty goods which would be harmful to children if ingested.

According to Midler, poor quality products are just as likely, if not more likely, to hit established factories as newer factories. The management and ownership of established factories are more likely to think that they know all the tricks of the trade, and figure that they can game the system and get away with their crimes.

It also raises questions about the whole contract manufacturing system and outsourcing, which grew out of a desire to lower costs and to pass off the responsibility for product liability to manufacturers outside of the United States which are not owned by their importers. While the system has kept product prices in the US stable at a time when the US dollar has fallen against other major currencies, recent product recalls have revealed the hidden costs.

In the US, high product liability judgments against manufacturers and the drive to lower costs have spurred many name brands to get out of the manufacturing of their own products, and shifting most of their manufacturing to China, which has a large and relatively cheap labor force. The business sector and Republican party in the US have been behind an effort to limit litigation and damages payments to consumers; this is known as the “tort reform” movement.

Will the pendulum swing back, and will importers switch to owning their own factories in China and elsewhere so that they have a better grip on quality?

Time will tell.

8 Responses to “Mattel Recall Highlights Quality Fade and Hidden Costs of Outsourcing”

  1. Law Office of Todd L. Platek says:

    Paul, I find it hard to believe that a manufacturer in the US would leave manufacturing because of potentially high product liability judgments. Such entities generally have product liability insurance, and can also find codefendants with whom to share/spread the liability. Even if such entities manufacture offshore, they still bear legal liability within the chain of distribution, and cannot escape such burden. Comparative cost factors of greater and more frequent importance to operations are apt to be the reason for moving offshore. I would venture to say that if litigation bore such high correspondence to our current economic situation, then, by analogy, our medical profession would have moved offshore also. That hasn’t happened to date.

  2. admin says:

    Todd–There are other costs involved in litigation, many of which cannot be quantified in monetary terms and damages. Many CEOs fear the PR repercussions of bad publicity. Up until very recently, there were no damages in setting up in China and other countries with comparatively cheap labor.
    More than anything else, there is constant pressure from company boards, especially public companies, to relentlessly lower costs by outsourcing manufacturing, and cutting back on US labor. If you are politically conservative, most would say that US labor is over-regulated, adding to costs for management. If you are politically liberal, you would argue that these regulations are there to protect the rights of labor, and would resist any efforts to rollback these regulations.
    US importers first outsourced manufacturing to China because of lower costs, but more and more, they are in China because of the market’s potential. Any way you look at it, the US consumer market is less important to global companies, and this downward trend will continue into the future. The Chinese consumer market is increasingly more important, and soon, the Indian consumer market will also become important. (For certain sectors, such as mobile phones, it is already the most important single market.) Long story short: the US consumer market is on a downward trend, and the US standard of living will have to adjust downward to adjust to this reality. The Bush administration, and all the US candidates for the presidency in 2008, are aware of this, which is why they support the devaluation of the US dollar. It’s just that most Americans don’t understand that a dollar devaluation inevitably translates into a fall of the US standard of living if it continues on a long-term basis.

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