Expert Profile ExpertProfile Charles Woo Charles Woo is the co-founder and CEO of Megatoys, a toy manufacturer headquartered in Los Angeles, with and manufacturing facilities both in U. S. and China.
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"Made in China": What's Behind the Label

Charles Woo, CEO of Megatoys, interviewed by phone in Los Angeles on July 30, 2008 by Russell C. Leong, U.S.-China Media Brief editor.

As a leading U.S. toy manufacturer who frequently goes to China to oversee your factories, what's your take on the product safety issue?

CW: Let's step back to look at that question. Product safety is connected to the way products are actually manufactured in China — so this issue is far more complex than how the American media tends to cover it.

First, the costs of Chinese goods have risen dramatically over the past two years, due to the rising exchange rate of RMB (Chinese currency) versus the U.S. dollar, the higher cost of raw materials which are often imported, and the increasing labor costs. Vietnam and Pakistan, for instance, are much cheaper than China to produce or certain items such as low-cost garments, stuffed toys, etc. Second, the only factor here that might be considered cheap is the labor costs in China. Due to a shortage of skilled labor and rising living standards in recent years, even the labor costs have gone up drastically. The Chinese government has raised the minimum wage and started to enforce labor standards.

Third, most factories in China themselves do not control or understand specific consumer demands and trends for the foreign or international market. In reality, it's the U.S. companies, and those manufacturers from Taiwan, Hong Kong, and elsewhere, who set the trends, do the market research into consumer demands, and set up the marketing and sales strategies. And that's how these companies make their profits — from factoring in all all these other costs — design, research, marketing — into their cost mark-up. Labor is not really the biggest cost for them, though the media here basically focuses on "cheap labor" in looking at what the "Made in China" label stands for.

Factories in Shenzhen and other special economic zones in southern China and elsewhere are a case in point. A company's profits from raw materials, design, or research do not go back to China, either to benefit the workers or to benefit the state, but rather into the profits of foreign companies, whether they are from the U.S., Europe, or Taiwan or Hong Kong. I include Hong Kong, even though it is an SAR — Special Adminstrative Region of China, because its economic system operates somewhat differently.

The bottom line is that Western consumer trends and demands are all set by foreigners, not by the Chinese themselves.

So who's ultimately responsible for enforcing safety regulations and oversight in the design and manufacturing process?

CW: Again, we have to look at the concept of what's safe or not safe means to the average consumer in a certain period of time. Safety depends on design, quality control, and factories following detailed regulations that are pretty difficult to understand, much less enforce. As I said, most products for export are designed and created NOT by Chinese companies, but by foreign ones. Also, as you know, in the U.S. lead safety issue has been an issue for at least the past 30 years. However, there's a big lag time between what scientists or researchers know, and the consumer perception of the safety or danger of any item, such as toys. One example: there have been alot of American toys that use magnets for years. However, only in the past year or so have American consumers recognized the danger of children possibly swallowing small magnets and injuring themselves. So here again, there are a lot of factors to consider in looking at what's safe and not so safe — from focused consumer response, to design and research, and to responsibility--both in China and the U.S.— for oversight and regulation. I predict, however, that by the end of this year, those particular problems with magnets or lead probably won't be major concerns. By then, most parties in the supply chain would have recognized the serious nature of the problems and taken steps to correct them. Media interest would also have shifted to something else.

Can you talk a bit about Shenzhen,* which gets a lot of attention in the Western media?

CW: Let's compare some products. Simpler products like garments — which only require sewing machines basically — are now being sourced out to Vietnam and Pakistan. However, light industrial products, higher-tech products, and electronic products need to be manufactured in places like Shenzhen with its economic network of supporting industries. For example, if a factory's plastic-making machine breaks down, it can be easily repaired or even replaced because Shenzhen has a variety of interrelated, supporting factories in the immediate economic zone. Also, close-knit manufacturing and distribution chains are all located in the same area. So it's much more efficient to produce and ship from there, rather than from remoter inland regions in China. Shenzhen is also right across from Hong Kong where knowledge of western consumer tastes is readily available. Things like electronic games, radio-controlled toys, require much more sophisticated technology, including machines and components from a number of related industries. All these can be found in the special economic zones like Shenzhen, a region with the highest labor costs in China. So, it is this supply chain efficiency, not just cheap labor, that provides the competitive advantage to a lot of products manufactured in China.

[1] Shenzhen, in southern China's Guangdong province, situated immediately north of Hong Kong. Following the economic liberalization policies of Deng Xiaoping, Shenzhen became China's first - and most successful - Special Economic Zone. Shenzhen is also the second busiest port in mainland China, ranking only after Shanghai.

[keywords: product safety, labor costs and standards, consumer trends, Shenzhen, supply chain]

1 Shenzhen, in southern China's Guangdong province, situated immediately north of Hong Kong. Following the economic liberalization policies of Deng Xiaoping, Shenzhen became China's first - and most successful - Special Economic Zone. Shenzhen is also the second busiest port in mainland China, ranking only after Shanghai.

© Copyright 2008 by Charles Woo