Keep buying from China, but beware.

16 August 2007

The hard lesson from the latest recall of products made in China is that Businesses have to manage the risks and liabilities of Chinese products.

“'That's the price of doing business" is the too-often-heard excuse from American companies that choose to overlook China's loose business ethics and tight (verging on strangling) political controls.“ accuses The editorial in today’s IHT (full article here). “The high cost of such enabling was on display, once again, Tuesday when Mattel announced that it is recalling millions of Chinese-made toys contaminated with lead paint or containing dangerously easy to swallow magnets. And that follows discoveries of Chinese toothpaste laced with industrial solvents and drug-contaminated seafood.”

The editorial stresses that “Right now it is the clear responsibility of companies that import Chinese products to guarantee their safety, and U.S. regulators have to ensure they do it adequately”.

Fulfilling this responsibility is proven difficult for foreign companies: their capability of controlling what they buy is undermined by a lack of visibility of what really happens inside the factories in China (Mattel, which is a best practice on implementing safety standards, was not able detect what was happening albeit it has been doing business with that supplier for 15 years) and by a buying culture where all it counts is “best price”; it means razor thin margin for Chinese supplier and a push to cut corners to remain competitive.

The Economist (read its editorial on this matter here) is pessimistic that the Chinese Government will be able to effect change albeit willingness to do so, and that onus to manage the product safety risk rest on foreign buyers: “In practice, however, effecting change will be difficult. Unhealthy links between government and business, combined with patchy implementation of rules and regulations, mean that China has a political culture that will be hard to transform quickly. There is anecdotal evidence, for example, of "product fade", whereby some Chinese companies ensure that the first few batches of products delivered meet the required standard, before quality gradually tails off as quality inputs are replaced with cheaper equivalents. Regardless of the Chinese government's efforts, the onus is therefore likely to fall on Western importers and retailers to conduct more product checks on goods made in China, in order to forestall the negative publicity caused by the discovery of substandard products.