Outsourcing Gone Wrong German Toymaker Steiff Pulls Out of China

The German toymaker Steiff, which is famous for its high-quality teddy bears, moved some of its production to China in a bid to cut costs. Now it is pulling out due to concerns about quality and logistical difficulties -- but the jobs aren't going back to Germany.

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In the land of stuffed animals, there is conflict twice a week. That's when the designers at famed German stuffed toy maker Steiff are required to present their latest creations to the director of quality control, a man named Mr. Krebs. He is completely immune to the heartbreakingly sweet faces of teddy bears, cuddly baby rabbits and cute longhaired guinea pigs. The furry toys' baby-like faces do not trigger any paternal feelings in Krebs.

Instead, his feelings toward the toys are driven by scientific curiosity. When Krebs sees a stuffed animal, his first thought is to burn it, drown it and wring its neck. He chars them, covers them with saliva and tears at their heads. He rubs acid into their fur, roasts them under UV light and tests the way they respond to all sorts of chemicals.

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Photo Gallery: Steiff Quits China

Only when a test bear has survived Krebs' onslaught is it permitted to become a Steiff animal. And when that happens, it gets the company's trademark button in its ear -- a medal for bravery, if you will -- at company headquarters in the town of Giengen in southwestern Germany.

No Fluff

Steiff CEO Martin Frechen loves these kinds of anecdotes. The 41-year-old head of Margarete Steiff GmbH is constantly talking about the quality of the world's most famous stuffed animals. He raves about the recently introduced "Steiff Purity Law" (the name is a play on Germany's famous Reinheitsgebot or "purity law" for beer). He is enthusiastic about seemingly mundane things like ISO certification and sings the praises of the organic cotton Steiff uses in its baby products.

"We want to make the most beautiful, best and safest teddy bears and stuffed animals in the world," he says, tugging at a piece of bear fur. "Look, there's no fluff. That's because we also weave the fur instead of just knitting it."

Steiff puts a great emphasis on its manufacturing philosophy, Frechen says. He's talking about the company's reputation for hand-made, high-quality production -- real, honest and devoid of hazardous substances.

But why does he have to mention all this in the first place? Didn't practically every German grow up with a Steiff animal? Doesn't everyone know that, for some people, the stuffed animals remain a lifelong object of their affection? Even German Chancellor Angela Merkel has three Steiff animals, the celebrity gossip magazine Bunte reports: a rabbit, a duck and a lamb.

Given Steiff's reputation, why does Frechen needs to talk the company up so much? The answer is simple: A minor globalization adventure almost destroyed the reputation of this deeply traditional company.

The Misadventure of the Cosy Friends

In 2004, the company's then-management, in an effort to reduce costs, began producing in China. Of course, the Chinese-made products were not the company's flagship teddy bears and expensive collectors' items, but a cheaper collection called Cosy Friends. The purpose of the venture was to fight the low-cost producers that were filling department stores with cheap stuffed animals from Southeast Asia.

Even McDonald's was handing out free stuffed animals with millions of its Happy Meals at the time. A company like Steiff, producing in high-wage Europe, could hardly compete. But producing in China, where labor costs are significantly lower, enabled Steiff to sell teddy bears for just €14.95 ($21.50) -- a snip compared to the company's traditional bears, whose prices start at around €50 for a 12 centimeter (5 inch) bear.

Four years later, Frechen, who was named CEO in 2006, announced the end of the Chinese venture. He says he was skeptical from the start, but now he is convinced. "We don't want it any more," says Frechen. "China isn't part of our story. We want to place a Steiff product in a baby's crib and be able to assure the parents that nothing can happen."

It isn't as if the Chinese-made Steiff collection were filled with hazardous substances. But ever since the Mattel scandal involving contaminated toys, many parents no longer trust toys made in China.

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