Mattel’s Chinese Sourcing Crisis of 2007As globalization continues, and supply chains expand acrossthe globe, how does a company like Mattel assess the risksassociated with the way it does business?

Ahu Bosnali & Ugur Saribay

Global financial crisis in 2007• This crisis is considered as the worst financial crisis happened

since the Great Depression in 1930s.

• The lack of liquidity in the United States banking system

triggered this crisis and caused the large financial institutions to

collapse. It also caused bailout of banks by national governments

and downturns in stock markets around the world. The housing

market has also suffered which resulted in evictions,

foreclosures and prolonged vacancies. It contributed to the

failure of key businesses, declines in consumer wealth and

economic activity, which later led to a global economic recession

in 2008.  

China and the Global Financial Crisis

• China’s economy had been one of the world’s fastest growing

economies and it contributed a lot to world economic growth.

• However, it faced with the problem of slowing down caused by

the current global financial crisis.

• It was thought that the effects of it to the U.S sub-prime

mortgage securities were limited.

• But, it was also considered that China’s export industries

and sectors, which are dependent on foreign investment,

could be affected in a negative way if the economies of its

major trading partners (ex. United States) experience a

slowdown.

• This possibility concerned the Chinese government, because they

see rapid economic growth necessary to maintain social stability.

• China is a major economic power and holds huge amounts of

foreign exchange reserves. And it could also play a major role in

responding to the current crisis.

• For example, it can help U.S to stabilize its economy by boosting

its holdings of U.S. Treasury securities. It would help funding of

the Federal Government’s purchases of troubled U.S. assets.

Mattel’s Chinese Sourcing Crisis of 2007

Mattel is an industry leader which has a reputation in

corporate responsibility. It was seen that the company was

being affected by the crisis and had affected a variety of

products produced in and exported from China in 2007. These

products include dog food, toothpaste, tires, and seafood.

When the Mattel CEO, Robert Eckert was faced with a crisis

Mattel had recalled 19 million toys made in China. The stock

price of Mattel declined when they took a $40 million charge

for recalls. Their costs increased because of the new

regulation added in China and the United States. Customers

threatened to boycott Mattel and all the toys made in China.

Bob Eckhart, CEO of Mattel (US), had a problem

• On July 30, Mattel had discovered that a number of its toys

which were manufactured in China contained lead paint.

• They recalled lots of the toys during the following month

and the political tensions between the United States and

Chinese governments rose.

• Mattel was the only company that had been in China for

such a long time. The original Barbie had been created

there in 1959.

• Mattel had a deep experience and a long time relationship

which should have prevented this problem. In the end it

was those relationships and that longevity which may have

contributed to the product safety failures.

Global Supply Chains and Risk

• Toys were based on a global supply chain. The global supply

chain was highly sensitive to petrochemical (plastics) and labor

input costs, environmental and human rights in terms of social

responsibility and sustainable business practices, transportation

and logistic disruptions, border crossings, cost and time to

market.

• In 1997, Mattel had established its Global Manufacturing

Principles. These principles and practices were for all companies

and sites which manufactured Mattel products, either company

owned or licensed manufacturing.

First Chinese Signal

• The crisis begun in June when U.S. toy maker RC2 recalled

1.5 million Thomas the Tank Engine products made in

Guangdong, the Chinese province next to Hong Kong, and

the center for contract manufacturing by Western firms.

Mattel followed with a series of three recalls in less than one month

• The first recall of 1.5 million toys of 83 different models

was announced on August 2. Most of the toys were

produced by Lee Der Industrial which has been a Mattel

supplier for 15 years.

• The toys contained high levels of lead paint which is a

chemical banned many years ago. But it was still secretly

used by manufacturers around the globe to reduce costs.

Mattel followed with a series of three recalls in less than one month

• On August 14, the second recall of 18 million toys

worldwide was announced. Products ,which were recalled,

were made by The Early Light Industrial company in China,

a Mattel partner for 20 years

• The third recall of 800,000 toys was announced on

September 4. Most of the toys were accessories for Barbie

dolls. Mattel explained that according to the testing of the

products, the products contained high amount of lead paint.

The products were originated from seven different Chinese

factories.

Mattel followed with a series of three recalls in less than one month

• This third announcement had made the European Union

take an action. They announced a two-month review of

toy product safety for toys sold within the EU

(regardless of the source of their manufacture).

Mattel followed with a series of three recalls in less than one month

• Products Recalled Include:▫ Thomas the Tank▫ Pet food▫ Toothpaste▫ Mattel toys

• These Recalls Have Created Concern Over:▫ Toy safety and product safety▫ Quality control when outsourcing to China▫ Toy safety inspection processes

Mattel followed with a series of three recalls in less than one month

• Recall Effects:

▫ lost sales, damaged reputation, diversion of resources,

increased customer support, threat and expense of

litigation

Mattel’s Recall Tactics

The Good: The Bad:

▫ Worked with the CPSC (is a federal agency that monitors the safety of 5,000 products)

▫ to launch an external media blitz

▫ CEO Eckert apologized to parents in a video posted on website

▫ New Corporate Responsibility organization

▫ New three-point safety check system

▫ Delayed reporting to the CPSC: 1.5 months

▫ Prematurely shifted blame to China

Mattel’s Sourcing

• Chinese manufacturers were the source of 65% of Mattel’s

toys. Of those 65% , about one-half were owned by Mattel,

and one-half manufactured product for the company under a

variety of licensed manufacturing agreements.

• Mattel still owns the 12 factories which make the majority

of its core products like Barbie and Hot Wheels. But for the

other 50% of its product lines it relies on a set of vendors,

which had included Lee Der Industrial and First Light.

Mattel’s Sourcing

• As a result of the long-standing relationships and the trust

between Mattel and Lee Der and First Light, Mattel allowed

the companies to do most of their own product testing.

• Many of the non-Mattel vendors had sourced many

components and parts to other businesses, regardless of

who owned the actual manufacturing facility.

Mattel’s Sourcing

• All of the businesses in the supply chain were facing the

same competitive cost pressures in China, which were

rising wage rates, a shortage of skilled labor in coastal

provinces, escalating material and commodity prices.

Some of them may have been the motivation for suppliers

to cut corners and costs.