Mattel Inc. ($22.72) is recalling 1.5 million Chinese-made toys, which resulted in a charge of about $28.8 million for the second-quarter ended June 30, 2007. A contract manufacturer in China, using a non-approved paint pigment containing lead, made the toys for Mattel's Fisher-Price unit, which included popular characters like Elmo and Big Bird.
In a regulatory filing, the Company said: “[it] believes that it has some of the most rigorous quality and safety testing procedures in the toy industry.”
Jim Walter, Mattel’s senior vice president of Worldwide Quality Assurance, said: “We require our manufacturing partners to use paint from approved and certified suppliers and have procedures in place to test and verify, but in this particular case our procedures were not followed.”
Mattel is also conducting a review of the procedures followed with respect to all its products manufactured by vendors at its 50 plants in China. If any similar problem is discovered, Mattel “will take prompt, responsible remedial actions.”
For the six months ended June 30,2007, Mattel Girls & Boys Brands (including Barbie fashion dolls and accessories, Polly Pocket!, Hot Wheels, and, Matchbox); Fisher-Price Brands (including Sesame Street, Dora the Explorer, and Go-Diego-Go!); and, American Girl Brands (Just Like You, the historical collection and Bitty Baby) contributed $472.2 million (43.6%), 491.7 million (45.4%), and $118.7 million (10.9%), respectively, of total domestic sales.
Given that most of the foregoing toys are made utilizing third-party manufacturers throughout Asia, primarily in China, Indonesia, Malaysia and Thailand, the 10Q Detective questions just how fearful suppliers are to threats of ‘remedial action’ promulgated by Mattel.
In addition, gross profit is driven by squeezing every last penny in cost efficiency from its supply chain: as a percentage of net sales, gross margin improved 70 basis points to 44.2% in the second quarter of 2007, driven by favorable exchange rates and “made in china” savings, partially offset by the impact of the Product Recalls (which had the effect of decreasing gross profit as a percentage of net sales by 190 basis points).
In a November 2006 cover story, BusinessWeek commented on how American companies continually demanded lower prices from their Chinese suppliers. Ergo, U.S. price pressures created a powerful incentive to cheat, whether it be labor conditions or toy paint.
American importers counter that they have increased inspections of labor conditions and product safety and quality control inspections at the factories run by their Chinese suppliers. Unfortunately, many Chinese manufacturers have just gotten better at concealing abuses.
In terms of scale and scope of product quality—China's export of counterfeit drugs, tainted pet food ingredients, and toothpaste—cheating is far more pervasive at Chinese export manufacturers than Mattel will ever publicly admit. And, no amount of audits will catch third-party suppliers devoted—like Mattel—to the almighty dollar.
For example, a boss pays $10,000 for a ton of plastic materials and his employee goes and pays $8,000 for something else. The $2,000 is eaten up and you end up with a cheaper material that has toxic substances in it.
Mattel awarded CEO Robert A. Eckert, President Neil B. Friedman, and Thomas A. Debrowski, Exec. VP-Worldwide Operations, cash bonuses of $2.5 million, $1.2 million, and $639,000 for service performance(s) in fiscal 2006. Perchance aligning cash incentive compensation to quality assurance will serve as a needed incentive to manufacture non-toxic toys.
A lasting solution would be to bring manufacturing jobs back to the shores of the United States. Doing so, however, would mean passing on higher costs to the consumers buying the “Made in U.S.A.” Barbies and Big Birds. A worker earns around $132 a week for toiling 11 hours per day, six-days per week, in a Chinese toy factory.
Next time your kid is nibbling toxic lead paint from a “made in china” doll, remember, too, that because as a consumer you wanted a ‘bargain price,’ the health of your child is not just the responsibility of Mattel.
Editor David J. Phillips does not hold a financial interest in Mattel Inc. The 10Q Detective has a Full Disclosure policy.