12.2.09

Seth Faison Discusses Doing Business in China

Buying “Made in China”

The “Made in China” label has been rocked by product safety scandals and quality concerns. Who is most affected and how do companies respond when their brand name is on the line?

November 30, 2009 – By JASMINE AKO

With US$338 billion of goods imported from China in 2008, the United States hopes it is getting its money’s worth. A three-year spat of consumer safety controversies, however, continues to leave buyers wondering.

In the past few years, the “Made in China” label has taken a serious hit, with the most notorious recalls hitting close to the American home. In March 2007, Menu Foods, a Canadian pet foods company, recalled over 60 million cans of pet food contaminated with the plastic additive melamine, added to raise measured protein levels. Two months later, Foreign Tire Sales Inc. was ordered to recall 450,000 faulty tires imported from a Hangzhou company. And in August, Mattel recalled around 21 million lead-tainted toys in a span of five weeks.

From Barbie dreamhouses to off-road vehicles, consumers and businesses alike are rightfully concerned.

“What I saw was a deliberate attempt to bamboozle Western customers about where products were actually made by setting up ‘five star’ and ‘shadow’ factories,” says Alexandra Harney, author of The China Price: The True Cost of Chinese Competitive Advantage. “These five star factories are essentially Potemkin plants maintained to give Western buyers the impression that their goods were made under safe, healthy, legal conditions that conformed to the buyers’ codes of conduct.”

These “for show-only” plants are the ones that Western companies see, while the actual production of goods is made in what Harney describes as shadow factories.

“In these factories, workers are not paid the legal wage, they have no insurance, and they work far longer hours than China’s law or the companies’ codes of conduct mandate,” Harney explains. “Because the buyers never see the shadow factories, they have no idea whether substandard materials or ingredients are being used on the production lines there.”

Paul Midler, author of Poorly Made in China, encountered similar situations in China as a supply-chain management expert for American and European companies.

“In China, factory workers often are not very open with what they’re making,” Midler says. “What you’ll see is that factories will make changes to specifications unilaterally without checking with their customers…until factory owners can stop doing this out of habit, then the risk of product failures is still there.” BusinessWeek reported a similar trend in 2006, noting that factory owners are increasingly adept at concealing violations.

While Americans have fretted about sub-par goods, it is Chinese consumers that have experienced the most ill effects. In September 2008, a large Chinese dairy company, the Sanlu Group, was found to be the central culprit in one of the country’s largest consumer safety scandals. Six infant deaths in eastern China and Gansu province were linked to tainted baby formula containing the melamine additive. Another 860 infants were hospitalized, and 300,000 other Chinese were sickened after drinking milk products.

Adding to the controversy was speculation that the scandal had been covered up to prevent bad media coverage in the run up to the 2008 Olympic Games in Beijing. According to some sources, Sanlu began receiving complaints as early as December 2007, yet held off on reporting problems to authorities. In September 2008, the New Zealand government went public with news of the tainted formula, information it received from the domestically based dairy company Fonterra, a partner of Sanlu. The Chinese company quickly took a nosedive in public opinion, and after months of legal skirmishes and prison sentences for several top executives, the company went bankrupt in December 2008.

Midler has worked with dozens of manufacturers with China-based production lines. In his book, he attributes the many cases of product defects he saw to “quality fade,” or “the deliberate and secret habit of widening profit margins through a reduction in the quality of materials.”

“Very often in China, quality is not seen as something that can help a company build up its reputation and expand market share,” Midler says. “Very often quality is seen as a barrier to profitability. A lot of times when importers are pushing for higher quality, sometimes, bad things happen.”

Chinese manufacturers, however, are not solely to blame. “In China’s case, you have additional problems: farmers in particular are often poorly educated; there are hundreds of thousands of companies in any industry; class action lawsuits against companies are extremely difficult; and there is very little investigative reporting to expose wrongdoing by companies,” Harney adds.

American companies doing business in China should be aware of these problems, but also must take the initiative to ensure their products are being made safely.

“For American companies that do business in China, it’s a complex place,” adds Seth Faison, who reported from China for the New York Times. Now the deputy head of Sitrick and Company, a global strategic communications firm, Faison sees certain cultural barriers as adding to the problem. “They need to understand the historical mindset of Chinese businessmen and officials that they are dealing with.”

But what happens when the damage is already done? Prevention is the ultimate goal, but when the leaded dolls and protein-maximized milk hit the streets, American and Chinese companies must deal with the ensuing tidal wave of bad public relations.

“My advice, having been through several situations like that, is tell the truth,” Faison explains. “If you have bad news that you have to put out, put it out quickly and completely, because hiding bad news always looks worse if the bad stuff comes out later.”

One international public relations professional, who asked to remain anonymous, offers similar advice, suggesting that companies dealing with product safety issues act quickly and publicly, immediately recall the tainted or altered product to deal with the crisis, and emphasize the importance of their customers’ welfare through vigorous public response.

He also noted that most Chinese manufacturing firms seek to control lines of communication rather than engage customers, seeking to steer any negative coverage through personal relationships rather than an established PR crisis strategy.

“Figure out a way to tell your story in a way that ordinary people can understand,” Faison urges. “I can’t stress enough how important it is to be able to frame things in a way that’s understandable.”

While Chinese companies are quickly catching on to the importance of public relations, global PR firm Weber Shandwick reports that there are still false impressions in China about what public relations truly entails. “Public relations is synonymous with organizing events and entertainment and there is much to be done to change the image of the industry so the brightest university students see PR as a serious career.”

Midler adds that Chinese companies often do not experience the same repercussions as big-name American and international brands. “The reputational damage that you might like to see with a scandal really isn’t as applicable in China as it might be in some other environments,” he says. “Suppliers are usually hidden from the marketplace. Importers from the United States have brand names that are exported from small, medium-sized companies that don’t have brand names.”

Harney adds, “In the US, the threat of litigation or brand damage through media exposure puts pressure on companies to monitor product safety more closely. The vast number of companies makes it harder for the Chinese government to monitor them adequately. Farmers and businessmen may not always understand the consequences of the chemicals they are adding to their products to improve productivity or lower costs.”

Only a handful of Chinese brands garner the international recognition to feel lasting global ill will to their brands. As with with the Sanlu case, however, reputation within the Chinese marketplace clearly matters. And while American consumers have a bevy of consumer safety groups, the Chinese public is becoming its own product quality watchdog.

“While the traditional media is very heavily regulated by the government, the internet allows more freedom,” says Jeremy Goldkorn, founder of Danwei.org, a popular English-language blogs that operates in China. “This has become the place where scandals very often break.”

Although the Internet does provide a means for people in China to express their opinion, it is still heavily regulated. Danwei itself was blocked in July 2009. In response, Goldkorn wrote in an article for The Guardian, “Censorship contributes greatly to the crisis of trust that many complain of in China.” This lack of information only makes sensitive issues, such as product safety concerns, more controversial.

Due to factors such as censorship, Goldkorn sees China as an entirely different environment for PR work as opposed to the US. “It really depends on the industry, and also, things work very differently here than they do in the US,” he notes. “Now a lot of companies are trying to use social networks like Facebook and Twitter to do promotions, but those two companies are blocked in China. It could be pretty much everything you name in terms of how PR is done in the United States – it would be done differently here.”

Countering negative public opinion may take a different form in China, but U.S. and international companies appear to be learning some lessons: 2009 has seen far fewer major safety scandals than just two years prior.

Midler, however, notes that it is the hidden safety scandals that are a concern. “For every single major quality fiasco, the sort that would make the papers, there were probably hundreds of smaller disasters that never got any publicity at all,” Midler writes.

Large recalls persist – Toyota recently recalled nearly 700,000 made-in-China vehicles due to faulty electrical switches, while flawed tires and valve stems on some American cars have led to three fatalities. But building the adequate oversight and infrastructure to ameliorate these problems takes time.

“Product safety problems in China are not going to disappear, just as they haven’t disappeared in America or anywhere else,” Harney asserts. “Western buyers and governments are more aware of these issues than they were in the past. And quality control is certainly higher on the agenda of the Chinese government and many Chinese suppliers as a result of the scandals of 2007.”

American companies must work to build relationships with their Chinese suppliers that provide more open modes for communication, and come up with strong preventative measures to counter not only potential product defects but also public relations crises.

Faison offered his own take on what should be done to prevent future scandals.

“Whether it is an American company that is sourcing products that are manufactured in China, or if it is a Chinese company exporting to the United States, they need to find a way that can underscore safety records, the consistent ability to produce reliable consumer goods that are not tainted in any way, and to show that when [unsafe] products come up they are usually restricted to a small number percentage wise of total exports in China.”

The U.S. remains incredibly reliant on China for manufacturing its goods. In terms of toys alone, 80% of those in the U.S. are made in China. As long as country’s labor force keeps churning out goods and U.S.-Sino trade relations remain open, there will be little slowdown.

“Barring a wave of protectionism, it is highly unlikely that the tide of globalization will reverse,” Harney says. “China is a player in all major global supply chains today, from vitamin C to airplane parts, and its role will only get bigger.”

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