China’s toxic toymaker

China’s toxic toymaker
@ economist newspaper ltd 2007

Until a brief notice appeared in China’s state-run People’s Daily on August 14 announcing that Zhang Shuhong had hanged himself, almost no one had ever heard of him. The Economist could not find a picture of him. Even in Foshan, a manufacturing centre in southern China where he owned part of a factory that produced dolls for Mattel, a big American toy-maker, he was an obscure figure.

That is not unusual. There are legions of equally faceless sub-contractors, who are collectively responsible for much of the astonishing growth in Chinese exports. But when Mattel announced a recall of the flawed toys Mr Zhang had made, and especially after he took his own life in response, he became one of China’s most famous businessmen—and the embodiment of all the world’s misgivings about what comes out of its factories.

The same day that he died, Mattel recalled 436,000 cars daubed with lead-based paint and more than 18 million toys containing small magnets which could come loose and be swallowed by children, with dire medical consequences. The recall was Mattel’s second of the month. Earlier, the company’s Fisher- Price unit had found lead paint on its toys, at least some of which came from Mr Zhang’s factory. All of the flawed items were made in China, where 65% of Mattel’s products are sourced. The first recall will cost the firm about $30 million, and the second might prove more expensive.

The consequences might have been worse still were it not for the fact that Mattel is hardly the only company to have been caught selling sub-standard Chinese goods of late. Pet food, lorry tyres and toothpaste have all suffered recent product recalls. Nokia has just warned that some of its mobile-phone batteries made in China are prone to overheating, although the factory at fault belonged to Japan’s Matsushita.
Some of America’s more populist politicians are taking this list as proof that anonymous Chinese subcontractors are not to be trusted, that America needs much more elaborate safeguards against tainted goods and that firms that had outsourced manufacturing to faraway lands would have done better to keep their factories closer to home. Charles Schumer, a tub-thumping senator from New York, has called for the creation of an ‘import tsar’ to police foreign goods.

No doubt many importers will examine their supply chains more carefully, if only for fear that they will be sued by customers who have bought poisonous furniture or explosive mobile telephones, and shunned by others who hear about such fiascos. This sudden scrutiny will probably bring other scandals to light. Mr Zhang’s problems, after all, appear to have stemmed from the contaminated paint he bought from another, as yet unidentified, local industrialist. On the assumption that Mr Zhang was not the local industrialist’s only customer, there must be other firms that have not yet disclosed their own shortcomings, or are not yet aware of them.

There are several ironies in this. One is that in China, it is often said that subcontractors making electronics or trainers or toys are not the worst violators when it comes to safety and labour standards. Their products are typically bought by big firms, like Mattel, and the order is large enough for the purchaser to set standards and carry out regular inspections. Smaller foreign firms ordering smaller lots, in luxury goods for example, have a far weaker negotiating position.
Monitoring contract manufacturers from abroad is not easy. Visits to factories are hard to arrange, are often cancelled, and, when they do occur, are sometimes elaborately stage-managed. Reporters are particularly unwelcome, but even customers do not always know what is going on. Mattel, for example, had done business with Mr Zhang for 15 years.

The other irony is that, broadly speaking, quality is improving (something that worries the Japanese).

The Chinese authorities are aware of and embarrassed by the recent string of scare stories, and are anxious to revive China’s faltering reputation. They have started a high-profile campaign to raise standards and punish slapdash manufacturers.
Getting to know you

What Chinese manufacturing lacks is not so much quality control as accountability. Foreign firms feel obliged to use contractors like Mr Zhang to cope with capricious and corrupt local officials, and the arbitrary justice they mete out. Yet firms like Mr Zhang’s are inscrutable and transient, with no brand or reputation to speak of. When Japan was industrialising, ambitious companies did some contract manufacturing, but they also worked hard to build their own brands, as Matsushita did with Panasonic. In South Korea Samsung has prospered by keeping both production and marketing in house. Yet in China, firms like Mr Zhang’s eschew brands of their own, and keep a low profile, in order to win contracts from several competing foreign firms.

Until now, this anonymous arrangement suited both the contractors and their clients. It would undermine the brands that Adidas, Puma and Nike have spent so much to promote if their customers knew that a Taiwanese contractor called Yue Yuen produced shoes for all of them in China. Likewise, Hewlett Packard, Dell and Apple don’t advertise that they all make use of a firm called Hon Hai. Conversely, it is only by keeping the lowest of low profiles that the likes of Yue Yuen and Hon Hai can sell to several competitors.

But this whole system might founder on the question of quality control. To distinguish themselves from their dodgier rivals, Chinese contractors will have to become better known. In that sense, the suicide of a faceless figure like Mr Zhang, and the furore it has prompted, might prove the death-knell of all China’s anonymous industrialists.

@ economist newspaper ltd 2007