15/S/O
Business Line/New Delhi/16/10/07
Toys: Time for a better gameplan
The recent recalling of Chinese-made toys by Mattel brings to the fore the crucial issue of
supply chain risk. At the same time, it provides a wonderful opportunity for the Indian
toy industry to step up exports and compete with China at the global stage.
Play it right.
Pradip K. Bhaumik
Arindam Banik
The recent recall of as many as 19.6 million Chinese-made toys by Mattel and the
subsequent high drama can be analysed at different levels — company, industry and
country.
At the firm level, the CEO, Mr Robert Eckert, testified before a Senate panel
investigating the issue of toy imports from China and suggested that outside contractors
were behind the recent product recalls.
“We were let down, and so we let you down,” is what he is reported to have candidly said
referring to the three massive product recalls.
Soon thereafter on September 21, Mattel’s Executive Vice-President for worldwide
operations, Mr Thomas Debrowski, travelled to Beijing and in a meeting with China’s
product safety chief, Mr Li Chanjiang, took full responsibility for the three recalls and
said that, “vast majority of those products that were recalled were the result of a design
flaw in Mattel’s design, not through a manufacturing flaw in China’s manufacturers.”
Reading out from a prepared text, he continued, “Mattel takes full responsibility for these
recalls and apologises personally to you, the Chinese people, and all of your customers
who received the toys.”
Volte-face
The quick volte-face highlights the importance of the complete supply chain even for
mega corporations. With an annual turnover of $5.65 billion in 2006 from selling 800
million toys, Mattel is the largest toy company of the world. It is worried about its
consumers and has communicated to them the quality assurance policy changes that are
designed to prevent and pre-empt the need for similar future recalls. But, at the same
time, it cannot ignore the supply side of the supply chain. Over 65 per cent of its global
production comes from China and obviously such high dependence cannot be shaken off
easily in the short or medium term.
Incidentally, Mattel’s outsourcing strategy is both wide and deep with many whollyowned foreign enterprises in China along with contract manufacturers who, in turn, use
the services of contractors and sub-contractors.
Supply chain risk
The intriguing volte-face of Mattel also brought to fore the related concept of supply
chain risk. In the initial phase of outsourcing, the sourcing companies were largely
influenced by the attractive returns offered by the low costs — it is only now that the risk
side of the same coin is coming to the fore.
Globally, the toy industry is a highly fragmented. With an annual turnover of $5.65
billion, the largest producer’s market share is below six per cent and so Mattel alone
cannot drive the US toy industry. However, when one juxtaposes this with the fact that 80
per cent of the toys sold in the US come from China, the supply chain risks begin to
appear in starker contrast.
If Mattel’s apology is the result of behind-the-scene arm twisting, as opined by many
experts, the US toy industry must have already begun exploring ways to reduce its
vulnerability from overdependence on Chinese manufacturing.
Country-level impact
Beyond the firm and industry levels, there could be country level repercussions too. With
intense media bashing that the ‘Made in China’ tag has had to undergo, China needed to
project the image of a responsible trade partner genuinely interested in assuring the
quality and safety concerns of its consumers. But the hasty and stage-managed apology
from one of its oldest foreign investors has apparently resulted in a PR fiasco which can
create strong backlash among companies sourcing from China that may reach other
industries than mere toys. In any case, a fuller and more realistic analysis of supply chain
risks will certainly be made in sourcing decisions in future.
Moving away from the US, we find that about 30 per cent of the world production of toys
takes place in China.
Although much of this represents foreign firms that have moved their manufacturing to
China, a sizable part also comes from vendors who undertake contract manufacturing on
behalf of other toy companies such as Mattel.
Indian toy story
These Chinese toy manufacturers have left an indelible mark on the Indian toy market
and industry. In the wake of economic liberalisation, restrictions on toy imports were
lifted in 1996. The large-scale Chinese imports played havoc on domestic toy
manufacturers. At its peak during 1999-2003, India was importing almost 1.2 million
toys from China every week. The domestic toy industry was traumatised by the loss of an
estimated 80 per cent of its home market to the Chinese. According to one estimate, only
200 of the nearly 700 companies in existence survived.
With more than 1,000 units in the small sector and even a larger number in the tiny and
cottage sectors, the Indian toy industry is highly fragmented. A large number of very
small producers in the unorganised sector makes it impossible to have reliable data about
the industry.
One estimate puts the total production in the organised sector at $1 billion and another
$1.5 billion in the unorganised sector. The small size of individual units makes infusion
of capital and technology and skill upgradation difficult. Still, the Toy Association of
India along with the Ministry of Small Scale Industries and UNIDO launched the
National Programme of Development of Toy Industry in 2000. UNIDO helped in
technological upgradation and provided financial assistance to acquire technology from
reputed global suppliers and slowly the turnaround began.
Imports from China have gradually dwindled and the Indian producers have largely
regained their domestic market shares. Not only that, Indian exports have doubled in the
last four years from Rs 200 crore in 2003 to Rs 400 crore now and many of the closed
units have reopened.
In the aftermath of the Mattel episode, many global toy companies would be reexamining their outsourcing strategies and re-evaluating their respective supply chain
risks. What do these developments portend for India? Do they provide opportunities for
Indian toy companies?
For the Indian toy industry the timing looks near perfect provided it gets the right kind of
support from the Government. The supply chain risks originating from the manufacturing
hub of the world may provide enormous opportunity for the Indian toy industry.
With the active participation of the industry associations, the Government should quickly
put in place a comprehensive policy for enhancing the global competitiveness of the
Indian toy industry. Among other things, this must cover mandatory standards, regulating
institutions, institutions for supply and upgradation of technology and skilled manpower,
infrastructure needed for the industry such as tool rooms and design houses, independent
testing laboratories, fiscal incentives and industry consolidation, cooperation and
competition.
In his Budget speech of last year, the Finance Minister, Mr P. Chidambaram, had
remarked that, “every second toy and every third shoe sold globally is made in China.”
With a little support from the Government and riding high on the ‘Made in India’ tag, we
may soon have another winner in our toy industry.
(The authors are professors at the International Management Institute, New Delhi.)