China Product Outsourcing Done Right: A Sort Of Guide

International manufacturing lawyers

Chang W. Lee of the New York Times recently wrote an informative article on China product quality, entitled, Toymaking in China, Mattel’s Way.  The article touts Mattel as a paragon of quality control in China and sets out what Mattel does to ensure the quality of its products from China.

Early on, the article nicely sets out one of the biggest issues facing every company outsourcing its product manufacturing to China (or to any other emerging market country, for that matter):

The recent wave of recalls and warnings from China has ignited worldwide concern about the safety of Chinese products, potentially mucking up a global system built, in large part, on outsourced manufacturing. As a result, companies are trying urgently to figure out how to do business here, without risking their reputation, consumer trust, or customers’ lives.

The article then puts forth Mattel as maybe “the best role model for how to operate prudently in China:”

“Mattel realized very early that they were always going to be in the crosshairs of sensitivities about child labor and product safety, and they knew they had to really play it straight,” said M. Eric Johnson, a management professor at the Tuck School of Business at Dartmouth, who has visited numerous factories in China, including some of Mattel’s. “Mattel was in China before China was cool, and they learned to do business there in a good way. They understood the importance of protecting their brand, and they invested.”

“Mattel, and many of the outside analysts, say the key is command and control.” Mattel gains this control by owning its manufacturing facilities in China, which the article describes as “a more costly method than using the lowest-bidding local manufacturer.”

Mattel still uses outside Chinese manufacturers for some of its components and for materials, but controls their quality by demanding “these outside manufacturers comply with its [Mattel’s] safety guidelines” and by analyzing and testing incoming supplies and raw materials:

That may sound elementary. But many Western companies operating in China do not test their raw materials, even though suppliers are known for substituting cheaper material to pad their profit.

“This is very common,” said Dane Chamorro, regional director of Control Risks, a global consulting company. “The samples you get are always fantastic; but once they rope you in they can cut back. And a lot of Chinese companies will do anything to cut costs.”

Providing Mattel “with fake or tainted supplies is a ticket to losing the contract with Mattel.”

Mattel initially went into China largely by using outside vendors, “but in the 1980s executives became concerned that outsourcing toy-making put trademarks at risk: the market could be flooded with imitation Barbies. Executives also thought they could handle manufacturing more efficiently themselves by building large factories:”

Mattel aggressively expanded the number of plants it owned in Asia. Noncore products, like trinkets made under movie-licensing deals, could be outsourced. But Barbie dolls and Hot Wheels, among others, would be kept in tightly controlled factories.

In 1997, in reaction to news reports of poor conditions for workers at its Asia plants, Mattel “hired S. Prakash Sethi, a professor at Baruch College, part of the City University of New York, who had an international reputation as a critic of worker mistreatment:”

Mr. Sethi would make unannounced visits to Mattel’s factories and vendors’ plants. He insisted that he would only monitor

Mattel if the toy maker let him post his reports publicly and uncensored.

Mattel agreed.

Give Mattel credit for allowing the New York Times to visit “one of its Chinese factories:”

Mattel was one of only two major toy makers that agreed to allow a reporter for The New York Times to visit one of its factories in China — or even to put an executive on the phone to discuss the issue of Chinese product safety. Hasbro, LeapFrog and Zizzle — the maker of Pirates of the Caribbean toys, among others — all declined requests.

Lego does not manufacture in China, but it declined a request to visit factories elsewhere. Aside from Mattel, only MEGA Brands of Canada said it would permit a visit.

The article raises the question as to whether those who outsource their manufacturing to Chinese factories can obtain the same high level of quality control:

Some manufacturing experts say factories that are owned by global brand companies, like Mattel, often appear to be of higher quality than plants owned by vendors.

But others say that companies relying on contract factories could be just as tough if they chose to. David M. Upton, a professor at Harvard Business School, said, “You can fire the vendor, too.”

The article concludes by noting how increased quality requires increased costs, at least in the short term, but may mean increased savings in the long term:

All the toy testing and safety measures cost money. But the Mattel brand can command a premium price, said Mr. [Sean] McGowan, the analyst at Wedbush Morgan.

And, he said, “a major toy safety problem” could prove much more costly than prudence.

I really like this article because it nicely highlights by real world example some of the things companies must do to assure quality in the products they get from China. But at the same time, I find fault with much of it.

First off, the article makes it seem as though manufacturing one’s own product in China is necessarily more expensive than outsourcing this manufacturing to Chinese factories. Mattel itself says it went into direct manufacturing because it was more efficient, which implies less expensive. Beyond that, my experience with my firm’s own manufacturing clients has been that many of them have realized major cost savings by switching from outsourcing the manufacturing of their products in China to directly manufacturing such products themselves in China. Oftentimes, a portion of those savings comes from the increase in control that allows for a reduction in monitoring, without any corresponding reduction in standards.

Secondly, the article seems to imply that the reluctance of other toymakers to open up their Chinese operations to the New York Times is additional proof of Mattel’s quality prowess as compared to its competitors. I view the reluctance of these other toy manufacturers to talk as based on their desire not to publicize their China connections in today’s anti-China climate. I have been interviewed by the Christian Science Monitor, the Wall Street Journal, Corporate Counsel and the Washington Post on the issue of China product quality and in each instance, the reporter sought my help in finding companies that would be willing to talk about what they do to ensure quality in their Chinese products. I went to my firm’s clients that do a superb job in maintaining quality control over their China products and not a single one would speak to the press, even anonymously. As one of them put it, “we have nothing to gain by talking with the press, and everything to lose.” None of the articles ended up with interviews with any manufacturers, leading me to conclude that it is not just me who has difficulty in getting companies to talk these days regarding their China manufacturing. Though I certainly credit Mattel for its willingness to talk to the media about these issues, I draw no implications regarding the quality control standards of those toy companies that chose to remain silent.

Lastly, and perhaps most importantly, like Professor Upton, I am not convinced those who outsource their product manufacturing to China cannot do pretty much the same things as Mattel to achieve pretty much the same results. Based on the experiences the international manufacturing lawyers at my firm have had with our clients that manufacture in China, it is clear that those companies that make the effort to secure high quality product from China generally get high quality product from China and those companies that fall short in that effort typically fall short in their results as well.

33 responses to “China Product Outsourcing Done Right: A Sort Of Guide”

  1. Thank you. Not many people blog about success stories in China.
    On a personal note I have seen the improvements Chinese manufacturers have made over the years, not just quality, but IP protection, labor relations, etc.

  2. China problems create rewards for PR risk takers
    All PR has an element of risk to it. That’s one of the things that separates it from advertising. Ultimately,

  3. Dan, I have equal difficulty in approaching clients to discuss their operations in China, despite the fact that I eat their products, wear their products, and use their hardware and garden items, and find no fault with them.
    Keeping a low profile in China has definite advantages. Some of the wealthiest exporters I know drive VWs in China to avoid envious eyes of competitors, gangsters and the tax man. Not easy to plead poverty at the Ka-La-OK when you drove up behind the wheel of a S600.
    With respect to legal aspects of the Mattel success in Q.C., publication of such high standards can also provide easier probing for a basis for negligence if injuries occur from product made in the factory, if departure from those standards proximately causes the injury. Mattel is of course to be commended here, but, as an attorney, I don’t blame any others who wish not to throw open the gates to prying eyes.

  4. I chatted about this post and the NY Times article with my partner, Roger Rambeau, who worked with Mattel for 20 years in manufacturing and quality control. He concurred that Mattel not only went out of their way to run a tight ship in terms of manufacturing and quality overseas, but really helped lead the industry in the development of safety and quality standards. But, even for all their efforts, not every problem could be stemmed with testing, inspection, and control. He regaled me with a few good stories which I’ve written up here:
    http://www.product-global.com
    Thanks Dan and hope you enjoy.

  5. I just wanted to add a few more thoughts regarding contract manufacturing and establishing one’s own manufacturing facilities in China.
    The NY Times lauded Mattel for owning most of their facilities in China, Dan pointed out that this isn’t necessarily more expensive than contract manufacturing. I definitely agree that, yes–a company can have more control over it’s incoming materials, quality control, testing, and working conditions than if you are working with an outside vendor. But you’ve really got to take a lot into account to get an idea of total cost. For example, the toy industry is cyclical. After Christmas, in January and February, you are paying a very large staff and employee base that was necessary during the Christmas push–but is now standing around without much to do. Seasonal layoffs and cutbacks could be imminent. Then you need to recruit, rehire, and retrain the workforce again when production ramps up. In addition, even for all that Mattel made in house, the company still purchased quite a bit from outside vendors. Working with outside contract manufacturers can be a very good way to go, if you have a presence on the ground there that can monitor production; you pretest your goods with an outside testing lab when needed; you have an outside quality control provider come in and pull finished product out of the packaging before every shipment for testing; and as always, you do your homework on your vendors.

  6. Did Mattel speak to soon? Fisher-Price just recalled nearly a million plastic toys made in China because of excess lead in the paint.
    Sorry for the uglified link, feel free to clean it up.

  7. And sadly someone at Mattel blinked and that was all it took for their vendors to cheat them:
    1 million toys recalled:
    The good news is that their quality control caught this before these items went to market in the USA.

  8. As I told Imagethief in his post a few days ago, when the only reported news was good, what happens IF bad stuff happens, now that Mattel has made public how sweet it is performing? The legal consequences are not pleasant, because having gone public with their s.o.p., negligence is that much easier to demonstrate. If you missed Zheng Xiaoyu’s head rolling in Beijing over his stewardship of China’s food & drug safety and alleged taking of bribes, you’re in time to watch what happens inside HQ at Mattel and FisherPrice.

  9. It is really the small business person with a widget that they want manufactured in China who is at risk. I have been there and done that. There is a good way to do this. The small business man can’t spend 6 months out of the year in China to guarantee they will get what they ordered. They need an American overseer of the product qualification and manufacturer in China to protect your backside.
    Bob Miller

  10. Charles Liu —
    You are welcome, but of course right after this Mattel was forced into a $30 million recall. Chinese product quality is definitely on the upswing, but it still has a ways to go.

  11. Bob Miller —
    I agree that there must be constant and consistent quality control monitoring but that certainly does not necessarily need to come from an American. I have clients who have successfully used their Chinese employees for this and the Japanese and Koreans and Germans have all done quite well monitoring the quality of their goods coming out of China.

  12. Was thinking about the enforcebility issue of the US judgements in China? If some products went wrong and hurt some people in US, how could the Judgement reach the Chinese Manufacturer? Thanks.

  13. What we should get from Dan’s article was not that Mattel is a perfect company, but that the advertised China practice by Mattel is a good example to follow. This article presents a number of good principles to maintain quality control in China, which are still very much valid despite the Mattel’s pitfall.

  14. Good story and update from Forbes Online today…
    http://www.forbes.com/markets/2007/08/21/china-toy-industry-markets-equity-cx_jc_0821markets1.html
    Part Quotation:
    “Despite the mounting worries over the safety of Chinese products, the total value of recalls that have come to light have not yet reached an alarming level compared to the overall volume of trade. James Zimmerman, a partner in the Beijing office of the law firm Squire Sanders & Dempsey, estimated that American recalls of Chinese-made goods have not exceeded 1% of U.S. imports from China, which stood at $288 billion in 2006, up nearly three times from 2001.
    Early this month, Mattel estimated its first China-made toy recall cost it $30 million, but did not reveal the figure for its second recall.
    A sudden surge in recalls is seen in part by analysts as a reflection of China’s expanding role in the world’s supply chain, the increased sophistication of products nowadays, as well as the limitation of China’s bureaucracy to cope with the strains of the boom in exports.
    “While trade increased substantially, it is my understanding that the government agencies responsible for supervising the quality standards did not have comparable personnel increases, and have most likely been overtaxed and understaffed in light of the huge increase in production and exports,” Zimmerman said”
    What is the latest with the French drinks company JV … ?

  15. From the Forbes article: “… estimated that American recalls of Chinese-made goods have not exceeded 1% of U.S. imports from China, which stood at $288 billion in 2006, up nearly three times from 2001.”
    Let’s see, 1% defective would be the equivalent of bad tap water 88 hours per hour. And, yes, that 1% defective mentioned in the article is MINIMUM, as that is only what has been discovered to date!!!

  16. China Melamine Yet Again And This Time It’s Getting Mighty Fishy.
    Most of you probably already know more about melamine than they ever expected. Melamine refers to both a chemical and to a resin produced from it. Human ingestion of melamine “may lead to reproductive damage, or bladder or kidney stones, which can lead…

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