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.