Brand “China” has been coming in for a lot of bad press recently, both in the United States and elsewhere. Two news stories last week—one on the recall of 450,000 tires, and another on FDA action limiting the import of farm-raised seafood from China—added to the series of incidents involving faulty or contaminated products that have been linked back to Chinese producers.
In recent months we have also heard about toothpaste contaminated by diethylene glycol, pet food containing melamine, and wooden railway toys coated with lead paint. These episodes all serve to further damage China’s already tarnished reputation as a manufacturer of quality products.
But are those producers the only party at fault? Or do brand marketers deserve to shoulder some of the blame, for pandering to the desire of Western consumers for cheaper products?
China’s exports to the rest of the world are booming. The People’s Daily Online reported that in July, exports hit a record $56.2 billion, up 28 percent on the previous year. From a variety of other sources (including China Now), I pulled together the following facts: China manufactures more than 70 percent of the world’s toys and more than half the world’s sporting goods, supplies 80 percent of the world’s ascorbic acid (vitamin C), and assembles approximately 80 percent of the world’s notebook and desktop computers.
However, China’s growth as a manufacturer is very dependent on demand in the United States for cheap food and consumer goods. Over the last three years, U.S. agricultural imports from China have doubled. Martin Hart-Landsberg and Paul Burkett report in the Monthly Review that, if one includes goods that are re-exported from other countries, exports to the United States account for about half of China’s total exports.
The reason behind China’s success as an exporter is simple: cheap prices. Cheap labor and cheap land have fueled China’s growth as manufacturer to the world. Back in December 2004, an article in BusinessWeek said “The China Price are the three scariest words in U.S. industry. In general, it means 30% to 50% less than what you can possibly make something for in the United States. In the worst cases, it means below your cost of materials.”
Because of “The China Price,” manufacturers have been forced to outsource to China in order to remain competitive, and now some of the risks they took on in doing so are coming to light. As recent news stories have highlighted, there is a hidden price for cheap products: the lower the price, the higher the risk of sub-standard quality.
The Chinese government is currently acting to stem the tide of poor quality goods. The crackdown is reported to have started in December 2006, but until recently authorities had denied that problems were widespread. A few weeks ago, the top food and drug regulator was sentenced to death for taking huge bribes from pharmaceutical companies, and this week brought news of 180 food processing plant being closed. While the central government may be trying to avert a public backlash abroad and a slowdown in the exports which are fueling the country’s economic growth, it faces significant problems. National Public Radio spoke to William Hubbard of the lobbying group Coalition for a Stronger FDA, about the long-term safety of fish from China. Hubbard, who is also a former FDA deputy commissioner, explained another aspect of the problem. “Many of the exports from China come from essentially a cottage industry and that presents a challenge for the Chinese government,” said Hubbard. “I suspect they will not be able to do a completely thorough job.”
Given China’s high degree of political and economic decentralization, it is perhaps not surprising that greedy entrepreneurs often believe that they can get away with pulling a fast one on customers. And there is little doubt that money is the root cause of the problem. In the case of the contaminated toothpaste, The New York Times reported “After denying the use of diethylene glycol in products manufactured by his company, Mr. Hu said, ‘You know, if you’re in the export market, the margins are small, so people use the substitute,’ he said. ‘Even one percent or half a percent price difference can matter to people here.’”
Not only is there pressure to make money, cultural differences may also play a part. A deal is never final in China. The following extract from The New York Times article about the recent tire recall gives just one example of how deals can go astray.
[The tires] were supposed to include a gum strip between the steel bands that prevented them from separating. Mr. Lavigne said the gum strip cost less than a dollar a tire to install. But in October 2005, officials at Foreign Tire Sales became suspicious that the tires were made without the strips. Nearly a year later, in September 2006, Hangzhou Zhongce officials acknowledged that they had “unilaterally” decided to omit the gum strip, according to a report by Foreign Tire Sales for federal regulators.
However, the blame cannot rest solely on Chinese producers. It did, after all, take several years for Foreign Tire Sales to identify the sub-standard tires. To understand the full scale of the problem, we need to follow the chain back to its origin: Western consumers.
As competition has increased and companies have cut back on investments in R&D and branding, we have observed Western consumers become blasé about brands in many different product categories. Today, it is not uncommon for people to value getting the best price over choosing a specific brand. There are a couple of reasons for this:
- First, many product categories lack physical differentiation that people can readily perceive or appreciate. Whether it is high definition TV screens, mobile phones or apple juice, it is tough to tell which one is best based on product specifications alone.
- Second, people in Western countries believe that their governments do a reasonable job of controlling the safety of food and drugs. Unlike the Chinese consumer interviewed in an international supermarket in China who said, “It’s expensive here, but that doesn’t matter as long as it’s clean. We’re buying security,” Western consumers give little thought to safety until something bad happens.
When people perceive little differentiation and assume that products will at least meet minimum standards, cheapest price determines what gets bought. Western retailers, most notably Wal-Mart, have become successful at meeting that desire, putting pressure on brand manufacturers to lower prices.
People are not to blame for wanting the best price, but Western retailers and manufacturers who try to provide the best price by buying their products or ingredients from the cheapest supplier (at home or abroad) are potentially vulnerable.
The attorney for Foreign Tire Sales, the New Jersey tire importer, reports that the recall will cost $200 a tire, and stated, “There’s no way F.T.S. can recall this universe of tires. It will have to go belly up.” By contrast, P&G undoubtedly will survive the consequences of the pet food recall, but in order to regain consumer trust, the Iams brand has offered vouchers for free pet food. When things go wrong, the cost of “The China Price” can be significant indeed, for brand China, for Western retailers and brand manufacturers, and for Western consumers.
In a follow-up post I will consider what implication outsourcing has for the definition of “product quality,” but meanwhile please give us your thoughts on the China price. Who is ultimately responsible for the quality and safety of the goods we buy?
(21 votes, average: 3.29 out of 5)
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July 3rd, 2007 at 5:48 am
First, I would like to commend your effort of moving away from the popular press and take a more holistic approach to the issue of quality in China, and the China price.
It is true that many Chinese manufacturers are able to reduce their prices below those of a U.S. manufacturer. The price of labor is probably the largest component of this, but items like land, PPM, and electricity can also bring reduced per unit costs differences.
However, where I would like to diverge a degree is that moving to China is not necessarily more risky than producing in new Jersey… IF you have the right team in place.
Where the increased risk occurs is when companies outsource to China and think that all they need to do is stand by the door and wait for their supplier to send the goods. They fail to put in place quality control systems, they fail to monitor their suppliers, and as in the case of Iams… they never even went to the factory.
As I have been writing on my own blog All Roads Lead to China that U.S. manufacturers, wholesalers, distributors, or retailers whom outsource to China need to ensure that the products they are bringing from China to the U.S. are safe.
FTS is a perfect example of this and I think you let them off the hook too easily. When FTS first suspected that the tires were not being made to spec, they should have immediately stopped their purchases and tested the tires. In their own words, the strip that “may” have been missing was an important safety feature that they added on… yet, even after suspecting that this “important” safety feature was not being added, all they did was order more tires. It was only after the lawsuit that they brought this to the view of the public, and it is clear that they were doing so to shift the blame to their supplier (note: Highway Safety Board says that these tires meet minimum standards for safety and out of the 4.5 million tires sold, only 2 have shown to fail).
U.S. manufacturers who outsource need to come to understand that just because one outsources a product, that does not mean that they are not responsible for the integrity of their supply chain. Full quality management process, teams, and tests need to be put in place before outsourcing a single screw.
Great piece, and I am looking forward to the next installment
Rich
http://www.allroadsleadtochina.com
July 3rd, 2007 at 7:17 am
It is unreal how much more expensive is to purchase or consume what your own country makes. This is the reason why you see more and more tourism going to places like the Dominican Republic and Mexico. It’s not because it is great but because is affordable. This is only one example of many where going out of the U.S. is way cheaper and people are willing to risk the quality and security for some fun. And then, they want us to consume what’s “Made in the U.S.A”????
July 3rd, 2007 at 9:50 am
Hi Rich, thanks for the comment, I love the your suggestion that outsourcing to China is no less risky than outsourcing to New Jersey, although I suspect many state residents will think it is being unfairly maligned!
Your basic point has to be correct, however, no company can afford to outsource anywhere without proper quality controls.
Overall, I think the current furor over China just hides the inherent complexity of today’s global economy. No one is suggesting that Chinese entrepreneurs are right to take advantage of our desire for cheaper prices and failure to put adequate quality safeguards in place, but it is a lot easier to do so when the customer is the other side of the planet and your product ingredient is combined with many others before it reaches the final consumer.
To Elena’s point, why do we pay so much for local goods and services in the U.S.? Because we enjoy a higher standard of living (on average) than most of the world’s population. Put another way, we get paid a lot more and companies have to pay for those wages.
July 3rd, 2007 at 11:59 am
As to your final question, each person is responsible for the quality and safety of the food they buy. That’s what a free market means. However, it also means we need all the information necessary to make that free market decision. As a marketer, i understand the desire to keep this information less visible, as a consumer, I would love to see country of origin on all ingredients. I think as people learn the ‘risks’ associated with goods from China, they might factor that into the Price equation. And then those high wages, and higher standards in the US might make sense.
July 6th, 2007 at 10:14 am
Nigel - Thank you for starting a stimulating discussion that I hope will continue - so many issues are involved. I must take issue with the suggestion from Rich that manufacturing in China can be as safe as in New Jersey “IF the right team is in place”. This is completely untrue since it is completely impossible to put the right team in place in China. In New Jersey, as throughout the rest of the United States, the FDA, USDA, OSHA, etc, etc have very broad powers of inspection and enforcement (Arguably, in our current political climate, these powers are underutilized, but they remain in place.) China did not permit entry of Western inspectors demanding to inspect the manufacturing facilities and exporters producing the adulterated and mislabeled food and glycerin until local officials had had time to shut down the operations and destroy much of the evidence. Quotes appearing in the New York Times and other sources, and obtained from area residents make it very clear that product adulteration is an accepted part of the manufacturing culture in China. This is emphatically not the case in the United States. Abuses of consumer trust certainly occur here, but in my opinion, we have not seen such widespread and calculated disregard for human health and safety in this country since the outrages that led to the establishment of the FDA.
I feel that Matt’s response that “each person is responsible for the quality and safety of the food they buy” is a bit glib. He does go on to say that this “means we need all the information necessary to make that free market decision” without acknowledging that this information is deliberately hidden from consumers with the collusion of too many politicians. Since he is a marketer, I do not think he would really like to see country of origin information of all ingredients listed on labels, as for all but the simplest of products, this would barely leave room for the name of the product. This would severely limit opportunities for branding. Now, I hope you will forgive the observation from someone not connected to advertising or marketing that this would probably be a very good thing. As far as I can tell, these marketing activities are aimed at creating a perception of ‘need’ where none exist. I will mention in passing branding aimed at young children, and its negative impacts on the health, and the national economy.
I will close by responding to Nigel’s observation that “it is tough to tell which one is best based on product specifications alone.” In our current global economy, it is clear that the specifications are all too often meaningless, since the sellers choose not to verify that their specifications are being met by the outsourced manufacturing operations. Hence, the likelihood that FTC will go under.
Nigel - you trace the chain back to the Western consumer. Have you considered the link in the chain that is marketing, that in essence pushes sex appeal over any substance?
I hope to hear more from you on this topic. Thanks for writing.
July 6th, 2007 at 1:31 pm
Hi Pamela,
Thank you for adding your comments to this debate.
Let me ask you a question, would the U.S. give Chinese inspectors the right to check up on businesses in New Jersey that they have reason to believe were adulterating products sold in China? Or would the response be, “No, it’s our back yard, we’ll deal with it.”? I do not know the answer, but I would be interested to learn if we allow unfettered access to other countries inspectors in the U.S.
On the issue of the value of marketing, all I can say is that it is nigh on impossible to create a perception of need where none exists. People are not going to buy something that does not meet a real need more than once (and most marketers rely on customers buying more than once!).
Unfortunately, it is all too easy to appeal to desires which are not necessarily beneficial to the consumer over the long-term, e.g. encouraging people to eat and drink more than is good for them, or to choose foods which taste great but are not as healthy as the alternatives. As many food companies are finding out, trying to profit from these desires does eventually backfire, particularly if that company does not also offer healthy alternatives.
Interestingly, I believe that McDonald’s, having introduced and advertised its healthy menu alternatives, is now selling more burgers on a same-store basis than before. Should McDonald’s have removed burgers from sale entirely to stop people making the “wrong” choice? If they did, do you think people would buy the salad instead or head over to Burger King for their meal?
Yes, I have considered the link between marketing sex appeal over substance. My conclusion is that people buy the “sex appeal” because it has value to them (I assume you are thinking about emotional appeals in general here). If the “sex appeal” makes them feel good/think better ofthemselves/helps them make a statement about who they are, then the marketer is giving them something extra that they would not otherwise have. But people will not buy the “sex appeal” if the product is no good.
Marketers do have a responsibility to market their goods and services in ethically, i.e. they should not misinform people about what the product is or what the consequences might be from using it. Beyond that I side with Mark, we are responsible for deciding what is in our best interests.
Nigel
July 6th, 2007 at 3:19 pm
Nigel,
I thought the NJ joke might ruffle some feathers..
My basic point is that if global supply chain management is too difficult for your firm, don’t do it. Stay in the States. Going global is not the same as opening a shop in Omaha, and if a company is niehter prepared nor willing to take the steps to ensure the integrity of their products, then something will fail at some point.
There is not free lunch, and as such, one must offset some of the cost benefit with investing the the QC process.
@ Pamela,
I am interested by your belief that one cannot put a team in place in China. Does that come from experience, or is that what you read?
I myself am part of one of those teams and I am actively managing 20+ suppliers and I have never been barred access to any one of my suppliers.
If in fact if your assessment were true, then Iams never should have been sourcing here in the first place because you should never EVER buy form a factory you have not personally been to or sent a TRUSTED party to.
China is NOT a blackhole, and if you are buying product you are given access. There are a lot of resources online and on the ground that buyers have free access to that are unbiased..They neither had their own team in place, nor did they hire a local group=, nor did the do any surface investigations of the market in general.
As for the assertion that this kind of thing does not occur in the U.S, I would say that you are right on the whole, but the U.S. does have its moments… California spinach laced with ecoli would be one of them
http://www.allroadsleadtochina.com