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Toy story: In August alone, Mattel recalled millions of toys manufactured in China.

FOREIGN POLICY: On August 14, Mattel, the world’s largest toy maker, recalled millions of toys manufactured in China. Add those items to the problems we’ve seen with other Chinese-made products this year—dog food, toothpaste, computer batteries—and it seems we’ve got an epidemic on our hands. Are production standards growing more lax in China, or are consumers just becoming more vigilant? Or is it all just hysteria?

Eric Johnson: There are a few phenomena going on. Toys have been manufactured in China long before the country was cool in terms of low-cost outsourcing. Most of the big companies, particularly Mattel and Hasbro, have a long series of successful operations in China. So, it’s not like they are new to China.

But there have been some interesting changes in the past decade. Ten years ago, companies like Mattel were outsourcing to some key vendors, but oftentimes they still controlled much of the supply network. For example, the paint, the plastic, etc., were typically coming from other multinationals. And as China has matured in toy making, the toy companies’ supplier base has grown larger. There are literally thousands of plants and subcontracting relationships. The quality problems are not with what we would call the first-tier suppliers, but the suppliers to the suppliers.

FP: How well do the major toy companies track quality control on their own? Mattel runs a few of its own factories in China, but what about other toy manufacturers?

EJ: Mattel is in many ways one of the better companies. They are very sophisticated in their Chinese operations. That’s because they run plants, not just in China, but throughout Southeast Asia. They have their own plants in Indonesia and Thailand, which have even lower costs. China will not be the low-cost labor supplier forever.

But when you get out of the [main] supplier base, you’ll find a real range of capabilities and quality-control measures. That means a lot of these companies will have to be more vigilant in the way they operate with their contractors. The larger problem is one I’ll call concentrated manufacturing. That’s really at the root of the pet-food issues, where you have a few very large players in China that are supplying many different brands. What shocked Americans about that [incident] was that it wasn’t just the Winn-Dixie brand or the Wal-Mart brand. It was suddenly just about every brand they could possibly buy when they went to the supermarket. That phenomenon exists in toys, too. There are some very large companies in the back end of the supply chain that supply everybody.

FP: China dominates global toy production. Two thirds of Mattel’s toys are manufactured there, and 80 percent of toys sold in the United States are made in China. Given the recent recalls, will we see a shift to other markets in the years to come?

EJ: China is like the Silicon Valley of toys: There are literally thousands of very good toy suppliers there. There are manufacturers who just focus on plush toys and then there are people who just focus on injection-molded plastic and people who die cast, like Hot Wheels and Matchbox cars. So, for companies that don’t do any of their own production, they really don’t have anywhere to go but China. Thailand has a toy industry with some big players like Mattel, but it’s nothing like China. And it’s difficult to shift those capabilities.

FP: What is China doing to improve quality inspection?

EJ: In working with managers and companies, I would never advise them to rely on China to fix this. China’s oversight on a national level isn’t very mature at this point; much of the oversight that occurs in China is more localized. You will certainly see a lot more pressure on the manufacturers in the toy-producing regions, such as Guangzhou and Shenzhen, to clean up their act because [the recalls] are hugely embarrassing. But it’s still naive to imagine that China’s own regulatory capabilities are going to be able to control quality. Mattel is ultimately responsible for what’s coming into the United States—it’s their brand at stake.

FP: So, the burden sits with the companies. Do these larger companies need to institute higher standards for quality control?

EJ: Absolutely. But the reality is that Mattel is already very careful, because it isn’t the only issue they face in China. If you go back 10 years, you will find a whole host of stories about child labor in toy factories in China. Mattel has been very sensitive to these kinds of issues for a long time because they have a big brand that is going to be the focus of a lot of media attention when things go wrong.