The toys include the popular Sesame Street, Dora the Explorer and other children's toys. See the recall notice

This follow another recall of Chinese-made Thomas the Tank Engine toys also due to high lead levels.

Keep informed of juvenile products recalls on Health Canada's web site.

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Mattel Recall of Lead-Tainted Chinese Toys Cost $30 Million

By Heather Burke
Source: Bloomberg.com 

Aug. 2 (Bloomberg) -- Mattel Inc., the world's largest toymaker, said a recall of 1.5 million Chinese-made products will reduce second-quarter operating income by almost 50 percent and that it will review the production methods of all its contractors in China.

The recall of toys, including Sesame Street dolls, that may contain excessive lead levels will cut $30 million from Mattel's previously reported operating income of $63.5 million. The company didn't say what the impact on net income would be.

The lead discovery might force Mattel to find new sources of low-cost goods and may further damage China's reputation as an exporter, following a recall of ``Thomas & Friends'' toys in Asia, a U.S. ban on Chinese toothpaste and scandals involving tainted cooking oil and diseased pork.

``Mattel has for many years been a leader in product safety,'' said Sean McGowan, an analyst at Wedbush Morgan Securities in New York. ``This serves as a reminder that even the most diligent companies are vulnerable to the materials that get supplied to their factories.'' He rates the shares ``buy.''

The company is recalling 967,000 preschool toys sold in U.S. stores since May, including Elmo's Guitar, Dora's Talking House and 81 other products, the U.S. Consumer Product Safety Commission said yesterday.

``There can be no assurance that additional issues will not be identified,'' the company said in a regulatory filing today.

Mattel shares fell $1.58, or 6.7 percent, to $22 at 8:25 a.m. before the start of New York Stock Exchange composite trading.

Tainted Products

U.S. officials have raised alarm about tainted products from China, which produces 80 percent of the world's toys, including seafood containing harmful drugs, toothpaste with an ingredient found in antifreeze and pet food containing a chemical used to make plastic.

President George W. Bush last month ordered the creation of a panel to study whether the U.S. needs more stringent safeguards for imported food and other consumer products.

Concerns over the safety of Chinese products are seeping into trade and exacerbating U.S. anxiety over the trade gap with China, estimated by the Asian Development Bank to widen 45 percent next year to a record $257 billion.

At the same time, China's quality inspectors said they've also found cases of substandard U.S. food including pistachios, dried apricots, raisins and health supplements in the past month

Mattel, which also makes Barbie dolls, said the affected toys were made by a contract manufacturer in China. The El Segundo, California-based company said it's investigating the incident and plans to review manufacturing procedures with all its products made by vendors. About half of Mattel's toys are made in company-owned factories.

Early July

The perceived risk of owning the company's debt rose today, according to traders of credit-default swaps, financial instruments used to bet on the company's ability to repay its debt.

Credit-default swaps on $10 million of Mattel's bonds rose $1,500 to $34,000 in London. A decrease in the five-year contracts signals improvement in the perception of credit quality.

Mattel first learned of a potential problem in early July, according to Jim Walter, Mattel's senior vice president of worldwide quality assurance. It then began a so-called ``fast- track'' recall with the CPSC, its statement said.

No injuries have been reported from the products which contained the lead in their paint, the CPSC said. The toys, many geared toward children ages two to five, included dolls, stuffed animals and vehicles featuring characters from Viacom Inc.'s Nickelodeon children's network, including Dora and Diego. The toys cost $5 to $40, the CPSC statement said.

Replacement Value

Lead may be toxic if ingested by children and can lead to serious health effects, the CPSC said. Consumers should take the toys away from children and contact Fisher-Price to arrange a return. They will receive a voucher for a replacement toy up to the value of the recalled one, it said.

Manufacturers of foodstuff, drugs, farm produce and health products that fail quality standards will be fined up to 200,000 yuan ($26,460), according to a Chinese government statement on July 26. Producers may have their licenses revoked and company officials may be jailed, the statement said.

``When it comes to things like food and children's toys, the level of consumer aversion to a health and safety problem is very high,'' said Alan Oxley, managing director of Melbourne- based ITS Global, which advises companies on trade policy.

Production Halt

Mattel stopped production and shipping of the affected toys and began an investigation around July 7, Walter said in an interview. Two-thirds of the affected toys never hit store shelves, according to company spokeswoman Lisa Marie Bongiovanni.

The toymaker has worked with the contract manufacturer for 15 years, said Walter. Mattel said it has stopped producing toys with the manufacturer for now, pending results of its inquiry.

``We're taking a very aggressive, different look at the process that we have in place so we are not embarrassed in this form again,'' said David Allmark, general manager of the Fisher- Price Friends unit. `I'm sure other companies will reassess and check their processes to make sure they're not in the situation we are in.''

The recall is Mattel's biggest since 2.5 million Fisher- Price baby swings were taken off the market in 2000 after children fell out and were injured, according to CPSC spokesman Scott Wolfson.

The toymaker's biggest recall occurred in 1998 involving 10 million Fisher-Price Power Wheels ride-on cars and trucks, Wolfson said. The vehicles could overheat and cause fires. Shares of Mattel rose 67 cents, or 2.9 percent, to $23.58 yesterday in New York Stock Exchange composite trading before the announcement. They have risen 4.1 percent this year.

Safety Problems

A survey released in May found 23 percent of 105 locally manufactured toys failed a quality test, China's General Administration of Quality Supervision, Inspection & Quarantine said in a report on its Web site.

Some toys have ``safety problems'' that may potentially hurt children, the report said. The survey covered 240 local manufacturers of toys, children's clothing, infant milk powder and jelly.

The China consumer goods scares indicates that Chinese manufacturers are making a transition, ITS Global's Oxley said.

``They're moving quite strongly from being the best low- cost producers in the bottom end of markets into an area where they're getting high-value products, where brand recognition is quite important,'' he said. ``It means that their systems have to adjust to be able to get the benefit of branding by companies such as Mattel.''

(Consumers wishing more information about the recall should contact Fisher-Price at +1-800-916-4498.)