Mattel has a long-standing relationship with Chinese manufacturers. For decades, Mattel has depended on Chinese suppliers to manufacturer its licensed products. In fact, 65% of all of Mattel’s products are made in China, representing 50% of Mattel’s total revenue. Mattel owns and operates 11 manufacturing plants in China that produce many of its products. Mattel also outsources a large number of its products to between 30 and 50 external vendors. Mattel started taking ownership of the factories in China in the 1980s when Mattel officials became concerned with control of its trademarked products and became worried that the toy market would be flooded with imitation Barbie dolls. For example, Mattel outsources short-term licensed products from Disney, Nickelodeon, and Sesame Street to other facilities but ensures the manufacturing of Barbies and Hot Wheels are done within Mattel’s own facilities. Mattel has faced challenges in the past with its outsourcing. In 1996, NBC’s Dateline did an exposé highlighting the sweatshop conditions in Mattel’s Indonesian factory that showed the employment of underage workers.

The First Recall

On August 1, 2007, Mattel announced that it was recalling 967,000 toys that were part of its Fisher-Price division because they could contain dangerously high levels of lead in the paint. The recall was estimated to cost Mattel $30 million and included 83 types of toys with characters from Sesame Street and Nickelodeon that had levels of lead that would be toxic if ingested by a child. Mattel stated that despite the size of the recall, the impact on the public would not be as dramatic because almost two thirds of the products were still in the warehouse and were not yet available to the public. Mattel stated that the toys were produced by a third-party manufacturer and not made in one of its own facilities. Mattel would not identify the manufacturer but said that the vendor had been a supplier for Mattel for 15 years. Mattel admitted that it allowed long-term vendors such as this one to do their own inspections, and Mattel relied on the results. As a result, Mattel officials trusted the audit reports presented to Mattel by the vendor.

Mattel admitted that it did not discover the high levels of lead in its own products. Mattel was informed about the high levels after a French retailer notified Mattel of the problem in early July 2007. Mattel stopped production at the facility around July 7, 2007, and notified the Consumer Product Safety Commission (CPSC) verbally on July 20, 2007. Mattel submitted a written report to the CPSC on July 26, 2007. This was a tough announcement for Mattel to make because it was known in the industry as being the most conscientious related to toy manufacturing in China. Mattel was proud of its state-of-the-art testing facilities and independent manufacturing audits. In addition, Mattel was known to have some of the toughest and more stringent requirements for any company that becomes a vendor of Mattel in China.

Recalls are not a rare occurrence for Mattel. In fact, this was the 17th recall that Mattel had to make in the past 10 years. When Mattel outsources the manufacturing of a product, it requires the vendor to only use raw materials that are provided by certified suppliers. On August 9, 2007, the Chinese General Administration of Quality Supervision, Inspection and Quarantine suspended the export license of Lee Der Industrial, which manufactured the tainted toys for Mattel. Lee Der claimed that it used a paint that was described as lead free and implied that the supplier was the responsible party in the recall. Four days later, Zhang Shuhong, owner of Lee Der Industrial, committed suicide by hanging himself in a company warehouse. It was also reported that Zhang Shuhong had used lead paint in the manufacturing process and that the paint was made by a company that was controlled by a close personal friend of his.

The Second Recall

On August 14, 2007, Mattel announced its second recall of toys that were made in China. The recall included 436,000 toys due to high levels of lead. The toys were a die cast version of the character Sarge from the Pixar/Disney movie Cars. These toys came from a different manufacturing facility than Lee Der Industrial. In addition, Mattel also recalled, on the same day, 18.2 million magnetic toys that were considered a safety hazard because the magnets could become loose and then be ingested by a child. All of these toys were manufactured in China. Along with the announcement of the Sarge toy recall, Mattel officials announced that they were implementing a three-point check system to ensure that lead paint was not in its products. The first check was allowing only certified suppliers to provide the paint; the second check was tightening controls during the manufacturing process, including taking random samples; and the third check was testing for lead paint in every production run of a finished product. Mattel said that the manufacturer of the Sarge toys was Early Light Industrial, which had subcontracted the painting to another company, Hong Li Da, a noncertified third-party supplier of the paint.

The Third Recall

Just over a month after the first recall, Mattel had to announce a third recall of toys manufactured in China. On September 5, 2007, Mattel announced the recall of 775,000 toys that had dangerous levels of lead in the paint. A majority of the toys were accessories for Mattel’s Barbie doll. The recall was the result of a systematic review by Mattel of all its manufacturing processes. The results of the review found the defective toys and resulted in the elimination of a number of subcontractors that Mattel had used for manufacturing the toys in China.

Why Manufacturers Use Lead Paint

Lead is added to the paint to give the paint more “desirable” features. Lead paint is quicker to dry than leadfree paint is. Lead paint is opaque so a small amount can cover a large area without needing a second coat of paint. Lead is insoluble, so when it is added to paint, the paint will be highly water resistant and be able to be cleaned with water easily. Lead can add to the richness of the color of the paint. In addition, lead paint is also easier to apply on hard surfaces. But the main reason is cost. Lead paint can be bought at approximately one third of the price of non-lead paint because in most countries it is forbidden to be used on consumer products, which reduces the demand related to the supply. For example, many countries in the Middle East do not have any restrictions on lead content of paint.

In China, industrial paint does contain lead, and it is used for outdoor applications such as buildings, bridges, and sidewalks. Therefore, the problem is that the lead paint is available to be misused by unscrupulous suppliers because the lead paint can “accidentally” be poured into “lead-free” paint containers. Suppliers that want to increase their profit margins will use the lead paint to improve their bottom line.

Dual Apologies

On September 12, 2007, Mattel’s CEO Robert Eckert apologized to Congress for failing to stop the tainted toys from coming into the United States. While Eckert explained that Mattel understood the problem and had implemented the three-check solution to solve it, many senators were discussing the idea of significantly increasing the fines for companies that imported tainted products. Also discussed was the fining and bringing criminal charges against the top executives responsible for bringing in the tainted products.

A week and a half later, Mattel apologized again, but, this time to government officials in China. Thomas Debrowski, who is Mattel’s executive vice president for worldwide operations, apologized to the Chinese government for harming the reputation of Chinese manufacturers. The response in the United States was disbelief that a company would apologize for the illegal actions of another country. Critics of Mattel complained that Mattel was afraid it would lose China as its manufacturing base so Mattel officers are doing whatever they could to reestablish good relations with the Chinese government. Based on this response, Mattel attempted to clarify the apology by stating that the apology was meant for the Chinese consumers and not the Chinese manufacturers, even though almost all the recalled toys were sold in either Europe or the United States. In another attempt to clarify the message, Mattel released a press statement in which Mattel apologized to the Chinese manufacturers for the 17.4 million magnetic toys that were recalled. The apology was based on the flaw being the design of the toy and not the manufacturing of the toy and was, therefore, Mattel’s fault.....

Questions

1. Identify the stakeholders in this case. Which, if any, are the most important? Why?

2. Is 50% of the total price or a $10 voucher enough compensation to customers for the recall? Why or why not?

3. How can a company like Mattel appear to have such a blatant disregard for one of its major stakeholders, children? Explain.

4. Explain the steps for reporting a product recall to the U.S. government. Is the process adequate to protect consumers? Why or why not?