INTEGRATIVE CASE 4
Not a Toy Problem: How Chinese Toymakers
Respond to Recalls1
Hao Chen
University of Texas at Dallas
Facing a sudden onslaught of product recalls, Chinese toymakers responded differently.
According to China Central Television, in 2008, 75%
of the toys in the world were made in China, 70% of
which were made in Guangdong Province. In total,
approximately 10,000 factories in China export toys.
Although Chinese toymakers dominate the world
market, they are still vulnerable because they do not
“call the shots.” Instead, they depend on their part-
ners, especially leading Western toy companies such as
Mattel, for survival. In fact, most Chinese toymakers
are original equipment manufacturers (OEM), which
do not have their own brands and mainly produce toys
or toy parts for their buyers such as Mattel.
In 2007, Chinese toymakers caught everyone’s
eyes with the large-scale toy recalls released by the
Consumer Product Safety Commission (CPSC), a
US government agency, in collaboration with Mattel.
According to the CPSC database, the first toy recall
in the United States was issued in 1974 by a US
manufacturer. It was not until 1988 that the first recall
announcement on toys made in China was issued.
As the number of Made-in-China toys has increased,
the number of recall announcements has grown over
the years (Exhibit 1). While toy recalls have been
made before, the scale and scope of such recalls during
2007 were unprecedented. Exhibit 2 shows the results
of online searches using keywords “toy recall in the
US + year” in Google (English) and “wan ju zhao hui
(“toy recall” in Chinese) + year” in Baidu (China’s
most popular search engine). Clearly, media scrutiny,
from both Chinese and foreign sources, dramatically
intensified during 2007.
1
This case was written by Hao Chen (University of Texas at Dallas) under the supervision of Professor Mike Peng. It was based on
published sources. The views expressed are those of the author and not necessarily those of the individuals and organizations mentioned.
© Hao Chen. Reprinted with permission.
Under such pressures, how have Chinese toymak-
ers responded? While much of the Western media has
focused on the behavior of Western toy companies
such as Mattel, and treated suppliers of Mattel’s toys as
one monolithic bloc of “Chinese toymakers,” in real-
ity, tremendous diversity exists among various Chinese
toymakers, and so each will respond differently.
We can broadly classify Chinese toymakers into
three categories. (1) The first type adopts a passive
strategy. They pay little attention to the formal and
informal requirements at home and abroad governing
the necessity of paying attention to product quality,
and tend to act after recalls. Thus, they are most likely
to be eliminated by the market. (2) The second group
of toymakers is defensive: they accept responsibility
but do the least required. (3) The third kind of firms
adopts a proactive strategy and seeks to act before
recalls. Each of these types can be illustrated by the
following case studies based on three different firms in
Guangdong Province.
Lee Der Toy Company
Lee Der was founded in 1993 in Foshan, Guangdong.
The company is a joint venture by Fenjiang Industrial
Company from Chancheng District, Foshan, and Lee
Der Industrial Company, Ltd., from Hong Kong. Both
parent companies owned 50% of the stakes of Lee Der.
For more than ten years, Lee Der had been produc-
ing toys and toy parts for Mattel’s leading toys such as
407
 408 integrative case 4 Not a Toy Problem: How Chinese Toymakers Respond to Recalls

EXHIBIT 1 Number of Toy Recall Announcements in the United States (1988–2007)

90

Toy Recalls (Total)

80
Toy Recalls (Total: Made in China)
70

60

50

40

30

20

10

0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: www.cpsc.gov.

EXHIBIT 2 Recall Related News in Both Chinese and English Media (2002–2007)

600
Google (Thousand)
Baidu (Thousand)
500

400

300

200

100

0
2002 2003 2004 2005 2006 2007

Sources: www.google.com (English) and www.baidu.com (Chinese).

Openmirrors.com
integrative case 4 Not a Toy Problem: How Chinese Toymakers Respond to Recalls
Barbie and Fisher-Price toys. Before the recalls, Lee Der
was the second largest toy manufacturer in Foshan.
On August 2, 2007, Fisher-Price, a subsidiary of
Mattel, reported the recall of 967,000 pieces of plastic
preschool toys made by Lee Der to CPSC. These toys
were reported to contain an excessive amount of lead
in the paint. Due to pressures from the public, Fisher-
Price revealed the name of Lee Der, its Chinese con-
tract manufacturer, to the press. It was the first time a
US company involved in a recall released its Chinese
supplier’s information directly to the press.
The reason Lee Der’s toys contained an exces-
sive amount of lead was that Lee Der’s paint supplier,
Dongxing New Energy Limited (Dongxing), supplied
Lee Der with “fake paint.” Mattel had been requesting
that its Chinese suppliers use paint from its contract
paint suppliers or test each batch of paint purchased
from a non-certified supplier. Lee Der apparently
violated these contractual requirements. Dongxing
was not on Mattel’s contract paint supplier list, and
the paint from Dongxing was not tested by Lee Der.
In fact, the boss of Dongxing is a friend of Shu-hung
Cheung, vice chairman of the board of Lee Der.
According to company records, Cheung owned one-
fourth of Lee Der. He was also the primary strategic
decision maker in the company.
After the recall, Lee Der found itself in a dif-
ficult position, facing criticism from both the US
and Chinese sides. While the US government and
consumers were understandably upset, the Chinese
government was also upset because the irresponsible
behavior of Lee Der (and other toymakers) under-
mined the quality image of potentially all goods made
in China. After the recall, Chinese officials temporar-
ily banned Lee Der from exporting products. In total,
the recall cost Lee Der US$30 million. Lee Der tried
to make some amendments after the recall. For exam-
ple, it produced new toys, which it claimed had passed
quality tests and met US standards. However, all was
in vain. Two weeks later, Cheung committed suicide
in his factory warehouse due to the pressure, bringing
a tragic end to Lee Der.
In this case, Lee Der represented a firm that chose
a passive strategy to deal with institutional pressures. It
denied its responsibility as a supplier and contract manu-
facturer and violated the rules of the game. It also acted
reluctantly after recalls, which made it more passive under
409
increasing institutional pressures. Once a firm ignores
the existing problems or mistakes it makes, it overlooks
the possible negative outcome from those mistakes.
When institutional pressures intensify, such as announced
recalls, it may not have time to respond strategically, nor
have the resources to pool to help it through.
Le Qu Toys
Le Qu Toys was a family-owned company established
in 1987 in Dongguan, Guangdong. Gam-gwan Dang,
owner of the company, built Le Qu from scratch. By
producing toys for foreign companies and develop-
ing its own brands, Le Qu became the third largest
toy manufacturer in Dongguan. Different from Lee
Der, Le Qu had its own design team and was able to
produce its own brands, such as Di Qu intellectual
toys. However, most of its profit came from its for-
eign importers. Also different from Lee Der, Le Qu
had been carefully following domestic requirements
for manufacturing quality. Le Qu exported toys to
the United States, Europe, and Africa, and enjoyed
a good reputation among partners and competitors
since the beginning of its establishment.
Dang was overwhelmed by the success of Le Qu.
As a successful entrepreneur, he became a billionaire.
But he failed to anticipate the serious consequences that
the recalls could bring to him and to Le Qu. In fact, he
did not do much to prevent recalls from happening. In
2007, Le Qu also received recalls from Mattel. Le Qu
was so vulnerable that it did not survive the recall due to
a lack of experience, preparation, and sufficient work-
ing capital. In early 2008, Le Qu filed for bankruptcy
and afterwards Dang sold all his Le Qu properties.
Like many other toymakers in China, Le Qu failed
to pay attention to the rules of the game overseas.
Although it had a long history of relationships with
companies from around the world, it did not learn
much from them. Only after the recall arrived did Le
Qu realize the importance of complying with foreign
regulations. Unfortunately, Le Qu’s late response
led to fatal consequences. Companies that adopt a
defensive strategy such as Le Qu face the possibility of
losing legitimacy in the eyes of their stakeholders (such
as foreign importers), consumers, and governments.
They may also become vulnerable after foreign insti-
tutional pressures begin asserting their influence.
 410 integrative case 4
Early Light Industrial Co., Ltd. (ELI)
ELI is a private company owned by Francis Choi, an
entrepreneur in Hong Kong. Choi started the com-
pany in 1972. In 1983, he became one of the earliest
entrepreneurs to establish factories in mainland China.
After two decades of development, ELI became one
of the largest toy manufacturers in the world, produc-
ing leading toy products such as those associated with
Snoopy.
ELI faced the same problem of excessive lead
levels in their paint that Lee Der experienced. Also
in 2007, ELI received a recall from Mattel to with-
draw 436,000 pieces of “Sarge” toy cars from the US
market. However, this did not become a disaster for
ELI. In fact, the toys involved in this recall were not
manufactured in ELI’s factories. Instead, they were
made by ELI’s subcontractors.
Before the recall was announced, ELI had already
found that problems might arise due to the unstable
quality of its paint suppliers. Different from Lee Der
and Le Qu, ELI did not tolerate this problem. It made
several moves to avoid future issues. First, it built new
factories to integrate each process of its toy manufac-
turing in 2005, far earlier than the 2007 recall. Then,
it signed contracts with several subcontractors to deal
with the increasing demand in the market to support its
expansion. Only those that had good quality and high
productivity were considered. In addition, ELI built its
own inspection team to test any hazardous elements of
its products and control the quality of its toys.
Nevertheless, ELI could not control certain prob-
lems, given its limited resources—for instance, its
subcontractors made mistakes, too. This was the main
reason ELI received recalls in 2007. After the recalls,
ELI realized it needed to make itself less dependent on
subcontractors in the future. As for its next move, ELI
plans to reduce the percentage of product made by its
subcontractors to 10% in 2008 and aims to soon use
no subcontractors.
Companies such as ELI, which take their responsi-
bility seriously and continuously improve themselves,
Openmirrors.com
Not a Toy Problem: How Chinese Toymakers Respond to Recalls
often proactively act before recalls happen and so
avoid possible losses. As a result, these companies have
a higher chance of maintaining their legitimacy under
institutional pressures.
The Road Ahead
Of course, this is not just a toy problem. The strategic
choices a company makes when facing institutional
pressures from home and abroad are crucial. Chinese
regulations for manufacturing exist, but they are
not vigorously enforced until an outcry erupts from
overseas recalls. To simply gamble, as many Chinese
toymakers have done—hoping they can “get by”
without devoting serious effort to meeting quality
standards—is no longer viable in today’s global mar-
ketplace. For Chinese toy exporters that have survived
this crisis but more generally for concerned companies
around the globe, the lesson is that a more proactive
strategy is the best safeguard against possible negative
consequences down the road.
Sources: Based on (1) H. Bapuji & P. W. Beamish, 2008, Mattel and
the Toy Recalls (A) and (B), Ivey Case Study, University of Western
Ontario; (2) China Central Television (CCTV) reports; (3) CNN
reports online; (4) M. W. Peng & H. Chen, 2008, Strategic responses
to global institutional pressures in the Chinese toy industry, Working
paper, University of Texas at Dallas; (5) Southern Metropolis Daily;
(6) www.lequ.com; (7) www.cpsc.gov.
Case Discussion Questions
1. What are the pros and cons of each of these strate-
gic choices?
2. If you were a toy company executive and you
were aware that the problem behind the recall was
due to design flaws and not manufacturing flaws,
what would be your reaction?
3. If your company’s products were cited as unsafe,
what strategy would you choose to deal with the
crisis?