I worked on this paper during my last semester at college. I got interested in the subject when I first started hearing media reports of Chinese product failure. Being a cynic, I automatically assumed that the media was not treating China fairly. It took me about 3 months to do enough research to overturn that basic hypothesis. My new theory is that the media, dominated by the 24 hour news cycle and a constant battle for ratings, treats very few issues in enough detail to fully understand.
In this paper, I feel that I did not touch enough on the complexity of global supply chains and the mathematical possibilities for error in each process. I found
very helpful in explaining this concept, but it is way over my head to analyze any further and make reasonable approximations as to why China's product error is so high.
The Implications of the Lead Paint Incident on the Sino-U.S. Trade Relationship
The summer of 2007 was an American consumer’s nightmare. Pet owners found their beloved animals slain by tainted food. Reports of poisonous toothpaste flooded the media, and worst of all, lead paint was found on numerous Mattel toys. All of the troubled goods came from China, the behemoth country that many Americans feel could be its next adversary. From the heartland came cries of Chinese malicious intent, and it only worsened the already omnipresent disdain for overseas foreign labor. Hawks claimed that this was proof the Chinese were ready to wage war, and succeeded by getting right to the heart of America: the children. Globalization advocates played it down by citing the growing pains of America’s own industrial revolution 100 years ago. Yet on the other side of the Pacific, Chinese leaders defended their products by leveling blame on the American companies producing the goods. Leaders of the Chinese Communist Party (CCP) were quick to assure consumers that they are taking this issue seriously, lest they lose their biggest export market. The closure of the American marketplace would prove to be a tremendous disaster for the party. It is easy to get lost in the media storm of economic nationalism that has been rampant on both sides of the Pacific.
The point of this paper is to analyze the situation from the point of view of Mattel, the American and Chinese government, and the American and Chinese people. In addition to all of these actors, the general Sino-American relationship beginning with the Shanghai Communiqué up to the present will be examined. I will try to prove that although the lead paint incident might have caused short-term turmoil, it will be beneficial in the long run because it opened a dialogue previously closed. It also made leaders face the brutal reality about the future trade relationship. From the Chinese side, it reinforced the idea that political stability can rest in the hands of American corporations. From the American end, it reiterated continued reliance on Chinese labor and failure of multi-national corporations to control their products.
How Did the Sino-American Relationship Progress so Fast?
For the purposes of this paper, the modern Sino-American relationship began with Richard Nixon’s 1972 visit to China. This ended 30 years of bitter hostility and virtually no contact between the two nations after the Korean War. During those years, China was domestically a closed society and had very little trade with most outside countries. Mao’s vision was to promote an autarkic economy based on the hard work of the proletariat. Nixon’s visit, along with the death of Mao Zedong in 1976 and the rise of Deng Xiaoping, was the right formula to economically open up the country. Nixon and Mao signed the Shanghai Communiqué, and pledged to work together to normalize relations.
Seven years later, full diplomatic relations were restored when Jimmy Carter and Deng Xiaoping signed the Joint Communiqué. While not dealing directly with economic concerns, the document highlighted America and China’s belief “that normalization of Sino-American relations is not only in the interest of the Chinese and American peoples but also contributes to the cause of peace in Asia and the world.” China started its gai ge kai fang movement, or reform and opening, a catch phrase that is still posted on red banners and blared through radio speakers all over the country. It was a policy of export-driven growth, to take China’s gargantuan labor force of 800 million and train them to produce export quality products. In the process, China would reap the benefits of opening its closed economy and receive the much needed training and technological expertise from the West. In order to achieve this, Deng set up thirteen “Special Economic Zones” (SEZ), offering foreign companies tax incentives to set up joint ventures with Chinese firms.
Never in history had a country with such a huge, motivated workforce opened up so methodically. Already by 1985 the U.S. and China were trading $6 billion worth goods, and the trade was balanced.
The U.S. China relationship did face some rough patches during these years: most notably the Tiananmen Square incident of 1989. The uprising and eventual massacre at Tiananmen Square in 1989 ended the American illusion that an economic opening brought political freedom. The Tiananmen Square incident contradicted everything the West hoped China would become: a vibrant economy with a thriving democracy. Constant replaying in the media of the violence quickly changed public opinion in the United States.
Foreign journalists had already been given access into China in order to cover the summit between the CCP and Mikhail Gorbachev, and cameras rolled as students flocked to the biggest anti-government protest since China’s May 4th (1919) movement. Americans watched as the students went on a hunger strike for freedom and Americans watched as the students built a replica of the Statue of Liberty directly facing the portrait of Mao. Americans then watched as tanks pounded their way through mobs of angry but unarmed civilians and killing an estimated 2000 people.
The backlash against China was widespread. Congress was ready to revoke China’s Most Favored Nation Status and the State Department chided George H.W. Bush for a misguided China policy. In a secret cable dated July 11th, 1989, U.S. Ambassador to China. James Lilly, outlined how the relationship was extremely one-sided. He wrote, “today the Chinese are engaged in a massive campaign to discredit U.S. influence to the Chinese people. At the same time, China wants our trade … [and] our technology.” Lilly also notes that select American companies were being labeled as corrupt without merit, while others were getting face-time with the Chinese leadership. Lilly labeled this as the “let us cooperate and move forward approach,” while the Chinese state run media noted that the “only obstacle [to better economic relations] is the USG (United States Government).”
Ironically however, trade between the two countries continued to grow. U.S. exports to China dropped in 1990, yet its imports continued to grow and have not stopped growing.
The U.S. Congress reacted to the Tiananmen uprising by legislating that China’s Most Favored Nation (MFN) status had to be annually renewed and based on their human rights record. In addition, Congress issued a military embargo with China, which included civilian technology that could possibly be used for the military. These goods are termed “dual use.” The 418-0 vote in the house and the 81-10 passage in the Senate of this embargo displayed the incredible fortitude at which Congress sought to punish China. Technology was the main type of export that China needed. Now, any technology that could possibly be used to bolster the Chinese military or police forces were restricted from exports. The embargo still is in effect, and even today, Chinese leaders point at these export controls and claim that it adds to the bilateral trade deficit.
Although 1989 brought the biggest setback between the two countries, the relationship has certainly had its ups and downs since then. Events like the Taiwan Straights crisis of 1995-96, America’s bombing of the Chinese embassy in Serbia in 1999, and the EP-3 incident of 2001 all but undermined an already shaky relationship. Yet again, it is apparent that American consumers do not react to these problems. Imports from China steadily rose throughout all of these troubles, while growth in exports slowed only around the time of the 1999 embassy bombing. The growth of the trade relationship in the midst of debilitating events shows the bifurcation between politics and economics. American consumers are completely responsive to cost. By the same token, the U.S. government has seen the American consumer grow accustomed to China’s low prices, and the government has done everything in its power to ensure the trade relationship is strong. The American government ignores policies that otherwise would not be tolerated, such as China’s pegged currency, human rights abuses, and dumping.
The Trade Imbalance: Problems in the American Heartland
Even though both countries benefit from the symbiotic relationship, the American Main Street is not happy with the current trends. Public opinion as well as rhetoric in the media is generally unfavorable towards China, yet no concrete steps have ever been taken to restrict Chinese trade. Americans have fallen in love with the cheap goods to the dismay of domestic manufacturing. To better understand the trade discussion in the run-up to the lead paint incident, narratives from both sides of the Pacific should be examined.
The trade deficit simply means that Americans consume Chinese goods much more than they produce for the Chinese market. Even so, 60% of Americans believe China is trading unfairly and 57% would support tougher trade policies. The deficit is currently hovering around $250 billion, the largest the U.S. has ever had with one single country.
Americans use a few general narratives to describe why trade is so imbalanced. One narrative is “wages are so much less in China.” This is surely true. China’s hourly labor cost is an average $1 per hour in urban areas compared to America’s $30. This factor obviously makes it hard for America to retain manufacturing jobs. Union regulations as well as individual workers’ pride will not allow wages to drop to a level that would be anywhere close to competitive with low Chinese wages. However, American workers are better educated and highly trained. The World Bank estimated that an American worker from the years of 1995-1999 was 28 times more productive than a Chinese worker. Also, wages only make up one facet of a very complex production scale. For simple goods like apparel, labor costs account for about 20% of the total inputs, yet for high-tech goods, they only account for 5%. Many developing countries could provide a labor force that competes with China’s on account of their wages. Yet China has obviously found ways to cut costs on the other 80% of the supply chain. This low-wage phenomenon is obviously not debilitating after looking at the global economic picture. Germany is the largest exporting country, even in the face of extensive labor costs. If lower wages were the only metric to asses final cost, Americans would be flooded with cheap goods from South East Asia, Central America, Mexico, Africa and the Middle East. Somehow, China is able to take wages similar to these other countries and shave off the price using other methods. Lower wages definitely have some role in bringing prices down, but it is not the end-all-be-all reason that Americans generally assume.
Another popular American narrative is that China has unfair trade practices. In an ad campaign to highlight the evils of Wal-mart, a group calling themselves “Wake up Wal-mart” argue that middle class Americans are losing jobs because of corporate America’s conciliatory approach to unfair Chinese trade practices. Under the backdrop of an American flag, the narrator’s voice sternly points out that “as our trade deficit grows and good paying middle class American jobs are shipped overseas, Wal-Mart and China get stronger [...] America gets weaker.” According to the group’s website, Wal-mart was responsible for 1/10 of the trade deficit, a phenomenon they link with the undervaluation of China’s currency.
The Chinese government does not allow the Ren Min Bi (RMB) to float on the open market, and pins it to the dollar at a rate that is favorable for export. Thus, the narrative follows, the Chinese are able to export much more than in a perfect economic environment. Richard Thornton compares China to the turn-of-the-century American Rockefeller industrial center: “Just as Rockefeller held an iron grip over his closed company towns and profited from exporting to the surrounding American economy, China’s centrally-controlled company town economy flourishes in the global economy in the same way.” The Chinese government can heavily invest in the industries that will produce quality exports, otherwise known as a mercantilist strategy. Of course Rockefeller did not have the ability to manipulate the currency, which acts as a tariff, albeit one that is not protected by the WTO. American goods are going to be more expensive while Chinese goods for export are going to be much cheaper.
The argument can be rebuked by pointing out that the Chinese economy is more open to American goods than most other developing countries. In 2005, China’s applied tariff rates were under 10%, well below that of India, Mexico, Brazil and Argentina. Liberal estimates might contend that the currency manipulation could add a 5% tariff, still making China’s economy more open than other developing countries. The RMB’s weakness also makes raw materials more expensive so that with the lower labor costs the final product will be about the same. As China’s GDP grows at around 9% per year, the percentage of imports in relation to GDP has been growing tremendously as well, and now accounts for about 30%. American exports to China are steadily rising as well, just not as fast as imports.
The Chinese also have narratives as to why the trade deficit is so large. The most common claim that Chinese government sources use is that America still has restricted exporting. The embargoes after 1989 are still in effect and restrict anything that can be used by the Chinese military or security forces. The United States has a flourishing military technology industry—none of which can be exported to the Chinese. Yet high-tech items have not had any trouble getting into China. The United States Department of Commerce approved $2.4 billion worth of goods and only restricted $12.5 million. Without these export restrictions, America’s exports would only have grown .006%.
People ask if there are some rational explanations for such a massive trade imbalance. There are two ways to look at the situation: a macro-economic approach or a micro-societal approach. Economists have attacked how country of origin statistics are gathered and suggest that the numbers might be overblown. The Asian economy has literally put China at the center of the supply chain as the final assembly point. Asian countries produce products in which they have the comparative advantage, and send it to China to be put together. For example, a computer might contain microprocessors produced in Japan, a motherboard produced in South Korea, and a fan produced in Taiwan. All of these parts are then shipped to China for final assembly. China’s cheap labor supply, whether it be line workers or managers, hold the comparative advantage in the assembly process. These goods are then shipped all over the world and counted as a Chinese export. Some scholars suggest that 65% of Chinese goods exported to America were actually products of other Asian countries.
Another rational explanation for the huge trade imbalance lies distinctly within the Chinese psyche. Scholars and businessman call this phenomenon the “China Price.” This phenomenon not only encompasses the fact that Chinese peasants are willing to work for fractions of what Americans will, but also that every level of management has a cost cutting mentality. Jack Peroski, a successful American businessman and author of Taming the Dragon, explains exactly how Americans react to dirt cheap Chinese prices. They divide the sum in RMB by 8 (or whatever the exchange rate happens to be) and marvel at such a low cost atmosphere. When going on a business trip with American colleagues, Peroski notices how happy they are to find a hotel room for 250 yuan, which equates to roughly $30. Chinese businessmen, on the other hand, would never settle for such an exorbitant price. After all, China is a country where everyone over the age of 30 has definitely experienced poverty. Thus the ‘China Price’ can be understood as a different cost perspective. Perkowski uses the “$100 Versus RMB 100” approach. Since these two bills are the highest unit of currency in both countries, they are thought of equally. Yet when American’s pick up the RMB 100 bill, they first divide by 8 to get $12.50. When this attitude is used all throughout the supply chain, whether it be in hiring line workers, building machinery, travel costs or any other production process, the Chinese will not settle for anything close to Western standards of a “good deal.” Although this is to be expected in a poorer country, Perkowski believes that China is unique because of mid-level management who are earning more money than ever but still have the old cost-cutting mentality.
And this is where the problem lies. In an environment strikingly similar to Upton Sinclair’s The Jungle, where market forces in a “Peoples Country” react solely to the bottom line, corners are often cut. University of Maryland International Economics professor Peter Morici labels this an “export or die” culture. The market is flooded with factories competing to get that lowest price. One of these companies is called Lee Der, which was completing a contract for the Hong Kong based Hong Li Da toys, which was farmed out by Mattel to produce toys for American children.
Hu Put the Lead Paint On?
Initial reports that lead paint was found on Mattel toys sent the media into a frenzy like many other politically sensitive issues. Politicians acted tough, protectionists said “I told you so,” free trade advocates downplayed it, and consumer groups blamed it on the corporations. All the while, the Chinese had a public relations nightmare on their hands when everyone else played the blame game. Before actually analyzing what happened, it is peculiar to look at the reaction from the different sources and notice that every interest group tried to just further their talking points.
American officials responded to initial news reports of contamination with some harsh criticisms. Mike Leavitt, the Secretary of Health and Human Services, said the following:
“We need to say to the rest of the world if you intend to produce products for American consumers, you need to meet the standards of quality and safety that we expect. Not your standards, our standards. And then the U.S. needs to have a process which we can assure the quality standards are being met”
To further explore the issue and show the constituents where their tax dollars were flowing, the Senate appropriations committee held a hearing about toy safety. Nancy Nord, the chairman of the Consumer Product Safety Commission (CPSC), was in attendance as well as many other representatives of the toy industry. Senator Durbin made personal remarks about how he became interested in the subject, noting that he bought his grandson a toy that was later found to be a choking hazard to infants. Senator Brownback later took over and went on a tirade about how American dollars are being used around the world in support of bad guys;
As hundreds of billions of U.S. dollars flowed to China every
year, China in turn sends support to bad actors around the world, like
Iran, Sudan, Burma, Zimbabwe and North Korea. As we know, these are
Dictatorships which commit acts of genocide and promote terrorism.
Most disconcerting is that the Congressional Research Service has
confirmed that China's sales of weapons, small arms and munitions to
Iran have ended up in the conflicts involving U.S. forces in Afghanistan and in Iraq.
Brownback, most likely forgetting the fact that the hearing was about toy product safety, then suggests, “it's time to end the status quo, business as usual, relationship with China.” To rectify the situation, Brownback believed the Senate should enact countervailing duties that would offset the Chinese currency manipulation. Senator Brownback is a good example of the group called the “blue team,” or those who see China as a rising competitor to America and will do anything in their power to weaken the rise.
The hearing got back on topic with the questioning of the head of the Consumer Product Safety Commission, Nancy Nord. There was unanimous consent in the committee that the CPSC organization is extremely under-funded. At its inception in 1974, the organization had over 900 employees to inspect $104 billion worth of goods. Currently, it is at an all-time low of 401 employees charged with the processing of $1.8 trillion of goods. Nord opens by expressing how committed the Chinese are to cooperating with her organization. Lead paint is not banned in China, so it is imperative that the Chinese equivalent (General Administration of Quality Supervision, Inspection and Quarantine) be on the exact same page as to the regulations for exporting to America.
In the end, not much was decided in this hearing. It was more a visceral reaction to a chronic problem. It was important, however, in exposing the weaknesses of the Consumer Product Safety Commission.
Dialogue outside the beltway was also fairly limited to preexisting sentiments about China. Many protectionists used this opportunity to finally put up trade barriers that would “level the playing field.” A debate between Pete Morici, an academic at the University of Maryland, and Steven Moore, a member of the Wall Street editorial board, shows the two opposing viewpoints in this matter. Morici believes the problem can be rectified if American consumers don’t buy products from China that are “put in your mouth or given to your kids.” In addition, he concurs with Secretary Leavitt that the Chinese government should hold their producers responsible for this breech of integrity. Steven Moore disagrees and believes that the situation has been over hyped because protectionists wanted to use this incident for ammunition to block Chinese trade. He then reminds the public how much Americans benefit from cheap Chinese goods by saying “the greatest anti-poverty program in the last 30 years that has raised the real purchasing power for Americas low income citizens has been products from China.”
Anti-corporation advocates also jumped in the mix. Ed Mierzwinski of the U.S. Public Interest Research Group thinks “manufacturers and retailers laugh at the consumer product safety commission…It cannot protect us at our border”. Mierzwinski believes that corporations like Mattel have fought for years to keep the U.S. Consumer Product Safety Commission weak to make sure the flow of exports remains high and that the cost is low.
Chinese newspapers and other media outlets had an almost unanimous reaction to the lead paint incident. These party-controlled sources all harped on how important it is that Chinese products remain safe, and that there are only a few bad apples to blame. The China Daily claimed the government has already taken a tough stand. “The fact that the manufacturers responsible for the products with quality problems have already been punished- and some have been closed down – speaks volumes about the government’s lack of tolerance to unsafe products”. The Peoples Daily also took a very conciliatory approach by asking for complete cooperation between the two countries. “If both sides keep the big picture in mind and continue to improve the mechanisms through which the two countries exchange information […] not only will the problems decrease in number, but they will also be resolved at their route long term.”
The Chinese embassy also assured American consumers that “Chinese toys are still well received by U.S. customers.” The embassy interviewed a selection of American shoppers during the Christmas shopping season. Ironically, none of these consumers were shy about buying Chinese products. “Even God makes mistakes, let alone human beings,” says Dick Kent, an IT professional from New Jersey. Kent was not eager to buy products that had paint on them, citing the lead paint problems. Yet he still notes “all the Chinese toys would have gone if the situation were as bad as the media said it was.”
Dick Kent is right. The nature of the U.S. media did not allow for a fair discussion of the issue. The emotions involved coupled with the competitive nature of the 24-hour news networks led to coverage being highly sensationalized. Although it was a massive recall, no children died from these toys. The fact that this recall happened in the midst of other pet food and toothpaste problems did not help the situation. Whereas the American media is controlled by advertising revenue based on the number of viewers, the Chinese media is based on a mixture of readership and Communist Party propaganda. Although only the American media can be classified as “open,” both are skewed in their coverage and did not help towards a long-term solution.
What Happened? A History of Mattel in China
The first recall came August 14, 2007 when Mattel and the CPSC announced that 243,000 toys were unsafe. A very important fact about this particular toy car, Sarge, was that it was only a seasonal toy produced in conjunction with the Disney movie “Cars.” Mattel isolated the production facility where the tainted goods were produced and realized that Sarge was not the only toy that might have lead paint. More recalls followed, including some from Mattel’s subsidiary, Fisher Price.
How did Mattel end up in China? Like many other American manufacturing companies, they moved the bulk of the labor-intensive production to Asia long ago. The past 15 years has brought the majority of their manufacturing capabilities to China. The 83 million manufacturing workers and incentives for investment drew Mattel to the mainland from already existing production facilities in Taiwan, Philippines, Malaysia and Hong Kong. All the research and design remained at their corporate headquarters in California. It appeared to be a perfect match: keeping the high paying white collars jobs for Americans and giving the labor-intensive jobs to the Chinese.
Another reason why Mattel decided to move to China is they wanted access to the domestic market. The former President and CEO noted, “only 3% of the world’s children are here in the U.S. Our biggest opportunities are in growth outside the U.S.” China’s enormous population as well as its rising middle class is a great market for Mattel, and they decided to integrate themselves further into the society in an unprecedented way for American corporations.
To spread the word about Mattel as well as improve their image at home, Mattel became one of the first multi-national corporations to address the issue of international corporate social responsibility (CSR) in China. CSR theory claims that corporations have a responsibility above basic production and distribution. It could range from a mandatory minimum wage for factory workers or having stricter environmental policies than any other government. Of course this is not a new idea. Henry Ford stunned the public when he promised his factory workers $5 per day, double the market rate for a factory hand. This was also enough to quell the unions’ fears and provide a steady flow of the best labor into the Ford factories. McDonalds in the 1980s had a policy of hiring only minorities in Los Angeles neighborhoods, which spared them from damage during the Rodney King riots. These are just two examples of how American companies used social responsibility to increase their bottom line.
Yet CSR in China is much more of a challenge. First off, the Communist Party reigns supreme. Any attempt to undermine their authority, even as small as instituting a mandatory minimum wage different from theirs, would result in legal ramifications. Also, there is already a framework for how workers should expect to be treated. Much of China’s comparative advantage, or “China Price,” comes from the management skimming off these costs. Peasants from the countryside flock to urban manufacturing centers and know exactly what they are getting into. Factory hands work seven days a week, almost 12 hours a day, and earn only $120 a month. Management has ways of keeping workers under their control. They provide very little rest, withhold their pay and always push for better productivity.
CSR also goes against the very nature of the free market. A corporation’s sole purpose in the market is to maximize profits, which will happen when they have found out how best to serve the public and maximize their demand. The god of free-market theory, Milton Friedman, thought that corporations should focus on only one thing: “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition.” Friedman also believes that if corporations start making their own laws, it could “thoroughly undermine the very foundations of our free society.” Stockholders invest in a company in order to make a profit by putting their faith in management to maximize their sacrifice. If these corporate leaders start making decisions ad-hoc, not only will they be undermining elected officials in making regulations, but they will also break the most basic bond between a stockholder and an executive.
Despite the free-market critique of CSR, it has become almost mandatory for a company to participate. In his book Setting Global Standards, Dr. S. Prakesh Sethi argues that CSR should be taken by all companies in order to create a better world and set a new competitive environment. One of the core principles of this doctrine is that “MNC’s must act as positive and proactive agents of change through the use of their enormous economic power to protect and foster basic human rights and democratic values.” Almost all corporations currently have ethical standards; most just differ as to what extent they are enforced.
Many companies however use CSR as a public relations initiative that can eventually lead to more sales. Corporations must be careful when trying to institute this abroad. The example of the clothing company Levi Strauss shows how high moral values can eventually do more harm than good. The clothing company has a very strong ethical base that includes a clause “we will not initiate or renew contractual relationships with countries where there are pervasive violations in basic human rights.” China certainly falls under this category.
In 1992, Levi Strauss sent audit teams to all of their international locations. At this time, China was only providing 2% of their total output, but their future plans were eyeing China for a growing manufacturing base. Instead, the audit team composed a report as to why Levi Strauss was leaving China. Two of the main reasons were that “staying in China means tolerating a climate of repression inconsistent with company fundamental values” and that “more and more customers of Levi Strauss’s products are concerned about human rights…the brand loyalty could be damaged.”
After a year of being China free, Levi Strauss reversed its decision. Human rights groups were livid. In an explanation of why they were returning, Levi Strauss Co. said, “the 1993 decision [leaving China] was not intended to change human rights policies … or to impose Levi Strauss’s values on others. It was essentially a business decision.” They also mentioned how competitive the market was, and not returning would “threaten commercial interests.” Levi Strauss however retains a very low standing in the Chinese manufacturing scene because instead of setting up independent factories, they only subcontract. The CEO of Levi Strauss, Peter Jacobi, also noted that even though the company has high ethical values, it is not in the business of human rights. Doing business in China was fine as long as their subcontracting facilities were up to standard. Thus Levi Strauss eventually put up with horrible factory conditions and acquiesced to the cutthroat nature of the market.
Mattel had a different approach. They wanted to promote an aura of compatibility with the Chinese government as well as an approach that emphasizes their value of human rights to American consumers. Currently, 76% of Mattel’s products are produced and exported from China. As part of their Global Manufacturing Principles, Mattel ensures that employees are treated “safe and fair” as well as “the facilities protect the environment while respecting the cultural, ethnic and philosophical differences of the countries where Mattel operates.” When looking at Mattel’s rules for employment, for the most part, they only ensure that the factories are adhering to the minimum standard of their host governments.
Going along with this approach, Mattel invested enormous amounts of money in building wholly owned factories in many countries, most of which were in Southern China. These factories would build Mattel’s core products, or the ones that sell all year round. Barbie and Hot Wheels are examples of these types of products. Mattel would outsource any seasonal or non-permanent item to various Hong Kong manufacturing companies with production experience within Mainland China. The global manufacturing principles applied to any factory that produced Mattel toys, but obviously they did not have as watchful of an eye on the contracted factories.
It was this bifurcation in production facilities that likely led to the lead paint disaster. Mattel was safely producing their core products in their wholly owned factories while other interior private factories were commissioned to produce seasonal products. These factories most likely do not know for whom they are producing, what the laws are in the country of destination, or sometimes even exactly what they are producing. They have a deadline, a price, product specifications, and everything else is up to them.
Zhang Shuhong owned the Lee Der toy company. His company was the one commissioned by a Hong Kong firm, Hong Li Da Toys, to produce Mattel’s seasonal toys. Despite the competitive nature of China’s production system, Zhang was a godsend to his employees. He paid them on time and did not mandate overtime. He lived in a very small apartment in the factory, putting all his life savings and energy into production. In the days after Lee Der Toy Company was blamed for the tainted toys, Zhang assembled all of his employees and apologized, telling them to find other jobs. He then went into his upstairs office and hanged himself.
Zhang took some secrets to the grave with him. After the lead paint story came out, the Chinese government promptly took away his exporting license. This crippled his business as it was mostly made up of contracts pinned for export. According to his co-workers, he had no idea that one of the three paint suppliers he was using had lead in the paint. Actually, the supplier of the faulty paint was a personal friend of Zhang’s, perhaps adding to an already horrible situation that could have driven him to suicide.
The Mattel Reaction
Rational corporate behavior would dictate finding everything wrong with one’s suppliers and publicizing these defects. Mattel did send a fact-finding team to analyze the situation and to note any other potential problems. The most startling event however was when Mattel apologized to the Chinese government for the design flaws that were at first pinned on the producers. The lead recalls happened concurrently with a total recall of 18 million toys all made in China. The vast majority of these recalls were design related errors, such as magnets coming loose and posing a choking hazard. All of these recalls were really blended together in the American media, giving the story a particularly unfair twist. China should not be held accountable for faulty specifications they receive from Mattel headquarters in California. The Chinese would describe this situation as “losing face,” which is a very deep cultural concept concerning how one is perceived.
To try and placate China, Mattel executive Thomas Debrowski traveled to Beijing and delivered his apology, saying “Mattel takes full responsibility for these recalls and apologizes personally to you, the Chinese people, and all of our customers who received the toys.” By issuing this apology, Mattel is putting itself at risk for lawsuit from numerous parties. Yet Mattel executives saw China as such a valuable asset that they were willing to accept responsibility and try to move forward. For the Chinese, this was a major concession.
Mattel certainly did not need to apologize. In some ways, they hold the Chinese government hostage. All of the goods produced through Mattel factories employ countless peasants, and because of CSR, usually at better than market prices. These workers then send excess money home to placate an already politically volatile countryside. Mattel knew that if they did not apologize, they would suffer the same fate as many other Western companies who anger domestic Chinese citizens. The Chinese consumer differs from the American consumer in that they will react through grassroots boycotts. Nationalism in China is rampant, and if boycotts began against Mattel, it would significantly affect their bottom line. Article after article started appearing in Peoples Daily about how product safety should be dealt with by companies.
Using the common “developing nation” tagline, Peoples Daily began trying to play down the safety issues. The State-controlled media claims “China is a developing nation. That some of its exports have safety and quality issues is an objective fact […] What is behind the Sino-U.S. dispute over product quality and safety, in reality, is the politicization of the imbalance in Sino-U.S. trade.” Xinhua news was quick to point out Nancy Nord’s comments about not turning the lead paint problem into an “Anti-PRC Trade Issue.” Other articles pointed out the fact that the vast majority of the recalls were due to design errors. The Chinese public was inundated with reasons to hate Mattel. If there is one thing that Mattel does not want to do, it is lose the Chinese production and consumption base. But suddenly, the brand name was affected and Mattel’s leadership saw millions of potential customers slowly slipping away. This is why Mattel apologized.
The Future of China as a Production Center: Does the Incident Even Matter?
Mattel’s reaction was based not only on China as a production center but also as a market for consumption. China’s middle class is growing just as fast as its GDP, and their working population is shrinking while demanding more rights. There are a couple reasons why China might not be as powerful a producer in the future. First off, family planning policies starting in the 1970s enforced that a couple was only allowed to have one child. Population distributions show the greatest number of workers migrating to the cities between 1988-1993. This is because of the population boom during the Cultural Revolution, which produced a surplus of 18-25 year olds right around that time. More workers flocked from the countryside to the Southern production centers during these years, which drove labor costs down and allowed for the brutal factory conditions. The number of factories swelled because of the excess labor and the opening of foreign markets. China still has the biggest labor force in the world, but it is not as large as it had been in previous years. Current workers have more factories to choose from and less competition. This increases labor costs and forces factories to improve conditions. Also, Chinese labor law has become much more developed and workers are beginning to learn their rights.
Scholars have named this generation the “Second Generation.” In her book called The China Price: The True Cost of China’s Comparative Advantage, Alexandra Harney follows one such worker who lost an arm in a factory accident. Li Gag was only 18 when he made the trek from the countryside to the Southern Coast. Two weeks after landing his first job, he woke up in the hospital with only one arm left and about $900 of compensation from his former employer. Unhappy with this compensation, he went on a quest to learn Chinese labor law and eventually was able to help other workers get fair settlements in labor disputes. Hundreds have followed Li, and Chinese labor law is increasingly becoming more worker friendly.
In order to attract workers, factories now offer amenities such as Basketball courts, air conditioners, and increased pay. Many factories are trying to attract 30 year-olds and older because they traditionally have a more indifferent attitude towards their personal rights. The market has created a peaceful labor revolution in China, one that might affect the types of products that can be exported. In five years, it is very possible that China will not hold an absolute advantage on labor-intensive goods. Toys, clothes and small electronics might be split between Southeast Asian countries and China, whereas the Chinese might focus more on computers, microprocessors and other unfinished technological products.
This is why the U.S. government, Chinese government, and Mattel took a very cautious and practical approach to the situation. The U.S. government, despite all its tough rhetoric, did not impose any sanctions. Instead, Congress focused domestically and passed H.R. 4040, which called “To establish consumer product safety standards and other safety requirements for children's products and to reauthorize and modernize the Consumer Product Safety Commission.” This raises fines for violators and provides more funding for staff and testing facilities. The U.S. government rationalized that products have a failure rate, and Western companies, just like Chinese companies, make dangerous products. One cannot forget dangerous tires, SUVs that roll over, mattresses that catch fire, or baby cribs that fall apart. Seventy percent of all toys are produced in China, and ninety percent of toy recalls came from China. Although this is a disproportionate amount, the vast majority were due to design flaws. Thus, China’s manufacture failure rate in terms of toys is about the same as any other country.
The Chinese government was very quick to act. They are always careful to walk the fine line between placating Western companies and putting on a strong nationalist face. Mattel’s apology was paramount in assuring this balance. Meeting between the Consumer Product Safety Commission and China’s General Administration of Quality Supervision, Inspection and Quarantine are a step in the right direction. These meetings will now take place twice a year and address different product safety issues.
Mattel also quickly realized the vast amount of flaws in their production process. According to the CEO Bob Eckert, Mattel has “significantly increased testing and unannounced inspections at every stage of the production process. Finally, finished toys from every production run must be tested for lead to ensure they are safe before reaching store shelves.” Mattel’s sales surprisingly increased in the 3rd quarter of the fiscal year by 5.6%. Much of this is due to the weak dollar, but executives also believe that the worst is behind them. Brazil is the only country that has taken away Mattel’s exporting license. Brazil represents 2% of Mattel’s customer base and can be easily made up by China’s growing middle class. Also, this event might have been a wake up call for Corporate Social Responsibility advocates. Although it is a very charitable and decent undertaking for a corporation to ensure high standards for workers, their biggest responsibility should lie in the products they produce. The market has slowly but surely responded to working conditions in China. This is apparent through the “Second Generation” of Chinese labor, who demand better factories and higher pay in order to work.
Conclusion
Does this short-term turmoil have any negative implications for the future of the U.S. China Relationship? No. The summer of 2007 actually brought the two countries closer because it started a dialogue that had been previously silenced. Instead of Americans thinking about the trade imbalance, intellectual property rights or human rights, consumers faced the harsh reality that they must live with the risk associated with Chinese products. Surprisingly, there has not been a massive backlash, and despite the media outcry, Americans took a pragmatic approach to a sticky situation.
The Chinese also acted with mercenary pragmatism, but their survival was on the line. The CCP dealt with the situation by playing it down domestically and creating a fuss internationally about the unfair press coverage. Nationalist sentiment was harnessed, but soon discarded when Chinese officials saw it could turn on them. Currently, the CCP appears serious about ensuring product safety, yet their capabilities should be called into question. It is impractical to assume that the Chinese government has full control of all of the production centers.
As China moves up the production ladder, it will still be of utmost importance to ensure that their products are safe, but it will be a different kind of safety. Cars or airplane parts that are worthy of export need to be extensively tested and pass rigorous safety criteria. If there is one aspect of the production process slowing China from producing these goods, it is foreign fear of product quality. This is the one long term implication. Even so, Chinese automobile companies have set a goal to export their first cars to America in 2009.
Mattel handled the situation extremely rationally, so much so that their sales did not reflect a massive recall. They also gained prestige with the future Chinese domestic market. Yet Mattel should be much more careful as to where their products are manufactured. It would be wise to limit production only to Mattel-owned factories with intensive quality controls. This would not only ensure their doctrine of CSR is upheld, but also keep a close eye on all the raw materials going into the goods. In the end, Mattel’s biggest responsibility is making sure their toys are safe, whether it is from a design or production standpoint. In the summer of 2007, they failed on both counts.
Mattel’s experience should also be a lesson to all multi-national corporations on the importance of managing their risk. Producing in China is much riskier than domestically, but the China Price still makes it a more cost effective mode. It is not possible to eradicate this risk, but MNCs should strive to reduce it as much as possible. Eliminating the middlemen and producing directly with a certain factory would work better since these producers would know exactly what market they are producing for and the rules associated with that country.
Lastly, it should be noted that “The Market” is working exactly the way it should. The best CSR is coming from the “Second Generation” of labor and the new Chinese labor law. Product safety is also a huge component of the American consumers’ psyche, which has implications throughout the supply chains. MNCs will now be more careful about working with legitimate and safe factories. Prices might rise a little bit, and companies might search for even cheaper labor in Southeast Asia, but it is a necessary consideration.
The trade relationship is one of the only facets of the Sino-U.S. relationship that can be regarded as stable. Taiwan, human rights, Tibet, American hegemony, or any other problem that strains the relationship does not have such implications for mutual benefit as trade. China is so ingrained in world production that it would have been irrational to punish it because of the summer of 2007. The future of Chinese production will change similar to the pace of its GDP. Although Americans would like more quality control and rule of law, consumers will not stop buying and producers will not stop producing. Although the Chinese would like to maintain total sovereignty over their production centers, they know that MNCs and the market will do the best job at controlling the jungle. This uneasy equilibrium will remain to define the future Sino-U.S. trade relationship.
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