Friday, August 3, 2007

Toy recall shows challenge China poses to partners

Mattel's recall of lead-tainted toys illustrates the potential risks firms face as they seek to benefit from low-cost Chinese goods. U.S. and Chinese officials agreed to work more closely to promote product safety.

Jane Spencer And Nicholas Casey, Wall Street Journal

Mattel Inc.'s recall of nearly one million lead-tainted toys shows the challenge Chinese companies increasingly pose for U.S. partners: how to benefit from low-priced goods without getting torpedoed by safety and regulatory risks.

The Mattel recall, comprising 83 types of toys from its Fisher-Price unit, involves excessive levels of lead paint in toys -- a common problem in China despite lead-paint regulations both there and in the U.S.

China makes nearly 80% of the toys that come into the U.S. and is a leading exporter of products from electronics to apparel to auto parts. Recent weeks have brought a spate of quality-control concerns about Chinese exports, from pet food to toothpaste to tires, which besides spooking consumers has heightened existing trade tensions with Washington. The events also are triggering questions about the role Western companies should play in monitoring the complex supply chain that links them to low-cost production facilities in China.

The Chinese government has tried to reassure consumers about the safety of its products. Chinese Minister of Commerce Bo Xilai said this week that more than 99% of Chinese exports are safe and of good quality.

The toy industry, along with other businesses, has moved so much manufacturing to China, in order to cut costs, that it remains exposed to problems despite laws and efforts on the ground to contain them. Public-health experts say Chinese manufacturers repeatedly revert to lead paint regardless of the rules because it is cheap and readily available, and helps factories meet relentless pressure to contain costs. Such violations slip through because of regulatory gaps in both nations.

While the recent recalls have ignited health worries in the U.S., lead exposure is a major public-health problem in China, where millions of children have unsafe levels of lead circulating in their blood. One 2004 study by researchers at Peking University in Beijing found 34% of young children in China had blood-lead levels that exceed the safe limit set by the World Health Organization, though exposure rates have improved in recent years.

"We're obviously concerned about the toys reaching the U.S.," says Scott Clark, a professor of environmental health at the University of Cincinnati. "But there are kids in China who are exposed to this stuff all over the place." He has found unsafe levels of lead paint in India, Indonesia, Ecuador and Nigeria.

In the U.S., a crescendo of lead-related product recalls has encouraged calls for more-rigorous, standardized product testing for toys made in China. About a third of the 967,000 toys being recalled in the U.S. -- which include popular Elmo, Dora the Explorer and Sesame Street characters -- reached stores this spring and summer before Mattel began the recall process last month.

Mattel won't publicly name the manufacturer until the El Segundo, Calif., company completes an investigation of how the toys were tainted. But Jim Walter, the company's senior vice president of world-wide quality assurance, said, "It's my understanding that they are producing toys for other companies." He said if products from the factory were sold to other companies, it would be the responsibility of the factory owner, not Mattel, to alert them.

"We have no right to go in there to ask, 'Who else are you producing for, and what else are you making?' " Mr. Walter said. He added that he had personally received no calls from toy companies seeking the name of the factory. The Toy Industry Association, which has close ties to Mattel, said it hadn't asked for information on the toys' source.

U.S. retailers and toy makers, including Mattel, have attempted to devise processes to prevent products with lead contamination and other problems from reaching shelves. But the systems vary, and they haven't kept problem toys from slipping through the process. Sometimes, toys that have passed inspection more than once are later found to contain excessive levels of lead paint -- a sign Chinese companies may have been able to game the safety inspections.

In Mattel's case, its own inspection process -- praised for being an industry standard -- also failed. Mattel allowed the manufacturer to perform its own tests, the company said, because it has a trusted 15-year relationship with it. Mattel says it performed monthly audits of the manufacturer's toys, which sometimes involved testing samples and other times involved reviewing the manufacturer's own testing records. "They didn't perform the testing they should have," said Mr. Walter. "And the audit we performed didn't catch it."

"We're certainly taking a hard look as an industry for a common set of requirements or procedures," Mr. Walter added.

Such incidents are one reason for calls to mandate independent third-party testing.

Meanwhile, some critics say U.S. regulators such as the Consumer Product Safety Commission are ill-equipped to police toy imports from China. "The CPSC does not test the products in advance," says Ed Mierzwinski, the consumer-program director at the U.S. Public Interest Research Group. "Even if it were ordered to, it's underfunded, understaffed and has inadequate authority to even impose recalls."

Last month, acting CPSC Chairman Nancy A. Nord sent a letter to members of Congress asking them to help modernize the commission. It was last reauthorized in 1990, said agency spokeswoman Julie Vallese, and its regulatory powers weren't written for a globalized marketplace. The reauthorization didn't include how to deal with purchasing over the Internet, for instance, Ms. Vallese said, adding that the CPSC is "seeking 21st-century tools for 21st-century problems."

At the same time, Chinese regulators are seen as lax in enforcing their own lead-paint standards. China has laws banning lead paint from consumer products. But a lack of regulatory enforcement means such laws are routinely ignored. Over the past three years, Mr. Clark at the University of Cincinnati has tested 38 paint samples from China, representing 11 brands. He found more than 25% had lead levels exceeding the U.S. safe limit of 0.06% for paint.

Lead is a neurotoxin that hijacks the developing brain. It causes damage by mimicking helpful metals found naturally in the body, such as calcium, iron and zinc. Lead displaces those and disrupts brain circuits critical for learning. Occasional exposure to small amounts is unlikely to have serious health effects, but repeated exposure can cause declines in IQ and, in extreme cases, severe brain damage. New research suggests there is no safe level of lead exposure, and the World Health Organization has tightened its guidelines over the past year.

That has sharpened concern over whether industry or governments can stop Chinese manufacturers from using lead paint. A series of recalls so far this year has involved not just Mattel, but millions of pieces of children's jewelry, Thomas & Friends trains made by RC2 Corp. and other goods. The recalls can be costly for companies -- Mattel, which had 2006 sales of $5.65 billion, said today it expects to take a charge of $30 million for the second quarter for the incident.

Mattel could face liability lawsuits over the recall, even though the toys were made by a third party. RC2 faces several suits, with allegations including negligence and unfair and deceptive trade practices. Some plaintiffs are asking for funds to medically monitor children who played with the toys.

An RC2 spokeswoman said the company believes it has taken "the right steps to protect the safety of the children...and assure their parents the safe, high quality products they expect."

Lead can make paint more resistant to corrosion, stabilize it and fend off mold. It also helps it dry quickly, speeding up production and reducing costs.

Two decades ago, Mattel was one of the first U.S. companies to move manufacturing to China. The gritty industrial province of Guangdong in southern China now has more than 5,000 toy factories, where the majority of the world's toys are made.

Lead experts say the scale of the recall suggests the use of lead paint wasn't uncommon at the factory at issue in the Mattel recall. "From the size of the recall, we're not talking about accidental use of paints," says Paul Mushak, a toxicologist at PB Associates, a Durham, N.C., risk-assessment firm specializing in toxic metals. "We're talking about something that's been a conventional practice."

Mattel disputes this claim.

How to prevent lead-paint use has bedeviled U.S. toy makers. In 2003, for example, Toys "R" Us Inc. voluntarily recalled 50,000 lead-laden sticks of sidewalk chalk. Afterward, the company ramped up safety measures by evaluating products before full-scale manufacturing, as well as enlisting third-party labs to perform spot-checks. An internal team was also established to bring products beyond CPSC standards.

Even so, lead contamination has remained an issue for the retailer. In March, Toys "R" Us voluntarily recalled about 128,700 military toys produced by Toy Century Industrial Company Ltd. of Hong Kong that were found to contain high levels of lead paint.

According to Rick Ruppert, the company's executive vice president for product development and global sourcing, the toys had originally passed two safety inspections: first before they were put into production, and then on the first shipment. No lead was found. Subsequent shipments aren't always tested, Mr. Ruppert said, but periodic spot-checks were done by a third-party inspector as well as annual tests. It was during one such spot check that a Hong Kong lab detected the lead.

Since the most recent incident, Toys "R" Us says it has stepped up testing for lead and has increased its quality-assurance budget by 25%.

But Mr. Ruppert said the cost of moving operations from China were too high given China's unique ability to produce high toy volume. "The cost of the transition would be disruptive," he said.

McDonald's Corp., one of the world's largest toy buyers, says the problem of lead paint is so widespread in China that the company has developed a system to monitor paint all the way through the supply chain back to the paint suppliers. The company requires its Chinese toy makers to agree to use only those suppliers.

"We never go on the open market, so we know exactly who we're dealing with," said Walt Riker, vice president of corporate communications.

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