Harvard

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Mattel, Inc: Vendor Operations in Asia
Only 3% of the world’s children are here in the U.S. Our biggest opportunities are in growth outside the U.S. – Jill Barad President & CEO Mattel, Inc. The sun was just breaking over Kowloon Harbor. From his corner office, Ron Montalto gazed across the water and watched the early morning light reflect off Hong Kong’s famous downtown skyline.Only 24 hours ago Ron had been riding around the Carolina Speedway in Kyle Petty’s blue Pontiac, emblazoned with the Hot Wheels logo. The event was part of the kickoff for a new series of Hot Wheels® replicas of NASCAR racers. Now, back in Hong Kong questions still swirled around the sourcing decisions to build those and the rest of the die-cast family of miniature cars. Starting over a year agowith the announcement of the merger between Mattel, Inc and its second largest rival, Tyco Toys, Montalto had been embroiled in a debate over the sourcing strategy for the existing Hot Wheels product line and newly added Matchbox® cars. By July 1997, the company had decided to build a wholly owned manufacturing facility in the Guangzhou region of southern China, starting production in 1999. TheAsian currency crisis that ensued later that fall had reopened the “build decision.” It was now the beginning of March 1998 and all of the original options were once again under debate. While in the US, Ron had met with his boss Joe Gandolfo, President of Worldwide Manufacturing Operations and learned that he would be reassigned within the next month to oversee die-cast car operations. An ex-lawyerwho had lived and worked in Hong Kong for nearly fifteen years, Montalto was a Senior Vice President and had been responsible for company’s Vendor Operations Asia division (VOA) which managed Mattel’s outsourced production. Mattel began the vendor operation program in 1988 hoping to add flexibility to the company’s traditional in-house manufacturing. Montalto had spent the last ten years developingVOA into one of Mattel’s most valuable strategic assets. In 1997 it was responsible for manufacturing products that generated nearly 25% of the toy company’s total revenue. The Tyco merger resulted in VOA manufacturing products that generated an additional $350 million in revenues for the Mattel organization. The majority of those revenues came from a combination of Tyco’s Matchbox die-cast cars,its line of radio-controlled (RC) cars, its View Master® series and products from its Sesame Street license. With demand for
This case was written by M. Eric Johnson and Tom Clock. It is written for class discussion and not to illustrate effective or ineffective management practices. Some names and facts have been changed. © 2002 Trustees of Dartmouth College. All rights reserved. For permissionto reprint, contact the Tuck School of Business at 603-646-3176.

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Matchbox cars at 64 million units in 1997 and growing, die-cast capacity concerned Montalto the most. Tyco manufactured the cars through joint-venture arrangements in Shanghai and Bangkok. Both of the joint ventures were minority share partnerships which raised questions for Mattel in the future.What’s more, the quality of Matchbox products had been eroding for years and was currently at an all-time low. The production equipment and steel molds used in the manufacturing plants were becoming obsolete. Though it might be possible to upgrade the existing Tyco operation in Bangkok, Mattel saw little hope of expanding the Shanghai operation. Mattel owned a state-of-the-art die-cast facility thatwas operating at full capacity in Penang Malaysia (see Exhibit 1). Expanding that facility significantly beyond its 1997 volume of 120M cars would be expensive and complicated. There was no room for further building on the site and no available land adjacent to the plant. The proposed China facility would solve the capacity problems. However with the financial storm sweeping through Asia, some...