Monday, September 21, 2009

CPSIA - Brace for It, Things Are About to Get WORSE

CPSIA Testing Costs . . .
Tracking Labels . . .
Retroactivity . . .
Civil Penalties . . .
Criminal Penalties . . .
Phthalates ban . . .
State AG enforcement . . .
Market Chaos . . .

It's bad, bad, bad right now. Could it REALLY get worse?

Consider Section 102(d)(2)(B) of the CPSIA, the latest horror story to smack you in the kisser:

"(d) ADDITIONAL REGULATIONS FOR THIRD PARTY TESTING . . . (2) COMPLIANCE; CONTINUING TESTING.—Not later than 15 months after the date of enactment of the Consumer Product Safety Improvement Act of 2008, the Commission shall by regulation . . . (B) establish protocols and standards— (i) for ensuring that a children’s product tested for compliance with an applicable children’s product safety rule is subject to testing periodically and when there has been a material change in the product’s design or manufacturing process, including the sourcing of component parts; (ii) for the testing of random samples to ensure continued compliance . . . ."

Nice and obscure, buried deep in the CPSIA. Never heard of it? Ayyy! Haven't I told you that you must ALWAYS read the fine print???

This rulemaking, which has been giving CPSC Bar attorneys sleepless nights but has otherwise escaped the attention of the business community, is due in about seven weeks (November 14 deadline). It has the potential to be the final nail in our coffin, guys. Right now, there are no rules on frequency of safety testing. We are free to negotiate with our customers or establish our own testing plan. This has worked rather well for many, many years - after all, less than 0.01% of all children's products are EVER recalled. But no longer. The CPSC is going to tell us how to assure safety and quality now. The premise is that we are incompetent to do so without government involvement. In our company's case, the 130 pieces we recalled in 25 years (one incident) out of perhaps a billion pieces sold is no proof that we know what we are doing, apparently. Thank heavens we will finally have someone qualified to oversee our processes!

The speculation is that the CPSC is going to specify testing every X pieces or Y lots, or at least annually. In addition, the requirement to have random testing suggests that we cannot be allowed to supply testing samples directly. The "idea", as simple-minded and insulting as it may be, is that manufacturers might somehow pull the SWITCHEROO after a test report is issued. After all, we are SO EVIL! The CPSC does, actually, worry about the "switcheroo". They have mentioned it repeatedly as one of the impediments to the long-promised component testing rule that is aging like fine wine somewhere. NEVER has anyone pointed to a SINGLE recall that involved a "switcheroo" to my knowledge, but whatever - laws don't need any basis in reality anymore. Hence the CPSIA.

Math Interlude Begins Here . . . .

I have submitted information to Congress on testing for one of our telescopes. We recently obtained a new quote on testing - it now costs about $11,500 all-in (including the 23-24 samples). Our annual revenue for this item before the econony crashed was about $30,000 per annum. Assuming gross margins of 33%, typical for the toy industry (and easy for illustration purposes), our annual gross profit (not NET profit) would be $10,000. The cost to test this item is MORE than our annual GROSS PROFIT. This means that the telescope dies - even IF we can set our own reasonable testing program. If testing on this item is conducted annually, our COMPANY dies, too.

Let's look at it another way. Say your testing cost (including samples and so on) is $3,000 for a particular product. How much profit do you require to make it worthwhile to sell that item? If you need a gross profit 33% to make 5% on the bottom line, presumably you cannot afford an annual testing cost of even 5% of the total revenue of the item. If you accept breakeven as the tipping point for this illustration, then the math is also simple: $3,000/5%, or $60,000 in annual revenue. Ideally, you would want more than that so you aren't just "trading dollars". You would be marginally profitable at $80,000 in annual revenue for this ONE item. In the specialty market, a product producing $80,000 per annum is pretty darned good. The profit you would earn on this $80,000 item would be 5% net profit or $4,000 less the testing cost of $3,000, or a grand total of $1,000. Sell $80,000 in telescopes, make a thousand bucks. Nifty, that must be how Bill Gates got so rich.

Remember, this also means that the prospective revenue hurdle for a comparable NEW item is ALSO $80,000 per annum revenue. AND, in the case of a new telescope, you would have to front $11,500 before you get revenue dollar "one". Hmmm, that might cut your product development pipeline down a LOT.

In fact, this annual testing requirement will send many companies scurrying into other markets, such as the mass market or into other businesses, in any event far, far away from the CPSC and this law. I do not see how the education market would survive. Honestly, virtually every manufacturer serving the NSSEA market (educational dealers) is a small company. Even the bigger small companies still do insufficient revenue on the vast majority of products to justify this expense. I know that this rule ALONE could many companies to shed at least two-thirds of their product line. That's too horrible to contemplate.

Math Interlude Ends Here . . . .

It is another irony of this rule that by formalizing the requirement to retest when you change components, you actually provide a negative incentive to become more efficient or more safe. There is no incentive to change factories if you save less than the new testing costs. It will take our factories about two seconds to realize that this gives them dominion over their customers. American businesses will be tied to their sources irretrievably even as costs rise, and will thus be at a cost disadvantage outside the U.S. to more efficient European and other competitors. In addition, the law punishes companies for improving their products by imposing a testing penalty on any change. Thus, your incentive to change a product to, for example, make it better or safer is greatly reduced - you will pay (literally) for your good deed. As these innovations are often voluntary, it will be impossible for the government to know how you might have improved your products had they not meddled in your business. You save money, and your products are more expensive, uncompetitive and less safe. What a great way to run an economy!

Given everything that has happened to date, we shouldn't expect a Knight in Shining Armor to emerge from the CPSC to save us. After the double-speaking phthalates standard and tracking labels guidance, plus the truly stupefying rules on exempt materials, I find it hard to believe they will do the right thing here. The lip service by Commissioners about recognizing the needs and legitimate concerns of the business community has been just that - lip service.

How could disaster be averted? It would take unprecedented bravery and character by Inez Tenenbaum. Democratic leadership in Congress has thumbed its nose at the children's product industry. It would be overly kind to call their attitude a calculated indifference to our fate. That leaves us in the hands of Chairman Tenenbaum. Thusfar, Ms. Tenenbaum has chosen to kiss the pinkie rings of Mr. Waxman and Mr. Rush and with Southern charm, coo about the "good statute". She has done nothing to stand up for the moral, law-abiding, crucial businesses serving the children's market despite overwhelming documentation of the senseless damage being done by the terrible CPSIA.

Ms. Tenenbaum needs to have a change of heart. If she takes the route of least resistance and issues guidance requiring frequent testing and other unnecessary but expensive similar requirements, it is probably game over for everybody. On the other hand, she could rise to the call of history and tell Mr. Waxman to drop his pretense that this law is somehow workable. Frankly, there is no data available to justify Section 102(d)(2)(B). The assertion that the government must, for the first time in history, tell us how often to test to assure quality has no basis in fact. It's just a Congressional staffer's (or consumer group's) lunkheaded idea.

Ms. Tenenbaum, it's your call. You can save us and be a hero, or you can send us down the river and be remembered as the one who committed this mortal sin. You won't be afforded the opportunity to blame this one on Congress - you can act, and you know it.

4 comments:

Mom said...

If enough people refuse to obey, there won't be enough lawyers or jail space to enforce it. Just a thought.

Rick Woldenberg, Chairman - Learning Resources Inc. said...

Please note that Toys R Us is requiring full testing twice a year. See my March 9 post: http://learningresourcesinc.blogspot.com/2009/03/cpsia-my-first-response-to-rep-dingell.html.

Kimberly Demeter said...

Isn't all of this nonsense going to affect schools on the product they have in classrooms? Aren't they going to be required to get rid of it like we are? How is anyone justifying the cost to schools and businesses? Can we get the schools on board?

This kind of sounds like the apocalypse of business to me.

Rick Woldenberg, Chairman - Learning Resources Inc. said...

In many respects, I think the apocalypse is happening as we speak. The CPSC and Congress have ignored the (repeated) warnings, with the rationalization that no one knows what the real problems are or will be until the CPSC is finished implementing the law. That seems demonstrably untrue, but since they just don't want to hear about it, that's the current official position of the Democrats controlling this process.

One thing that the regulators and legislators seem to have a hard time grasping is that decisions are being made NOW by business people who take these new rules seriously. What choice do we have, anyhow? Those business decisions assume the worst (no changes for the better), which in many cases, seems quite justified. So even if a miracle happens and they begin to listen (and act), the damage is already done in some significant ways. Dead products and dead companies won't spring back to life as in a zombie movie. In business, typically the rule is "once dead, always dead".

Congress and the CPSC are well-informed but aren't inclined to help us. This is something to be truly outraged about.