Printed for personal use only

Toy Story

How El Segundo-based Mattel managed to help consumers forget why millions of its products were recalled last year

At Mattel’s testing and design lab, two minutes from the company’s El Segundo headquarters via the “Hot Wheels” shuttle bus, a half-dozen technicians in white coats take apart toys to make sure they’re safe. Matchbox cars, Polly Pocket dolls, Barbies—many of Mattel’s signature lines. There are machines to check whether a toy can be choked on or ingested or twisted into a sharp object (the techs use a special tape to simulate human skin). Testing for lead paint can involve hours of accumulating enough shavings for the ten milligrams necessary to heat, filter, and analyze a sample in a device called an inductively coupled plasma-optical emissions spectrometer. Just examining black paint on the pinhead-size eyes of a Bitty Baby can mean sacrificing scores of plastic infants. “It’s a tedious process,” says Geoff Massingberd, who heads the company’s corporate responsibility unit. “But we know toy testing at least as well as anyone else and perhaps better.”

Nobody is likely to argue the point. If any suspicious Big Birds come into Mattel’s testing labs around the world, the guys in the white coats are almost certain to locate the trouble. Up until August 2, 2007, everyone assumed these spot checks would be enough. Well, everyone was wrong. Covering a five-week span in August and September 2007, more than 2 million toys were recalled because high levels of lead paint had been detected. The recalls, which were made in three announcements throughout that time, included some of Mattel’s most popular lines: Sesame Street characters, Sarge cars, and Barbie-brand pet and furniture play sets. The story took a gruesome turn after a co-owner of the Chinese factory that used the lead paint hanged himself.

Adding to the alarm was a separate Mattel recall involving Polly Pocket play sets studded with magnets that could be ingested and later bond together in a child’s digestive tract. Inexplicably, the magnet problem was announced in the same press release as one of the lead paint recalls, creating confusion among parents, retailers, and reporters. Chief executive Robert Eckert, who has been at Mattel since 2000 and is credited with righting a company that had been in a financial tailspin, went public almost immediately. He said that Mattel was sorry for what happened, that the company was investigating what went wrong, and that he would do everything in his power to make sure the mistakes would not be repeated. Another Mattel executive apologized for the magnet recall being inadvertently blamed on factory work in China. The problem turned out to be Mattel’s own product design, not Chinese manufacturing. The situation was a mess.

More than a year later the recall saga—and the ensuing bad press—has been contained. Congress is placing tougher curbs on the use of lead in toys (yes, it is still allowable within limits), and Mattel has beefed up the way its factories test for lead paint. “All of the right things were done and acted upon immediately,” says Massingberd, a senior vice president who has become Eckert’s point person for enhancing safety and compliance. He proudly notes that Fortune magazine named Mattel one of the 100 best companies to work for—even after the recalls were announced. “We explained that we were going to look hard and shine the light in every corner, and we will tell you what we found,” Massingberd adds. (Mattel’s PR people wouldn’t make Eckert available for an interview.)

A number of consumer activists I spoke to were not impressed with Mattel’s claims of forthrightness. Some say the company lucked out because its transgressions were eclipsed by broader safety issues involving other Chinese-made products, such as toothpaste containing a thickening agent that’s found in antifreeze and pet food contaminated with a chemical used in the manufacture of plastics. In addition, the lead paint on Mattel’s toys has not resulted in any deaths from lead exposure, though it might be years before symptoms show up. High levels can harm a child’s nervous system, brain, and kidneys. “These recalls are very episodic,” says Tom Neltner, cochair of the Sierra Club’s National Toxics Committee. “As long as there are no bodies and the company looks like it has taken adequate steps, the public moves on to tomatoes or peppers.”

Beyond luck and circumstance, Mattel has limited the fallout by simply keeping quiet. Since Eckert’s damage-control efforts that summer, the subject has largely disappeared from press releases, Wall Street analyst meetings, and toy industry presentations. Most amazing was an analyst conference call to discuss earnings for the October-December 2007 period. Such calls provide a quarterly review of the company, warts and all, so it would have been the logical time to update investors on how Mattel was improving its quality standards. Yet the topic came up only when Eckert briefly mentioned an ad campaign that ran during the holidays. “I thought it was time to stop talking about lead, and I’m glad we did,” he said. Nor did any of the analysts bring it up. It would be like President Bush delivering his State of the Union address without mentioning Iraq.

To be fair, what happened at Mattel wasn’t like the Tylenol scare in 1982, when seven people in the Chicago area died after ingesting capsules of the painkiller that had been laced with cyanide. Mattel’s lead paint recalls represented a small fraction of the nearly 800 million products that the company made last year. Moreover, many of the 2 million toys hadn’t even reached store shelves. “Just like eating steamed rice, sometimes you might find that there are one or two grits in your bowl,” says Xie Yuguang, the chairman of a Chinese factory implicated in the lead paint recall.

Wall Street attention has focused on the obvious short-term fallout, which includes a cut in last year’s operating margin by $110 million and stepped-up testing, along with other quality-control measures that will tack on an extra 1 percent to 1.5 percent to the cost of making every Mattel toy. Figure it will run tens of millions of dollars annuallyroughly four times as much as had been spent before. Then there are potential payouts from a batch of lawsuits against the company, in which Eckert and the Mattel board are alleged to have breached their fiduciary responsibilities by not focusing enough on product safety and by selling stock in advance of public disclosures concerning the recalls. There’s little evidence of wrongdoing, though at some point Mattel might have to take out its checkbook to make those suits go away.

These are not trivial costs, even for a company that generated almost $6 billion in revenue last year. But what’s not acknowledged is the reason lead found its way into toys in the first place: too many products being made in too little time for too cheap a price—and in a country where cutting corners is a tolerated business practice. “You’ve built a system that ultimately goes back to consumers who demand the hot toy at exactly the right moment at exactly the right price,” says Dara O’Rourke, an associate professor of environmental and labor policy at the University of California at Berkeley. Mattel has not said anything about this bigger part of the story, the why part.

The vulnerabilities are apparent inside the factories of Guangdong province, where much of China’s toy manufacturing takes place. Workers are untrained, pay is meager (roughly $140 a month), turnover is high, and equipment is old and subject to frequent breakdowns. What’s more, toy companies can be tough to work for. “The speed to market and the compressing of delivery cycles in the toy industry is really phenomenal, probably more so than in any industry I’ve studied,” says O’Rourke. “There’s enormous pressure on Chinese factories to produce for 24 hours a day within a short period of time. That puts pressure to outsource contract work. At the same time, there’s massive downward pressure on pricing, largely due to the bigger retailers—Wal-Mart, Target. So you have huge pressures on delivery times and huge pressures on cutting price, which almost guarantees that these factories in China will subcontract and the subcontractors will be working to shave pennies to be able to make any profit.”

By all rights, Mattel should not have expected any trouble at Lee Der Industrial Company, one of its suppliers since the late 1990s and the second-largest toy manufacturer in Guangdong province. But Mattel had been left out of the loop. It never knew that Lee Der’s co-owner, Cheung Shu-hung, was friends with the owner of another company, Dong-xing New Energy, and that for years Dongxing had supplied Cheung with paint for Mattel toys. In early April 2007, when Dongxing ran out of yellow colorant, a manager got on the Internet and found a third company, Dongguan Zhongxin Colorants. On April 10, according to the Chinese business magazine Caijing, Dongguan sold 500 kilos of colorant to Dongxing, with a fake certificate claiming that the paint was lead free (such forgeries are common in Guangdong). Even with a certificate, Lee Der was supposed to have tested the paint. But that would have taken a week or longer, and toy orders were backed up. So instead the factory began using the paint, despite workers’ noticing that it had a different smell.

Testing procedures are by necessity hit-and-miss. You can’t sample every $3 toy. Mattel performs spot checks, as do independent third-party labs working on behalf of retailers and importers, but there is no coordination as to who looks at what. In this case Mattel didn’t realize there was a problem until June 8, when an outside lab detected high lead levels in the toys made by Lee Der. Several weeks of analysis confirmed the initial result, and on July 13, Eckert was notified of the problem.

Why it took more than a month to go through Mattel channels and then to the Consumer Product Safety Commission is a source of contention. The company says false alarms often come up during preliminary testing, so it can take a while to gauge a problem. But for years the agency has been on Mattel’s case for not immediately notifying the government about potential safety issues. It has been investigating the delay, and Mattel might be subject to a fine.

The timing of the August 2 announcement could hardly have been worse. Just a week earlier The New York Times had published a glowing feature about how “Mattel may be the best role model for how to operate prudently in China.” When it came to integrity and trust, the company not only tooted its own horn but tsk-tsked the ethical misdeeds of others. Every time a major business scandal is uncovered, Eckert said during a 2004 UCLA commencement address, “the American public trusts a little bit less.” He called such instances “reprehensible.”

“When you have a relationship with a supplier that lasts 10, 20 years, you take it for granted that it is in the supplier’s interest to not jeopardize that long-term contract,” says S. Prakash Sethi, a professor at Baruch College in New York and president of the International Center for Corporate Accountability. Sethi, who has been hired by Mattel to audit workplace conditions in the company’s factories, says, “Trust is a proxy for assumed due diligence.” With Lee Der, it wasn’t just that Mattel hadn’t done its homework. It was that it didn’t know the subcontractors existed.

There is an edgy, almost defiant way in which Mattel responds to questions about the recalls. When I ask Massingberd about the slipups, he says that in the context of what’s produced each year, “our mistakes are infinitesimally small.” As for deciding to lump the magnet and lead paint recalls into a single announcement, he says that Mattel was just following orders from the Consumer Product Safety Commission. But the commission says that the decision was made by Mattel, not the government. After I put the question to Mattel several different ways, the company said it was indeed its decision and that it was made so that the two recalls would not be delayed (never mind that the magnet problems had been percolating for months).

Of course, this is a company that has never been afraid of a tussle, the most recent being its win over MGA Entertainment in a copyright infringement case involving MGA’s Bratz dolls. The Bratz designer was found to have conceived the dolls while working at Mattel, a significant breach considering that the dolls are estimated to generate $1 billion in annual revenues. Other battles over the years have centered on disgruntled employees and trademark infringement. When legislation was introduced in Congress late last year to enhance toy safety regulations—the first major consumer protection reform in more than 30 years—Mattel took issue with a provision that would require companies to test products at independent labs. Through its newly hired lobbying firm Johnson, Madigan, Peck, Boland & Stewart, the company argued that it would be in a better position to handle testing than an outside firm.

The irony was delicious. “Mattel’s failure was why we were considering this law in the first place,” says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. Nevertheless, Mattel got its wish. As the bill worked through both houses, language was quietly inserted that allowed a manufacturer to do its own testing (it was dubbed the “Mattel amendment,” though other companies would be eligible). Consumer groups were steamed, as were several senators. They said that a company conducting its own tests and sidestepping separate oversight was an inherent conflict of interest.

In the end, the two sides compromised for the sake of getting the bill passed. More toys would undergo scrutiny, and while the clause that lets Mattel do its own testing stayed in, any labs used by the company would have to be sanctioned by a government-approved body. The company simply needs lab certification, and it must promise not to “exert undue influence over test results.” (Third-party testing can still be done by retailers and others.) Mattel shelled out more than $500,000 in lobbying costs last year and is on track to pay more than $1 million in 2008. Compare that with each of the previous five years, when lobbying costs ran a touch above $100,000. All things considered, it was a bargain.

The trick now is to not give customers any more reason to worry. But judging by what happened at Lee Der, there’s only so much enforcement that Mattel or Chinese inspectors can do. Besides, it’s not as if toy factories are even desirable in that part of the nation. With wage inflation eating into low-cost, low-margin manufacturing, Guangdong is being pushed as a center for computers, TVs, and other consumer products, the kinds of items that require better-trained workers. The toy business will eventually move to another region of China, or perhaps another nation, such as Vietnam, but that’s a while off.

In some ways, the post-recall world is scarcely different from before. On the ground floor of the company’s main office tower is the Mattel Toy Store, a retail outlet that’s open to the public (a 25 percent early-bird discount is offered Tuesday mornings). The place looks like any other toy store, which is to say there are kids yanking at their parents for this or that item. And their parents are buying lots of stuff. “I hope it’s OK,” says Wendy Gayner, a Redondo Beach mom who is walking to her car carrying an oversize bag, her young daughter in tow. “I’m sure they’re much more aware of what’s going on,” says her friend, Ingrid Safranek, who has her own two kids with her and another bag. They’re both relying on Mattel to work out those rough patches, but their trust seems conditional. Gayner has become so careful that she’ll throw out a toy even if it was manufactured months before a recall took effect. When I bring up China, she scrunches her face.

Illustration by Brian Stauffer