Gross: Why Mattel Must Save Face with China

When Mattel recalled lead-tainted toys in August, and earlier this month, the company was quick to blame its suppliers in China. It was as if Mattel weren't responsible for the quality of products sold under its name.

But today the toy giant changed its tune. An executive offered a public apology to China and Chinese suppliers. "Our reputation has been damaged lately by these recalls," Thomas A. Debrowski, Mattel's executive vice president for worldwide operations, told a Chinese consumer-products safety official. "And Mattel takes full responsibility for these recalls and apologizes personally to you, the Chinese people, and all of our customers who received the toys."

This kowtow isn't a sudden outbreak of good manners or even responsibility at a Fortune 500 company. Rather, it's a sign of how the balance of power has shifted between massive American consumer-products companies and their rapidly growing China-based suppliers.

Companies like Mattel have pursued a deliberate strategy in recent years: get out of the low-margin, capital-intensive business of manufacturing goods and focus on the higher-margin business of branding and marketing. Pursuing this strategy has led them to relentlessly seek centers of low-cost production. As a result, China has quickly emerged as the world's workshop, able to cheaply mold petrochemicals into toys and just about anything else.

Today Mattel and other American companies can't do business without Chinese partners. In a highly competitive environment, they need suppliers who can turn around new products quickly, complete their orders ahead of those placed by rivals, and commit to maintaining the desired production levels at the desired costs. Yes, Chinese toy producers need Mattel's orders. But it's now a two-way street.

The U.S. economy finds itself in a similar situation vis-à-vis China, as does Mattel and its supplies. America can't afford to offend or alienate China—not because it would suddenly stop selling goods to us, but because the U.S. economy has evolved in such a way that its health depends on China.

U.S. companies need China to produce goods cheaply and thus keep our rate of inflation in check. Many companies—from Wal-Mart to General Motors, from Starbucks to McDonald's—feel as if they need China since it represents a vast, largely untapped consumer market, a billion-strong frontier for growth. And the U.S. government needs Chinese investors—including China's central bank—to purchase and hold the massive quantities of debt the U.S. creates each year.

Until recently, large companies haven't asked many questions about how China is delivering all the goods we require. And there's been a general willingness to overlook the downsides of China's rampant growth—the environmental degradation, the lack of civil rights, the culture of piracy—mostly because those are phenomena whose impact seems limited to China. As the Mattel recall shows, however, that is increasingly not the case. The relationship between the two distant countries has evolved beyond a simple supplier-purchaser relationship.

To a degree unthinkable 10 years ago, China and the United States now share a bloodstream. The toxins that China ingests as it produces goods are exported here. Clouds of mercury emitted from Chinese power plants waft over the West Coast of the U.S. several days later.

Financially, the two countries are connected as if through an umbilical cord. Inflation in China would translate into inflation in the United States. It works the other way, too. A sudden downturn in the U.S. economy would be horrific news for China. China has expressed concerns about the health of imported pork from America. And if Mattel is to be believed, some of the problems with its China-produced toys stem from flaws in designs created by Mattel.

All of which is to say that it's not sufficient for American executives or American consumers, who have benefited in equal measure from China's willingness to produce goods cheaply, simply to blame their Chinese counterparts for the problems that crop up, or to turn a blind eye to industrial conditions in China. Just as conditions in America's factories and slaughterhouses a century ago led to increased vigilance and reform, conditions in China should lead to similar vigilance and reform there. And it's likely we'll be seeing more apologies—from Chinese suppliers and from their American customers. Today the Consumer Product Safety Commission announced it is recalling 1 million cribs made in China and marketed under American brand names, due to a potential lethal safety problem.

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