China’s Manufacturing Problem

China has a serious image problem in the recent recalls.  They are quite aware of this (Wall Street Journal):

While in China, senior Mattel executives also met with Chinese government officials to discuss the recall, according to a person in the industry who has been in contact with Mattel employees. Mattel employees said Chinese officials were upset that the American company’s toy recall had disgraced the name of China, according to the person.

Of course the recall was the most responsible way to handle the issue (bravo Mattel), so China’s complaints aren’t exactly sensible here (what else should they have done?).

The reason there had to be a recall in the first place suggests many more to follow failing productive action by Chinese authorities:

In the past, Mattel has had difficulty getting factory owners to fall in line, according to reports from the New York-based International Center for Corporate Accountability. An audit conducted by the center of Mattel factories in 2005, for example, reported that manufacturers had balked in responding to Mattel’s orders to reduce overtime and reimburse workers for job-related medical expenses.

One of the added costs of outsourcing, then, is this lack of control.  That can be a very significant cost indeed, as Mattel is finding out.

He said buyers may be able to thoroughly enforce outside standards in China only by having their own people working and living at facilities — not by simply conducting the periodic audits that many smaller toy makers have come to rely on.

One alternative would be for the Chinese government to begin adopting stronger labor laws.  If they bring their standards up to the rest of the worlds, the image problem, the recalls, and the logistical difficulties of keeping everything in line would go away.  Of course, this would drive up costs, but should a country founded on an idealogical support for “the workers” have better protections in place regarding working conditions?

China’s good name has indeed been disgraced, and it is up to China to take the necessary steps to clear it.

In the meantime, domestic companies should take a long hard look at the risk of doing business with Chinese manufacturers.  This recall could hit Mattel hard, but imagine a recall in October or November.  That would devastate holiday sales.

This should bring home to executives that sound labor policy translates directly to sound fiscal policy in the long run.

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