Price Cutting Pressure Leads to Dangers
Posted on August 29, 2007 by webteam
Toy recall highlights rife corner-cutting in China [Reuters via The Washington Post]
Boxes stacked in the factory window are labeled clearly: “Fisher-Price,” “toys,” “preschool.” The future of the plant, though, is not so clear.
Guards say the workers have all “gone on vacation” at the Foshan Lee Der Toys Company Ltd, caught in early August in the middle of a major recall when client Mattel Inc found excessive amounts of lead in some of the toys it produced.
A senior factory official, who declined to meet in person, said by telephone that manufacturing had ceased. Asked if the company could survive, he replied: “I don’t know.”
The fate of Lee Der—the final chapter of which has yet to be written—highlights the hazards in a competitive industry with low barriers to entry, where price pressures are high and accountability is low, analysts say.
In the wake of the recall, Lee Der’s top boss, Zhang Shuhong, was found dead in his factory workshop. Newspapers reported he hanged himself.
Lee Der’s tragedy started when Zhang’s friend supplied the lead-laced paint later applied to the preschool toys in what experts described as an attempt to save money—with devastating consequences.
“It’s a shame about the boss here,” said one local in the industrial suburb where Lee Der sits. “He was sold down the river by a friend.”
But the practice is not uncommon, experts say. Indeed, corner-cutting stunts plague the complex web of contractors and sub-contractors making everything from toys to scaffolding that keep the world’s fourth-largest economy humming.
“It happens frequently, it happens often, it happens when you least expect it,” said Paul Midler, founder and president of China Advantage, a business consultancy.
QUALITY FADE
It is part of what Midler says is China’s biggest business challenge: “quality fade”—the deliberate stretching of profit margins through the use of cheaper, lower quality materials.
China’s toy industry, anchored in the Pearl River Delta, has come under heavy pressure in recent years, industry insiders say.
The price of raw materials, energy and labor have all risen significantly, while buyers keep asking for lower quotes.
Ironically, some say that makes it even tougher for companies such as Lee Der that do business with industry big hitters like Mattel, which make a concerted effort to ensure that quality, health, safety and environmental standards are met.
Mattel, the world’s largest toy maker, is “far and away the best on these sorts of things, but it’s competing against a whole raft of companies that aren’t paying any attention to this sort of stuff at all,” said Stephen Frost, a corporate social responsibility expert at City University of Hong Kong.
“The squeeze comes, then, when companies like Mattel are requiring their supply chain partners to then spend more money on dealing with these issues,” he added.
That accountability can filter down one or two layers, but it doesn’t always make its way through the entire supply chain.
Part of the problem is that firms tend to be secretive about who their suppliers are, and suppliers prefer the anonymity.
When the recall story broke earlier this month, China Advantage’s Midler said he “Googled” Lee Der and was struck by the results.
“My sister, when she was dog walking, had a bigger presence than this factory, a 15-year supplier for Mattel. The Korean dry cleaner around the corner from me has a bigger Web presence than this guy,” he said.
It’s even quieter now at the Lee Der factory. A few cars and a handful of people come and go through the main gate on a hot afternoon. At dinner time, guards and a few others inside the compound head to the cafeteria with empty metal bowls, then shuffle back out with them full of food.
“How well is the public really going to be protected?” wondered Midler, adding another factory could easily open soon. “And the same person who was responsible for making the decision to put in the paint that had lead in it could be in business tomorrow.”
