Mattel has exposed the cracks in China

At first sight, there may not seem much to connect Northern Rock, a minor bank rooted in the North-east of England, with Mattel, the world’s largest toy manufacturer, based in California.

In fact the similarity is striking. Both are examples of brands that have put profit ahead of public trust in their order of priorities. In other circumstances, neither might have been found out, and shareholders and analysts would have continued to applaud their neat gearing and attitude to risk. But that’s the trouble with chancers: they do tend to get found out, eventually. That said, it has to be admitted the consequences for the Northern Rock brand are terminal, whereas for Mattel’s they are merely severe.

Northern Rock’s disastrous arbitrage strategy in the wholesale money market barely requires further comment. Mattel’s folly – its monomaniacal infatuation with a low-cost manufacturing base in China, which produces two-thirds of its toys – demands a little more insight, and perhaps a degree more sympathy.

For a start, the humiliating apology made to “the Chinese people” over a whole slew of product recalls should not be taken at face value. All right, the little magnets that children might swallow by accident were a Mattel design fault, for which China did not deserve the blame. The lead-painted toys are another matter – a result of poor manufacturing supervision inherent in the Chinese production system, over which Mattel can have had little control. The ultimate apportionment of blame, in short, has everything to do with China’s emergence as the world’s key industrial power; and, more specifically, the projection of “brand China” in next year’s Beijing Olympics. Mattel’s abject compromise under pressure must take its place beside Disney’s, Google’s and Rupert Murdoch’s.

All the same, how did Mattel get into this predicament in the first place? It has certainly not been alone in reasoning that the only way to stay “competitive” in increasingly cut-throat global markets is to outsource manufacturing to China (which boasts an industrial infrastructure and scale not matched by other emerging countries). Nor is it alone in having to deal with the product recalls that seem part and parcel of doing business there. Only last week, for example, Simplicity, a US-based manufacturer, recalled 1 million Chinese-made cots.

Where it does seem to have excelled, thanks to incompetent crisis management, is in making itself a lightning conductor for all these woes. Inasmuch as there is a consumer backlash against “Made in China” – especially as it relates to toy purchases – the brunt is likely to be borne by Mattel.

With hindsight, it is easy to say that Mattel should have spread its manufacturing commitments more widely, even though the operating margins might not have been so attractive. Certainly Denmark’s Lego and Germany’s Playmobil – which, contrary to the general trend, have retained most of their European plant – now look likely to cash in on a “Not Made in China” dividend.

But then, with hindsight, Adam Applegarth, chief executive of Northern Rock, would have known that his strategy was to produce the first run on a UK bank since 1866.

Stuart Smith, Editor

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