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Letter to the editor

Recalls show toymakers must fix Chinese operations

The first Barbie doll to hit the market in 1959 cost $3 each. Today, the fashion doll won't set you back for much more.

That's the economics of the toy business. Consumers demand low prices. Toymakers want fat profits. So manufacturing ambled off to China, which for a long time has been willing and able to please both.

Now a huge toy recall by Mattel Inc. reveals an ugly side to that cost-cutting drive. The sacrifice of safety just to provide cheap toys is something for which everyone will have to pay.

The slogan "Made in China" has long stood for affordability. Thanks to the dramatically lower labor costs that China offered - estimated by some to be a fifth of what they are globally - toymakers could lower expenses by shifting production abroad.

That not only has boosted corporate earnings, but also helped them gain shelf-space in retail chains like Wal-Mart Stores Inc. that insisted on low prices for the products they bought. The merchants could then offer good deals to price-conscious shoppers without losing profits.

The result is an industry that hasn't seen its products' prices soar much. Many of today's toys, when adjusted for inflation, may be less expensive than those decades ago, even though such things as raw material costs - like paper and plastic - have skyrocketed, says independent toy industry consultant Chris Byrne.

"We can't have ever-decreasing prices without something eventually being squeezed," Byrne said.

That squeeze is what has been grabbing headlines lately., including another four companies announcing recalls Wednesday of toys made in China, As millions of China-made toys have been recalled, Americans have become aware - and scared - of the risks of manufacturing there.

This puts the toy industry in a tricky spot. With more than 80 percent of U.S. toys imported from China, toymakers here can't afford to abandon production. But if they want to keep customers, toy sellers must change their Chinese operations significantly.

Mattel Inc. is facing that reality. The world's largest toymaker, has seen its reputation as a leader in manufacturing safety unravel after two highly publicized recalls in just as many weeks.

Mattel has said it will take a $30-million charge to cover the cost of the recalls, but that doesn't include what it will spend to convince the public that its toys are safe.

While Mattel has become the poster-child of Chinese manufacturing gone wrong, its rivals should be scrambling to avoid being caught in a similar spot. That doesn't mean just keeping better tabs on the manufacturers with which they have direct contact, but looking at every vendor, the vendor's vendor and so on.

"The transparency at the back-end of these operations is hazy," said Eric Johnson, professor of operations management at Dartmouth's Tuck School of Business who has studied Chinese manufacturing. "Each layer becomes harder to manage and control."

It's pretty clear that doing business in China just got more expensive. It can't stay the wild west of manufacturing that it has become.

[Last modified August 23, 2007, 00:36:20]