updated 8/19/2007 5:37:23 PM ET 2007-08-19T21:37:23

The first Barbie doll to hit the market in 1959 cost $3 each. Today, the fashion doll won’t set you back for much more.

That’s the economics of the toy business. Consumers demand low prices. Toymakers want fat profits. So manufacturing ambled off to China, which for a long time has been willing and able to please both.

Now a massive toy recall by Mattel Inc. reveals an ugly side to that cost-cutting drive. The sacrifice of safety just to provide cheap toys is something everyone will have to pay for.

The slogan “Made in China” has long stood for affordability. Thanks to the dramatically lower labor costs that China offered — estimated by some to be a fifth of what they are globally — toymakers could knock down their expenses by shifting production abroad.

That not only has boosted corporate earnings, but helped them gain shelf-space in retail chains like Wal-Mart Stores Inc. that insisted on low prices for the products they bought. The merchants could then offer good deals to price-conscious shoppers, without losing any profits.

The result is an industry that hasn’t seen its products’ prices soar much. Many of today’s toys, when adjusted for inflation, may be less expensive than those decades ago, even though such things as raw material costs — like paper and plastic — have skyrocketed, according to independent toy industry consultant Chris Byrne.

“We can’t have ever-decreasing prices without something eventually being squeezed,” Byrne said.

That squeeze is what has been grabbing headlines lately. As millions of China-made toys have been recalled, suddenly Americans have become very aware — and scared — of the risks of manufacturing there.

It’s easy to see why the alarm bells are going off. When playthings with big-time brands’ names are considered health risks, that makes for much conversation among parents who are now dismayed about what’s lurking in their toy bin.

This puts the toy industry in a tricky spot. With more than 80 percent of U.S. toys imported from China, toymakers here can’t afford to abandon production. But if they want to keep customers, toy sellers must change their Chinese operations significantly.

Mattel Inc. is facing that new reality right now. This summer has been tough for the world’s largest toymaker, which has seen its reputation as a leader in manufacturing safety unravel after two highly publicized recalls in just as many weeks.

The first came on Aug. 2 with its Fisher-Price division recalling 83 types of toys — including the popular Big Bird, Elmo, Dora and Diego characters — because their paint contains excessive amounts of lead. Then on Aug. 14, lead paint also led to the recall of hundreds of thousands of die cast cars.

In total, El Segundo, Calif.-based Mattel has recalled almost two million toys worldwide due to lead paint concerns, plus millions more for other safety reasons.

Mattel has said it will take a $30 million charge to cover the cost of the recalls, but that doesn’t include what it will spend to convince the public that its toys are safe. Analysts estimate that millions of dollars more will have to go toward monitoring its foreign vendors and creating a marketing program that assuages parents’ concerns.

Mattel has already said that it will switch from randomly testing finished toys to testing every batch of toys produced. It will also step up safety checks at the suppliers and subcontractors before they finish making the toy.

While Mattel has become the poster-child of Chinese manufacturing gone wrong, its rivals should be scrambling to avoid being caught in a similar spot. That doesn’t mean just keeping better tabs on the manufacturers that they have direct contact with, but looking at every vendor, the vendor’s vendor, and so on.

“The transparency at the back-end of these operations is hazy,” said Eric Johnson, professor of operations management at Dartmouth’s Tuck School of Business who has studied Chinese manufacturing. “Each layer becomes harder to manage and control.”

He sees how the situation at Mattel — and probably plenty of others — could have played out. With everyone up and down the supply chain so pressed to cut costs, factories that used to rely on brand-name paint found cheaper no-name options from local suppliers. And as those suppliers continually race to offer the cheapest alternative, lead paint lands on toys.

It’s pretty clear right now that doing business in China just got more expensive. It can’t stay the wild-west of manufacturing that it has become.

Toymakers can’t just roll out flashy advertising campaigns that promise upgraded safety, and not fix their behind-the-scenes operations. They have to figure out how to bring the standards and ethics of their Chinese partners up to acceptable levels, or threaten to take their business elsewhere if changes aren’t made.

Gone are the days of squeezing every last penny out of an operation. What toy companies are saving won’t matter if no one buys their playthings.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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