Made in China Toy story with a cautionary moral message for manufacturers

Having finished an 11-hour overnight stint they are replaced by the day shift, who carry on producing the goods, be it Barbie dolls, or Elmo and Big Bird from Sesame Street. A six-day week will see them earn 1,000 yuan a month (about £65). It is the frontline of what the government here describes as "Communism with Chinese characteristics" and the rest of us understand as globalisation, a booming operation that sees toys moulded, assembled and packaged for sale overseas, at minimum cost delivering maximum profit, 24 hours a day, seven days a week.

But the lure of cheap labour is starting to show its downside for western companies. It is also causing alarm for those responsible for safeguarding the "Made in China" brand, namely the Beijing government, whose reliance on the country's prodigious manufacturing output has seen it amass foreign currency reserves of $1.3 trillion.

As for the manufacturers, Mattel is particularly aggrieved. The US toy maker is widely considered to be one of the most scrupulous operators in China. Its facilities are regularly audited and laboratories used to ensure goods are up to scratch. But despite those checks, Mattel has been forced to recall 1.5 million toys, including 533,000 from Europe, because of fears that they were coated with toxic paint when assembled in China. The toys were made for Mattel's Fisher-Price operating arm and were produced by a contract manufacturer in China using a non-approved paint pigment containing lead, Mattel said.

Last week's problems are not isolated. In June, another toy manufacturer had to recall 1.5 million wooden Thomas & Friends toy trains because some of them contained lead paint.

What both incidents have exposed is the economic blow-back hitting western companies. Having reaped the benefit of cheap labour, companies are now reeling from the accompanying problems of China's exponential growth. With so many factories producing so many products, effective regulation is becoming virtually impossible, say experts. Mattel alone operates 50 factories in China, with many located in the Pearl River Delta, the hub of China's manufacturing sector. Stretching from Hong Kong up to Guangzhou, the Pearl River Delta has in the past 25 years grown into one of the world's biggest manufacturing areas, saturated with hundreds of thousands of factories churning out products. The nine major cities that comprise its reach are now collectively the world's top manufacturer and exporter of toys, watches, phones, radios, footwear and clothing, according to Hong Kong's Trade Development Council.

"What's happened is a lot of guys have got very sharp on how to look compliant without being compliant," said Dane Chamorro, Greater China manager of Control Risks, a risk consultancy. "Too few companies do surprise inspections, and many times the inspectors that go in are not that familiar with the factories."

The Mattel recall comes one week after the European commissioner for consumer protection, Meglena Kuneva, visited China and pressed regulators and local toy makers to improve the quality and safety of products shipped to the EU. Worried that the recalls could put a dent in exports of some goods and even lead to trade sanctions, Chinese regulators say they have stepped up their safety checks this year and created a system that holds toy makers and other exporters more accountable for shipping dangerous goods.

But any inspection system is vulnerable, analysts say, whether it be ineffective sampling and testing, poor enforcement or the rampant bribery that allows products to pass inspections and leave the country.

Ian Anderson, Asia-Pacific director of SGS, which conducts consumer testing for toy makers, said: "You can put the best systems in the world in place, and you can always find some enterprising person who can get around it."

Mattel's recall involves 83 products and was discovered by a European retailer in early June. The company had even helped the contract manufacturer blamed for the recall to set up its own testing laboratory, which should have guarded against the paint problem. But while the US toy maker follows strict labour laws at its own facilities in China, it has also followed other manufacturers in relying on dozens of sub-contractors. When combined with 1,000 licensees who can produce goods based on Mattel's brands, operating about 3,000 factories in China, the task of quality control becomes increasingly difficult.

"There's a lot of this going on," said Ken Chan, a manager at the Heng Jia Plastic Mould Company in Guangzhou, of the manufacturing business in China in general. "It's very difficult to have perfect quality control."

Even with regular inspections, breaches in the production chain are always a possibility.

"For example, a boss pays $10,000 for a tonne of plastic materials and his employee goes and pays $8,000 for something else. The $2,000 is eaten up and you end up with a cheaper material that has toxic substances in it."

While some say regulatory difficulties are the inevitable result of rapid industrial change, others are more scathing in their diagnosis of China's growing pains. "A good system for guaranteeing quality control simply doesn't exist in China," said Wang Hai, a consumer rights campaigner who has campaigned against shoddy goods. Mattel's problems, which have cost it an estimated $30m, have also shown that China is vulnerable to the charge that it uses 19th-century factory methods and materials to produce 21st-century goods.

With the US government seeking assurances on food and drug safety, following worldwide concern about Chinese exports from tyres to tainted food, drugs and toothpaste, Chinese export safety will remain in the public eye. What will be more interesting is whether companies will look at Mattel's woes when making their next China risk assessment