Mattel's reputation under fire

Mattel chief executive Robert Eckert is shown in an undated photograph taken last month. Eckert, the man credited with the company's turnaround, is on the defensive, forced to explain to the US Congress how some of his decisions resulted in the recall of millions of Chinese-made, lead-tainted toys not long before the holiday shopping season begins. PHOTO: AP/MATTEL

In the seven years since chief executive Robert Eckert took over Mattel Inc, the world's largest toy maker has gone from struggling with sagging sales and unhappy shareholders to a leaner, more profitable company.

Now, the man credited with that turnaround is on the defensive, forced to explain to the US Congress how some of his decisions resulted in three high-profile recalls this summer involving millions of Chinese-made, lead-tainted toys, not long before the holiday shopping season begins.

"The real issue or question lies with not so much how he's handling it all, but how the heck does this happen on his watch?" said Linda Bolton Weiser, analyst with Oppenheimer and Co. "Why wasn't he aware that there appears to be a quality and monitoring and testing issue in his company?"

Eckert, 53, declined an interview request.

Among other things, he put the company back on track by closing what was then Mattel's last US factory in favor of shifting more production to less expensive plants and subcontractors in China and Mexico.

The move was in line with what Mattel and other toy companies had done for decades. More than 80 percent of toys sold in US stores are now made in China, and other toy makers have also been stung recently by recalls of Chinese-made products.

But Mattel has taken more of a beating because of the scope of its recalls and the fact that it had cultivated an image of being an industry leader when it came to controlling its production in China. About 65 percent of Mattel's toys are made in China, but the toy maker has stood out among its rivals because it owns many of its factories there. About 50 percent of Mattel's production in China is produced in company-owned plants.

Apparently, the controls were not strong enough, and the string of recalls has left Mattel fighting to maintain its reputation, as company shares have fallen approximately 9.4 percent since Aug. 1, the date of the first recall. Mattel stock fell US$0.62, or 2.8 percent, to US$21.30 on Friday.

In a little more than a month, Mattel has recalled more than 21 million Chinese-made toys worldwide over worries that they were tainted with lead paint or contained small magnets that could be swallowed by children.

The latest recall came last Tuesday and targeted about 800,000 toys, including 675,000 accessories for Barbie dolls.

In response to the problems, Mattel said it has stepped up testing of its toys and oversight of subcontractors in China while promising consumers that problems would be quickly found and fixed.

Eckert been front and center throughout the effort, issuing public apologies and trying to reassure parents during TV interviews or on videos posted on Mattel's Web site.

The company said it has more than 1,500 quality control and safety employees around the world, including 400 engineers, technicians, auditors and managers. It did not provide a specific number for operations in China.

Among other things, they are checking every production run of completed toys before they go to stores, Mattel said.

The toy maker previously required paint to be tested but said some of its Chinese vendors and their subcontractors did not follow the procedures.

Eckert drawn some positive marks from Wall Street analysts and industry experts. But they note it might be too early to tell whether his actions will be enough to steer Mattel from trouble.

The big question is whether parents will avoid the brand in favor of other competitors. The most vulnerable is its Fisher-Price preschool brand, which had built a reputation among parents for its safety but has been swept up in two of Mattel's three lead paint recalls, analysts said.

"In a kind of crisis management view, he's done that pretty well," said Eric Johnson, professor of operations management at the Tuck School of Business. "The part that's unfortunate is this most recent recall ... It just shows this is a problem deep in the supply chain, and it takes a while to root it out."

Questions also surfaced about whether Mattel took longer than necessary to disclose problems to regulators. Eckert will likely have to address such questions on Wednesday before a Senate Appropriations subcommittee.

Also scheduled to testify are Toys "R" Us Inc chief executive Jerry Storch, two Consumer Product Safety Commission members and representatives of industry and consumer groups.

A House Energy and Commerce subcommittee plans a Sept. 19 hearing on hazardous toys.

In a prepared statement late on Friday, Eckert said he looked forward to addressing lawmakers and supports the regulatory agency that handles safety recalls.

"Mattel has worked hard and in good faith not only to comply with its obligations but also to go beyond them," Eckert said. "In addition to what the law expects, I know that parents expect safe toys and they want assurances that those toys have been tested to make sure that they're safe. That's what we are doing at Mattel."

At Mattel, Eckert has presided over many successes.

Last year, powered by sales of the popular TMX Elmo doll, Mattel posted full-year profits of US$592.9 million, or US$1.53 per share, compared with a profit of US$417 million, or US$1.01 per share, in 2005.

The toy maker's revenue of US$5.65 billion last year also marked an increase over the previous year's US$5.18 billion.

Still, Mattel has struggled to turn around lagging sales of the company's flagship Barbie dolls, particularly in the US, as rival MGA's Bratz dolls cut into the Barbie market.

"I would say Barbie's decline and [the toy recalls] are the two biggest things he's had to face as CEO [chief executive officer]," Bolton Weiser said. "He's under a lot of pressure right now."