Case 7 Troubled Times for the Chinese Toy Industry.pdf

7/26/2019 Case 7 Troubled Times for the Chinese Toy Industry.pdf

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Troubled Times for the

Chinese Toy Industry

The history of modern Chinese toy industry dates back to the early 1900s. By the early

1980s, the Chinese toy industry was developed enough to compete in the international

market. By 2006, benefiting from economies of scale and cheap labor, the Chinese toy

industry had come to dominate the global market for toys, accounting for around 75%

of the world's output. However, in 2006-07, the Chinese toy industry faced a series of

product recalls, adversely affecting its global image.

The case discusses the development of Chinese toy industry over the years.

It discusses the problems facing the toy industry in China, with specific emphasis on

the issue of recalls in 2007 and the reason behind the recalls.

The case examines some of the other challenges that the Chinese toy industry faces

such as increasing labor costs, technological inferiority of Chinese toys and the

growing demand for high tech toys, and the Chinese toy manufacturers' lack of brand

power. The case ends with a discussion on the actions taken in response to the series

of recalls and the possible impact of these recalls on the Chinese toy industry.


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Troubled Times for the

Chinese Toy IndustryIf this flood of dangerous products continues and retailers are forced to pull toyafter toy from their shelves, China will become the Grinch that steals Christmas this

year.1

- Richard J. Durbin, Democrat Senator from Illinois, commenting on the

recalls of Made in China toys, in August 2007

This is the last warning. If there is an unsatisfactory report in October [2007] we

will [impose] the next layer of measures. Among them is a ban on products.2

- Meglena Kuneva, the EU commissioner responsible for consumer

protection, in response to recalls of Chinese toys

Its quite urgent that we re-construct the Chinese toy industry. Otherwise, we will

not only lose the domestic market, but also the global market in the long term.3

- Shi Xiaoguang, president of the China Toy Association4, in 2002.

Introduction

On October 4, 2007, the Consumer Product Safety Commission (CPSC)5 in the USrecalled more than half a million toys made in China as they contained dangerouslevels of lead. The CPSC announced that the recalled toys included Pirates of the

Caribbean, Baby Einstein, and Totally Me! Funky Room Decor Set decorating

kits, imported and sold by Toys R Us Inc.6, and a variety of wooden toys imported

and sold by KB Toys Inc.7A lot of what is being recalled is because it violates the

law, not that there is an imminent health risk, said CPSC spokeswoman Julie Vallese(Refer Exhibit I for more information on toy recalls in October 2007).

The October 2007 recall was the latest in a series of Chinese toy recalls by toycompanies and retailers in developed countries. Among the reasons given for therecalls were excessive levels of lead paint, loose magnets that could be swallowed bychildren, or other potentially serious problems.

1 Louise Story, Toy Makers Brace for a Chill in Sales, www.nytimes.com, August 16,2007.

2 Elitsa Vucheva, EU could Ban Unsafe Chinese Products, www.businessweek.com,September 14, 2007.

3 Toying with the Future, http://app1.chinadaily.com.cn, 2002.4 The China Toy Association is an industry association, with Chinese toy companies as its

members. It has four committees for each toy category wooden toys, plush toys, plastic

and mechanical toys, and prams.5 The United States Consumer Product Safety Commission (CPSC) is an independent agency

of the United States federal government. CPSC was created in 1972 through the ConsumerProduct Safety Act that was framed to protect the public from unreasonable risks of seriousinjury or death from more than 15,000 types of consumer products that come under theagencys jurisdiction. (Source: www.cpsc.org)

6 Toys R Us Inc., headquartered in New Jersey, USA, is one of the largest retailers of toysand baby products in the world. A public limited company between 1978 and 2005, Toys RUs was acquired by an investment group. As of 2007, it had around 1,500 stores, with 830stores in the US.

7 Founded in 1922 by Kaufman brothers, KB Toys Inc. is a large mall-based retailer of toys.As of 2007, this privately-owned Massachusetts company operated around 600 stores in theUS.


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Exhibit I

Products Recalled in the US in October 2007

i. About 35,000 Baby Einstein Discover & Play Color Blocks, distributed by Kids II Inc.The blocks were sold around the country between June and September.

ii. About 79,000 Pirates of the Caribbean medallion squeeze lights, imported by theEveready Battery Co., a brand of Energizer Holdings, Inc. The flashlights were soldnationwide and online between September 2006 and October 2007.

iii. About 15,000 Totally Me! Funky Room Decor Sets, manufactured by Hong Kong-based

CKI Toys and imported by Toys R Us Inc. The kits were sold at Toys R Us storesaround the country and on the companys website between May and September 2007.

iv. About 10,000 wooden Pull-Along Alphabet & Math Blocks wagons, Pull-AlongLearning Blocks wagons, 10-in-1 Activity Learning Carts and Flip-Flop alphabetblocks, imported by KB Toys Inc. The toys were sold at KB Toys stores around thecountry between August 2005 and September 2007.

v. About 63,000 green plastic cups shaped like Frankensteins head, imported by DollarGeneral Merchandising Inc. The cups were sold at Dollar general stores around thecountry in September.

vi. About 192,000 key chains imported by Dollar General Merchandising Inc. The keychains featured a metal charm engraved with wisdom, truth, believe, love,hope or dream. They were sold at Dollar general stores around the country betweenJune 2005 and August 2007.

vii. About 150,000 bookmarks and journals, imported by Antioch Publishing. The productsfeatured a variety of decorations including Winnie the Pooh. The bookmarks andjournals were sold at book, card, and gift stores around the country between March 2005and October 2007. Some of the bookmarks were sold with bracelets.

Source: Another Huge Recall of Chinese made Toys, www.cbsnews.com, October

4, 2007.

The recalls had a limited impact on toy sales in the US and the EU but they severelydented the Chinese toy industrys image in international markets.

The possible long-term impact on its reputation, however, was only one of the many issuesconfronting the toy industry in China. With costs of raw materials and labor increasing, thetoy companies were seeing an erosion in margins. Also, the growing popularity of high-techelectronic toys was a challenge to Chinese toy companies as they were not very strong in thisfield. Furthermore, even in the traditional toy markets, Vietnam and Thailand were beginningto pose a threat.

Background Note

Toys have had a prime place in Chinese society since ancient times. Folk toys made ofwood, clay, and paper have always been very popular with Chinese children. Masksand clay figurines in the shape of animals have been found in the ruins of ancientChinese habitations. The history of modern Chinese toys, however, dates back to theearly 1900s. Around 1910, the first factories that made toys from tin were set up. Toymaking in China started gaining momentum after the May Fourth movement8in 1919.Several toy factories came up in the region around Shanghai. These factories madeclockwork, tin-plate warships, tram toys, simple tin containers, plates, and otherobjects. With the demand for tin increasing (for making cans for paints, cosmetics,

8 The May Fourth Movement in China began on May 4, 1919. The movement promotedMarxism in China and resulted in the birth of the Communist Party of China.


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biscuits, and sweets), tin sheet manufacturing units started to be established aroundShanghai in the 1920s and the 1930s. This gave a boost to the local toy industry.However, in this period, Germany dominated the worlds toy markets with its high

quality tin toys. Though the Chinese tin toys were no match for the German ones asfar as quality was concerned, they scored on the price front. By 1935, Chinesecompanies which had earlier been producing tin cans, started making tin-plate toysincluding toy planes, wind-up tin monkeys, and other toys.

During the Second World War, war related toys like fighter planes, tanks, and soldiersconstituted a major percentage of toy production in China. The war adversely affectedthe German toy industry, with most toy factories there being used for makingammunition.

In the 1950s, Japanese tin toys started gaining popularity for their novel designs andgood quality. In this period, Japanese toy companies also began producing plastictoys, which were very inexpensive. In China, toys began to be made with Chinesedesigns, as opposed to the western designs being used earlier. According to Marvin

Chan,9a Hong Kong-born graphic designer,10Before the 1950s, the toy designs arevery influenced by Europeans, but after, the toys have a more Oriental feel to their

patterns and design.

In the mid-1960s, most Japanese toy companies stopped making tin toys and shifted tomaking toys out of plastic and superalloys

11. China then became the manufacturing

center for tin toys. Though the tin toys from China were of poor quality initially, thequality improved over time.

During the Cultural Revolution,12toys were used as a propaganda tool in China. Dollsdressed up in Mao-suits, cars with political slogans, and building block cubes with

propaganda scenes on them were some of the popular toys during this period.13

The Growth

Chinese toy companies, like other companies in the manufacturing sector, benefited

from the reforms initiated in China in 1979. With the opening up of the Chinese

economy, toy makers from Hong Kong, which by then had become a major global

center for good quality toys, started setting up production facilities in mainland Chinain order to take advantage of the lower operational costs. However, most of the value-

added work such as product design, production planning, quality control,

management, and marketing continued to be done from Hong Kong.

Over the years, Chinese entrepreneurs and multinational companies too started setting

up toy factories in China. As several cities of the Guangdong province were allowedto adopt a more open industrial policy than the cities in the rest of China, most of the

toy factories came up in the Pearl River Delta region of Guangdong Province. The

9 Marvin Chan opened the Museum of Shanghai Toys in Singapore. The museum wasdedicated to high quality Shanghai toys made in the period between 1910s and 1970s.

10 Sonia Kolesnikov-Jessop, A Trip into Chinas Past, through its Toys, www.iht.com,March 27, 2007.

11 Superalloys are metallic alloys that exhibit excellent mechanical strength even at hightemperature, and are resistant to oxidation, corrosion, and deformation. Most superalloys arebased on iron, nickel, or cobalt.

12 The Great Proletarian Cultural Revolution in China was a struggle for power within theCommunist Party of China. The Cultural Revolution started in October 1966 and ended inOctober 1976.

13 Sonia Kolesnikov-Jessop, A Trip into Chinas Past, through its Toys, www.iht.com,March 27, 2007.


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special economic zones, especially in Shenzhen, attracted several international toy

makers.

Several of these factories were very large. Scale economies, together with cheap labor,

helped the Chinese toy-making firms to compete with toy producers from other

countries, who were mostly small or medium-sized.

Besides cheap labor, China was able to attract international toy companies alsobecause of an efficient network of supporting industries such as component industriesand services such as logistics, communication, etc. This helped international toymakers to strengthen their competitiveness in terms of productivity, reliability, anddelivery.

In 1987, the countrys first toy design institute was set up at Tianjin Science andTechnology University.Around this period, toy makers in China started incorporatingmodern technology like battery-operated controls, magnetic controls, and sound andlight controls in their products.

Chinas accession into the World Trade Organization (WTO)14 strengthened thedomestic toy industry, with a sharp rise in exports.

China organized its first international toy exposition in October 2002. Held between

October 8 and 11 in Guangzhou, the capital of Guangdongprovince, the expo washosted by China Toy Association (CTA) in cooperation with its counterparts in HongKong and Taiwan and Spielwarenmesse, a Germany-based toy exhibition companythat hosts the International Toy Fair.

15 Toy producers and dealers form Germany,

Britain, Russia, Spain, Mexico, the Republic of Korea, and other countries attendedthe expo.

As of 2006, there were about 7,000 toy factories in and around the cities of Shenzhen,

Dongguan, and Guangzhou (Refer Exhibit II for information on some toy

manufacturing centers in China). In 2006, China exported 22 billion units of toysworth more than $7.5 billion (Refer Exhibit III for statistics on Chinese toy exports

and imports). According to the China Chamber of Commerce for Import and Export

of Light Industrial Products and Arts-Crafts (CCCLA),16

as of end 2006, Chinese toysconstituted 75% of world toy output.17

The Problems

Though the Chinese toy industry had several strengths, it was also up against severalproblems that had the potential to significantly impact future growth. To start with,Chinese toy companies were faced with the dual pressures of rising costs anddeclining prices. On the one hand, buyers demanded lower prices. There is so much

pressure on prices from foreign companies, said Chen Huangman, Secretary General

14The World Trade Organization (WTO) is an international organization that deals with rulesfor international trade through negotiations among its member governments. It also helpssettle disputes between members based on an agreed legal foundation.

15 The International Toy Fair, organized annually on a one million sq. m. exhibition space at

Nuremberg, Germany, is the worlds leading fair for toys, and hobby and leisure-timearticles. The fair reportedly attracts around 2,750 exhibitors from 60 countries and 80,000trade visitors from 120 countries.

16 The China Chamber of Commerce for Import and Export of Light Industrial Products andArts-Crafts (CCCLA) was founded in 1988. It coordinates the trade in light industrialproducts and arts-crafts, and provides service for its member enterprises. (Source:www.cccla.org.cn)

17 Guangdong is a province on the south coast of China.


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of the Guangdong Toy Association. Wal-Mart18in particular, puts a lot of pressureon prices, and as they order so much from China, it has a large influence, said LiZhuoming (Zhuoming), Vice Chairman of the Guangdong Toy Association.19And on

the other hand, raw material and labor costs were increasing. Toy factory executivesacross the country admitted that they were forced to raise wages, sometimes by doubledigit rates, in order to attract and retain young workers.

Exhibit II

Major Toy Manufacturing Centers in China

Yunhe, Zhejiang

Yunhe, a picturesque county in Lishui, a prefecture-level city is a major center for woodentoys. Around 500 toy factories that manufacture wooden toys have sprung up in the 2000s.The annual output of the region crosses Yuan 1.5 billion. Yunhe is considered the largestcenter for wooden toys in China. The city was given the title Wooden Toy City by theChina Light Industry Association.

Pinghu, Zhejiang

Pinghu, a major city on the Pearl River delta region and one of Chinas largest garmentexport hubs, is also a major center for prams. It accounts for around 25% of the pramsmanufactured in China. According to 2006 estimates, exports of prams from Pinghu werevalued at $ 4 million. Chenghai, Guangdong

Chenghai district in the city of Shantou is a major toy manufacturing center with more than2,500 enterprises engaged in the toy business and over 100,000 employed in the industry.The annual output of toys and gift articles is worth around Yuan 8.8 billion

Yangzhou & Yizheng, Jiangsu

Yangzhou, a prefecture-level city in China, and especially Yizheng city, are famous for theirplush toys (or stuffed toys). There are around 100 large-scale factories in this region, with anannual output of around Yuan 3 billion.

Compiled from various sources

In addition to rising costs, and demands from foreign clients to keep prices low, therewas increasing pressure on Chinas toy companies from clients in the US and the EUto meet their high labor standards. Chinese toy factories had long been branded assweatshops

20and toy factory owners had been accused of denying workers their legal

rights. Violations allegedly included forced overtime, wage payment below theminimum standard, failure to provide social insurance, restriction of workers

personal freedoms, etc. However, Chinese toy manufacturers shifted the blame ontoWestern retailers and toy companies, saying they were squeezing their margins,leaving them with little money to improve working conditions. Liu Kaiming,Executive Director of the Institute of Contemporary Observation (ICO),

21said, There

are more serious problems in the [Chinese] toy industry than any other sector as the

prices are too low.22

Bama Athreya, Director, International Labor Rights Forum, also

18 Wal-Mart Stores, Inc. was founded in 1962. It is the worlds largest retailer and one of theworlds largest corporations by revenues.

19 Calum MacLeod, Chinas Toy Industry Feels Growing Pains, www.usatoday.com,December 21, 2006.

20 A sweatshop is a shop or factory in which employees work long hours at low wages underpoor conditions.

21 The Institute of Contemporary Observation (ICO), founded on March 18, 2001, is a civil societyorganization dedicated to labor development and corporate social responsibility. (Source: www.ico-china.org)

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shared the same view. In her testimony23to the Congress, she said, Wal-Mart bears alion share of responsibility for pushing the [Chinese] toy industry to a place whereworker health and safety are basically nonexistent.

24

Exhibit III

Chinese Toy Import and Export Statistics

Category 2005 2006

Exports ($) Imports ($) Exports ($) Imports ($)

16, 18 or 20

Cross-countrybicycles

275,358,952 8,021 260,999,221 17,122

Bicycles not largerthan 16, notelsewhere specified

or included

174,573,263 44,643 214,011,194 64,672

Baby carriages andparts

565,990,037 9,146,881 663,350,087 9,806,131

Musical boxes 19,037,697 541,223 21,731,462 172,980

Mechanisms formusical boxes

5,791,566 1,292,657 6,958,622 1,277,389

Wheeled toysdesigned to beridden by children,dolls carriages

270,006,643 635,640 355,774,372 943,052

Dolls, whether or

not dressed

318,705,789 11,449,860 389,714,240 13,382,616

Dolls garments and

accessories,footwear, andheadgear

66,734,251 9,980,431 72,254,540 3,436,787

Other dolls partsand accessories

35,376,056 9,778,648 37,706,999 13,195,698

Electric trains,including tracks,signals, and otheraccessories

40,557,441 1,816,729 39,582,741 1,066,407

Reduced-size modelassembly kits,working models

38,805,107 3,869,446 45,886,660 3,871,976

Other constructionsets andconstructional toys

5,342,864 180,716 12,243,909 255,553

23 Bama Athreya was testifying to a Senate panel which was considering passing a law thatwould make it illegal to import or sell goods in the US that were made abroad in sweatshopsor by prisoners.

24 Byron Wolf, Sweatshop Toys? Chinas Goods Finds US Homes, www.abcnews.com, October25, 2007.


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Stuffed toysrepresentinganimals or non-

human creatures

1,570,834,234 6,344,984 1,605,111,623 6,407,679

Other toysrepresentinganimals or non-human creatures

124,539,699 1,692,589 136,856,016 2,263,466

Toy musicalinstruments andapparatus

68,014,801 805,718 75,767,193 704,982

Puzzles 355,525,300 8,133,680 397,326,556 10,541,972

Other toys, put upin sets or outfits

226,013,097 3,111,896 307,838,064 4,501,503

Other toys andmodels,incorporating amotor

716,962,733 5,406,644 724,520,854 11,116,661

Other toys 2,724,867,112 51,348,669 2,855,080,436 51,001,271

Video games usedwith a televisionreceiver

3,888,966,084 46,635,371 5,077,008,358 189,892,142

Other video games 2,472,537,295 136,149,393 3,146,348,401 100,254,202

Articles forChristmas

1,073,407,609 1,431,126 1,151,238,737 2,592,939

Other festival andentertainmentarticles, includingconjuring tricks

146,917,463 1,814,837 163,916,886 2,729,764

Source: www.toy-cta.org.

To put things in perspective, the prices of many exported Chinese toys were a fractionof the prices of similar toys manufactured in developed countries. For example, thecost of manufacturing a pair of roller-skates in China was 16.8 euros ($21.15) on anaverage, compared to 62.3 euros in Japan.25

Also, toy manufacturers claimed that repeated inspections and evaluations of theirfactories in China caused lower productivity. Cited often was the case of a toy factorythat was inspected over 50 times in one year.

In 2005, international toy producers such as Mattel26

, Hasbro27

, and LeapfrogEnterprises Inc. (Leapfrog),28 submitting to international pressure, announced thatthey would cancel the orders placed with Chinese toy manufacturers unless these

25 April Mei, Playtime is over for Chinas Toy Industry , www.atimes.com, June 21, 200626 Mattel Inc., founded in 1945, is an American toy company. As of 2007, it is the worlds

largest toy company based on revenues.27 Hasbro was founded by two brothersHenry and Helal Hassenfeldin 1923 in Providence,

Rhode Island as a company that sold textile remnants. It started selling toys in the 1940s. Asof 2007, it was the second largest toy maker in the world, after Mattel Inc.

28 LeapFrog Enterprises Inc., founded in 1995, is a toy company based in Emeryville,California.


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manufacturers secured the International Council of Toy Industries (ICTI)29Code ofBusiness Practices certification by January 1, 2006 (Refer Exhibit IV to know moreabout the ICTI code). Alan Hassenfeld, President, CARE Foundation30at the ICTI,

said What we need to do is to set up unified factory inspection standards beforeNGOs make allegations against us.

31

Exhibit IV

A Note on the ICTI Code

ICTI released the ICTI Code of Business Practices (ICBP) in 2002. The ICBP isalso called the CARE Process, where CARE stands for caring, awareness,responsibility, and ethics.

The ICBP bars the use of underage, forced, or prison labor and the denial of a jobon the grounds of gender, ethnic origin, religion, affiliation, or association. Also,factories have to comply with laws protecting the environment. In all, the codecovers eight aspects: child labor, prison/forced labor, working hours, wages and

compensation, discrimination, working conditions, industrial safety, and EHS(environment, health, and security).

ICTI delegates the monitoring work to six independent monitoring agencies whichadopt monitoring approaches such as checking local laws, conducting on-sitevisit/inspection, interviewing workers, etc. Monitoring involves the inspection oforiginal documents. Interviews of workers are conducted in a separate room withno factory representative present, and special efforts are made to protectconfidentiality.

The ICTI certification procedure involves an audit checklist (in the Appendix II

of the Code). A high-ranking official of a factory is required to state whether thefactory has complied with items in the checklist by ticking in the Yes/No box

provided against each item and write how it was implemented in the Commentbox. If the factory has failed to comply with any of the items in the checklist, itmust take measures and then apply to be re-examined, until the certifying agencyapproves. After that, it also needs to be inspected by the ICTI CertificationTechnical Consulting Committee and confirmed by the ICTI (Asia) Co. Ltd. beforethe factory can receive certification. Furthermore, factories need to undergoevaluation on a yearly basis. Certification will be revoked if factories fail anyevaluation. Toy factories subsidiary factories and subcontracting factories mustalso undergo evaluation.

Though only a voluntary code, an increasingly large number of brand namecompanies require that their suppliers (of both components and finished goods)receive the ICTI certification. As per ICTI data, until February 2005, over 150

brand-name companies including Mattel, Hasbro, Leapfrog, Lego, and Toys RUs, have signed and acknowledged the ICTI certification. These companies

accounted for more than 50% of the global sales of toys.

Source: Liu Songjie, Mainland Toy Companies Facing the ICTI Dilemma,

www.chinalaborwatch.org, February 15, 2006.

29 ICTI promotes ethical and safe practices in toy factories and looks after the interests of toymanufacturers in 21 member countries.

30 The CARE (Caring, Awareness, Responsible, and Ethical) Process is the ICTI program topromote ethical manufacturing in the form of fair labor treatment, as well as employeehealth and safety, in the toy industry supply chain, worldwide. (Source: www.icti-care.org)

31 Liu Songjie, Mainland Toy Companies Facing the ICTI Dilemma,www.chinalaborwatch.org, February 15, 2006.


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At the beginning of 2006, the Chinese government in an attempt to improve thequality of Chinese toys, imposed the China Compulsory Certification (CCC)32schemeon toy makers. Under the scheme, effective from June 1, 2007, only toys that met

CCC standards would be allowed to be exported to foreign markets or sold in thedomestic market.

In April 2006, the Chinese toy industry suffered a blow when a EU report stated that25% of the problematic imported products recognized by the Unions Rapid Alert

System for Non-Food Products (RAPEX)33were toy products, and 85% of these weretoys imported from China.

34 The same month, Chinas General Administration of

Quality Supervision, Inspection, and Quarantine and the EUs Health and Consumer

Protection agency signed a draft guide for strengthening the Sino-EU CooperativeAction for Toy Safety.

In the months preceding June 1, 2006, Childrens Day in China, the Guangdongquality inspection authority checked toys produced in the province. The authorityfound that more than 45 percent of them did not meet state quality and safety

standards.

Despite lingering quality issues, even as late 2006, foreign buyers continued toexpress confidence in the Chinese toy industry. Michael Araten (Araten), President ofKNex IndustriesInc.,

35said, Theres a comfort level about China now they have

the investment and infrastructure, and meet U.S. and European safety standards.36

Tom Debrowski (Debrowski), Executive Vice President of Mattel, also held the sameview. He said, There are other places in the world where you can get lower labor

costs, but China has a very well-developed infrastructure, well educated engineers,excellent transport, and a business-friendly government.37

A Spate of Recalls

In mid-December 2006, in what was to be the first in a series of major recalls, theCPSC in the US issued warnings against Chinese products like BRIO bell rattles,Lobby Christmas lights, Holiday Time stuffed Christmas beagles, and three othertypes of toys. The commission said that as the parts of these products could be easilyseparated, there was a choking risk for children. This apart, high lead

38 content,

battery leakage, and inflammable parts were given as other reasons for the warnings.Several retail outlets in the US too issued warnings, and recalled the China-made toys.Around this period, the EU too issued safety warnings on a list of 15 made-in-China

32 The CCC is the compulsory Safety and Quality mark for many products sold in the Chinesemarket. The CCC Mark became effective on May 1, 2002. It is the result of the recent

integration of Chinas two compulsory inspection systems (one to check contents of

products for import and export, and the other for quality control) into a single procedure.(Source: www.ccc-mark.com)33 RAPEX is the EUs rapid alert system for all dangerous consumer products, with the

exception of food, pharmaceutical, and medical devices. (Source: http://ec.europa.eu)34 April Mei, Playtime is Over for Chinas Toy Industry, www.atimes.com, June 21, 2006.35 KNex Industries Inc. was founded in 1992. It is a privately held company, with its

headquarters and manufacturing facility located in Hatfield, Pennsylvania, USA. (Source:www.knex.com)



38 Lead is a toxic metal that can cause adverse health effects if ingested.
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toys including indoor Christmas lights, decorative string lights, fruit-shaped erasers,toy telescopes, toy air guns, and toy rifles.39

In 2007, the Chinese toy industry faced a series of product recalls and import banswith importing countries raising numerous consumer safety issues. In fact, the yearrecorded a sharp rise in the number of recalls, with some analysts referring to 2007 asthe year of recalls

40.

In February 2007, the CPSC and Hasbro recalled about 985,000 China-made Easy-Bake Ovens

41. The stated reason for the recall was that the door of the toy oven could

trap childrens fingers and cause burns.The CPSC said it had received 29 reports ofchildren getting their hands or fingers caught in the oven door, including five reportsof burns.

42

In June 2007, the CPSC and RC2 Corporation43 announced a recall of 1.5 millionThomas & Friends wooden railway toys manufactured in China. The products wererecalled because thesurface paint on these products was found to contain lead. UnderUS regulations, childrens products containing more than .06% of lead

44were subject

to recalls.45

In July 2007, the CPSC and Hasbro again recalled China-made Easy-Bake Ovens(about 1 million) citing the same reason as they had in February 2007.

46The CPSC

said that it had received 249 fresh reports of children getting their hands or fingerscaught in the ovens opening and getting burnt. Out of the 77 reported cases of burns,16 cases were reported as second and third-degree burns. It said it had also receivedone report of a five-year-old girl suffering a serious burn that required amputating herfingers.

In August 2007, Mattel recalled China-manufactured toys twice as the paint used on themcontained more than the permissible levels of lead. The first recall of almost one milliontoys was on August 1, 2007, and the second on August 14, 2007.Nancy A. Nord, ActingChairwoman, CPSC, said, These recalled toys have accessible lead in the paint, and

parents should not hesitate in taking them away from children.47 Mattel also recalledmagnetic toys manufactured in China as they had small but powerful magnets that couldcome loose and be swallowed by children. On September 4, 2007, Mattel again recalled844,000 toys that contained excessive levels of lead paint.

The successive recalls seemed to have seriously eroded the confidence of US companiesin China-based manufacturers. Soon after the August recalls, Jim Walter, Senior VicePresident for worldwide quality assurance, Mattel, reportedly visited Mattels contract

39 Rough Play for Guangdongs Toy Exports, www.tdctrade.com, March 27, 2007. 40 The recalls of 2007 on consumer goods manufactured in China also included pet food,

toothpaste, lipstick, and certain types of seafood.41

Easy-Bake Ovens were launched by Kenner Products (later purchased by Hasbro) in 1963,allowing little girls to bake treats by themselves.42 Nearly 1 Million Hasbro Toy Ovens Recalled, www.money.cnn.com, February 6, 2007.43 RC2 Corporation is a US-based designer, producer and marketer of toys and infant products.44 The US Consumer Product Safety Commission had banned paint containing more than

0.06% (600 ppm) lead for residential use in the United States in 1978. The US Governmentdefines lead-based paint as any paint, surface coating that contains lead equal to orexceeding one milligram per square centimeter or 0.5% by weight.

45 RC2 Corp. Recalls Various Thomas & Friends Wooden Railwa y Toys Due to LeadPoisoning Hazard, www.cpsc.gov, June 13, 2007.

46 New Easy-Bake Oven Recall Following Partial Finger Amputation; Consumers Urged toReturn Toy Ovens, www.cpsc.gov, July 19, 2007.

47 Lead Paint Prompts Mattel to Recall 967,000 Toys, www.nytimes.com, August 2, 2007.
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manufacturers in China to reemphasize the companys standards. He later described inan interview what he had conveyed to Mattels contract manufacturers The messagewas very clear. If you cannot do these things [meeting the quality standards], please let

us know. No problem, but you wont be doing business with us.48

Although recalls of made in China toys were not a new development ( Refer ExhibitV for recalls of China-made toys between 1988 and 2007 and the reasons), the factthat the year witnessed the recall of other made in China items such as pet food,toothpaste, etc. attracted more attention from the world press, thus denting theinternational image of Chinese manufacturing in general and toys in particular.Chinese officials, however, maintained that the majority of its toy exports were safeand of high quality. Some international toy industry officials came out in support ofthe Chinese toy industry, arguing that made in China toys were largely safe and thatthe issue was being blown up out of all proportion. There is something like 30,000

different toy products on sale at any one time. How many items have been recalledlately? Anyone can have something go awry. Its difficult to stay on top ofeverything, said Ian J. Anderson, the Asia Pacific director at SGS, a consumer testing

company that worked with Mattel and other toy makers in China.49

Exhibit V

Toy Recalls between 1988 and 2007

Year Total Number

of recalls

Recalls of toys made

in China

Percent of recalled toys

that were made in

China

1988 29 1 3

1989 52 4 8

1990 31 14 45

1991 31 8 26

1992 25 13 52

1993 20 8 40

1994 29 16 55

1995 35 19 54

1996 26 13 50

1997 22 9 41

1998 29 12 41

1999 20 4 20

2000 31 15 48

2001 23 12 52

2002 25 11 44

48 David Barboza and Louise Story, Mattel Issues New Recall of Toys Made in China,www.nytimes.com, August 14, 2007.

49 David Barboza and Louise Story, Mattel Issues New Recall of Toys Made in China,www.nytimes.com, August 14, 2007.


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2003 15 10 67

2004 15 13 87

2005 19 16 84

2006 33 26 79

2007 40 38 95

Toy Recalls by Type of Flaws between 1988 and 2007

Year Total number of recalls Recalls due to

Design Flaws

Recalls due to

Mfg. Flaws

1988 29 25 2

1989 52 42 2

1990 31 25 3

1991 31 29 1

1992 25 16 0

1993 20 15 1

1994 29 21 4

1995 35 32 0

1996 26 15 5

1997 22 17 1

1998 29 23 1

1999 20 15 2

2000 31 25 2

2001 23 15 4

2002 25 20 3

2003 15 14 0

2004 15 8 4

2005 19 14 3

2006 33 23 6

2007 40 26 10

Source: Hari Bapuji and Paul W. Beamish, Toy Recalls - Is China Really the

Problem? www.asiapacific.ca, September, 2007.

In what could be seen as a positive development for the Chinese toy industry, onSeptember 21, 2007, the Mattel management apologized to Chinese officials, toymanufacturers and the country as a whole for the loss of image and said that thecompany would take the blame. Debrowski said that the majority of these toys had

been recalled because of loose magnets (around 17.4 million units), which were theresult of design flaws. He apologized personally to Li Changjiang, Director of theState Administration of Quality Supervision, Inspection and Quarantine, China.


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Debrowski said, Mattel takes full responsibility for those recalls [of magnetic toys]and I would like to apologize personally to you, the Chinese people, and all of thecustomers who received toys that have been manufactured .50Mattels press release

stated, Mattel does not require Chinese manufacturers to be responsible for themagnets-related recalls due to design problems. The magnet-related recalls do notinvolve lead paint or manufacturing failures by Mattel or its vendors, includingvendors in China.

51However, regarding the lead related recalls, Mattel stated they

were the result of a minority of manufacturers [in China] not following the companys

guidelines; though even in the case of lead-related recalls, the company said that theywere overly inclusive.

52Mattels follow-up inspections also seem to have confirmedthat some of the recalled toys complied with US standards.

However, after repeated recalls of China-made toys, more consumers in the US werereportedly looking for alternatives to Chinese toys. Sales of US-made toys apparentlyincreased and US-based manufacturers found it difficult to meet the sudden increasein demand. Some of them were forced to hire more people and lease more warehouses

to stock their produce. Every time thered be a new recall this summer, wed get ahuge new order, said Deborah Evanoff, owner of Arrowcopter Inc., a private toymanufacturing company based in the US.53Earlier US producers had been unable tocompete against low-cost Chinese toys, but now they were able to successfully lurecustomers using made in USA labels. Some of these manufacturers brought photosof their manufacturing facilities to toy fairs, and placed advertisements in industry

publications to drive home the point that their quality standards were much higherthan those of Chinese manufacturers.

According to some analysts, the increase in the demand for US-made toys wasunlikely to last. They were of the view that claims by US-based toy manufacturers ofsuperior quality were not entirely true as the quality of US-made toys varied fromfactory to factory and some Chinese toys were of higher quality and yet cheaper.

In 2007, the EU, the second largest export market for the Chinese toy industry,introduced new environmental safety rules including those that banned the sale of toyscontaining over 1% of phthalate

54and five other chemicals. As phthalates were widely

used in the manufacture of plastic toys in China, the new rules were expected tosignificantly impact the Chinese toy industry.

Other Issues

Meanwhile, the Chinese toy industry was facing problems on the home front as well. Withlabor costs in China increasing rapidly, the industry was beginning to lose competitivenessin the export market. A survey by the Guangdong Toy Association indicated that Vietnamand Eastern Europe with their low prices posed a threat to Chinese toy exports. BryanEllis, Chairman of the Toy Industries of Europe, also held the same view. He said,Production is going to develop elsewhere, in Thailand, Indonesia, India, and Eastern

50 Mattel Apologizes to China, Pledging to Take Responsibility for Defective Toys,http://news.xinhuanet.com, September 21, 2007.

51 Media Statement September 21, 2007, www.shareholder.com.52 Mattel Apologizes to China, Pledging to Take Responsibility for Defective Toys,

http://news.xinhuanet.com, September 21, 2007.53 Rachel Konrad, Chinese Toy Recalls Benefit U.S. Firms, www.courierpostonline.com, October

15, 2007.54 Phthalates or phthalate esters are a group of chemical compounds that are mainly used as

additives to plastics to increase their flexibility. Some researchers believe that phthalatespose no health risks while others believe that significant exposure to some kinds ofphthalates cause allergies, asthma, cancer, etc.
http://en.wikipedia.org/w/index.php?title=Bryan%20Ellishttp://en.wikipedia.org/w/index.php?title=Bryan%20Ellishttp://en.wikipedia.org/w/index.php?title=Thailandhttp://en.wikipedia.org/w/index.php?title=Thailandhttp://en.wikipedia.org/w/index.php?title=Indonesiahttp://en.wikipedia.org/w/index.php?title=Indonesiahttp://en.wikipedia.org/w/index.php?title=Thailandhttp://en.wikipedia.org/w/index.php?title=Bryan%20Ellishttp://en.wikipedia.org/w/index.php?title=Bryan%20Ellis


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Europe.55

The appreciation of the yuan56

against the dollar, though gradual, was furtherreducing the already thin margins of Chinese toy manufacturers.

In an attempt to cut costs, some toy companies shifted operations to lower-cost areaswithin China. The [stringent labor] standards and rising labor costs are forcing an

exodus of downstream manufacturing out of Shenzhen57to second border locations

and even the hinterland of China said Apo Leung, Director of the Asia Monitor

Resource Center (AMRC)58

in Hong Kong.59

The Chinese Ministry of Commercefurther predicted that the toy industry would restructure, with larger and moreorganized companies eventually acquiring smaller and sub-standard factories.

A major challenge for the Chinese toy industry, despite its dominance in the globalmarket, was that it lacked brand power. The Chinese companies acted merely asoriginal equipment manufacturers (OEMs) who manufactured products for foreigncompanies. These products were then sold under foreign brands. In addition, Chinesetoy factories were weak in market knowledge and product promotion. Apart frommarketing, design was another weak area. There was moreover a severe shortage of

international quality designers. China needs lots of talented toy designers to turnitself from a big toy maker into a powerful one,

60said Liang Mei, secretary-general

of the China Toy Association. Though China had established some design institutes,the demand for designers often outstripped supply. I really dont know how to

distribute this small number of graduates for such a big demand, said Jin Guifang,

director of the design institute at Tianjin Science and Technology University.

Another challenge was technology. Though many China-made traditional toy productssuch as stuffed toys and dolls had taken a substantial share of markets in the EU aswell as in the US, Chinese toymakers were unable take advantage of the growingdemand for high-tech toys including electronic games and educational toys ( ReferExhibit VI for trends in the toy industry). This was because the business model of alarge majority of China-based toy companies was one of cheap labor and a low levelof technology. Most toy factories are small or middle -sized, with limited staff and

budgets for toy innovation. Besides, developing new products requires a largeinvestment and long-term payback, said Mei Meng, generalmanager of the NantongEurofield Arts Toy Company. Among toys China exported to the EU in 2006, morethan 80% were traditional toys; high-tech toys were less than 5%.

By competing on price, the Chinese toy industry also faced the danger of losing ordersto other emerging manufacturing hubs. However, the authorities were aware of thedownside to following a processing model. Shi Xiaoguang, president of the ChinaToy Association, said, The toy processing model is highly risky for the Chinese toyindustry. About 60 to 70 per cent of exported toys are produced in GuangdongProvince (in South China). If they lose overseas orders, they could lose their wholemarket.

61

55 Chinas Lockhold on Global Toy Industry Set to Ease, www.taipeitimes.com, February12, 2006.

56 As on October 26, 2007, US$ 1 was equal to 7.4976 yuan.57 Shenzhen is a city in the Guangdong province in southern China.58 The Asia Monitor Resource Center (AMRC) was founded in 1976. It is an independent non-

government organization which focuses on Asian labor concerns. (Source:www.amrc.org.hk)


60 Barbie Doll Poses a Challenge to Mammoth Chinese Toy Industry,http://english.peopledaily.com.cn, January 06, 2003.

61 Toying with the Future, http://app1.chinadaily.com.cn, 2002.


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Exhibit VI

Trends in the Toy Industry as of 2007

Continued popularity of smart toys: Toys with electronics and new technologyintegrated into them continue to see increased demand. Some companies haverecreated their very successful toys with new electronic features. For example,wooden trains by BRIO are now equipped with modern infrared remote control andelectronic sounds. Some newly introduced dolls and toy robots communicateinteractively with other toys in the same product line, such as Hasbros Furreal

Friends.

Sustained interest in licensing: Licensed products continue to be successful in the

market. In the case of video games, companies are now constantly inventing new

characters even as sales of games featuring licensed characters remain satisfactory.

Strong and clear focus on educational, creative, and developmental toys : With

more parents looking at toys as aids to develop their childs listening, creative, andinter-personal skills, the market for educational toys is growing in size. Hasbro has

launched a product called T.J. Bearytales, an animated bear that encourages

children to read with it. Another company Toy Quest has video books, which

encourage families to learn together through reading and sharing stories.

Trend of shorter product life cycles and a wider variety of novelty designs:

The product life cycle of toys has shortened over the past decade. In order to

achieve higher sales for products in their maturity phase, companies are using

fancy designs and gimmicks. Even for classic toys such as LEGO construction sets

and Barbie dolls, new features are regularly being added or improved to spur new

sales.

Wide interest in multi-media and web-compatible toys: The rising popularity ofthe Internet is making companies assimilate real and virtual toys together. New

toys that are capable of linking with the Internet are being introduced. For example,

Bandai, a large Japan-based toy maker, has introduced toy robots that allow buyers

to play games with animated versions of their robots over the Internet.

Youth electronics: Youth electronic toys are kid-size versions of adult products.

As most parents are not very keen on buying their younger children expensive

electronic products, the popularity of youth electronic toys is growing. Kid-sized

and affordably priced MP3 players and digital cameras are some examples of youth

electronics.

Sports-like toys: As concerns about health and child obesity rise, sales of sports-

like toys such as aquatic toys and equipment, are growing.

Growing demand for collectibles: Collectors articles have a loyal clientele even

among adults, particularly in the US, Germany, and Japan. The most popular

collectibles are soft toys and dolls, model railways, and parlor games. In response

to the growing demand, more and more companies are introducing two lines for the

same product, one for kids and the other for collectors. For example, besides its

childrens line, Mattel sells collectors lines of Barbie dolls, Matchbox die -cast

cars, and the Hot Wheels racing system.

Adapted from Profiles of Major Hong Kong Manufacturing Industries,

www.tdctrade.com.


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Outlook

In an attempt to improve the quality of toys, the Chinese government sponsored a two-

day training session on October 11 and 12, 2007, on quality control for more than1,000 people from the Chinese toy industry. At these sessions, Chinese governmentofficials and executives from multinational companies lectured on European and USquality and safety standards, Chinas toy licensing system, toy certificate systems,export test regulations, etc. Participants were also taught how to deal with high leadlevels or design flaws in their products. Officials from the Ministry of Commerceadvised toy companies to specify their obligations with respect to quality in thecontracts so that they could protect themselves from potential losses. 62According toLiang Mei, Secretary General of the China Toy Association

63, the recalls presented

both a challenge and an opportunity for the Chinese toy industry.64

In late October 2007, the provincial government of Guangdong announced that it hadsuspended or revoked the export licenses of 764 toy factories because of variousquality problems. Another 690 toy factories were ordered to renovate their plants and

improve product quality. According to sources, the provincial government had, by lateOctober 2007, finished inspecting 85 percent of Guangdongs toy factories andexpected to complete the process soon.

Though the majority view within China was that the toy recalls, especially those of toyscontaining high levels of lead, were due to lapses on the part of Chinese toy makers, therewere some who believed that the recalls were part of a conspiracy to sully the image ofChinas toy industry. Chinas product safety chief, Li Changjiang, was of the view thatsome importing countries had orchestrated the recalls so as to protect their domestic toyindustries and slow down Chinas toy exports.

On customer response to Chinese toys post-recalls, Ron Boire, president of Toys RUs Inc.s North American division, said, Consumers are still confused. However, headded that he did not see a sea change.

65 Chris Byrne, a New York-based toy

consultant,

66

talking about toy sales in the Christmas season, said, Its a blip. In thefourth quarter, a lot of purchases are made based on supplications to the North Poleand the phrase country of origin isnt in the vocabulary of children writing to Santa.

In late 2007, a weak dollar and US economy that appeared to be slipping intorecession seemed to have impacted exports from China, especially of toys and tiles.The dollar has depreciated so much that American goods are more competitive. Onthe other hand, the import decline tells you about what retailers are thinking about theholiday shopping season. Theyve cut back orders, said Sung Won Sohn, chiefexecutive of Hanmi Bank in Los Angeles.67In an attempt to encourage toy sales, Wal-Mart, USs largest retailer of toys, slashed prices by 10 percent to 50 percent inOctober, several weeks ahead of the usual shopping season. However, analysts fearedthat sales in the all-important Christmas season would be disappointing.

62

China Gives Toy Industry Crash Course in Quality, www.chinapost.com, tw , October 15,2007.

63 The China Toy Association, founded in 1986, is an industry organization with more than1,000 members. It acts as an interface between the toy industry and the Chinesegovernment. (Source: http://www.shanghai-toy-expo.com)

64 Tim Johnson, Chinese Toy Factories Retool after Recalls, www.mcclatchydc.com,October 23, 2007.

65 Anne Dinnocenzio, Despite Recalls, Chinese Toys Still Sell, www.theledger.com,October 2, 2007.

66 Rachel Konrad, Chinese Toy Recalls Benefit U.S. Firms, www.courierpostonline.com, October15, 2007.

67 Cargo Decline Portends Consumer Weakness,http://globaleconomicanalysis.blogspot.com, October 10, 2007.


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Meanwhile, the price of crude oil crossed an all-time high of $93 a barrel. This wasexpected to increase the cost of plastics, of which the majority of toys were made,creating further problems for Chinese toy makers.

Despite the problems, some toy industry experts were of the view that the 2007 recallswould not affect future demand for Chinese toys. Next year at this time when an

awesome new battery-operated toy comes out and its made in China will peoplesay no way? It just depends on the mood of the consumer, said Mary Jo Meister,sales manager for Lauri Toys Inc., a US-based toy manufacturing company. While itwas anyones guess whether Chinese toy exports would contract or not, China -basedtoy makers were increasingly hopeful of the booming domestic market. In 2006, ToysR Us opened its first store in China signaling the huge potential of the domestic toymarket in China. Frank Clarke of Strategy XXI Ltd.,68the communications agency ofToy Industry Association Inc. (TIA)

69 in New York, said. All our members are

looking at China as a retail opportunity, not just an export base. In the U.S., there are50 million children in the 0-8 age group. China has 300 million in that age group.

70

According to some estimates, Chinas toy market would grow 40 percent annually in

the next few years to be worth $12.5 billion by 2010.

68 Strategy XXI Ltd. is a member of the Kreab Group, a communications consultancy. StrategyXXI solves public relations and public affairs problems for corporations, governments, tradeassociations, and non-governmental organizations. (Source: www.strategy-xxi.com)

69 Toy Industry Association Inc. (TIA) is a non-profit trade association for producers andimporters of toys and youth entertainment products sold in North America. (Source:www.toyassociation.org)

http://www.usatoday.com/http://www.usatoday.com/


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References and Suggested Readings:

1.

Tim Johnson, Chinese Toy Factories Retool after Recalls, www.mcclatchydc.com,

October 23, 2007.

2. Rachel Konrad, Chinese Toy Recalls Benefit U.S. Firms,www.courierpostonline.com, October 15, 2007.

3. China Gives Toy Industry Crash Course in Quality, www.chinapost.com.tw, October 15,

2007.

4. Anne Dinnocenzio, Despite Recalls, Chinese Toys Still Sell, www.theledger.com,

October 2, 2007.

5. Media Statement-September 21, 2007, www.shareholder.com.

6.

Mattel Apologizes to China, Pledging to Take Responsibility for Defective Toys,

http://news.xinhuanet.com, September 21, 2007.

7. Kelly Marshall and Rob Kelley, Mattel Announces Third Toy Recall, www.money.

cnn.com, September 5, 2007.

8.

Hari Bapuji and Paul W. Beamish, Toy Recalls Is China Really the Problem?

www.asiapacific.ca, September, 2007.

9. Consumers: Mattel Expands Recall of Chinese Toys, http://europa.eu. August 16,2007.

10. Anne DInnocenzio, Toy Industry Challenged by Disposal Plan, www.boston.com,

August 15, 2007.

11. David Barboza and Louise Story, Mattel Issues New Recall of Toys Made in China,

www.nytimes.com, August 14, 2007.

12. Mattel Issues New Massive China Toy Recall, www.msnbc .msn.com, August 14,

2007

13.

Lead Paint Prompts Mattel to Recall 967,000 Toys, www.nytimes.com, August2,2007.

14. New Easy-Bake Oven Recall Following Partial Finger Amputation; Consumers Urgedto Return Toy Ovens, www.cpsc.gov, July 19, 2007.

15. RC2 Corp. Recalls Various Thomas & Friends Wooden Railway Toys due to Lead

Poisoning Hazard, www.cpsc.gov, June 13, 2007.

16. Rough Play for Guangdongs Toy Exports, www.tdctrade.com, March 27, 2007.

17.

Sonia Kolesnikov-Jessop, A Trip into Chinas Past, through its Toys, www.iht.com,March 27, 2007.

18. Nearly 1 Million Hasbro Toy Ovens Recalled, www.money.cnn.com, February 6,2007.

19.

Calum MacLeod, China's Toy Industry Feels Growing Pains, www.usatoday.com,December 21, 2006.

20.

April Mei, Playtime is over for Chinas Toy Industry, www.atimes.com, June 21,2006.

21. Toy Industry Gets Improved Regulation, http://english.peopledaily.com.cn, April 1,

2006.

22.

Liu Songjie, Mainland Toy Companies Facing the ICTI Dilemma,

www.chinalaborwatch. org, February 15, 2006.

23.

Chinas Lockhold on Global Toy Industry Set to ease, www.taipeitimes.com, February 12,2006.
http://www.usatoday.com/http://www.usatoday.com/


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24. Tin Toys Tradition Lives On, www.tinmantintoys.com.

25. Conquering Chinas Consumer Market Example: Toy Industry, www.fiducia-

china.com.

26. Keith Bradsher, Wages Up in China as Young Workers Grow Scarce,

www.nytimes.com, August 29, 2007.

27.

www.toyassociation.org.

28. www.strategy-xxi.com.

29.

www.chinalaborwatch.org.

30.

www.amrc.org.hk.

31. www.cpsc.org.

32.

www.icti-care.org.

33.

http://ec.europa.eu.

34.

www.ccc-mark.com.

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