What Barbie tells you about near-shoring

Chuckle if you will but Schumpeter is looking forward to the first live-action “Barbie” film, due out in July. It is directed by Greta Gerwig, maker of “Lady Bird” and “Little Women”, two movies with strong characters. Its trailer is a parody of “2001: A Space Odyssey’‘, which suggests that, love Barbie or loathe her, she will be treated with a knowing wink.

It is a business turnaround story, too. If the film is a hit, it could crown a comeback for Mattel, one of the world’s biggest toymakers, with brands like Barbie, Hot Wheels and Fisher-Price in its toy box. Five years ago it was in a funk, having lost three CEOs in four years, and a decades-old licence to produce dolls for Disney to its rival, Hasbro. Under Ynon Kreiz, its CEO since 2018, its cost base, balance-sheet, manufacturing footprint and morale have all improved. Last year, to the joy of staff, it won back the Disney contract. A Barbie red-carpet blockbuster would put icing on the cake.

So it was with a Ken-like spring in his step that your columnist travelled to Monterrey, in northern Mexico, this month to witness the way Mattel has consolidated its North American manufacturing operations into a single Mexican factory, its biggest in the world. He was hoping that Barbie, as well as becoming a star of the silver screen, could also become emblematic of a hot new trend in trade: near-shoring. Among the brightly coloured toys on the assembly line, there was sadly not a Barbie in sight. The only one on display was a prop in the Barbie Dreamhouse, a Tinseltown-like mansion that is one of the plant’s flagship products. In fact, Barbie is not made in Mexico at all. She is still made in Indonesia and China (the first blonde doll was made in Japan in 1959).

That makes Barbie emblematic of something else entirely: the paradox of today’s supply chains. As well as bringing some production closer to home, Mattel is maintaining global manufacturing operations in Asia. In a business landscape where demand is increasingly hard to forecast, the environment is fragile and the geopolitics unstable, this is the new reality for multinational manufacturers. They need to be global and local at the same time, even if this adds to the complexity of their supply chains.

Despite what American politicians might have you believe, the overriding rationale for near-shoring is not to decouple supply chains from China. As Roberto Isaias, Mattel’s supply-chain chief, puts it, it is to provide flexibility. In some cases, it makes sense to shorten supply chains, in order to be more responsive to changes in consumer demand. In others, it is better to prioritise low-cost production, however far away the factories.

To understand Mattel’s two-pronged strategy, consider Mexico’s pros and cons. On the plus side, it adjoins the world’s biggest market. It has a free-trade agreement with America and Canada, which eases the cross-border flow of goods and services. The cost of labour has become more competitive with South-East Asia (Chinese labour has been pricier for years). Its workers may not be as target-oriented as their Asian counterparts, but they tend to be more collaborative. Mexicans treat benign employers and colleagues like family, pitching in ideas to make things flow more efficiently, reports Mr Isaias (himself a Mexican). Mexico is also more or less immune to the rising Sino-American rivalry, which introduces an element of risk into all Asian supply chains.

Yet Mexico, too, presents some business risks. Though Mattel and Lego, its bigger Danish rival, have been in the Monterrey area for years, the toy industry has yet to nurture an ecosystem of lower-tier suppliers to rival that across the Pacific. The plastic resins used at Mattel’s Monterrey factory, for example, are transported by rail from America and Canada. The toy moulds into which the hot plastics are poured come from China. Asian infrastructure also remains more solid than Mexico’s. In Monterrey Mattel has no complaints about electricity and water supply, the reliability of which can be patchy. But Roberto Durán-Fernández of the Monterrey Technology Institute, a university, says that the recent flood of investments by carmakers such as Tesla to Nuevo León, Monterrey’s home state, could exacerbate the strain on all manner of infrastructure, including roads and housing.

Mattel’s Barbie supply chain illustrates these trade-offs. Her Dreamhouse is three storeys high, heavy and expensive—the sort of item that parents splash out for mostly at Christmas-time. Making it in northern Mexico means it can be shipped within 48 hours to Amazon, Target, Walmart and other retailers in America, enabling Mattel to wait until relatively late in the run-up to Christmas to gauge the strength of demand. The proximity to its market also reduces transport-related costs and emissions.

Barbie, the doll, is different. She is just 11.5 inches (29cm) tall and famously svelte. That makes her fairly cheap to ship in bulk from Asia to America. Demand for the dolls is relatively predictable, so the long trans-Pacific transport time poses less of a market risk. And she is intricately made, with well-coiffed locks and tailored garments—the beneficiary of a tradition of handiwork built up over generations in Asian factories. If demand spikes for particular dolls, Mattel can have Chinese subcontractors make them quickly while it ramps up its own production capacity.

Dreamsolution

For Mattel, then, near-shoring is still a work in progress. It is trying to develop local tooling suppliers to reduce the dependence on China. To become a near-shoring powerhouse, Mexico needs that, too. Over time, the hope is that industries from carmaking to toymaking will develop fully integrated supplier networks across the country, in order to reduce overcrowding near the border. As for Barbie, the optimal supply-chain strategy is probably to manufacture her as close to her biggest markets as possible, provided costs are kept reasonable, in order to respond quickly to consumer demand. Though Mr Kreiz, the CEO, no longer thinks of them as consumers. He thinks of them as fans. ■

Read more from Schumpeter, our columnist on global business:
A battle royal is brewing over copyright and AI (Mar 15th)
How to stop the commoditisation of container shipping (Mar 9th)
Lessons from Novo Nordisk on the stampede for obesity drugs (Mar 2nd)

Also: If you want to write directly to Schumpeter, email him at [email protected]. And here is an explanation of how the Schumpeter column got its name.