U.S. biz blamed for dangerous Chinese products

Industry experts say U.S. companies need to monitor overseas factories more closely to prevent product safety lapses.

By Parija B. Kavilanz, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- As many more U.S. companies outsource their production base to China, their poor oversight there is exposing American consumers to greater safety risks, according to some industry experts.

No doubt, the recent spate of product recalls - melamine-tainted pet food, toothpaste laced with anti-freeze and now Mattel-branded toys made with lead paint - all were made in Southern China's low-cost manufacturing hub that's notorious for its lax regulations.

Nevertheless, industry experts say U.S. importers that do business with these factories are more to blame than even their Chinese suppliers for allowing those unsafe products to enter the U.S. marketplace.

"U.S. law is pretty clear. The importer is responsible for quality and safety of good imported into the country," said Erin Ennis, vice president with the U.S.-China Business Council. "But the Chinese can absolutely do more to prevent safety issues."

Chris Byrne, an independent toy industry consultant, agreed. He said Mattel's recall on Wednesday of 1.5 million Chinese made toys isn't necessarily a "geographic issue."

While companies could decide to shift some of the production out of China into Malaysia, Indonesia or Vietnam, it doesn't guarantee that they won't face the same issues in these countries whose infrastructure is less developed than in China.

U.S. companies sourcing from China "have to be more responsible for product safety themselves," he said. "Consumers will now insist on this."

Other analysts also stressed that the onus should be on U.S. companies to introduce much more rigorous testing standards in China.

"American companies have to put their own people on the ground [in China]," said Sean McGowan, analyst with Wedbush Morgan Securities.

"After this latest episode, I think the toy industry will have to implement a level of oversight that's never been seen before," he said.

Gerrick Johnson, analyst with BMO Capital Markets, fears that the toy industry will suffer more recalls in the future unless companies like Mattel, Hasbro (Charts) and others tighten up quality standards and monitoring of their overseas factories.

"From the reports that I get about China, the manufacturing areas seem like the wild wild east. It's capitalism run amok with no enforcement of any standards," Johnson said.

As far as U.S. companies shifting sourcing to other low-cost manufacturing hubs in Asia, Johnson said it's not a realistic option right now.

"The infrastructure in countries like Vietnam and Cambodia is still underdeveloped, although the potential is there," Johnson said. "Vietnam right now can support manufacturing of some soft goods like clothing but not hard goods like electronics or toys."

Jim Silver, a toy industry analyst and co-publisher of Toy Wishes magazine, said U.S. companies have to enforce stricter penalties on their manufacturers for any safety lapses. "If you have to fire the vendor, fire them," Silver said.

Mattel (Charts, Fortune 500), the world's leading toymaker, said late Wednesday that its Fisher-Price pre-school division had issued a global recall of 1.5 million toys, including Elmo, Big Bird, and Dora that were made in China, because their paint may contain too much lead.

This marked the latest incident in a series of recent Chinese product recalls. China, the second-largest trading partner of the United States after Canada, is also the world's foremost toy supplier, producing more than 80 percent of the world's toys.

In June, RC2 Corp., (Charts) recalled 1.5 million "Thomas & Friends" wooden railway toys that were also made in China over concerns that the surface paints on the toys contained lead, which could result in toxic poisoning in young children.

"Mattel is trusted as one of the safest brand names in the world," Byrne said. "Something like this is very serious because it can shake consumer confidence in the brand. There's no way to put a nice face on it, especially when parents entrust their child's safety to your products."

Mattel spokeswoman Jules Andres told CNNMoney.com that the company has "ceased production" of its products at the third-party Chinese factory contracted to make its toys.

"We don't own that particular factory that made the recalled products, so we can't shut them down," Andres said, adding that the factory remained a client pending an investigation.

Regarding Mattel's overseas factories, Andres said the company owns and operates 10 factories worldwide - including five located in China - that produce half of all Mattel toys. The other five are located in Mexico, Malaysia, Thailand and Indonesia.

"The other 50 percent of our production we outsource to third-party vendors in China," she said.

Flawed regulation at home too

According to the Toy Industry Association (TIA), the agency has provided toymakers with voluntary safety standard for all toys.

The Consumer Product Safety Commission (CPSC) also regulates toys through its own inspectors that monitor the marketplace for both domestically produced and foreign-made toys.

But some consumer interest activists argue that limited budgets prevent federal agencies like the CPSC from enforcing adequate product safety mechanisms for most consumer products.

Apart from specific safety guidelines issued by the CPSC pertaining to use of hazardous substances, flammability and noise levels, there is no requirement that toy manufacturers must abide by the industry's own voluntary safety standards.

"The [CPSC] doesn't have pre-market jurisdiction, which means that they can't test products before they hit the market," said Rachel Weintraub, director of product safety and senior counsel with advocacy group Consumer Federation of America (CFA).

Said Byrne: "Obviously, these recalls could force the [toy] industry to reform those voluntary standards and maybe make them mandatory. If this could happen in China, it could also happen in a factory in any other country too."

Will Chinese factories lose business?

"Does it make sense for U.S. companies to look at other locations? Yes," McGowan said, also pointing to rising labor and production costs in the southern China's manufacturing belt.

"If I was sourcing heavily in China, I would be exploring alternatives like Vietnam and Cambodia," McGowan said.

At the same time, McGowan said U.S. companies have to make their suppliers in China or elsewhere "realize that the cost of any recall to them is also very high."

"American companies have to ask their vendors, 'What can you do for me to convince me not to take my business away from you,'" McGowan said.

Ennis, with the U.S.-China Business Council, said Chinese suppliers do face a legitimate threat of losing business.

"I think Chinese companies will face a very tough lesson if they don't respond adequately to growing concerns about safety and quality checks in their factories," Ennis said.

But ultimately analysts agree that it is big U.S. importers like Mattel who's business will suffer the most from insufficient oversight of foreign suppliers, no matter where they may be.

Officials at the Chinese Embassy in Washington were not immediately available for comment. Top of page

Sponsors
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.