Don’t bash China – U.S. toy makers are at fault
CHINESE TOY RECALL: OUTSOURCING PRODUCTION DOESN’T MEAN WE HAVE OUTSOURCED RESPONSIBILITY
Companies that take full credit for product successes must accept just as much blame when things go wrong
SHIH-FEN S. CHEN
Born in Taiwan and trained in the U.S., Shih-Fen S. Chen is an international business professor at the Richard Ivey School of Business, at the University of Western Ontario.
September 3, 2007
For years, consumers have been buying Chinese-made products bearing American brands. Many believe that U. S. companies moved their factories to China to enjoy a lower production cost. The mass recalls of Mattel toys reveal a little-known fact – those products are actually made by “ghost manufacturers” in China.
In a typical outsourcing arrangement called Original Equipment Manufacture (OEM), U.S. toy makers design a product, transfer design and production knowledge to subcontractors in China, buy back the final output, and resell it to consumers under their own brand names.
Outsourcing is a magic trick for U.S. manufacturers to enjoy low production costs abroad without the hassles of managing plant operations themselves. Critics of outsourcing focus mostly on job losses and the risk of ceding proprietary technology to foreign firms.
The current recall of millions of toys indicates that quality failure could be an even bigger risk.
Product safety standards usually improve in step with the increase in income in each nation – what is safe in a poor country could be considered dangerous in a rich one. So, by relocating production to low-income countries such as China, U.S. toy makers should expect to receive low-quality goods and step up quality control accordingly to pre-empt product failure.
Quality monitoring is particularly important in product outsourcing. Ghost manufacturers in China are anonymous to consumers in the U.S. and hence have “no stake” in the product brand. They may have an incentive to cheat on quality if they can shift the blame for product failure to U.S. toy makers and save on manufacturing costs.
After a series of recalls that involve Chinese-made products, the media, governments, and public opinion are all pointing their fingers at China for flooding the U.S. market with unsafe and contaminated products, ranging from pet food, toothpaste, tires, to toys.
The reality is that U.S. importers have failed to install a quality control system and reject any outsourced product that does not meet the benchmarks. We are not talking about a few random errors in production that escape the eyes of quality control managers, but about a colossal failure of the outsourcing firm that let 19 million pieces of unsafe toys slip into the marketplace.
I am not giving Chinese manufacturers an easy pass here. Together with their government, they must find an effective way to root out bad apples that ship faulty products to foreign markets and as a result damage the “Made in China” label as a country brand worldwide.
But, if we really need to find someone to blame, don’t blame China for U.S. toy makers’ failure to protect consumers. Let me explain why:
First, U.S. firms outsourcing products from China pocket most of the savings on production costs as profits. A recent study sponsored by the Alfred P. Sloan Foundation’s Personal Computing Industry Center at the University of California Irvine found that it costs only $4 to assemble an iPod in China, using parts and components from South Korea, Japan, Taiwan, etc. Apple keeps $80 in the total price of $299. If subcontractors in China must split the blame for quality failure with Apple, their fair share should not exceed 5 per cent (i.e., $4 divided by $80).
Second, most buyers rely on product brands rather than country names in making their choice decision. They purchase a Chinese-made Barbie not because they value the country name, but because they trust the product brand. Thus, the liability for breaching consumer trust should be assigned to the party who brands the final product, regardless of its country of origin.
Third, U.S. manufacturers take full credit for the success of an outsourced product if their subcontractors happen to deliver high quality to consumers (as they do in most cases). Has Steve Job ever said that “a subcontractor in Taiwan makes my iPhone” or Phil Knight told anyone that “shoemakers in China assemble the Air Jordan line”? If not, is it acceptable that U.S. toy makers scapegoat a subcontractor for their failure in screening out unsafe products?
My answer is “no”. The party who takes full credit for product success must bear full blame for product failure – it’s as simple as that.
Of course, U.S. toy makers can terminate their co-operating relationship with those subcontractors who violate the quality standards, seek punitive compensations from them, or bring the cheaters to a commercial court for possible legal sanctions if so doing is necessary.
Ironically, Mattel may end up a winner in the next toy-buying cycle, although it is now mistaken by some as a victim in the recall fiasco.
Previously, consumers relied on toy brands as a quality guide in making their purchase decisions. Yet, the publicity of these recent recalls has taught them that the “Made in China” label is also an important quality cue.
Imagine what will happen at toy stores during the coming holiday seasons – consumers pick up a toy, inspect its country of origin, and put the toy back if they see the “Made in China” label.
Many shoppers will leave the store empty-handed, given that more than 80 per cent of the toys sold in North America are made in China. Without buying any toys, they will instead spend the money on computer games, theme park trips, and other substitutes. The toy industry will collectively suffer from its poor outsourcing practices.
In December, however, some consumers will remember that Mattel is the company that initiated large-scale product recalls. So, any Mattel toys that remain on store shelves should be good and safe. The firm may then gain sales from competing toy makers.
Will Mattel share with its Chinese subcontractors the glory of bouncing back at that time? If not, let’s stop bashing China for the failure of U.S. toy makers.
Number of pencil cases made in China that Toys “R” Us Inc. recalled because of lead paint on the outer packaging.
U.S. recalls of Chinese-made products in August
Number of toys recalled
by Mattel Inc.
Pairs of steel-toed work boots
recalled by Caterpillar Inc. amid fears wearers would suffer electric shock.
work boots recalled by Caterpillar Inc. amid fears wearers would suffer electric shock.