Manufacturers Share the Blame for Product Recalls

Aug. 14, 2007 -- The tainted products may be manufactured in China, but the American companies whose brands they carry share much of the blame, according to people who work in China and do business there. These observers say for American companies it's all about cutting costs, which in many cases means cutting corners and standards.

Government-imposed manufacturing standards are virtually nonexistent in China; therefore the onus falls on Western companies. So if a Western company wants high standards it can pay for them. If it wants to compromise quality, as manufacturers of low-cost products sometimes do, that is entirely possible as well.

"I lay a lot of responsibility at the hands of American purchasing companies," said James Fallows, a writer who has spent an extensive amount of time looking into conditions in Chinese factories.

"American companies that have wanted to make sure standards are high enough, they are," Fallows added in a telephone conversation as he stood in the manufacturing metropolis of Shanghai and looked out over People's Square.

Gordon McBean of Roth Capital, who has lengthy experience surveying Chinese manufacturing facilities from an investor's vantage point, agrees.

"Responsibility belongs to the end seller of the product, the distributor in the U.S. The guys in the U.S. can do a lot about controlling quality. Communication is better [between the U.S. and China] than it's ever been – there are bilingual folks, travel back and forth is easier, setting up offices in China is much easier. There is no excuse for a company not to have strong oversight."

On Tuesday Mattel issued its second major recall of toys believed to contain lead paint in as many weeks, casting doubt on the safety and manufacturing standards at Chinese factories where 80 percent of the world's toys and millions of other goods are produced.

A Mattel spokesman blamed the Chinese manufacturers for the problem, saying the toy manufacturer requires its subcontractors to test toys for lead paint and other defects. "If these vendors and their subcontractors had adhered to our procedures, we won't have this issue," he said.

In issuing the recall, Mattel is not alone – toy manufacturing competitors, a toothpaste company and a tire manufacturer have all issued recalls of Chinese-made products this summer, suffering major blows to both their checkbooks and reputations.

In industries where competitive forces require high standards, manufacturing quality tends to meet the demands of the market; take for instance Apple's iPod or the computer you are using to read this article.

But if the market for lower-end products, say toys, happens to value low cost over high-quality, companies will tend to meet that demand as well. And that, the experts say, is how these recalls come about.

"Mattel, whose name is on these toys, certainly is responsible for the things that go out and are sold under its name," said William Kirby, a historian of modern China at Harvard. "To be shocked about conditions in Chinese factories after more than a decade of close cooperation between Chinese toy manufacturers and American distributors is not terribly believable."

And the complexity of Chinese supply chains is also partly to blame for the quality control issues we are now witnessing, said Scott Alberts, who has been manufacturing in China for almost 30 years.

"I would be willing to bet that most of these companies specified that you cannot use lead paint, and the contractor signed on to it, and the subcontractor signed on to it, but stuff gets through," said Alberts, who works for Build-It Engineering, a manufacturing firm. "When you're the company the size of Mattel, and you've got 30-40 manufacturers that you're giving business to, it's really hard to keep track."

"More and more of what we consume is being manufactured outside U.S.," said McBean, "and when you're outsourcing product and not manufacturing internally, there is a step lost in quality control. If companies are going to outsource more and more, they have to apply a lot more resources to quality control."

But for firms looking to maximize profit in very competitive industries, paying for quality control is not always an option.

"It's hard to introduce extra cost with a lot of retail pressure – you just can't afford to put in an expensive quality control unit," Alberts said. "The margins in toys are not substantial, especially in a competitive market. If you're selling cars for $1.00 each, it's very difficult to have someone inspecting every single car."

Kirby said he has visited semiconductor manufacturers and petrochemical plants in Shanghai and found the factories to be in excellent condition. The precision and quality those industries demand – not any benevolence on the part of the Western manufacturer – was largely responsible for that, Kirby said.

Fallows compared China's manufacturing boom – and the attendant lack of government-imposed standards – with comparable booms in America and Britain, which were characterized by rapid industrial expansion but very low standards.

Just like in early 20th century America, Fallows believes change will come with pressure. Only after media investigations and recalls expose factories' shortcomings will low-end manufacturers such as toy companies feel the financial pain necessary for them to increase the demands they place on their facilities in China.

"This is very much like the American factory ecology of the Upton Sinclair era where you had the muckrakers exposing…the excesses of immature manufacturing capitalism," Fallows said.

And Kirby said that those same market pressures that will force Mattel to improve its standards will also cause the Chinese government to more closely regulate slipshod manufacturers.

"To the degree a scandal like this brings people back to an earlier day when made in China meant not well made or dangerously made…it's not just an embarrassment for China but also will have economic costs," he said. "The Chinese government and Chinese manufacturers [now] have a strong set of reasons to increase oversight at all levels."