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that book about china

A whopping 75% of Canadians say that they have an unfavorable impression of products made in China with only 6% reporting a favorable view.

An official at the Chinese Embassy in Ottawa suggested that that the recalls are merely isolated incidents and that China’s image will not be affected as a result. Now there’s an optimist.

A survey done in the U.S. shows that 82% of Americans are concerned about the products made in China. Whenever someone tells me that the recent debate is about rising protectionist sentiment, I think about non-politicized figures such as these.

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Consider yourself in the following situation: You ask someone to run to the store to buy a candy bar, and you hand him more than enough cash. Keep the change, you tell him. The guy gets to the store and decides to shoplift the candy instead. Now, are you responsible for the person’s unethical actions?

In an article titled “China Pays Steep Price As Textile Exports Boom”, the Wall Street Journal suggested that companies like Wal-Mart, Nike and Liz Claiborne bear a responsibility for the unethical behavior of their suppliers. I had to read that one twice. The supplier is polluting, but the customer is to blame. No multinational ever suggested that its supplier pollute. That decision was made by the manufacturer, and if that supplier felt pressure from “ever-lower prices”, it could have simply asked for a higher price.

McClatchy Newspapers ran with “U.S. Businesses Share Blame For China Toy Recall” where their idea is also that the fault is ours. All those recalls, you see, were caused by companies that had the audacity – the nerve - to source products at a competitive cost. The idea that price pressure is to blame is very much appreciated by Chinese factories, by the way. No matter what they might be criticized for in the future, thanks to arguments like this one, they can say that the devil made them do it. Got caught cutting corners on quality? Found to be a major polluter? Treating workers poorly? “Wasn’t me,” they’ll insist. “It was those damn low prices!”

The name of the game is always to buy low and to sell for what you can get - it’s called “business”. Nothing new there, and neither are suppliers who cry poor. Not sure if everyone has heard the news, but China is in the midst of the biggest economic boom the world has ever known. It’s hard to sympathize with suppliers who say they have fallen on hard times after learning of the supplier in the Mattel case. The head of the company is worth over $1.1bn.

I love this next part: Those who suggest low prices are to blame are telling us that we can make all of our problems go away by paying the factories more. First, if you give more money to a supplier who has behaved unethically, isn’t that sending the wrong message? What would these people say about a CFO caught embezzling corporate funds? “The poor guy must have needed the money. Let’s give him a raise and see if the problem clears up on its own.” There is also a dubious assumption in there - that a supplier who has behaved unethically at $1.00 per unit is suddenly going to behave ethically now that he’s getting $1.10. Some of these China suppliers must be laughing at how the media is portraying their supposed plight.

I have a novel suggestion. Let’s look at unethical actions for what they are and not excuse bad behavior. It is not low prices that are to blame, in any case.

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For those anticipating another recall, the question to ask may be: Which industry is next? One reporter asked to pick some industries after seeing my article on “quality fade” - talk about being put on the spot.

Pressed to come up with an answer, I named a few conditions:

1. Heavy Products
   Laboratory testing does not prevent production shenanigans, but since everyone is still counting on more testing to help us prevent further recalls, I just want to point out: The majority of product testing is done at laboratories that are far from the point of production. Sample products are sent to laboratories by express courier, and it is easier to ship a stuffed animal than a leather couch. Inspectors from the third-party testing company can go on site, but such visits are often not cost effective. Long story short, heavier products get tested less frequently than lighter products. It’s an industry blind spot.
2. Products That Have A High Salvage Value
   When suppliers consider reducing the specifications of a product, they always take into account the associated risk. The supplier has to consider what he will do if his buyer learns about the quality fade. After all, he doesn’t want to suffer any loss from a rejected shipment. If an order can be unloaded elsewhere at cost, or better, his risk is low – and the buyer’s on the other hand is high.
3. Chemicals
   Be concerned about chemicals. They are hard to detect, and third-party testing provides limited assurances. Bear in mind that the laboratory must be told exactly what it is that they are testing in the first place. You can’t send a sample and tell them ‘just make sure it doesn’t have any bad stuff in it’. You have to know what kind of bad stuff to look for. Take an example: An importer of beds from China did not imagine that they should test for insecticides (the importer’s supplier had sprayed the bed with insecticides to prevent infestation). Even if the bed company had tested its product with a reputable third-party testing company, it is unlikely they would have thought about that one test. Another case. A woman claims she received chemical burns from a pair of flip-flops made in China and purchased at Wal-Mart. The case has not been proven, but it is doubtful that the importer would have thought to test for ‘some unknown chemical residue’ on the flip flop.
4. Products That Rely On FDA Approval
   Factories in China often claim to be U.S. FDA-approved when sometimes they are not. Certificates can be faked. A factory can claim they have approval when what they mean is that they are in the process of gaining approval. Or, a factory can have approval but decide to cut corners anyway. America’s FDA is an overgrown and under-funded agency that has enough on its plate with prescription drugs. FDA does not provide pre-market approval for many products where it has oversight, and it is not particularly rigorous about testing products on store shelves. U.S. FDA doesn’t approve factories in China itself. That job has been outsourced, actually, to a government agency inside China. As we have seen with the execution of China’s food safety chief, such approval processes may be influenced by graft, which undermines safety assurances.

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The Chinese vendor could not immediately be reached for comment. A man at a Lee Der Industrial Company in Guangdong province said it made cardboard boxes, not toys, while a woman who answered the phone at another number listed under the name said that company had gone bankrupt several years ago.

Here’s an easy piece of journalism done by The Associated Press. Someone at AP rang up the company listed as the source in Mattel’s toy recall. The person on the other end of the line said, ‘wrong number’. Guessing that someone in the original article was misled. There is of course one other possibility - knowing that they won’t be making too many toys in the near future, the supplier in this case has already found another line of business.

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Mattel has relented to public pressure and released the the name of its supplier – well, maybe.

When the story broke in the WSJ, I went over to Google and typed in the name of the supplier said to be responsible for the defective toys - Lee Der Industrial. Might have been a typo there, I don’t know. Only four listings came up, and two of them were for a link back to the WSJ article.

It’s hard to imagine one of the largest suppliers to the largest toy company in the world – for 15 years, no less – remaining so anonymous. But it is possible. And this kind of anonymity may have very much to do with the quality problems coming out of China in the first place.

I’ve written on this before: Importers like to keep their factories a secret. No importer wants to see the competition come in and enjoy an advantage they created for themselves. The factory naturally prefers it the other way around. They don’t want to be so hidden. But when a buyer is big enough and it asks the factory to “lay low”, the supplier simply does what it is told.

The irony here, of course, that suppliers engage in production shenanigans in part because they know they are not likely to be found out by the market. Hey, what happens in Dongguan stays in Dongguan.

One point of the WSJ article is that there is little the U.S. government can do to force an importer to reveal his sources, as it were. My own view on the subject is that an importer should have no recourse for secrets when a product recall affecting safety is issued. In the case where your company has been found importing a product that is toxic – sorry – game over.

In the U.S., we enjoy first amendment rights, and yet journalists can be jailed for protecting their sources. Law enforcement officials may obtain search warrants sometimes a bit too easily. And yet importers are allowed to sit on their hands while parents agonize over the toys their children play with. It is time to discuss this situation intelligently, and that discussion should include talk of legislation. Protecting the importer’s supply chain is of interest to business, but it is not a greater good than that of public safety. Mattel may have acted in good faith in this case, but there is no guarantee that another importer will act as responsibly.

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The Wall Street Journal article, “Toy Recall Shows Challenge China Poses to Partners” (08/03/07) touches on several points raised in the quality fade article.

“Public-health experts say Chinese manufacturers repeatedly revert to lead paint regardless of the rules because it is cheap and readily available, and helps factories meet relentless pressure to contain costs.”

The important suggestion here is that suppliers willfully engage in quality fade. I am not sure that I agree that the only cause is economic pressure, though. Certainly fifteen-year contract with Mattel is a nice bit of business. If they are like most suppliers, they paid off their capital and equipment a long time ago.

“Sometimes, toys that have passed inspection more than once are later found to contain excessive levels of lead paint — a sign Chinese companies may have been able to game the safety inspections.”

Ah, what a lovely bit. The paper is supporting the idea that suppliers may circumvent third-party testing. This is quite a turnabout from earlier calls for ‘more testing’.

“From the size of the recall, we’re not talking about accidental use of paints,” says Paul Mushak, a toxicologist at PB Associates, a Durham, N.C., risk-assessment firm specializing in toxic metals. “We’re talking about something that’s been a conventional practice.”

The problems are systemic? You don’t say…

Mattel won’t publicly name the manufacturer until the El Segundo, Calif., company completes an investigation of how the toys were tainted.

I noted a big problem for suppliers is that they don’t tend to share information, even when it’s in their best interest to do so. This was also briefly mentioned in my previous post in which I mentioned a case in Australia.

Here is the link to the WSJ article [reg req'd]. So, does quality fade affect the little guy? In light of this major case with Mattel, it would seem that the big buyer is affected by it also.

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