INTEGRATIVE CASE 3

Mattel and the Toy Recalls (B)1

Hari Bapuji
University of Manitoba
Paul Beamish
Ivey School of Business, University of Western Ontario

Mattel recalls thousands of toys made in China due to quality issues.

“China is now issuing two types of toys: leaded and un-leaded.”

– Jay Leno, U.S. Talk Show Host

On August 14, 2007, the U.S. Consumer Product
Safety Commission (CPSC) in cooperation with Mattel
announced five different recalls of Mattel’s toys. See
Exhibit 1 for excerpts of the CPSC recall notices. On
the same day, Mattel issued a press release (see Exhibit 2)
and held a press conference. Bob Eckert, CEO of
Mattel, made a five minute briefing and answered the
questions posed by the reporters. Following are some
excerpts from Eckert’s address.2
As you know today Mattel announced in coop-
eration with the U.S. Consumer Product Safety
Commission voluntary recalls on two issues, a
product recalled for impermissible levels of lead
and an expansion of the November 2006 magnet
recall. We’ve already put measures in place to
address these issues, and I will talk about those
in a moment. Obviously we don’t wanna have
recalls, but in acting responsibly we won’t hesi-
tate to take action to correct issues to assure the
safety of our products and the safety of children.
I want to underscore that Mattel has extremely
rigorous testing and quality procedures in place
and we will continue to be vigilant in enforc-
ing quality and safety. First Mattel has volun-
tarily recalled one toy from the Cars die cast
vehicle line, manufactured between May 2007
and July 2007 containing impermissible levels
of lead. The recall of the ‘Sarge Toy’ results
from Mattel’s on going testing procedures. The
Cars toy was produced by Early Light Industrial
Company, one of Mattel’s contract manufacturing

Professors Hari Bapuji and Paul Beamish wrote this case solely to provide material for class discussion. The authors do not intend to illustrate
either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information
to protect confidentiality.
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1
This case was written on the basis of published sources. Consequently, the interpretations and perspectives presented are not necessarily
those of Mattel and other organizations represented in this case or any of their employees.
2
Transcript of Eckert’s address to reporters.
397
 398
facilities in China, which subcontracted the
painting of parts of the toy to another vendor
named Hong Li Da, also in China. While the
painting subcontractor was required to utilize
certified paint supplied directly from Early Light,
he had instead violated Mattel standards and
utilized paint from a non-authorized third party
supplier. To address this issue we have immedi-
ately implemented a strengthened three point
check system . . . . (details of the system)
Additionally Mattel is voluntarily recall-
ing certain toys with magnets manufactured
between January 2002 and January 31st, 2007
that may release small powerful magnets. The
recall expands upon Mattel’s voluntary recall
of 8 toys in November 2006 and is based on a
thorough internal review of all of our brands
that have toys with magnets and analyzed the
ways in which magnets may come loose. Since
January, 2007 all magnets used in our toys have
been locked into the toy with sturdy mate-
rial holding in the edges around the exposed
face of the magnet or completely covering the
magnet. We now believe it is prudent to recall
our older toys with magnets that do not meet
our latest retention system requirements. This
means we are recalling 72 toys that were dis-
tributed in prior years. The safety of children
is our main concern and we’re confident that
our new requirements work based on our con-
tinued testing and consumer experience. The
risk of magnets are swallowed is serious and we
believe that all our toys with magnets should
have the safety benefit of our new standards.
The news of the recall spread like wildfire all
over the world. The media coverage it received was
unprecedented, with TV channels running the story
through the day. Several analysts pointed to the pre-
vious recalls of Chinese-made goods and demanded
that the U.S. and Chinese governments must act. The
recall of Mattel toys was quickly followed by several
3
http://www.signonsandiego.com/news/nation/20070919-0400-usa-foodsafety-poll.html
4
Testimony of Robert Eckert, CEO, Mattel, to the Sub-committee on Commerce, Trade, and Consumer Protection of the Committee
on Energy and Commerce. September 19, 2007.
Openmirrors.com
integrative case 3 Mattel and the Toy Recalls (B)
other recalls of Chinese-made goods. About 40 dif-
ferent products, most made in China, were recalled
for excess lead. Mattel announced three more recalls
on September 4 in which an additional 773,900 toys
made in China were recalled for excess lead.
The spate of recalls severely eroded consumer con-
fidence. In a poll conducted by Reuters/Zogby,3 the
majority of people (close to 80 per cent) reported that
they were apprehensive about buying goods made in
China. Nearly two-thirds (63 per cent) of the respon-
dents reported that they were likely to participate in a
boycott of Chinese goods until the Chinese govern-
ment improved the regulations governing the safety of
the goods exported to the United States. Several other
opinion polls conducted by news agencies and market
research firms revealed similar sentiments.
The governments in the West quickly responded
to the crisis of confidence. At a summit of North
American political leaders in Canada, the heads of
governments of Canada, the United States, and
Mexico decided to crack down on unsafe goods, par-
ticularly those designed for children. Using the Mattel
recalls case, EU Consumer Commissioner Meglena
Kuneva, initiated an extensive review of the strengths
and weaknesses of the consumer product safety
mechanisms in Europe. The review had involved
extensive work with national surveillance authori-
ties, the Chinese authorities, the U.S. authorities, the
European toy industry, retailers, as well as consulta-
tions with the European Parliament. The government
of Brazil decided to halt the import of toys by Mattel
until the lead issue was resolved.
The U.S. Senate as well as the House of Commons
held hearings on the safety of imported products and
Bob Eckert was summoned to testify in both the
hearings. In those hearings, Eckert asserted:4 “a few
vendors, either deliberately or out of carelessness, cir-
cumvented our long-established safety standards and
procedures.”
The recalls catapulted consumer product safety
to the center of debate. Questions were raised about
whether the CPSC had enough resources to ensure
integrative case 3 Mattel and the Toy Recalls (B)
product safety. Consumer advocates and some politi-
cians pointed to the steady budget and staffing cuts the
CPSC faced; with 420 employees in 2007, the CPSC
was half its size of the 1980s. Many wondered if that
number was adequate to monitor 15,000 consumer
products in a market valued at US$614 billion. It
was pointed out that CPSC had only one employee
devoted to testing the safety of toys. Also, only 15
CPSC inspectors were available to check all the U.S.
ports where import shipments were received.5
Given the limited resources of the CPSC, it was
easy for unscrupulous companies to “play truant.”
And, the CPSC “lacked the teeth” to check it. For
example, the maximum penalty the CPSC could
impose on companies for violations was $1.8 mil-
lion. Imposing penalties was never easy because the
burden of proof rested with the CPSC. Additionally,
the CPSC could not even make public its concerns or
investigations about companies. It was required by law
to take prior approval of the companies whose names
were being divulged.6
The role of Mattel in ensuring product safety
was also under scrutiny. Some observers pointed
that Mattel had not informed the CPSC within the
stipulated time. In the past, Mattel was fined twice by
the CPSC for not informing the latter about product
hazards in a timely manner. If the alleged delay by
managers was indeed true, then it was possible that
shareholders might sue the directors and senior execu-
tives of the company for the delays and exposing the
company to risk.
In an interview with the Wall Street Journal, Eckert
felt that the CPSC requirement of immediately report-
ing the incidents was unreasonable and that Mattel had
the freedom to investigate the incidents before provid-
ing the information to the CPSC. When asked by the
media about the time Mattel took to recall, Eckert said
that the company asked the CPSC to initiate a fast-
track recall and they acted as fast as they could. Some
observers criticized Mattel for being unapologetic
about the recalls. Efforts by several reporters to reach
Mattel after August 14 were in vain.
5
Stephen Labaton. Bigger budget? No, responds safety agency. New York Times, Oct. 30, 2007.
6
Felcher M. 2001. It’s No Accident: How Corporations Sell Dangerous Baby Products. Common Courage Press: Monroe, ME
7
http://www.reuters.com/article/domesticNews/idUSN1040588720070910
399
Mattel’s customers were livid about the recalls and
wondered if the company had any control and moni-
toring systems at all because they were recalling toys
sold over the previous three years. Some wondered if
Mattel had any quality systems to test the manufac-
tured toys for safety. As the recalls were announced,
parents found it difficult to empty the toy baskets of
their children without “breaking their hearts.” Some
families filed class-action lawsuits, asking Mattel to pay
for tests to determine if children were exposed to lead.
More lawsuits were expected to follow.
The recalls made the licensors of brands to Mattel,
such as Disney and Sesame Workshop, very nervous.
They feared the erosion of their brand value because
of the lead paint issue. Disney announced independent
testing of the toys it made with Disney brand names.
One of the largest toy retailers, Toys ‘R’ Us also began
to conduct its own lead testing of toys on its shelves.7
The continued attention to the issue of recall and
particularly Mattel’s role began to affect the image of
all toys sold in the United States. The toys made by
every company were being scrutinized and consum-
ers were looking more carefully at the toys to find
out where they were made. Many consumers rushed
in search of toys made in the United States or other
developed countries, but they were hard to find. Not
to be discouraged, some enthusiasts set up websites
to inform shoppers about where to buy American
toys (www.howtobuyamerican.com) and others set
up businesses that sold toys not made in China, aptly
named NMC Toys (Not Made in China Toys www.
nmctoys.com). A few companies, such as Little Tykes,
which manufactured some of their toys in the United
States began to prominently display Made in USA
labels on their toys.
Some analysts argued that the suppliers in China
and elsewhere were compromising on safety to meet
the ever increasing pressure of the Western toy com-
panies to supply toys and other products at a cheaper
cost, even in the face of increasing raw material and
wage costs. This resulted in a double-squeeze for
the toy suppliers. Some consumer advocates asserted
 400
that companies like Mattel which brought the toys
into the United States had the primary responsibility
for ensuring the safety of products — that no matter
where in the global supply chain, the problem might
have occurred.
The suppliers in China faced pressures from large
toy companies, who in turn faced pressures from
large retailers, to cut down costs. Additionally, the
economic growth enjoyed by China resulted in rising
wages, and a general increase in the cost of doing
business. Within China, toy-making is clustered in
Guangdong province. The Nominal Wage Rate
Index (NWRI) in Guangdong increased to 545 in
2003 from a base of 100 in 1991. The increase was
much higher than the national average of 450 in
2003, and was fifth largest within China. The average
Consumer Price Index (CPI) in China rose from 100
in 1992 to 202 in 2004. The rise in CPI was less stark
for Guangdong province, reaching 189.8
The suppliers in China faced another problem: the
rising value of the yuan when compared to other Asian
currencies. For example, since 1997 the Chinese yuan
has appreciated nearly four fold against the Indonesian
rupiah, doubled in value against the Philippine peso,
and increased in value by at least 1.5 times against
the South Korean won, the Malaysian ringgit and the
Thai baht. As a result, these destinations were becom-
ing increasingly attractive for manufacturing and the
advantage of operating in China was eroding.9
As a result of the increased wages, cost of living
and the value of the yuan, the pattern of economic
activity in China underwent a rapid change. Industrial
activity had shifted to higher-value industries which
could absorb the rising costs. Exhibit 3 presents the
changes in industry concentration by region in China.
From being dominant in only one region in 1990,
electronic equipment was the most dominant indus-
trial activity in four regions in 2006.10 The shift in
industrial activity was best captured in the words of
the Mattel CEO:
8
Delios A, Beamish P, Zhao X. 2008. The evolution of Japanese investment in China: From toys to textiles to business process outsourcing.
Asia Pacific Business Review (forthcoming).
9
Ibid.
10
Ibid.
11
http://www.ckgsb.edu.cn:8080/article/600/3051.aspx
Openmirrors.com
integrative case 3 Mattel and the Toy Recalls (B)
Wage rates are going up in southern China, and
it’s harder for us to find employees in southern
China. You know, next to a toy factory 20 years
ago, there was empty land. Today next to every
toy factory, I think you can look to your left and
see a cell phone plant or some sort of electronics
plant. You might be able to look to your right
and see an auto manufacturer.
The effect of recalls began to take a toll on the
already besieged toy suppliers in China. On August
11, 2007, Cheung Shu-hung, who directly managed
the operations of Lee Der, committed suicide. He
was 48, single, and lived in a 250 square foot room
in one of Lee Der’s offices. He was considered to be
kind to the factory workers and was credited with
the better working conditions that prevailed in the
three factories of Lee Der. Shop floor salaries for a
10-hour, six-day week in Lee Der factories ranged
between US$120 and 180 a month, higher than
the local average of $130 a month for seven-day
week schedules that often ran 14-hours a day. Also,
employees received overtime pay when the shift
exceeded 10 hours. One of the last things Cheng
Shu-hung did was to sell his factories and pay wages
to his employees.11
Following the recalls, Chinese employees in Lee
Der and other factories became jobless. The condi-
tions of workers became an issue of discussion. Some
observers wondered what the effect of lead was on
the employees who painted lead on the toys, and thus
ingested it, every day of the week.
The recalls began to severely erode “Brand China”
and the Chinese government quickly set up a taskforce
under the leadership of Chinese Vice Premier Wu Yi
to ensure product safety. This taskforce intensified
the inspection of Chinese plants and suspended or
revoked the export licenses of hundreds of companies.
Some suppliers named in the recalls were jailed.
integrative case 3 Mattel and the Toy Recalls (B)
Faced with intense pressure from all quarters,
the Chinese authorities asserted that the majority of
products made in China were safe and that Western
companies were unduly blaming China. Several sup-
pliers who worked with big companies and were
forced to close factories or lay off workers asserted
that Mattel and other large companies were making
them scapegoats.
In what appeared to be a counter-offensive, China
rejected North American imports such as frozen pig
kidneys imported from the United States and frozen
pork spareribs from Canada. These products were
found to contain residues of ractopamine, forbidden
for use as veterinary medicine in China.12 Also, China
rejected shipments of U.S.-made orange pulp and
dried apricots containing high levels of bacteria and
preservatives.13
In an effort aimed at enhancing product safety, the
CPSC and its Chinese-counterpart AQSIQ met in
Washington on September 11-12, 2007. This meet-
ing culminated in agreement to ban the use of lead in
toys made in China. At the meeting, in his address,
the AQSIQ chief asserted that the West was blaming
China for the problems created by its toy companies.
In support of his assertion, he mentioned a recent
Canadian study which found that the majority of toy
recalls in the U.S. were due to design flaws.
According to a report in the New York Times on
September 12, 2007, two Canadian business school
researchers, after analyzing the toy recalls in the United
States over the previous 20 years, found that 76 per cent
12
http://www.cbc.ca/consumer/story/2007/09/17/china-trade.html
13
http://www.cbc.ca/consumer/story/2007/06/26/china-trade.html
401
of the recalls were due to design flaws such as sharp
edges, easily detachable small parts, and long strings. In
contrast, only 10 per cent were due to manufacturing
flaws such as using poor material, incorrect assembly,
and use of unacceptable material like lead paint. The
researchers argued that China should not be blamed
for most of the recalls, when a vast majority of the
problems were because of the designs made in the
corporate headquarters of toy companies.
Mattel had considerable interests in China. Five
of its factories were located in China and a very
large number of factories made toys for Mattel,
directly or indirectly. The Chinese news agencies
began to report that Chinese suppliers were being
made a scapegoat by Mattel, despite the fact that
90 per cent of the toys recalled on August 14 were
due to magnets detaching, which was a design prob-
lem for which Mattel was responsible. The loss of
reputation for China as a result of the recalls was
huge and Mattel seemed like the floodgate that had
opened it.
Case Discussion Questions
1. What went wrong with Mattel’s recall strategy?
2. Who are Mattel’s stakeholders? Who did Mattel
cater to in the recall?
3. What values did Mattel exhibit during the recall?
How did they affect Mattel?
4. What should Mattel do right now and in the future?