Asked whether one of the most famous dolls on earth is going to be hurt by Mattel’s recalls of more than 10 million toys in the U.S. over the past three weeks, Wharton marketing professor Stephen Hoch offers this reassuring response: “Barbie is bulletproof.”

It’s not clear that the same can be said for Mattel. Although many observers give the company credit for responding to the crisis quickly — with an apology from the CEO and pledges to institute more rigorous product safety checks — Mattel faces a number of problems, including significant costs associated with the recalls and new monitoring systems, potential lawsuits and a hit to its reputation just as the holiday shopping season gets ready to launch.

At the same time, news of Mattel’s two recalls has done more than send thousands of parents rummaging through toy chests looking for potentially dangerous toys. It has put an even more powerful microscope on long-standing issues regarding quality control in China and the relentless push to cut prices along every step of the supply chain. “There is clearly a cost to ‘low-cost,'” says Marshall Meyer, Wharton management professor and China expert. “The problems are most likely much deeper than we had imagined.”

Rapid Response Apology

Mattel’s difficulties stem from two sources: lead paint and small magnets. On August 2, the company announced a recall of approximately 1.5 million Fisher-Price toys that contain lead paint — including Ernie, Elmo, Dora the Explorer and Big Bird. Lead, if ingested over time, can cause serious developmental and other health problems in young children. On August 14, Mattel announced a second and much bigger lead paint recall involving 436,000 “Sarge” toy cars (253,000 in the U.S. and 183,000 outside the U.S.). It also recalled approximately 18.2 million (9.5 million in the U.S.)  Barbie, Polly Pocket, Doggie Day Care and Batman toys and accessories whose small, high-powered magnets can come loose and, if swallowed, bond together to cause intestinal perforation.

In its own August 14 recall announcement, the U.S. Consumer Product Safety Commission (CPSC) noted that the magnets “measure 1/8 inch in diameter and are embedded in the hands and feet of some dolls, and in plastic clothing, hairpieces and other accessories to help the pieces attach to the doll or the doll’s house.” The announcement also said there had been three reports of “serious injuries to children who swallowed more than one magnet.” Press coverage of the second recall noted that similar magnets, used in toys not made by Mattel, had resulted in the death of one child and injuries to 14 others.

According to Mattel, the lead paint problems occurred after its Chinese contractor subcontracted the painting of the toys to a supplier that used inferior and unauthorized products. Regarding the magnet problem, the company said that in January it had “implemented enhanced magnet retention systems in its toys across all brands.” About 65% of Mattel’s toys are made in China.

In addition to posting an apology from chairman and CEO Robert Eckert and aggressively publicizing its recalls, Mattel will now require that every batch of paint from every vendor be tested for lead, that random inspections be instituted and that every production run of finished toys be checked for compliance.

Observers describe the CEO’s apology as a welcome action compared to companies in the past that have initially failed to acknowledge a problem and/or tried to shift blame to others. “High profile public apologies are a good idea for two reasons,” says Jacques deLisle, a University of Pennsylvania law school professor who specializes in Chinese law and politics. “First, they tend to get the word out even more effectively about the recall. Second, many studies show that victims of harm often do care a great deal about an apology and may actually settle for less money if the defendant apologizes and atones rather than denies liability.”

According to Wharton marketing professor Lisa Bolton, the advice given to companies in these situations is “to try and get out in front of the issue fast … to try and control the story and how it unfolds. I think the apology was an attempt to do that and also to reassure customers. But the apology might have been a little late in the game…. Because it’s not the first time there have been problems associated with tiny magnets, you wonder why the company proceeded with that technology” as long as it did.

Now that the apology has been offered, “the real challenge for Mattel is to show that it is making a massive effort in the area of quality control,” says Robert Mittelstaedt, dean of the W.P. Carey School of Business at Arizona State University. “I liken this to what the airlines experience after an airplane goes down. Several years ago, two US Airways planes crashed in a relatively short period of time. The company went out and hired a retired air force general to set up a major safety program specifically designed to review and enforce processes and procedures. Management had to reassure the public that it took safety seriously.”

Traditionally, says Mittelstaedt, author of a book titled, Will Your Next Mistake Be Fatal? Avoiding the Chain of Mistakes That Can Destroy Your Organization (Wharton School Publishing), companies have tended to focus most of their energies on producing a product as inexpensively as possible, getting it on the shelves as quickly as possible, and then, in the case of a toy retailer, “not bothering to worry as long the product wasn’t small enough to be swallowed by a child…. These days, the whole world is aware that everything is made in China to save money. Now what will be asked is where a company’s priorities lie. Mattel, for example, in addition to instituting new safety-check systems, should have massive educational campaigns to go along with that. It might, for example, consider publishing information about toys and how children should play with them safely. Johnson & Johnson, during the Tylenol scare back in the 1980s, did that voluntarily. It invented safety packaging before any government requirement to do so.”

Elmo, or Else

How much the Mattel brand will suffer remains to be seen, although Barbie may simply be impregnable. “Barbie is too strong a franchise to be really hurt,” says Hoch, father of two daughters who, at one point in their lives, had 40 Barbies between them and countless Barbie outfits. “The toys are really the brand name, not the company. Barbie is one step removed from Mattel.”

Bolton says any brand damage to Mattel is dependent, in part, on what happens in the next few months. If there are further recalls, or recalls from other toy companies, then “yes, the Mattel brand will probably suffer. On the other hand, the company really is the dominant supplier of children’s toys. Just look at the shelves in toy stores. Sometimes there is no alternative [to buying a Mattel product] because it offers all the branded toys with the tie-ins to TV, movies and so forth. If your child asks for an Elmo, you had better come up with one.” She agrees with Hoch that Barbie is probably safe. “The coverage has been about Mattel. It’s not clear that consumers will link [the problems] to Barbie. So the ‘negative affect’ won’t transfer over as much if people don’t make those connections.”

Mattel does, however, have a “trust problem,” Bolton suggests. “Parents rely on toy companies to do due diligence. The buck has to stop somewhere, and it’s hard for American consumers to blame it on nameless, faceless Chinese suppliers. The company has to be responsible for the parts that go into its products.” Kids, she says, “are vulnerable consumers. We expect companies to take extra care with them.”

Mittelstaedt raises another point: Many people, he says, “didn’t even know that Mattel owns Fisher-Price. It’s now more visible who owns what. If the company isn’t careful, the brand will be affected.” But he doesn’t think Christmas sales will suffer. “Toys are a very powerful part of the economy.” If Mattel is smart, he adds, “it will say, ‘We have learned an amazing lesson and we will be the most aggressive company in the industry in terms of protecting your children.’ If they do this well, that’s good, but if they just apologize and then keep going back to find the cheapest sources in China, they will have a big loss of confidence.” A company can blame its supplier once for defective or unsafe products, but the tactic won’t work twice, he says.

Wharton legal studies and business ethics professor Thomas Donaldson agrees that Mattel will most likely be able to weather the recalls without significant damage. “Most consumers understand that products are sourced from elsewhere and that there might be difficulties with this country’s high standards — which are dramatically more stringent than what we had in place in the U.S. 40 years ago.” The “irony of these recalls,” he adds, “is that Mattel is already ahead of the pack. Unlike many other retailers that source products form China, Mattel had developed internal standards and systems years ago.” Indeed, on the faculty page of Baruch College’s Zicklin School of Business, S. Prakash Sethi, a management professor and business ethicist, is described as “a consultant for Mattel … who helped the company establish a worldwide code of conduct and monitoring plan.”

Donaldson also suggests that it’s “not possible to always guarantee the safety of toys or any other products. With regard to China, we are sourcing from a place that is many decades away from the kinds of expertise, infrastructure and regulatory enforcement that we take for granted in the U.S. This is not true only with regards to China. It’s also true for Latin America, Southeast Asia and other places where countries are still way behind the curve, especially in terms of safety requirements.”

Going forward, says Hoch, “it would be in Mattel’s best interests to reveal everything it can. The company should scour the whole organization, including its suppliers, and make sure it hasn’t missed anything. This would have an impact on consumers’ concerns about product safety.”

The Liability Risk

Meanwhile, the company faces what is likely to be a number of lawsuits related to both the lead paint and the magnets. “There are a couple of issues here,” says deLisle. “According to U.S. law, the manufacturer or seller — Mattel, in this case — is going to be strictly liable for defects in the product. Much of what has been described as a problem with these toys is going to be considered a product defect. Beyond that, there is the question of whether a manufacturer is negligent in not scrutinizing more closely the products it is ordering from China…. Where consumer safety is at issue, there is a reluctance to allow potential defendants to escape liability by contracting out the decisions that lead to harm.”

In other words, he says, one could argue that, where the magnets are concerned, it was “negligent of Mattel not to have had a better design for its products” and where the lead paint is concerned, “not to have specified more concretely, and inspected more closely, what its Chinese suppliers were doing.” Donaldson agrees: “It’s going to be very hard for Mattel to claim it wasn’t responsible for what happened,” he notes. Nor will it be possible in most cases for Mattel to shift the burden of these lawsuits on to their Chinese manufacturers. “To the extent that the design is faulty, there is no passing responsibility back anywhere. Mattel could be found wholly responsible” for these defects.

Mattel’s recall, on the other hand, is clearly a “prudent liability-minimizing move,” says deLisle. “The point of a recall is to prevent harm from occurring. If you call a product back before harm occurs, and if you have sent adequate warning, and if people are harmed by products they didn’t return, then the manufacturer is in a stronger position” to defend itself against lawsuits.

Mattel, the world’s largest toy manufacturer — with 2006 sales of $5.65 billion — will most likely be the obvious target for lawsuits because of its deep pockets and relative accessibility compared to others in the supply chain. As deLisle notes, anyone suing over this issue “will have a less complicated time making a claim against Mattel than against Chinese defendants, and a surer means of enforcing any judgment.” Already, according to a report in the New York Times this week, an attorney is seeking class action status in a lawsuit against Mattel “aimed at forcing [Mattel] to pay for the testing of children who might have gotten lead poisoning from the toys….” This suit follows one filed earlier this month by a parent seeking a “refund for the toys, money for diagnostic tests for lead poisoning and damages,” according to the Times.

DeLisle, meanwhile, suggests that any damage payments Mattel has to make as a result of lawsuits “will be dwarfed by the costs of recalling millions of units, the lost profits and the harm to Mattel’s reputation — as well as the expenses involved in finding other networks of suppliers, adding more monitoring mechanisms and providing effective oversight.”  

Calling All Toys

The recalls are obviously an important part of Mattel’s strategy in responding to the safety issues over its toys. But even here, the company has come in for criticism. Rachel Weintraub, director of product safety at Washington, D.C.-based Consumer Federation of America (CFA), notes that Mattel instituted a recall last November of Polly Pocket toys after the CPSC learned of 170 cases where the magnets came loose. Last week’s second recall of Polly Pockets came after the CPSC had received 400 more reports of magnets falling out. “Why did it take the company so long to reiterate the recall?” she asks.

Some observers also raise questions about the effectiveness of recalls. According to Nancy Cowls, executive director of Kids in Danger, a Chicago-based non-profit organization focused on product safety, statistics show that only between 10% and 30% of products are returned during a recall. Children’s products alone — ranging from toys to clothes to nursery accessories/furniture — are recalled an average of two times a week. Approximately three billion toys a year are sold in the U.S., according to a spokesperson for the New York City-based Toy Industry Association.

“Recalls are done primarily through the news media,” Cowls says, “which isn’t very effective. The Mattel recalls have gotten a lot of press but that’s unusual. In most cases, consumers don’t hear about the recalls, so they either keep using the defective products or pass them along to others. Hopefully a lot of people are throwing them away.”

To get the word out more successfully, manufacturers should notify doctors’ offices and child welfare offices about recalls, she says, and retailers should be notified by manufacturers of any defective products. “Sometimes the retailers hear about a recall the same time consumers do,” she says. In addition, “companies should practice reverse marketing. They certainly know how to use their marketing dollars to reach consumers. They should use those same marketing and advertising dollars to let consumers know of defects or other hazards.” 

Bolton notes that “from my own experience as a consumer, I know it’s very difficult to determine whether your product is part of the recall. Companies can’t track down the consumers who have the product or motivate them to respond. Consumers might simply feel it’s too much trouble to read the recall instructions, figure out if your toy is affected and try to remember when you bought it. Then you might have to pay to ship the product back. And maybe you get a replacement product and maybe you don’t.”

Weintraub, too, has concerns over the success of recalls in getting defective products out of children’s hands. She applauds Mattel’s strong efforts to get word out to consumers and its acceptance of responsibility, but agrees that even more effective ways of communication are necessary. The CFA filed a petition with the Consumer Product Safety Commission several years ago that would have required manufacturers of children’s products to accompany them with registration cards — or the online equivalent — which consumers could fill out with essential contact information in case of a recall. The petition was rejected but a bill along these same lines recently made it through a Congressional subcommittee. “It still has many miles to go,” Weintraub says.  

‘Made in China’: Another Branding Problem?

In the wake of Mattel’s recalls — as well as recent news stories about defective or unsafe Chinese exports ranging from tires and pet food to toothpaste and pharmaceuticals — “the words ‘Made in China’ will most likely be suspect for a while, or regarded with a great deal of caution,” says Meyer. The Chinese government, he adds, recognizes the significance of this problem and is trying to do what it can to ensure that ‘Made in China’ suggests [good] quality, not poor quality.” One sign of this is the government’s announcement last week that it will start inspecting all food exports and cracking down on violations of health and safety standards. “But China is a very decentralized country, and the central government’s ability to control local governments is limited.” An interesting footnote here, Meyer adds, is that “Chinese consumers have suffered for years from poorly made or unsafe products, with very little recourse to [bring about] change. Now the international trading community may be able to do for Chinese consumers what their own legal system can’t.”

As for Mattel, Meyer suggests that its response so far should be considered just the first step. In China, he notes, the production chain consists of “contractors, subcontractors and sub-subcontractors. At the end of the day, this allows work to get done very cheaply because everybody is seeking the lowest price. But it also means that quality control is very difficult.” Companies sourcing from China, he suggests, should know every link in the production chain, which means “putting your own people on the ground. Alternatively, a company [should consider] actually owning its manufacturers. While this would be impossible in a sector like the automotive industry — where foreign investors are limited to less than 50% ownership — the toy industry is not considered strategic and there are no such limitations. Mattel, one way or another, should take control of the process.” Ultimately, Meyer says, this holds true for “all firms that are distributing and branding products in the West.”

DeLisle agrees with Meyer on the difficulty that companies, including Mattel, find when they source in China. “Many of the problems we are seeing now are not introduced by the Chinese company the American company is dealing with directly. It’s somewhere down the supply chain, usually with the subcontractor. Much of what drives this is really fierce price competition. Cost pressures are huge, and information is still relatively weak in China.”

While some along the production chain are cutting corners to keeps costs low, “there are also cases where people are just flat out cheating,” deLisle adds. With demand increasing, many small, relatively new suppliers “are springing up with little in the way of reputation or assets. There are no constraints to keep them from opportunistic behavior. So it’s a combination of everyone working in a cost-pressure market and others committing acts of fraud. [Actions] are not as well policed as they would be in a more mature economy that is growing at something less than a breakneck pace.”