Made In China

Since June, an unprecedented number of recalled products, mostly made in China, have sent the toy industry reeling. Reactions to the recalls have included increased testing by manufacturers, Congressional hearings, 900 percent growth in sales of home lead tests, Mattel's apology to the Chinese government and even the suicide of one supplier.

With all that tumult in a market not far removed from ours, an unavoidable question presents itself: Could the gift industry be next? In search of an answer, Gifts & Decorative Accessories explores the quantity of gifts made in China, whether Chinese origin is a significant factor in safety concerns, and what gift suppliers are doing to ensure product safety.

In the past five years, the number of foreign-made products recalled in the U.S. doubled to a record 467 last year, according to Donald Mays, senior director of product safety planning and technical administration for Consumers Union, publisher of Consumer Reports. About 67 percent of U.S. product recalls are imports; according to the Consumer Product Safety Commission (CPSC), Chinese-made products account for 60 percent of consumer product recalls, and 100 percent of toy recalls so far this year.

Beyond toys, other products shown to have hazardous lead contents include traditional ceramic pottery made in Mexico, often brought into the country by individuals. (The FDA subjects imported ceramics to a 24-hour leaching test.) CPSC is also helping to develop a voluntary lead standard for vinyl children's products such as bibs. The Consumers Union is investigating ceramic dishware and lunchboxes.

Gifts & Decorative Accessories examined CPSC recalls of products in other gift categories, and found that:

• Decorations had comparatively few recalls, mostly for lead content. Imports were evenly split between China, Mexico and unknown.
• Of the 82 candle recalls between 2002 and 2007, 56 percent were products from China. Although lead can appear in candle wicks, the vast majority of candle recalls were for burns and fire risks, followed by laceration.
• Glassware had very few recalls. Virtually all were made in China (the rest were of unknown origin) and all but one posed a laceration hazard.

However, it's possible that China's high recall rate is misleading. In the Canada-Asia Commentary article, "Toy Recalls — Is China Really the Problem?", Professor Hari Bapuji of the Asper School of Business, University of Manitoba, and Professor Paul Beamish of the Ivey School of Business, University of Western Ontario write that 76 percent of recalls from 1988 on involved design flaws, while only 10 percent involved manufacturing flaws such as lead paint. Much of the product that is manufactured in China is designed in the United States.

Nevertheless, manufacturing flaws are on the rise — in the past two years alone, the design flaw percentage has risen to about 20 percent. (In the recent Mattel recall, about 10 percent of the recalled products were due to lead paint.). Lead paint is one of the most common manufacturing defects; of 54 recalls due to manufacturing defects, 60 percent involved lead paint, and more than half of those were made in China.

Bapuji and Beamish note that Chinese-made toy recalls hovered around 50 percent until 2002, over a decade after most toy manufacturing moved to China. But since 2003, they've risen to 80 percent, reaching 95 percent this year.

So what's changed? And why are recalls on the rise? According to recent articles in The New York Times, China began experiencing labor shortages around 2003. The country is not short of workers in general, but of young workers willing to work long hours for low wages and live in factory dormitories. Rural areas were particularly hard hit, as the country's one child family policy, in effect since 1979, has resulted in a population with fewer young people, most of whom migrate to China's growing cities.

Frederic Contino, president of Cannon Falls, MN-based gift vendor Midwest, says the migration puts a strain on manufacturing resources. "[In places] where there was always plentiful labor for our factories, where there's a lot of manual work required, they started to see workers want to go to more high tech plants, air conditioned plants," he says, adding, "Those manufacturers were paying a lot more money, giving better food, better living conditions."

Contino has even heard of several manufacturers with orders delayed or canceled, and says, "There were some pretty serious shortages of product this year — and there will be more before the end of the shipping season."

Meanwhile, in July the Chinese government reduced export tax rebates for Chinese manufacturers by 3 to 8 percent in order to reduce trade friction with the U.S. and other countries. Commodities affected include glass, metal, ceramic, polyresin and wood — all materials commonly used in gift manufacturing.

In addition, China allowed its currency, the yuan, to appreciate, in response to U.S. pressure, and there have been significant increases in the cost of raw materials in China. According to Contino, American importers haven't raised the prices they are willing to pay, so the burden of increased expenses falls squarely on manufacturers. "These guys are looking for a way out, a way to make some profit. I think that lead, which is cheaper, is a symptom of this overall problem," says Contino.

Lead, of course, causes symptoms of its own. If consumed by children, it can lead to learning disabilities, behavioral problems, growth retardation, hearing problems and occasionally death. In adults, it can cause abdominal pain, reproductive problems, high blood pressure and heart and kidney failure.

The CPSC bans paint or other similar surface coatings that contain more than .06 percent lead on articles intended for use by children, as well as furniture coated with lead-containing paint. Printing inks, plastic pigments and ceramic glaze are not considered paints. Mirrors with lead-containing backing paint, artist's paints and metal furniture (other than children's furniture) with a factory-applied coating are exempt. Using lead in products outside the banned categories isn't illegal, though the state of California does require labeling.

The CPSC is working on rules to limit the amount of lead in children's jewelry, as well as vinyl products. California banned lead in children's jewelry in September, and in October also banned any product made for young children that contains more than one tenth of 1 percent of phthalates — chemicals used to soften plastic. The ban goes into effect in 2009.

Steve Russo, president/CEO of children's accessory importer New York-based FAB/Starpoint, is optimistic that lead issues will be resolved soon, believing that progress has already been made. "Products for holiday were in production, and probably in the distribution cycle, when all this came to light. But I think that post-holiday this will be under control."

What's more, Russo doesn't anticipate significant impact on pricing. "I don't think using lead is a cheaper way to make product," he says. "Obviously there are costs associated with the testing, but with this kind of volume it can be absorbed in the cost. It may go up a little, there are definitely costs associated with compliance, but it's not like the currency revaluation or an oil shortage that drives up the cost of plastics. I certainly would not accept from my factory that there's a 5 percent increase because of lead issues, because that's something they told us they were doing all along."

Contino, on the other hand, anticipates an industry-wide price increase — less because of lead than because of Chinese manufacturers' greater costs. "We already know our products and costs for next year, and it's a pretty big deal. We're in the process of figuring out what it means to the product line and looking at price points. But the enormity of it tells me it isn't going away," says Contino. "Chinese products have always been the best value out there. If we can't find a price that is acceptable we may have to change the specs."

Neither taking production out of China nor taking direct ownership of factories will solve the problem, according to Contino. "We do business in India, Vietnam, and Indonesia. We could shift some production to those areas, but those countries are not up to the level of infrastructure that China has in terms of handling volume. Will they be there someday? Yes, but not next year. We're not going to risk the quality of our products or the ability to get the product to our retailers. I don't think any other responsible manufacturer will either. If you own that factory, you're going to have the same problems."

As to consumers rejecting goods made in China, Contino is not worried. "There's going to be consumer concern, but because of the enormous number of the products that are purchased in China I don't think there's going to be a significant backlash. The bigger issue is how consumers are going to react to the pricing."