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Manufacturing in the Middle Kingdom

How to build a product in China without recalls, defects, missed deadlines...

By: Alex Salkever

Published December 2007

Around midnight on October 15, a shipping container filled with toy action figures left Hong Kong aboard a "K" Line vessel bound for Long Beach, California. Back in Philadelphia, Mahender Nathan and Elizabeth Haynes breathed a sigh of relief. The figures, embodying Rama and Hanuman, two key players in Hindu mythology, were the first products for their upstart toymaker, Kridana. The shipment had departed a month later than anticipated but just in time to ensure delivery to a Pennsylvania warehouse by the beginning of November--which meant the dolls would make it to retailers' shelves in time for the holiday season. Still, the process of getting the figures made and shipped had been so exhausting that the pair had only begun nailing down their marketing plan.

Apparently, even mythic Indian heroes aren't immune to production woes in China. As repeated waves of recalls of tainted products have roiled many American companies, including toymakers Mattel (NYSE:MAT) and RC2 (NASDAQ:RCRC) (of Barbie and Thomas the Tank Engine fame, respectively), the "Made in China" label has gone from a nonissue to a potentially serious liability. For start-ups like Kridana, keeping China production on track and problem-free has become a huge added drag on business.

To wit, Kridana's contract negotiations with a Chinese factory dragged out for months over product-quality language. Design problems forced Nathan and Haynes to drop a third action figure they had planned to produce. Delays at testing facilities used to verify that the paint on Kridana dolls was lead-free added an extra two weeks to the product cycle. And costs shot past Kridana's modest budgets, forcing the company to pony up $50,000 in additional capital. "It was much, much harder and more expensive than we thought it would be," says Haynes, wearily.

As a child, Nathan had always loved the stories his Indian-born grandmother told him--epics such as The Ramayana, a 24,000-verse poem that tells the story of the exiled prince Rama and his quest to recover his abducted wife, Sita, from the demon prince Ravana. "They're filled with demons and kings and heroic battles and everything kids could want," Nathan says. He wondered why he had to play with Transformers instead of action-figure heroes from The Ramayana and other classic tales.

Two decades later, Nathan, a manager at e-commerce services firm GSI Commerce (NASDAQ:GSIC), finally decided to do something about it. He contacted a friend, Malik Benin, a toy entrepreneur who also lived in Philadelphia, and asked for advice about starting a company to bring the best stories from classical Indian culture to life as toys and comics. After doing some research, Nathan and Haynes, his wife and a business consultant and former executive at Urban Outfitters (NASDAQ:URBN), figured that such products could prove popular with both hard-core collectors and the nearly 2.4 million Indian Americans. The couple called their new company Kridana, from the Sanskrit word for toy, and got a top-notch illustrator to create images for a killer action figure. "We wanted them to be viewed as collectible, quality figures," says Nathan. "But we also wanted them to be playthings and be able to stand up to 9-year-old kids." The duo budgeted $75,000 for design, development, marketing, and a first product run of 12,000 toys. They were to be completed in time for the 2007 holiday season and would be sold online and in some specialty toy and comics stores for about $15.

With design in hand, the couple began talking to other toy entrepreneurs for recommendations on where to get the figures made. They hoped their budget would cover the costs of producing three different dolls, plus comic books to accompany them. The comic books would be printed in Canada at the same facility used by industry giant Marvel. But the dolls had to come out of China. "We looked around, and no one else even makes action toy figures," says Nathan. The pair received valuable guidance from Benin, who had been to China and visited numerous factories. He told Haynes and Nathan they should start with the Lucky Group, a highly regarded factory that deals with many of the big U.S. toymakers.

After checking around and hearing similar reports from others, Haynes and Nathan decided to go with Lucky and begin hammering out a contract. Nathan hired a lawyer who had experience dealing with Chinese toymakers to write the first version, which included strict turnaround times and severe penalties if the factory failed to meet them. "It was probably a screamingly offensive contract, but in light of all the recalls, I thought it was a good starting point," says Nathan. Offended, factory officials declined to sign and even refused to make a counteroffer. The couple quickly realized they would need to bend and give the factory more wiggle room to fix its mistakes, among other concessions.

That brought Lucky back to the table. But discussions dragged on for three months as the two parties haggled over a number of issues. Haynes and Nathan, for example, decided to use a more environmentally friendly type of plastic, a move that added 5 percent to the piece rate. They also were forced to scrap the third figure because of design problems. When they agreed to a rough contract with Lucky in June, it was written in English. "We should have had it done in Chinese, too, and next time we will," says Nathan, acknowledging that the extra step probably would give the document added weight in China should a dispute arise. Haynes and Nathan flew to Hong Kong in late August to visit Lucky's factories in Guangdong province before signing the contract. They arrived knowing they'd have problems to address. They had learned, for example, that the factory intended to test just four of all the figures produced for lead paint or heavy metal contamination. "That freaked me out," says Nathan. "It's like a cookie company only sampling the test batch."

Kridana asked to modify the contract to permit testing of each production run of the dolls. Factory officials agreed, but only at an additional $1,200 per run. The timing of this process change was unfortunate. "While we were over there, Wal-Mart announced it would start doing more extensive testing of all products coming out of China," recalls Haynes. The result? A huge backup at the top-notch testing companies, which added an extra two weeks onto Kridana's timetable. That pushed the shipment into a yawning weeklong holiday season in China, with no shipments leaving the country. Frantic to make up the lost time and getting very close to missing the deadline for the U.S.'s holiday season, Haynes and Nathan dropped their initial shipping plans and got Rama and Hanuman to California on a quicker 12-day sailing on "K" Line. Unfortunately, the new plans forced Haynes and Nathan to do most of the customs paperwork themselves, which meant hiring a freight forwarder and working long distance with Chinese nationals who spoke little or no English. "On October 6, I still was not sure whether we would have our products on that boat," says Haynes. They made it, but just barely, and she and Nathan are hoping for a prosperous holiday season. Collectors who have seen pictures of the dolls are excited about them, and the figures got a brief mention in The Wall Street Journal.

Haynes and Nathan’s ordeal taught them a lot. By walking the factory floor and learning about the facility’s automatic painting process, they learned that they had additional choices for painting their dolls that could save 25 percent on future product runs (which will include the third action figure they had originally planned). Meanwhile, Kridana put on retainer a former U.S. toy executive who specializes in quality control and will inspect and monitor all future product runs in China. It’s another added expense, but Nathan and Haynes believe they don’t have much choice in the matter. Says Haynes: “You need to have someone over there that works for you, talking to the contractors, getting to know them. It’s absolutely essential if you want to avoid bigger problems down the road.”

Resources

For information on contracting issues in China, go to chinasourcingreports.com. The American Chamber of Commerce in Shanghai has lots of advice on doing business in China. Alibaba.com offers a large directory of offshore contractors, in China and elsewhere.
 

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