What went wrong at Mattel

A subcontractor's choice

In a press teleconference on Tuesday, Eckert and Jim Walter, Mattel's senior vice president for worldwide quality assurance, announced a number of steps they were taking to prevent further recalls.

Mattel said the lead paint on the latest products resulted from malfeasance in the company's supply chain. Mattel's main supplier of the "Cars" products, Early Light Industrial, had subcontracted out the painting to another company, Hong Li Da. While the subcontractor was supposed to use paint supplied by Early Light, it instead used paint that contained potentially poisonous lead.

"Early Light, the vendor, is every much a victim as Mattel is," Eckert said. "The subcontractor chose to violate the rules."

• MSN Health: Spot symptoms of lead poisoning

Mattel does more than many companies to make sure its Chinese suppliers operate ethically, including treating its workers fairly. The company relies on the International Center for Corporate Accountability to monitor its plants and publishes the sometimes critical reports on its Web site for review. About 65% of Mattel's toys are made in China. The rest come from Thailand, Malaysia, Indonesia and Mexico.

Whereas Mattel used to randomly test finished toys, Eckert say it will now test every single batch of toys produced. Safety checks will also get beefed up at the supplier and subcontractor level prior to the finishing of the product. The recalls Tuesday involved 436,000 toy cars contaminated with lead paint and 18.2 million magnetic toys manufactured between 2002 and January of this year.

Not all recalls are due to suppliers cutting corners. In the case of the recalled magnetic toys, technology advanced faster than toy maker's perceived risk.

Mattel's quality guru Walter noted in an interview with BusinessWeek in late July that the company puts products through rigorous stress tests. The industry didn't anticipate, however, that if two or more of the high-powered magnets were ingested at once they could close off the intestines of small children. In newer versions of the toys the magnets will be locked into the products in such a way that a child cannot break them free.

An ongoing impact on sales

On Aug. 2 Mattel announced that it had taken a charge of $29 million to cover the cost of product recalls this year. That amount is unlikely to have a major impact on the company. Mattel earned $592 million on sales of $5.6 billion last year.

But BMO Capital Markets analyst Gerrick Johnson said Monday in a report that he expected the recalls to have an ongoing impact on the company's sales. He adjusted his estimates for the company's revenues down by $25 million this year and by $40 million in 2008.

It's still unclear to what extent parents will shun toys this holiday season as repeated recalls of products undermine consumer confidence. "They have to prove they can manufacture these products safely or parents will stay away," says Dr. Stevanne Auerbach, author of "The Toy Chest," a guide to toys.

Other toy makers and retailers have already begun to promote the fact that their toys are made in the United States. Kidbeam.com, of Asheville, N.C., says its plush dolls are not only made locally, but manufactured from organic cotton. Green Toys says its line of gardening kits and pretend cookware are made from bioplastics derived from corn.

Eckert told reporters he was not pushing for any kind of federal safety standards. "I don't rely on anyone else to ensure the safety of our products," he said. "This is our concern." He also said he's hoping his ads and Web site will ease parental concerns. "I think it's important to establish a dialogue with parents," he said. "I want to make sure they hear from me."

This articles was reported and written by Christopher Palmeri for BusinessWeek.

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