25-1 Case 25

Case 25

Mattel’s China Experience: A Crisis in Toyland Mary B. Teagarden

Mattel realized very early that they were always going to be in the crosshairs of sensi- tivities about child labor and product safety, and they knew they had to really play it straight . . . Mattel was in China before China was cool, and they learned to do business there in a good way. They understood the importance of protecting their brand, and they invested. 1

M. Eric Johnson Professor, Dartmouth

1 Bob Eckert, Mattel’s CEO, was concerned but not alarmed when Jim Walter, senior vice president of worldwide quality assurance, walked into his office on Friday, July 13, 2007, and announced, “We have an issue.” 2 The Mattel executive had received confirmation that one of their European customers, Auchan, had found problems in a routine audit. The paint on the Sarge die-cast toy cars they produced in China contained lead levels in excess of U.S. federal toy safety regulations. 3 Mattel, a company known as an industry leader in corporate responsibility, was being pulled into a recall vortex that had seen a variety of products produced in and exported from China, including dog food, toothpaste, tires, and seafood, recalled in recent weeks. The Sarge recall would be the tip of the iceberg in which Mattel would face a major crisis. In the next several months, Mattel would recall 967,000 Chinese- made toys, which featured characters such as Batman, Sarge, Polly Pockets, and various Barbie accessory toys, for violation of lead safety standards or magnets detaching. Bob and his team moved into action to implement the recall process for Sarge cars and other toys that might contain excess levels of lead. More importantly, they had to identify an approach to the recalls that would protect the valuable Mattel brand and their sterling corporate reputa- tion while not undermining their intent to be the “World’s Premier Toy Brand—Today and Tomorrow.” 4

THE TOY INDUSTRY

2 Toys are serious business. The global toy market was estimated to be a $71 billion business in 2007, an increase of about six percent over the previous year. 5 North America was the largest regional market with about $24 billion in sales, or 36 percent of the global market.

1 David Barboza and Louise Story, “Toymaking in China, Mattel’s Way,” The New York Times, July 26. 2007. 2 http:cnnmoney.printthis.clickabilty.com/pt/cpt?action+cpt?action=cpt&title+Mattel+CEO+Bob+Eckert. 3 Mattel communication to the Subcommittee on Commerce, Trade and Consumer Protection, September 5, 2007. 4 mattel.com (http://www.mattel.com/about_us/default.asp). 5 http://www.toy-icti.org/resources/wtf_2006_files/frame.htm.

Copyright © 2008 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor Mary B. Teagarden for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

pea37160_case25_001-017.indd 1pea37160_case25_001-017.indd 1 11/20/09 6:51:56 PM11/20/09 6:51:56 PM

Mattel’s China Experience 25-2

Infant and Preschool Toys 14.0%

Outdoor and Sports Toys 12.2%

Arts and Crafts 11.8%

Dolls 11.3%

Games and Puzzles 10.9%

Vehicles 10.4% Action Figures and Accessories 6.3%

Plush Toys 5.9%

Youth Electronics 6.3%

Building Sets 3.2%

All Other Toys 9.5%

EXHIBIT 1 2007 U.S. Toy Sales by Segment

Source: www.RetailingToday. com, June 9, 2008.

However, annual sales in the North American market were slower than in other global mar- kets, about one percent per year. Europe was the next largest regional market with about $19 billion in sales, or 28 percent of the global market. The European market was growing at about five percent per year. The Asian region followed with slightly more than $16 billion in sales, or 25 percent of the global market. Asia was a bright spot for the industry, and sales were forecasted to grow at 25 percent per year, given the economic growth and growing middle class in both China and India. Latin America represented about seven percent of the global market and had sales of $4.5 billion per year. Latin America was also forecasted to have aggressive growth in countries like Brazil and Mexico, given the growth of the middle class and the large number of children.

3 The United States had about two percent of the world’s children, yet they purchased about half of the world’s toys. The dollars spent in the toy industry in the United States dipped about two percent in 2007 to $22.1 billion in sales. 6 Segments like action figures and accessories showed strong growth with sales increasing eight percent to $1.4 billion, while sales of dolls, at $2.5 billion, decreased by eight percent. Other segments and industry share are listed in Exhibit 1.

4 In this dynamic industry, children’s preferences were shifting from traditional toys like dolls, games, and puzzles to movies, electronics, and video games. The percentage of chil- dren under 12, the primary toy industry target customer segment, was the smallest it had been in 20 years, and, to make matters worse, children were playing with toys for fewer years than their parents did. 7 Anita Frazier, a toy industry researcher observed, “Young kids really are the sweet spot for the toy industry, because they’re not yet distracted by other entertainment choices as older kids might be.” 8 The toy industry had evolved from one with simple, physical toys that emulated adult life (e.g., Tinker Toys, Lincoln Logs, Barbie) to one based on hardware and software technology platforms, and rich, interactive content which supported fantasy (e.g., Lego Mindstorms NXT, X-Box, Nintendo Wii). 9

5 The industry had about 900 companies engaged in the manufacture of toys. The top 50 companies controlled 75 percent of the market. Mattel and Hasbro dominated with

6 www.RetailingToday.com, June 9, 2008. 7 Eric Clark, The Real Toy Story, 2007. 8 , “U.S. Consumers Buying More Toys,” SCTWeek, 13 (24), 2008, p. 2. 9 Steve Babitch, Enric Gili Fort, Andy Kim, Pam Nyberg, and Albert Wang, “The Future of Play,” Institute of Design, Illinois Institute of Technology, 2006.

pea37160_case25_001-017.indd 2pea37160_case25_001-017.indd 2 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

25-3 Case 25

control of more than one-third of the toy market in the United States, and the majority of the world’s largest competitors were headquartered in the United States. Mattel’s most direct competitors were Hasbro, JAKKS Pacific, and LeapFrog. Exhibit 2 shows the top ten global toy manufacturers ranked by sales.

6 Competition in the toy industry intensified as a relentless focus on profit and brand redefined an industry once known for creativity. Industry giants like Mattel and Hasbro did not have to depend on product innovation to compete. Rather, they depended on television shows and movies and the creation of new toys, based on brands they had already devel- oped or acquired, by doing such things as putting electronics in Playmobil characters, for example. These industry giants also exploited economies of scale and offshore manufactur- ing. Smaller industry competitors had to rely on innovation more than the big competitors with the hope of developing a successful breakthrough, like the Trivial Pursuit board game or Beanie Babies. 10 A big hit for the small players made the difference between struggle and success.

7 There was a symbiotic relationship between the toy and the entertainment industries. Industry expert Eric Clark contended that, “Toys and the entertainment industry have become two sides of the same coin—children’s television programs and some movies exist only because of product tie-in and are structured to maximize sales of those products.” 11 Indeed, many of the toys recalled in 2007 were based on Sesame and Disney charac- ters. Increasingly, the toy industry was integrating into the entertainment business. Clark observed that, increasingly, toy companies viewed “their toys as entertainment or lifestyle properties—the books, TV series, and movies are not purely to sell more toys, but rather to enhance and reinforce the brand.” 12

8 Five large retailers—Wal-Mart, Target, Toys“R”Us, Kmart, and KB Toys—sold more than half of all toys in the United States. 13 Three retailers—Wal-Mart, Toys “R”Us, and Tar- get—accounted for 43 percent of Mattel’s consolidated worldwide sales in 2007. Wal-Mart,

10 Clark, The Real Toy Story. 11 Ibid. 12 Ibid. 13 U.S. Department of Commerce Industry Outlook: Dolls, Toys, Games, and Children’s Vehicles, NAICS Code 33993.

Source: http://premium.hoovers.com.ezproxy.t-bird.edu/subscribe/ind/overview.xhtml?HICID=1207.

Manufacturer 2007 Revenue Headquarter Location

Mattel $5,970.1 m United States

Hasbro $3,837.6 m United States

Namco Bandai $3,833.8 m Japan

LEGO $1,383.9 m Denmark

Sammy Corporation N/A Japan Sanrio $940 m Japan

JAKKS Pacific $857.1 m United States

LeapFrog $442.3 m United States

RC2 $489 m United States

Ty N/A United States

EXHIBIT 2 Global Toy Manufacturers Ranked by Sales

pea37160_case25_001-017.indd 3pea37160_case25_001-017.indd 3 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

Mattel’s China Experience 25-4

the world’s largest retailer and largest toy retailer, sold about 20 percent of Mattel’s toys, Toys “R”Us sold about 14 percent, and Target sold about nine percent. These large retailers also sold competitors’ toys and their own private-brand toys that they sourced directly, often from China.

TOY PRODUCTION IN CHINA

9 Companies seeking ever-lower prices have benefited from what BusinessWeek called the “China price,” a price that was 30 to 50 percent cheaper than what it would cost a company to make the equivalent product in the U.S. 14 Companies manufacturing in China were able to produce at the “China price” for a variety of reasons, including lower business costs: labor, facilities, plant and equipment, and raw materials were all cheaper in part because of differences in absolute costs of labor, for example, and differences in regulatory oversight between China and many other countries, including the U.S. For example, the U.S banned lead in toys in 1978, whereas China only signed an agreement to do so in September of 2007. 15 Nevertheless, Chinese officials estimated that 50 percent of their exported products did not comply with Chinese law. 16 At the same time that the Chinese government agreed to ban lead, it also agreed to increase inspections and meet more regularly on export-related issues. 17 Skeptics believed that this was a public relations ploy to protect the reputation of “China, Inc.” Analysts, while noting the incredible economic growth in China, identified the parallel pressure on the physical, technical, and human resource infrastructure that this growth had brought. 18

10 Manufacturing in China is not going away. In 2007, China’s manufacturing sector ranked fourth in the world after the U.S., Japan, and Germany. China’s exports to the United States had grown by approximately 1,600 percent over the previous 15 years. According to the U.S.–China Business Council, the dollar value of imports from China was US$287.8 bil- lion in total, and toys, games, and apparel as industrial segments represented 40.8 percent of this volume. 19 The North American toy industry was a US$24 billion dollar industry, and 80 percent of these toys were manufactured in China through company-owned plants and an extensive network of contractor and supplier relationships. 20 China toy imports to the United States accounted for 86 percent of total toy imports in 2006. This was up from 41 percent 14 years earlier. The rise in toy imports from China came at the expense of other toy-exporting countries like Mexico, Japan, Taiwan, and Hong Kong.

11 Toys were one of the first consumer products to be produced in China in significant vol- ume, and Mattel was a pioneer in taking the manufacture of toys offshore. The importance of China in this industry could not be underestimated. Most of the toys produced in the world were produced in China, and most of these were produced in second- and third-tier and smaller cities surrounding Guangzhou and outside of Shanghai or Hong Kong. The supply networks for toys and their components were extensive, increasingly complex, and sometimes underscrutinized by the companies who branded and imported the toys. Mattel’s

14 Pete Engardio and Dexter Roberts, “The China Price,” BusinessWeek, December 6, 2004. 15 www.msnbc.msn.com/id/20726149/. 16 http://energycommerce.house.gov/cmte_mtgs/110-ctcp-hrg.092007.Teagarden-testimony.pdf. 17 Ibid. 18 Paul Beamish, “The High Cost of Cheap Chinese Labor,” Harvard Business Review, 2006. 19 www.uschina.org/statistics/tradetable.html. 20 Renae Merle, “Recalls of Toys Pressure Agency: CPSC Resources Called Inadequate,” WashingtonPost. com, August 3, 2007.

pea37160_case25_001-017.indd 4pea37160_case25_001-017.indd 4 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

25-5 Case 25

network exemplified this complexity with more than 3,000 partners in China alone. 21 By moving their manufacturing overseas, toy companies shifted their focus to research and development, product design, marketing, and other core business activities of strategic importance.

12 Companies knew how to take advantage of the benefits of manufacturing in China while maintaining product quality and obeying U.S. laws for the products they imported. Many companies produced world-class quality products that were high-tech and difficult and complex to manufacture in Chinese plants. Companies also knew how to produce safe, quality products in China, whether in their own plants or through contracting relationships with Chinese suppliers. Indeed, Mattel, one of the high-profile companies involved in the toy recalls, had been manufacturing toys in China for 20 years. If we look at the recall statistics, Mattel had done a fairly good job of manufacturing safe toys in China. But the large number of highly visible product recalls in 2007 was eroding customer confidence in products made in China. This was a big problem for China, where the focus was to move away from simple toy assembly to high value-added manufacturing and knowledge work. The 2007 China product recall timeline is shown in Exhibit 3.

13 Given the global shift of toy manufacture to China, it was not surprising that the number of China toy recalls rose from one product category, or three percent of the total annual recall in 1988, to three product categories, or 79 percent of the total annual recall in 2006. 22 Of the 550 toy recalls by the Consumer Products Safety Commission (CPSC) since 1988, “. . . only about ten percent (or 54) of recalls were historically attributable to manufacturing defects such as poor craftsmanship, overheating of batteries, toxic paint, and inappropriate raw materials.” 23 A history of the CPSC appears in Exhibit 4.

14 Lead paint on toys is a recognized danger to young children who tend to chew on toys, and thus its use in toy manufacture raises serious alarms. Exposure to this heavy metal poses a risk because even low levels of lead are dangerous for young children, as it can lead to lower IQ scores according to the Centers for Disease Control and Prevention. 24 Higher lev- els of lead can damage children’s brains and nervous systems, slow growth, create hearing or behavior and learning problems because their growing bodies absorb more lead. Chil- dren’s brains and nervous systems are more sensitive to the damaging effects of lead than are adults’ brains. 25 As a result, lead use is banned or restricted in most developed countries, but the same is not true for developing countries. 26

15 Environmental and occupational health experts found that India, China, and Malaysia still produced and sold paints with levels of lead that exceeded U.S. safety levels, even for products intended for use by children. 27 About 50 percent of the paint sold in these three countries had lead levels 30 times higher than U.S. regulations. 28 This heavy metal is used to improve the durability and color luster of paint. One of these experts, Scott Clark, commented, “There is a clear discrepancy in product safety outside the United States and in today’s global economy; it would be irresponsible for us to ignore the public

21 www.timesonline.co.uk/tol/news/world/article2259492.ece?print+yes&random=119. 22 Hari Bapuji and Paul Beamish, “Toy Recalls: Is China Really the Problem?” Asia Pacific Foundation of Canada: Vancouver, Canada. http://www.asiapacific.ca/analysis/pubs/pdfs/2007/toyrecalls.pdf, November 2007. 23 Ibid, p. 4. 24 http://toys.about.com/od/healthandsafety/f/leadpoisoning.htm. 25 http://www.epa.gov/lead/pubs/leadinfo.htm. 26 http://www.ens-newswire.com/ens/aug2006/2006-08-24-02.asp. 27 Ibid. 28 Ibid.

pea37160_case25_001-017.indd 5pea37160_case25_001-017.indd 5 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

Mattel’s China Experience 25-6

EXHIBIT 3 2007 Timeline of China Export Recalls

March 15: After consumer complaints prompted lab testing, Canada-based Menu Foods Inc. informed the FDA that it was recalling cat and dog food made with tainted wheat gluten. The recall included food sold under the Iams and Eukanuba labels.

April 30: USDA and FDA officials said chickens on at least 30 Indiana poultry farms in February were fed remnants of pet food that was contaminated by poisoned wheat gluten imported from China. The officials said the farms had since processed the chickens, but added that the risk to humans is “very low.” Officials earlier had revealed that the contaminated pet food was fed to hogs in at least six states. At least 6,000 hogs were quarantined and euthanized.

May 7: An invoice offered evidence that two Chinese corporations, Xuzhou Anying Biologic Technology Development Co. and Binzhou Futian Biology Technology Co., were linked to tainted wheat gluten found in the recalled pet food.

May 10: The Chinese cabinet vowed to crack down on the food industry, saying it will promote organic agriculture, beef up inspections of farms and butchers, and blacklist companies that make tainted products.

May 24: Responding to reports that diethylene glycol was found in toothpaste made in China, the FDA announced it will block Chinese imports of toothpaste until they can be tested. The action followed reports that authorities have found the chemical in toothpaste in Panama, the Dominican Republic, and Australia.

May 30: Beijing announced it will set up a food-recall system.

June 14: Colgate-Palmolive Co. said counterfeit toothpaste falsely packaged as “Colgate” and possibly containing diethylene glycol was found in several discount stores in New York, New Jersey, Pennsylvania, and Maryland.

June 25: About 450,000 Chinese-made tires sold in the U.S. were recalled after federal regulators and the U.S. tire distributor said the tires may lack an important safety feature designed to make them more durable.

June 27: The Chinese government said it closed 180 food manufacturers found to have used industrial chemicals and additives in food products.

June 28: The FDA announced it would detain all Chinese shipments of shrimp, catfish, basa, dace, and eel unless it is proven free of residues of illegal antibiotics and chemicals. An agency test of 89 samples from October 2006 to May 2007 showed 25 percent of the farm-raised seafood contained such residues.

June 29: The European Union said it will follow the lead of the U.S. Food and Drug Administration, which is stepping up scrutiny of Chinese farm-raised seafood.

July 2–5: American consumer-protection authorities recalled Chinese-made children’s necklaces and earrings that were found to contain dangerously high levels of lead.

July 4: China’s quality-control watchdog said that nearly one-fifth of the products sold in China that it studied failed to meet the country’s quality standards.

July 10: Zheng Xiaoyu, the former head of China’s State Food and Drug Administration, was executed for dereliction of duty and taking bribes from drug companies.

July 19: The U.S. House Agriculture Committee agreed to require country-of-origin labels on meats beginning next year, but it softened penalties and record-keeping requirements that had concerned many food retailers and meatpackers who opposed the law.

July 20: China said it had shut down several firms at the heart of food and drug safety scares. The country’s quality supervision agency pulled the business license of Taixing Glycerin Factory, which has been accused of exporting diethylene glycol—a thickening agent used in antifreeze—and fraudulently passing it off as 99.5 percent pure glycerin. The mix of 15 percent diethylene glycol and other substances ended up in Panamanian medicines that killed at least 51 people. Also, two companies linked to melamine-tainted wheat gluten blamed for the deaths of 16 dogs and cats in North America had their licenses revoked.

pea37160_case25_001-017.indd 6pea37160_case25_001-017.indd 6 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

25-7 Case 25

health threat for the citizens [children or workers] in the offending countries, as well as the countries they do business with.” 29 This health hazard has led to calls for global lead safety standards.

16 Merle A. Heinrichs, Chairman and CEO of Global Sources, an Asia-based corporation that serves as a platform for international trade connecting buyers and suppliers online,

29 Ibid.

July 23: The European Union’s top product safety cop, on her first official trip to China, said she has an “ambitious” agenda and is prepared to send a tough message to the Chinese government that it needs to crack down on producers of defective goods sold in the 27-nation bloc.

July 31: The U.S. Department of Health and Human Services sent a senior official to China to try to reach agreements aimed at improving the country’s food and drug safety by the end of the year.

Aug. 2: The U.S. Consumer Product Safety Commission said Mattel Inc.’s Fisher-Price unit will recall 967,000 toys that may contain hazardous levels of lead paint, including items featuring popular characters such as Elmo and Big Bird. The company said it would adjust second-quarter results by about $30 million to reflect the impact of the recall.

Aug. 7: Mattel Inc. identified the Chinese factory involved in the company’s recall of 1.5 million Chinese- made toys believed to contain lead paint. Mattel said the plant is Lee Der Industrial Co., located in Guangdong province.

Aug. 13: A Chinese public security official said an owner of Lee Der Industrial Co., the toy factory at the center of a major recall by Mattel Inc. earlier this month, killed himself at his factory’s warehouse in China’s southern Guangdong province.

Aug. 14: Mattel Inc. issued recalls for millions of Chinese-made toys that contain magnets that can be swallowed by children or could have lead paint. The recall involves 7.3 million play sets, including Polly Pocket dolls and Batman action figures, and 253,000 die-cast cars that contain lead paint. Also recalled were 345,000 Batman and “One Piece” action figures, 683,000 Barbie and Tanner play sets, and one million Doggie Day Care play sets.

Aug. 22: China claims quality issues associated with imports of U.S. soybeans, and calls for the U.S. to inves- tigate the situation. Analysts say the soybean complaint is simply a retaliatory gesture following the recent criticism of Chinese products.

Sept. 12: U.S. and Chinese regulators move to ban the use of lead paint in toys, and promised changes to the way Chinese imports to the U.S. are scrutinized for safety compliance after public uproar surrounding product recalls.

Sept. 14: Under immense international pressure, China’s chief inspector of exported food said he is working to strengthen oversight of Chinese products. He also suggested that China’s food exports had been unfairly targeted by the public furor over U.S. recalls of Chinese-made toys and animal feed.

Sept. 18: China restricts the exportation of garlic and ginger to the U.S., ordering numerous facilities in Shandong province, a hub for the nation’s agricultural exports, to stop shipping the foods until they can abide by tougher safety standards.

Sept. 21: Mattel issued an apology to China over the recall of Chinese-made toys, saying most of the items were defective because of Mattel’s design flaws rather than faulty manufacturing. The company also said it had recalled more lead-tainted Chinese toys than was justified.

Sept. 21: U.S. regulators recalled about one million Chinese-made baby cribs, branded Simplicity and Graco, after the cribs were linked to at least two infant deaths. In both deaths, the cribs were assembled incorrectly by consumers.

Source: Adopted from Wall Street Journal, October 21, 2007.

EXHIBIT 3 2007 Timeline of China Export Recalls (Continued)

pea37160_case25_001-017.indd 7pea37160_case25_001-017.indd 7 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

Mattel’s China Experience 25-8

EXHIBIT 4 History of the Consumer Product Safety Commission

Toy Safety and the Consumer Product Safety Commission

Toy safety is regulated by the Consumer Product Safety Commission (CPSC) in the United States. The CPSC was authorized by Congress through the Consumer Product Safety Act of 1972. The CPSC, an independent govern- mental agency, was charged with “protecting the public from unreasonable risks of serious injury or death from more than 15,000 types of consumer products. . .” Deaths, injuries, and damage to property from consumer product injuries cost the United States more than $800 billion annually. The efforts of the CPSC had contributed significantly to the 30 percent decline in the rate of deaths and injuries associated with consumer products over some 30 years following its authorization, according to government reports. The CPSC reported 22 toy-related deaths and an estimated 220,500 toy-related injuries in 2006. Some potential toy hazards scrutinized by the CPSC included lead-tainted paint on toys, and other major hazards like small parts or small magnets that came loose from the toy and were swallowed.

The CPSC has many responsibilities, including the development of voluntary standards in collaboration with industry. They inform and educate consumers through media, state and local governments, private organizations, and by responding to consumer inquiries. In addition, they conduct research on potential product hazards, and obtain the recall of products or arrange for their repair. The CPSC does not certify or test products for safety prior to sale nor do they recommend the safest products or brands. The agency, with a budget of $66 million in 2006, employed 420 people who were responsible for monitoring the safety of more than 15,000 kinds of consumer products. Janell Mayo Duncan of the Consumers Union observed that the Consumer Product Safety Commis- sion had only about 100 field investigators and compliance personnel nationwide to conduct inspections at ports, warehouses, and stores of US$24 billion worth of toys and other consumer products sold in the U.S. each day. She concluded that they needed more money and resources to perform more checks.

The CPSC relies on the voluntary compliance of companies who are required by law to report product safety hazards for products they have sold as soon as the manufacturer or importer becomes aware of the problem. The CPSC collects information from a variety of sources, including hospitals, physicians, consumer complaints, industry reports, investigations by the CPSC staff, and company self-reports. Once the CPSC is notified of a hazard, they work with the company to initiate and manage a recall.

Sources: http://www.cpsc.gov/about/about.html; Eric Lipton and David Barbosa, “As More Toys Are Recalled, Trail Ends in China,” The New York Times, June 19, 2007.

face-to-face, and in print, observed that offshore manufacturers produce for a variety of markets, and that, “These markets, whether they are developed markets similar to Germany or the U.S., or developing markets such as India and Nigeria, will all have a variety of prod- uct standards and specifications. The importer of record is ultimately responsible to ensure that the offshore manufacturer he/she has selected, regardless of country, must understand the appropriate importing country’s standards, and that the importer must take responsibil- ity for the inspection prior to distribution.” 30

MATTEL OVERVIEW

17 California-based toy giant Mattel was founded in 1944 with a vision of capturing the post–World War II baby boom toy market. And capture they did. Founders Elliot and Ruth Handler began building Mattel’s brand image in the mid-1950s by advertising on the very popular daily Mickey Mouse Club television program, a bold move because, at the time, toy advertising was seasonal. Mattel’s iconic core product, Barbie, now pushing 50, was intro- duced in 1959. The company rolled out the equally iconic product, Hot Wheels, a decade later. Mattel, a true toy industry offshoring pioneer, began manufacturing toys in offshore

30 Merle Heinrichs, Commentary, Thunderbird International Business Review, forthcoming, 2009.

pea37160_case25_001-017.indd 8pea37160_case25_001-017.indd 8 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

25-9 Case 25

locations to take advantage of lower manufacturing costs and to focus corporate resources and attention on building brand.

18 Mattel’s Fisher-Price division was instrumental in developing the first toy safety stan- dards in the industry as an extension of their focus on brand. Beginning in 1971, Fisher- Price worked with a team of experts from the American Academy of Pediatrics, the U.S. Consumer Product Safety Commission (CPSC), as well as toy industry designers and engi- neers, consumers, consultants, and retailers, to develop the very first voluntary toy safety standards. Eventually, these were adopted by the industry, as were Mattel’s international testing standards developed to ensure compliance with safety standards. Almost 40 years later, many of the tests established by this group were still being used. 31

19 Mattel endeavored to maintain supply network integrity as they executed an offshore manufacturing strategy in China and other locations. Roger Rambeau, a long-time Mattel employee who worked his way up from the production line to vice president of manufac- turing, believed that the company was the leader in protecting the integrity of their supply network and a toy safety champion at the forefront of their industry. Rambeau cited Mat- tel’s early voluntary collaboration with the U.S. Consumer Product Safety Commission and contributions to the development of the American Society for Testing and Materials (ASTM), an international product standards organization, as strong evidence of significant early efforts by Mattel to maintain supply network and product integrity. 32

TROUBLE IN TOYLAND

20 In 1973, Mattel had a major change in leadership. After thirty years at the helm, Elliot and Ruth Handler left the company as Mattel’s growth stalled due to operational problems in Mexico and Asia, and the SEC charged that Mattel had issued misleading financial reports. Arthur Spear, a former Revlon executive with extensive manufacturing experience, inherited a company in financial distress, characterized as “. . . the most incredible mess you have ever seen.” 33

21 In an endeavor to improve profitability and maintain consistent revenue streams, Mat- tel’s new management team implemented a focus strategy for maximizing the value of core brands like Barbie and Hot Wheels. Mattel continued offshore manufacturing to take advantage of cost savings from labor arbitrage. By 1979, Spear had cut Mattel’s debt to $20 million from $118 million, and diversified its product offering to include Intellivision, an electronic game system that was ahead of its time. 34 Spear grew Mattel’s annual sales from $281 million in 1973 to $1 billion when he retired in 1986.

22 John Amerman followed Arthur Spear as chairman and CEO, and promised to slash costs and reinvigorate product design and development. Amerman, who came from Warner- Lambert Company’s American Chicle division before joining Mattel in 1980, took the helm of a company that was losing money and had very little diversity in its product line, despite strong brand names like Barbie and equally strong marketing skills. He continued the prac- tice of manufacturing the majority of Mattel’s products in company-owned facilities around the world, a practice that was contrary to the industry norm of contracting manufacturing, usually to the lowest cost source. 35 In the 1990s, on Amerman’s watch, Mattel came under

31 http://www.mattel.com/about_us/Corp_Responsibility/CSR_FINAL.pdf. 32 http://productglobal.typepad.com/gss/2007/07/mattel-a-model-.html. 33 David Cay Johnson, “Arthur Spear, Who Led Mattel through Fiscal Crises, Dies at 75,” The New York Times, January 4, 1996. 34 Ibid. 35 Richard W. Stevenson, “More Trouble in Toyland,” The New York Times, December 20, 1987.

pea37160_case25_001-017.indd 9pea37160_case25_001-017.indd 9 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

Mattel’s China Experience 25-10

fire from critics charging that the company was running sweatshops in Asia and employing underaged workers in Indonesia.

23 As a response to this public relations threat, Mattel’s Global Manufacturing Principles (GMPs) were developed and introduced around the world. Highlights of the GMP standards are shown in Exhibit 5. These comprehensive GMPs provided a framework within which all manufacturing for Mattel must be conducted, regardless of whether it was done in their company-owned plants or in contractors’ plants. These principles were supported and rein- forced by an independent monitoring system, Mattel’s Independent Monitoring Council (MIMCO), created to ensure that GMP standards were consistently met. MIMCO was headed by Dr. Prakash Sethi, a distinguished professor at Baruch College’s Zicklin School of Business.

EXHIBIT 5 Mattel’s Global Manufacturing Principles

Mattel’s Global Manufacturing Principles (GMP) apply to all parties that manufacture, assemble, license, or distribute any product or package bearing any of the Mattel logos. GMP provides guidance and minimum standards for all manufacturing plants, assembly operations, and distribution centers that manufacture or distribute Mattel products. GMP requires safe and fair treatment of employees and that facilities protect the environment while respecting the cultural, ethnic, and philosophical differences of the countries where Mattel operates. GMP also requires internal and periodic independent monitoring of our performance and our partners’ performance to the standards.

Mattel is committed to executing GMP in all areas of its business, and will only engage business partners who share our commitment to GMP. Mattel expects all its business partners to adhere to GMP, and will assist them in meeting GMP requirements. However, Mattel is prepared to end partnerships with those who do not comply. Mattel and its partners will operate their facilities in compliance with applicable laws and regulations. Mattel has defined the following overarching principles to which all facilities and partners are required to comply. These prin- ciples are dynamic and evolving to continually improve our efforts to ensure ongoing protection of employees and the environment. In addition, Mattel has developed a comprehensive and detailed set of underlying procedures and standards that enable us to apply and administer our GMP in the countries where we operate. The procedures and standards are updated and refined on an ongoing basis.

1. Management Systems a. Facilities must have systems in place to address labor, social, environmental, health, and safety issues.

2. Wages and Working Hours a. Employees must be paid for all hours worked. Wages for regular and overtime work must be compensated

at the legally mandated rates. b. Wages must be paid in legal tender and at least monthly. c. Working hours must be in compliance with country and Mattel requirements. d. Regular and overtime working hours must be documented, verifiable, and accurately reflect all hours

worked by employees. e. Overtime work must be voluntary. f . Employees must be provided with rest days in compliance with country and Mattel requirements. g. Payroll deductions must comply with applicable country and Mattel requirements.

3. Age Requirements a. All employees must meet the minimum age for employment as specified by country and Mattel

requirements.

4. Forced Labor a. Employees must be employed of their own free will. b. Forced or prison labor must not be used to manufacture, assemble, or distribute any

Mattel products.

pea37160_case25_001-017.indd 10pea37160_case25_001-017.indd 10 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

25-11 Case 25

EXHIBIT 5 Mattel’s Global Manufacturing Principles (Continued)

5. Discrimination a. The facility must have policies on hiring, promotion, employee rights, and disciplinary practices that

address discrimination.

6. Freedom of Expression and Association a. The facility must recognize all employees’ rights to choose to engage in, or refrain from, lawful union

activity and lawful collective bargaining through representatives selected according to applicable law. b. Management must create formal channels to encourage communications among all levels of manage-

ment and employees on issues that impact their working and living conditions.

7. Living Conditions a. Dormitories must be separated from production and warehouse buildings. b. Dormitories and canteens must be safe, sanitary, and meet the basic needs of employees.

8. Workplace Safety a. The facility must have programs in place to address health and safety issues that exist in the workplace.

9. Health a. First aid and medical treatment must be available to all employees. b. Monitoring programs must be in place to ensure employees are not exposed to harmful working conditions.

10. Emergency Planning a. The facility must have programs and systems in place for dealing with emergencies such as fires, spills,

and natural disasters. b. Emergency exit doors must be kept unlocked at all times when the building is occupied. Emergency exits

must be clearly marked and free of obstructions.

11. Environmental Protection a. Facilities must have environmental programs in place to minimize their impact on the environment.

Source: Mattel.

24 This approach was effective and formed the basis of Mattel’s sterling reputation in the industry. Mattel was the first global consumer products company to apply such a system to its facilities and core contractors on a worldwide basis. “. . . [The] fact is that Mattel— largely under Sethi’s direction—has gone further than any other company to be a good corporate citizen with regard to its Chinese operations.” 36 Given the legacy of pioneering collaboration with the Consumer Product Safety Commission and the ASTM to develop industry safety and testing standards, plus adherence to Mattel’s GMPs and oversight by MIMCO, Mattel had earned its position as a role model in the toy industry for its worker health and safety and product safety practices.

25 Amerman was followed by Jill Barad, who was credited with building the Barbie brand from a dated doll generating $250 million in the mid-1980s to a collectible earning $1.9 billion in 1998 during her 18-year “storybook” career at Mattel. As CEO, Barad aban- doned Amerman’s focus on quarterly profits and shed unprofitable assets at a time when growth in Barbie sales was declining and Mattel continued to have a very limited new prod- uct pipeline. When Barad took over in 1997, Mattel had a $206 million profit; the following year they had a loss of $82.3 million. 37 She led the acquisition of the Learning Company, a company that controlled the market for educational software, in a $3.6 billion deal to secure Mattel’s online, interactive, high-tech presence and to grow the top line. 38

36 Jonathan Dee, “A Toy Maker’s Conscience,” The New York Times, December 23, 2007. 37 Ibid., p. 56. 38 Barbara Kellerman, Bad Leadership, Boston: Harvard Business School Press, 2004, p. 55.

pea37160_case25_001-017.indd 11pea37160_case25_001-017.indd 11 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

Mattel’s China Experience 25-12

26 Analysts criticized Barad and Mattel for a lack of due diligence in the Learning Company acquisition, for overly aggressive estimates of growth revenue synergies from the deal, and for failure to take responsibility for the financial disaster the deal created. 39 Between 1999 and 2000, Mattel experienced a steady stream of executive departures. Roger Brunswick, managing partner of Hayes, Brunswick, and Partners commented, “In the end, she alienated the very individuals charged with helping her grow the company and deliver shareholder value.” 40 Jill Barad was forced out in 2000.

MATTEL’S NEW MILLENNIUM

27 In May 2000, Robert Eckert took over as Mattel’s CEO, and BusinessWeek called him the “anti-Barad.” 41 He assumed the CEO role with no toy industry experience: Bob came from Kraft Foods, the only company he had ever worked for. He inherited a very troubled company, and many of the top management team had just left. 42 One of his first actions was to clean up the Learning Company fiasco. Eckert introduced a new vision for Mattel that focused on building brands of tried-and-true products—like Barbie, Hot Wheels, and Fisher-Price—cutting costs, and developing people.

28 When he took Mattel’s helm, Eckert encountered low morale, an equally low stock price, and lack of accountability among his followers, the legacy of his predecessor. To remedy this, Eckert worked with a team of line managers to craft a set of new values for the com- pany that conveyed collaboration. This well-respected CEO engaged the organization with a vision of greater collaboration, a vision that would eventually become known as One Mat- tel . 43 These values all built on the word play: Play Fair, Play Together, Play with Passion, and Play to Grow . Guided by these values, Mattel believed they would have to improve execution across all business segments, globalize into new markets, extend technologies and licenses, catch new trends with existing and future businesses, and develop people to carry out these missions. The spirit behind the strategies was to improve shareholder value by increasing revenues, operating profit margin, and ultimately cash flow. 44 Mattel’s annual income statements for December 2003 through December 2007 are shown in Exhibit 6.

29 In line with Eckert’s vision for cutting costs, in 2006 Mattel identified supply net- work initiatives to reduce manufacturing costs in response to the rising cost of material. These included ramping up lean manufacturing practices and optimizing distribution net- works among other cost-saving initiatives. 45 Mattel also identified efforts to streamline the procure-to-pay process, including reducing cycle time for ordering and receiving goods. The interaction of these initiatives resulted in increased performance pressure on Mattel’s Chinese contractors, including the Lee-Der Industrial Company plant, where the supply network was compromised by the use of lead paint on Sarge cars.

30 Mattel made about 65 percent of its toys in China, using a combination of company- run plants that focused on their most popular core products, and a network of contract manufacturers for the remainder of their production needs. They used this hybrid approach

39 John W. Torget, “Learning from Mattel,” Tuck School of Business, Dartmouth (No. 1-0072), 2002. 40 Byrne and Grover, “Mattel’s Lack-of-Action Figures,” BusinessWeek, February 21, 2000. 41 Christopher Palmeri, “Mattel: Up the Hill Minus Jill,” BusinessWeek, April 9, 2001. 42 Robert Eckert, “Where Leadership Starts,” Harvard Business Review, November 2001. 43 Douglas A. Ready and Jay A. Conger, “Enabling Bold Visions,” Sloan Management Review, Winter, Vol. 49, No. 2, 2008, pp. 70–76. 44 http://www.financialexecutives.org/eweb/upload/chapter/austin/The%20Worlds%20Premier%20 Toy%20Brands.htm. 45 http://www.shareholder.com/mattel/downloads/Mattel_AnalystHandout_6-14-07.pdf.

pea37160_case25_001-017.indd 12pea37160_case25_001-017.indd 12 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

25-13 Case 25

to protect the brand of their core products. Mattel used a higher proportion of company- owned plants than the industry standard, which was, in effect, a higher cost method than using low-bid local manufacturers for all of their production. 46 About half of Mattel’s toy revenue was derived from core products made in these company-run plants. When subas- semblies and raw materials arrived at company-run plants, they were analyzed and tested for safety, either on site or in Mattel’s test laboratories. As part of the independent monitoring process, Mattel’s factories were inspected by independent auditors who posed result reports on the Internet for public viewing. Contract manufacturers had to comply with Mattel’s strict quality and safety operating procedures and the GMPs, just like a company-run facility. 47

31 Mattel competed on brand. In Mattel’s public statements about quality, they promised:

Mattel’s reputation for product quality and safety is among its most valuable assets, and our commitment to product quality and safety is essential. Children’s health, safety, and well- being are our primary concern. We could damage our consumers’ trust if we sell products that do not meet our standards.

Our commitment to product quality and safety is an integral part of the design, manufacturing, testing, and distribution processes. We will meet or exceed legal requirements and industry standards for product quality and safety. We strive to meet or exceed the expectations of our customers and consumers.

46 Barboza and Storey, “Toymaking in China.” 47 Ibid.

December 2007

December 2006

December 2005

December 2004

December 2003

Revenue 5,970.1 5,650.2 5,179.0 5,102.8 4,960.1 Cost of Goods Sold 3,192.8 3,038.4 2,806.1 2,692.1 2,530.8 Gross Profit 2,777.3 2,611.8 2,372.9 2,410.7 2,429.5 Gross Profit Margin 46.50% 46.20% 45.8% 47.20% 49.0% SG&A 1,875.1 1,710.7 1,533.3 1,497.4 1,459.9 Depreciation & Amortization 172.1 172.3 175.0 182.5 183.8 Operating Income 730.1 728.8 664.5 730.8 785.7 Operating Margin 12.20% 12.90% 12.80% 14.30% 15.80% Nonoperating Income 44.3 34.8 64.0 43.2 35.7 Nonoperating Expenses 71.0 79.8 76.5 77.8 80.6 Income Before Taxes 703.4 683.8 652.0 696.3 740.8 Income Taxes 103.4 90.8 235.0 123.5 203.2 Net Income After Taxes 600.0 592.9 417.0 572.7 537.5

Continuing Operations 600.0 592.9 417.0 572.7 537.5 Discontinued Operations — — — — — Total Operations 600.0 592.9 417.0 572.7 537.5 Total Net Income 600.0 592.9 417.0 572.7 537.5 Net Profit Margin 10.00% 10.50% 8.10% 11.20% 10.8%

Diluted EPS from Total Net Income ($)

1.5 1.5 1.0 1.4 1.2

EXHIBIT 6 Mattel’s Annual Income Statements, December 2003–December 2007 (All dollar amounts in millions except per share amounts. Financial Year End: December)

Source: Mattel’s Annual Reports.

pea37160_case25_001-017.indd 13pea37160_case25_001-017.indd 13 11/20/09 6:51:57 PM11/20/09 6:51:57 PM

Mattel’s China Experience 25-14

Any compromise to product safety or quality must be immediately reported to Worldwide Quality Assurance. 48

32 The United States, where Mattel designed and developed their toys, generated about 51 percent of their global sales revenue. The international segment made up the balance. The products marketed through the international segment were generally the same as those developed and marketed by the domestic segment with limited product localization. In China, for example, the Barbie sold in the United States was seen as too mature for little girls. As a consequence, Barbie in China was given a more juvenile appearance. Barbie was Mattel’s largest and most profitable brand, but was experiencing declining sales. Unlike Barbie, Hot Wheels did not require local adaptation in China or most other international markets. Mattel was successful in extending existing brands; for example, Barbie movies on DVD, Barbie Lives in Fairytopia, a live touring stage show, or the Hot Wheels Hall of Fame exhibit at the Peterson Automotive Museum.

33 Mattel was the leading toy manufacturer for all children under eight years of age, pri- marily due to the strength of their Fisher-Price offerings. With children age 10 or older, however, Mattel lost considerable share to other competitors and non-toy activities. 49 All of Mattel’s early innovations were developed internally. But they had relied on acquisi- tions and licensing over the past 40 years. In addition, all non-toy-related acquisitions and internal development ventures had failed. 50 By 2007, Mattel had a very limited presence in electronic entertainment, which their business intelligence told them was a very important growth segment.

TROUBLE IN TOYLAND REDUX

34 Jim Walter, a senior vice-president for worldwide quality assurance at Mattel, gave an interview to the New York Times on July 26, 2007. It was noted by media insiders that Mattel rarely gave media interviews. Walter claimed, “We are not perfect; we have holes . . . But we’re doing more than anyone else.” 51 Other toy manufacturers agreed. One week later, Mattel issued a press release announcing a voluntary recall of “some products made by a contract manufacturer in China that were produced using a non-approved paint pig- ment containing lead . . .” 52 In this release, they stated that this procedure was in violation of Mattel’s standards. Walter commented, “We require our manufacturing partners to use paint from approved and certified suppliers and have procedures in place to test and verify, but in this particular case our procedures were not followed . . . We are investigating the cause to ensure such events do not reoccur.” 53

35 Mattel announced that they were conducting a thorough investigation of this problem, and would take appropriate action if they concluded that their safety procedures were knowingly ignored. Under CPSC rules, manufacturers were supposed to report all claims of potentially hazardous product defects within 24 hours. Mattel reportedly took months to gather information and privately investigate problems after becoming aware of them.

48 http://www.mattel.com/about_us/Corp_Governance/ethics.asp#or_consumers. 49 Babitch et al., “The Future of Play.” 50 Ibid. 51 Ibid. 52 http://www.shareholder.com/mattel/news/20070801-258085.cfm. 53 Ibid.

pea37160_case25_001-017.indd 14pea37160_case25_001-017.indd 14 11/20/09 6:51:58 PM11/20/09 6:51:58 PM

25-15 Case 25

Between August 14 and September 4, 2007, there were six separate CPSC recalls of Mattel products announced. 54 These included:

• Mattel Recalls Batman TM and One Piece TM Magnetic Action Figure Sets Due to Magnets Coming Loose (August 14, 2007)

• Mattel Recalls “Sarge” Die-Cast Toy Cars Due to Violation of Lead Safety Standard (August 14, 2007)

• Mattel Recalls Barbie and Tanner TM Magnetic Toys Due to Magnets Coming Loose (August 14, 2007)

• Mattel Recalls Doggie Day Care TM Magnetic Toys Due to Magnets Coming Loose (August 14, 2007)

• Additional Reports of Magnets Detaching from Polly Pocket Play Sets Prompts Expanded Recall by Mattel (August 14, 2007). This extends a November 21, 2006, original recall of Mattel’s Polly Pocket Magnetic Play Sets.

• Mattel Recalls Various Barbie ® Accessory Toys Due to Violation of Lead Paint Standard (September 4, 2007)

36 Mattel began working with “retailers worldwide to identify affected products, have them removed from retail shelves, and intercept incoming shipments and stop them from being sold.” 55 In this same press release, Robert Eckert apologized, “We realize that parents trust us with what is most precious to them—their children. And we also recognize that trust is earned. Our goal is to correct this problem, improve our systems, and maintain the trust of the families that have allowed us to be part of their lives by acting responsibly and quickly to address their concerns.” 56

37 On September 4, 2007, Robert Eckert issued a statement, “As a result of our ongoing investigation, we discovered additional affected products. Consequently, several subcon- tractors are no longer manufacturing Mattel toys. We apologize again to everyone affected and promise that we will continue to focus on ensuring the safety and quality of our toys.” 57 He added that Mattel had completed its testing program and spent more than 50,000 hours investigating its vendors and testing its toys in the preceding four-week period. 58 Of the 19 million-plus Mattel toys recalled, only 2.2 million of the recalls were because of lead paint. The rest of the recalls were the result of faulty design, the use of small magnets that could cause choking and internal injuries. 59

38 Toys were pulled from retailers’ shelves. A media frenzy ensued, and public pressure mounted. This resulted in Congressional hearings on toy safety, with a focus on protect- ing children from lead-tainted imports. Eckert testified to the House Subcommittee on Commerce, Trade and Consumer Protection of the Committee on Energy and Commerce, stating:

Mattel has been manufacturing products and using contract vendors in China successfully and without significant manufacturing-related safety issues for more than 20 years… When Mattel does contract with vendors to manufacture toys, our contracts require that

54 U.S. Consumer Product Safety Commission (http://www.cpsc.gov). 55 Ibid. 56 Ibid. 57 http://www.truthout.org.issues_06/090507HB.html. 58 Ibid. 59 www.businessweek.com;bwdaily/dnflash/content;Sept2007/db20070921_569200. htm?cha=top+news_top+news+index_businessweek+exclusives.

pea37160_case25_001-017.indd 15pea37160_case25_001-017.indd 15 11/20/09 6:51:58 PM11/20/09 6:51:58 PM

Mattel’s China Experience 25-16

the vendors comply with Mattel’s quality and safety operating procedures and Global Manufacturing Principles (“GMP”), which reflect the company’s commitment to responsible practices in areas such as employee health and safety, environmental management, and respect for the cultural, ethnic, and philosophical differences of the countries where Mattel operates. 60

THE PERFECT STORM?

39 By the time the dust settled, Mattel had recalled 19 million toys made in China. 61 Mattel’s stock price declined as they took a $40 million charge for recalls, and their costs increased. 62 Customers threatened to boycott Mattel and all toys made in China. 63 Bob Eckert had been called to testify before both U.S. House and Senate hearings on toy safety. In response to the hearing surrounding the recalls, Senator Sam Brownback commented, “Made in China has now become a warning label.” 64 Despite industry pleas for voluntary compliance, the U.S. Senate voted by a large margin to enhance toy safety by passing a bill that would make the ASTM 65 International toy safety standard, F963, a mandatory requirement for all toys sold in the U.S. 66

40 Chinese government officials saw Mattel’s recall public relations approach as blaming China’s manufacturers for what was primarily a Mattel design problem. This unfavor- able publicity drew attention from Chinese regulators, and resulted in Mattel making a highly publicized public apology to China and China’s quality watchdog chief, Li Changjiang. 67

41 When it looked like nothing could get worse for Mattel, Congress sent a letter in January 2008 charging that Robert Eckert was not honoring the public commitment he had made to consumers during the initial recall incident. The text of this letter is presented in Exhibit 7. This tsunami of negative events left Mattel executives perplexed and reeling: How could this industry giant, a company so highly regarded as a toy industry model of corporate citizenship, find itself mired in such a controversy? What next steps should they take to recover from the crisis? What must they do to protect their brand? What should they do to restore their reputation? Was this crisis a major roadblock to being the world’s premier toy brand “tomorrow”?

60 Testimony to Subcommittee on Commerce, Trade and Consumer Protection of the Committee on Energy and Commerce, September 19, 2007. 61 Steven G. Brant, “China’s Quality Problem: A Long-Term vs. Short-Term Thinking Teachable Moment,” The Huffington Post, 2007; Louise Story and David Barbosa, “Mattel Recalls 19 Million Toys Sent from China,” The New York Times, 2007. 62 http://caps.fool.com/Ticker/MAT.aspx. 63 http://www.abc.net.au/news/stories/2007/10/23/2066950.htm; Bill Mah, “Recall Has Parents Mulling Toy Boycott,” edmontonjournal.com, 64 http://www.msnbc.msn.com/id/20738314/. 65 ASTM International is one of the largest voluntary standards development organizations in the world, and is considered a trusted source for technical standards for materials, products, systems, and services. ASTM is known for high technical quality and market relevancy. ASTM International standards have an important role in the information infrastructure that guides design, manufacturing, and trade in the global economy. 66 http://69.7.224.88/viewnews.aspx?newsID=1300. 67 Andrew Clark, “Mattel: China Toy Scares Our Fault,” The Guardian, 2007.

pea37160_case25_001-017.indd 16pea37160_case25_001-017.indd 16 11/20/09 6:51:58 PM11/20/09 6:51:58 PM

25-17 Case 25

EXHIBIT 7 Letter from Congress to Mattel, January 30, 2008

Source: http://www.house.gov/list/press/md07_cummings/20080130mattel2.shtml.

Mr. Eckert: We write you today not only as federal legislators, but as parents, grandparents, aunts, uncles, neighbors, and representatives of the children who find joy in the toys produced by Mattel. We are gravely concerned about the dangers posed to children by the use of lead in your company’s products, and urge you, as a father yourself, to completely eliminate the use of lead in the toys produced by your company and all of its subsidiaries. Specifically, we are disturbed by your lack of action upon the discovery that a red toy blood pressure cuff manufactured by Fisher Price, Mattel’s subsidiary, contains high levels of lead; two such cuffs tested at 4,500 and 5,900 ppm of lead, respectively. It was not until Illinois State Attorney General Lisa Madigan notified you that the toys were in violation of Illinois state regulations that you took any action at all to protect our children, and said action was limited to removing the toy from the shelves of Illinois stores. We find this response to be deficient, and encourage you to immediately stop selling the red blood pressure cuff in all states. If this product is too dangerous for the children of Illinois, it is too dangerous for children in the rest of this country. The effects of lead poisoning are irreversible and tragic, and every precaution should be taken in the manufac- ture of products intended for use by children—our most vulnerable population. The federal lead paint standard established nearly thirty years ago is 600 ppm. If 600 ppm is too high for lead paint, then surely lead levels in toys that are 800% to 900% of this standard are unacceptable. The State of Illinois has taken a bold step in passing protective legislation on this issue, and other states and the federal government are examining legislation at least as strict as Illinois’ extension of the 600 ppm limit to all toys, regardless of material. It is unfortunate, however, that toy manufacturers have not voluntarily enacted these standards on their own. In an opinion statement published in the September 11, 2007, issue of the Wall Street Journal responding to criticism over recent recalls of numerous toys due to high levels of lead paint, you wrote:

It is my sincere pledge that we will face this challenge with integrity and reaffirm that we will do the right thing. We will embrace this test of our company and the opportunity to become better . . . [M]y father encouraged me to earn his trust through my actions rather than just talk about what I was going to do… And it is on this principle that Mattel will move forward. We will earn back your trust with our deeds, not just with our words.

We encourage you to review your pledge and act accordingly by recalling the red blood pressure cuff. Furthermore, we challenge you to live up to your words and set a standard for the entire industry by completely eliminating the use of lead in all of the children’s products manufactured by Mattel. When parents purchase a product from your company, they are not just purchasing a toy—they are putting their trust in an established brand that has histori- cally been believed to provide merchandise that is safe for their children. We urge you to live up to this reputation.

Sincerely,

Neil Abercrombie Thomas H. Allen Sanford D. Bishop, Jr. Corrine Brown G.K. Butterfield Kathy Castor Donna M. Christensen Yvette D. Clarke Wm. Lacy Clay Emanuel Cleaver Steve Cohen Elijah E. Cummings Artur Davis Diana DeGette Rosa L. DeLauro

Keith Ellison Anna G. Eshoo Sam Farr Chaka Fattah Bob Filner Barney Frank Al Green Raul M. Grijalva Luis V. Gutierrez Phil Hare Baron P. Hill Maurice D. Hinchey Sheila Jackson-Lee Carolyn C. Kilpatrick Dennis J. Kucinich

John B. Larson Barbara Lee John Lewis Nita M. Lowey Edward J. Markey Doris O. Matsui James P. McGovern Kendrick B. Meek Dennnis Moor James P. Moran Eleanor Holmes Norton Bill Pascrell, Jr. David E. Price Silvestre Reyes Steven R. Rothman

Bobby L. Rush Linda T. Sanchez Janice D. Schakowsky Vic Snyder Betty Sutton Bennie G. Thompson Debbie Wasserman Schultz Melvin L. Watt Henry A. Waxman Robert Wexler Albert R. Wynn

pea37160_case25_001-017.indd 17pea37160_case25_001-017.indd 17 11/20/09 6:51:58 PM11/20/09 6:51:58 PM