Hong Kong Toy Makers

US outrage over toxic toys has the Chinese toy industry reeling. But the fault lies all along the global supply chain, and so does the solution

Saturday, August 11 was a typical warm summer's day in Foshan, Guangdong in southern China. On the third floor of the warehouse of toymaker Lee Der Toys Ltd, co-owner Cheung Shu-hung would probably have been reflecting on the events of that summer. He might have silently cursed the sequence of events that had brought him to the brink of financial ruin. We'll never know. What is certain is that he had earlier made a final tour of the premises and made sure all his workers' wages were fully paid up. And that at some point later that day, he looped an electric cord around his neck and hanged himself.

Life had been good for Cheung and the 2,500-plus workers employed in Lee Der's three factories in Guangdong. The company had an annual turnover of US$26 million, and the world's leading toy brand, Mattel Inc, was a major customer. Then in early August, Mattel announced the recall of close to a million Lee Der-made toys that had been found to contain excessive amounts of lead.

Under US regulations, children's products found to have more than 0.06 percent of lead are subject to a recall. Lead affects children's brain development even at very low levels of exposure, and is also a known carcinogen.

Lee Der immediately sought to repair the damage by working with Mattel-approved paint suppliers. Despite this, China's General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ) placed a temporary ban on exports of the company's products. Lee Der by that time had some HK$16 million worth of new, quality-approved products and no way of getting them to American store shelves. Two days after the ban was announced, Cheung was dead.

Product recalls are commonplace in the toy business - just in February, Hasbro Corp, the world's second largest toymaker recalled nearly a million of its Easy-Bake Ovens following reports that children were getting their hands stuck in the oven, some suffering severe burns. But the spectacular scale of the current recalls, plus the ensuing involvement of government officials in both China and the US has given product safety - and particularly that of Chinese-made products - a new political gravity.

At the centre of the saga is Mattel Inc (2006 net profit: US$593 million). According to a Mattel spokesperson, some 65 percent of its toys are manufactured in China. On August 14 the company recalled 18.2 million units of toys containing lead-tainted paint or small, powerful magnets that could be poisonous if swallowed - just two weeks after it recalled 1.5 million toys containing lead-tainted paint manufactured by Cheung's Lee Der. And early this September, Mattel recalled a further 848,000 affected toys in its Barbie doll and Fisher-Price ranges.

Besides toys, China is also being charged with supplying other substandard and hazardous products such as melamine-tainted pet food, toothpaste containing traces of anti-freeze ingredient, defective vehicle tyres, inedible seafood and other products. According to the Consumer Product Safety Commission (CPSC) in Washington DC, 60 percent of over 400 product recalls this year in the United States had been supplied by China.

Winning back trust

Amid the international furore over the recalls, posters have gone up in plants all over the Pearl River Delta as well as the hinterland, extolling the virtues of improved quality control and strict adherence to standards. Additionally, reports are coming in from Mainland industry insiders and other sources of additional numbers of quality controllers taking their places on the factory floor.

By the end of August, China's GAQSIQ had announced new rules to bolster China's national recall system. Under these new guidelines, if the manufacturers do not voluntarily recall the faulty products, the government will do it and fine the producers up to three times the value of the products.

The GAQSIQ also said it will conduct a nationwide investigation into licensed toy producers and exporters in order to weed out "unqualified" ones. Unqualified manufacturers and exporters will have their export quality certificates revoked.

At the highest levels, the Chinese government is trying to redeem the 'Made in China' label. While initially skittish about acknowledging flaws and shortcomings, even citing cultural bias in the onslaught of bad news from across the Pacific, authorities have since thrown themselves into a public relations campaign to win back trust.

A formal notice that Beijing recently sent to the World Health Organisation defended the quality of its food exports, saying almost all such exports are now safe. And extensive damage control is being done in America. In early September officials from China's GAQSIQ met with their counterparts from the US Consumer Product Safety Commission (CPSC) in Washington DC, and promised to immediately stop the use of lead paint in toys.

After two days of intense talks with the visitors, Nancy Nord, CPSC's acting chair, felt that China was now "serious" about stopping hazardous products from entering the US market, and could ensure that future toy exports complied with US safety and quality standards. Nord said GAQSIQ vice-minister Wei Chuanzhong had agreed to improve the safety standards also of other supplies such as electrical goods, cigarette lighters and fireworks.

Across Guangdong and the rest of the Mainland, as well as in Hong Kong, toy exporters are scrambling to put things right (see ''The Toy Kings''). While China is currently cast in the role of the arch-villain, US makers are also being asked to examine the part they have played in the whole sorry mess (see ''Villains of the piece''). One hopes that when the dust has settled, market forces and sheer pragmatism will have transformed Chinese business reality into one with immeasurable benefits for the consumer-on either side of the Pacific.

THE TOY KINGS Hong Kong's toymakers are cleaning up their act

Sixty-eight percent of China's toy export industry is based in Guangdong - and seven out of 10 factories in the province are either owned by Hong Kong residents or registered in the SAR.

Naturally, the Mattel recalls rapidly sent shockwaves across the border. Cheung Shu-hung was, in fact, a Hong Konger, although he spent most of his time in Foshan. But other, even more prominent names have been affected, including billionaire Francis Choi Chee-ming, dubbed Hong Kong's 'Toy King'.

Choi, Number 38 on Forbes' Greater China Rich List, made his initial millions as a supplier of toys to the likes of Mattel, but has since diversified into where the seriously big bucks are: real estate. Nevertheless, he remains a leading player in Hong Kong's toys sector, and early blame for the Mattel recalls fell on Choi's Early Light Industrial Co, although the toy giant asserts that a Mainland subcontractor was responsible for violating Mattel rules and substituting cheaper, lead-contaminated paint for the approved paint Early Light had supplied.

The Federation of Hong Kong Industries admits that the recent recalls have "caused significant damage to the image and reputation of the Hong Kong toy industry".

Chairman of the Federation Clement Chen told the international media: "We are very, very nervous. Today, we are talking about toys. We don't know what we will be talking about tomorrow."

Lawrence Yau, spokesman for the Hong Kong Trade Development Council (TDC), told overseas reporters in August: "We are quite worried at the moment. We are surprised that Hong Kong manufacturers are involved. They have quite a good track record. They pay great attention to product quality and safety. They are now looking at their own supply chains."

The battering that the 'Made in China' name is taking could not have come at a worse time. As the mercury falls, these factories are moving up to peak production, churning out toys to fill Santa's sack, and other goods to meet rising year-end demand. The shipment season will reach its peak in early September to mid-October.

The Federation has urged its members to tighten their quality-control procedures, hire laboratories to test products before shipping, and double-check everything subcontractors do, even if they've done good work in the past. Hong Kong's toy companies are scrambling to comply.

Bill Gordon, managing director of P3 International, a Hong Kong maker of children's products who works with importers that supply the likes of Wal-Mart, K-Mart, Target and Toys ''R'' Us, told Hong Kong Business: ''The recent recalls have been pretty traumatic for everyone. Even our customers whose items have no painting at all are still panicking because their customers are still contacting them.

''Given the recent issues, we've increased our spot checks. We certainly don't want to see something fail far down the production run.''

VILLAINS OF THE PIECE Two, it seems, can play at the current blame game

University of Manitoba business professor Hari Bapuji and University of Western Ontario international business professor Paul W Beamish analysed recalls of Chinese-made toys by going through recalls issued by the US CPSC from 1988 to August, 2007.

They found that 76 percent of the 550 recalls since 1988 were attributed to design flaws, compared with 10 percent for manufacturing defects including poor craftsmanship, overheating batteries or lead paint.

"There is no case in the CPS database where a child has been seriously injured or died because of a problem with Chinese manufacturing," says Dr Bapuji.

Additionally, US manufacturers are coming under fire for constantly pressurising their Chinese suppliers to slash prices, ignoring the fact that the latter, squeezed to a point where they were not making profits, would have to compromise on safety.

The scandal has escalated to such an extent that the US Congress has expressed "deep concern". It asked Mattel's chief executive Robert Eckert and US product safety inspectors to appear for questioning by senators on September 19, and a cabinet-level commission on product safety has been formed, headed by US Health and Human Services Secretary Michael Leavitt.

Walt Disney Co has vowed to begin its own testing of toys featuring its characters and brand. Toys "R" Us, the biggest US toy retailer, says it has hired safety engineers to make random visits to its shops and take away products for testing in independent laboratories. In Mattel's case, the company insists it did a voluntary product recall because its own testing regime identified potential problems.

It still raises the question of how the supply system got into such a mess in the first place. Why were so much money, time and effort spent on producing sub-standard goods that will ultimately cost Mattel and its suppliers large amounts of money and huge damage to their reputations?

It seems suppliers and their customers must share the blame. A Hong Kong-based consultant who sources products in China on behalf of several brands and a large North American retailer, told Hong Kong Business: "My overseas clients are fixated on price. They have it in their minds that Chinese goods are cheap and that they must remain cheap. The reality though is that wages are going up in China, and the cost of raw materials is going up. But the customers expect the manufacturers to absorb these costs, which effectively cuts the factories' margins. That creates pressure on the factories to reduce costs, and one way of reducing costs is to use substitute materials."

Another problem seems to be that Chinese businesses are flooded with so many orders that they often have to sub-contract work to smaller factories and may not have a proper grip on quality control, says Paul Yin, vice-president of the Chinese Manufacturers' Association of Hong Kong.

Megaphone diplomacy between governments doesn't address the fundamental issue. The rich want cheap goods and the poor want to get rich by supplying them. Consuming countries shouldn't sacrifice public health for the sake of price, but neither should China. If lead paint on a toy is dangerous for an American or Hong Kong child, then working in a factory full of lead paint is also unacceptable for a Chinese employee and his or her child.

With reports from Nick Walker and Michael Grimes in Hong Kong and Manik Mehta in New York.

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