Wednesday, June 20, 2007

Fraud and Globalization: Toy Story III

The NYT has 3 related globalization and fraud stories in their top 25 list today, and they are 1,2,3 in the business section rankings:
This is, of course, really a story about fraud. Buyers think they're buying one thing (safe toys), but they get another.

Some useful quotes:
China manufactured every one of the 24 kinds of toys recalled for safety reasons in the United States so far this year, including the enormously popular Thomas & Friends wooden train sets, a record that is causing alarm among consumer advocates, parents and regulators...

...Scott J. Wolfson, a second Consumer Product Safety Commission spokesman, would not say how long ago RC2 discovered the problem or when it first reported it to federal authorities.

In the last two years, the staff of the consumer product commission has been cut by more than 10 percent, leaving fewer regulators to monitor the safety of the growing flood of imports.

Some consumer advocates say that such staff cuts under the Bush administration have made the commission a lax regulator. The commission, for example, acknowledged in a recent budget document that “because of resource limitations,” it was planning next year to curtail its efforts aimed at preventing children from drowning in swimming pools and bathtubs. ..


... Over the last two decades or so, American companies have generally followed a two-pronged outsourcing strategy. First, the companies have tried to move as much of their manufacturing as possible to places where wages are just a fraction of what they are here. Second, the companies have distanced themselves from their overseas production. They usually don’t own the factories and refuse to say much about them.

The current issue of The Atlantic Monthly has a fascinating cover article by James Fallows taking readers on a tour of Shenzhen, a southeastern city of eight million people (stunningly, up from just 80,000 a generation ago) that isn’t far from the factories that make the Thomas trains. Many of the world’s best-known companies — like a company that Mr. Fallows describes as a “very famous” American retailer — get products from Shenzhen. But he didn’t get permission to connect any of the individual factories in his article with a specific brand.

“In decades of reporting on military matters, I have rarely encountered people as concerned about keeping secrets as the buyers and suppliers who meet in Shenzhen and similar cities,” he wrote.

This secrecy brings a number of advantages. It keeps competitors from finding out tricks of the trade. It keeps consumers from discovering that their $100 brand-name shirt comes from the same assembly line as a $40 generic version. And it prevents activists from criticizing a company for the working conditions in a factory where its products are made. The companies get the cost advantages of outsourcing without the publicity disadvantages.

In the days since the Thomas recall was announced, the company that owns the Thomas brand, HIT Entertainment, has stuck to this script. HIT is an English company that holds the rights to a number of popular characters, including Barney and Bob the Builder, and then licenses the toy manufacturing to companies like RC2.

Except for a small link on the Thomas Web site to RC2’s recall announcement, HIT has otherwise acted as if it has nothing to do with the situation. Its executives haven’t even said that they regret having been promoting toys with lead paint in them. They haven’t said anything publicly.

When I suggested to the company’s public relations agency, Bender/Helper Impact, that this might not be the smartest approach, the agency e-mailed me a two-sentence unsigned statement. It said that HIT appreciated the concerns of its customers and was working with RC2 on the recall, but that the recall was “clearly RC2’s responsibility.”

In effect, HIT has outsourced Thomas’s image, one of its most valuable assets, to RC2. And RC2 has offered a case study of how not to deal with a crisis, which is all the more amazing when you consider that the company also makes toys for giants like Disney, Nickelodeon and Sesame Street.

When it first announced the recall, RC2 said that its customers would have to cover shipping costs to mail back the trains. It reversed that decision after parents reacted angrily, but it is still going to wait about two months to send the postage refunds. Why? “Because finance is in another building,” as one customer service employee on RC2’s toll-free hotline told me.

Most important of all, the company hasn’t yet explained how the lead got into the trains or what it’s doing to avoid a repeat. Like their counterparts at HIT, the RC2 executives have stayed silent...
There's not much new in either story. The last ends with a feeble hope that consumers will "punish" companies with unsafe products. They could do this, for example, by not buying toys. Gee, maybe that would work food and medicine too. If we stop buying food, toys and medicine maybe things will get better ...

I don't have that much faith in our overwhelmed populace. I have much more faith in the hunger of our lawyers. If they can find a way to sue the British based HIT Entertainment then we might see some changes. Alternatively, they can in future sue Walmart (for example) for selling items that any reasonable person would expect to be unsafe. If Walmart starts to worry about being sued, I'm reasonably sure toys from China will become much safer ...

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