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The Real Risks of Chinese Product Recalls

Peter J. Williamson is a professor of International Strategy and Asian Business at INSEAD and coauthor of Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition.

The recent spate of recalls of Chinese products (from toys covered in lead paint and contaminated pet food to allegedly unsafe tires) is leading some in the United States to extreme reactions. And if organizational leaders are not careful to hold those reactions in check, they may well be putting their businesses at risk.

First is the call for a rethink of China sourcing strategies. It’s certainly true that in the “Wild East” capitalism of today’s China there are cowboys who are willing to cut corners and risk safety for a quick buck. But the outcry is disproportionate. It has more to do with growing concerns about China’s rise as an economic power and the massive US trade deficit than the reality on the ground. Thousands of companies reliably source products from China; they span the gamut from Apple’s iPod, through port equipment, to Nike athletic shoes. These companies have learned that separating the cowboys from reliable suppliers in China means developing an experienced team on the ground to monitor quality and adherence to standards. Those who sit back in New Jersey or Illinois and simply issue purchase orders are bound to attract the unscrupulous fringe of Chinese business.

Others are too quick to generalize from a few cases of Chinese product recalls to condemn hundreds of thousands of Chinese companies who deliver quality products reliably every day. No one suggested the Japanese electronics industry had abandoned their quality standards when laptop batteries manufactured by the venerable Sony caught fire and had to be recalled. Did the headlines write off France as a supplier when Michelin recalled its “Pilot” front motorcycle tires with the "Made in France" markings this June? Did we stop buying Ford vehicles when the company recalled a staggering 527,000 Escape SUVs made in Kansas City and Avon Lake, Ohio, because of concerns that faulty seals in the vehicles' antilock braking systems? While it's true that we may have already had built-in comfort levels with these companies -- and with products from their home countries generally -- we still need to resist the urge to damn all Chinese manufacturers for the faults of a few.

Thus, the first lesson here: Don't panic over a few high-profile blunders by Chinese sourcing partners -- as damaging as they may have been. With smart management, there remains enormous opportunity for profitable relationships.

The second danger in the reaction to the latest recalls of Chinese products is that managers will give in to the myth that all Chinese competitors are simply low quality, low price. The lesson here is simple: don't allow such a delusion to cloud your thinking. If you do, you are likely to miss the fact that the best Chinese companies, such as Lenovo, Huawei, Haier, along with many others, are using cost innovation to rewrite the rules of the global competitive game. The very real risk to American business is that management will not see China’s emerging dragons coming with high technology at low cost, variety at low cost, and specialty products at mass market prices until it’s too late.

HARVARD BUSINESS ONLINE RECOMMENDS:
China Tomorrow: Prospects and Perils, 3rd Edition (HBR Article Collection)
The Chinese Business Toolkit (Second Edition)
IT and the East: How China and India Are Altering the Future of Technology and Innovation (Hardcover)


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Comments

As a Chinese learning Western Culture and Management Theory, I would say that China is making great progress in opening-up and and internationalization but still has a long way to go in order to meet the standardization of products of mentality of products and services.

China is developing by leaps and bounds. I am living in Shanghai, the most charming city in China and Asia Pacific at large. Every day you can see there are some changes outside, such as a new building, a new fashion. However, in the rural areas of Shanghai and other cities, people are not fully trust the quality of the products, whether bought at Carrefour, Walmart, or other Chinese groceries. Carrefour was fine for unclean products here several months ago.


Undoubtedly, quality is a ubiquitous issue. What we need is the mentality to deliver quality goods and services, physically and spiritually, in order to build a "harmonious society".


- Posted by Jordan Franklin
July 3, 2007 10:42 AM

I agree there is much to learn before we generalize and say we should be wary of Chinese and Chinese business. There are a myriad of traps to fall into. I urge education before decision.

That said, I recall my college days when I shared business classrooms with a small group of Communist Chinese and two Taiwanese students. The Communist Chinese refused to speak to us, (American students), even though we were at a University in the western U.S.. When I asked about this, one of the larger group mumbled something in Chinese. One of the Taiwanese students turned to me and said, "He says it is because you are insignificant."

Perhaps this story is only one of many fueling the over-reaction. Are these students from many years ago now leading the Chinese economic efforts? Did they represent an attitude that is every bit the threat some suppose? I choose to think not, and yet, I have many unanswered questions.

I hope more stories of a positive nature and about great partnerships of high standard come to the surface. The global marketplace is a reality with no place for unreasonable suspicions, fears, or the unethical behaviors that stoke such fires.

- Posted by Dan Eisenman
July 3, 2007 5:55 PM

This article is quite impressive, especially when the author cites the example of batteries manufactured by SONY caught fire without criticism. So in the long run, it is just a transition period, take it easy, and take it seriously. concentrate more on the quality control process. that is what we can do!

- Posted by Xiaofeng
July 3, 2007 10:41 PM

If China is going to be the one of the biggest economic powerhouses in the next 20 years, it needs a systematic approach to fulfill its dream.

Carcinogenic elements like lead and arsenic are critical. So the Chinese govt should do a thorough quality clearance before it exports to other countries.

The recent story of Coca Cola in India may not hamper its selling percentage on a long run but surely it could diminish its image in the global picture.

The safety and quality should be given due importance by countries like China and India which are going to be manufacturing hubs in the future.

shibaram karmakar
India
Mumbai

- Posted by shibaram
July 4, 2007 1:40 AM

It certainly is a very interesting article which presents China as a manufacturing location in a slightly more favourable light that current perceptions perhaps dictate.
However, I do not think it is a reasonable comparison to make between, say Sony or Ford. Certainly, these have been very large, publicised recalls that have not resulted in the vilification of entire countries, but they are, for the most part, the exception.
If you take the EU as an example, some 50% of all recalled consumer goods in 2006 were produced, or originated, in Greater China. These are not exceptions, this is the reality of the current climate.
The efforts being made by our respective governments are laudable, but there is still a long way to go.
There is no question though, China represents an enormous part of future global commerce.

- Posted by Jeremy Moore
July 4, 2007 8:29 AM

I am surprised that everybody seems to want to forgive China for their known product problems. It seems that all of congress wants to forgive China for every problem they send to the US.

China refuses to change their currency to reflect the real world. Why to we allow it? If the US were to do this, every country in Europe would stop importation of US goods. Why do we allow China to get away with this?

Now is the time to get a level playing ground with the Chinese.

- Posted by D. Barry
July 6, 2007 3:21 PM

One element that may be fomenting an overreaction to anti-freeze in toothpaste and lead-painted Thomas the Trains could be a dawning realization on the part of some American consumers that demand for lower and lower prices is something of a devil's bargain. We get a broader range of goods and lower prices, but in some cases they may be of dubious (and unregulated) quality. Often, the goods are produced under terrible working conditions; often the impact on the environment is disastrous. Growing pains for the Chinese economy, of course - and nothing we haven't lived through here to some extent. Still and all,not an unalloyed good.

- Posted by Maureen Rogers
July 6, 2007 10:25 PM

If I were ...

If were a part of the Chinese leadership, a member of the business community, a faculty member of some higher learning/research institution, a published author (saving blogging, not anything wrong with it), I would do this:

Dig deep into the root cause of the problem ...
seek some short-term solution quickly (MOFCOM and Chinese tax authority's recent policy on cutting export rebate is a good one )...
then work on a medium-range solution ...
and start to think on the long-term solution to fix it once and for all ...

Meantime, I would be open-minded to all sorts of opinions, pick ones that seem helpful and be appreciative, ignore noise, forgive innocent mistake, compromise when necessary, and move on ...

Have a good day!

- Posted by Don
July 11, 2007 11:36 PM

It would seem that the chinese short term solution was to shoot the minister responsible. When the consumer can make a stand for the quality of product over price, only then will the shift from profit to product occur in the manufacturer. Whilst all countries can manufacture faulty products, neither Japan nor France was responsible for 96% of recalls on childrens toys. Are dying pets not enough? Do we have to wait until as many children are dead before we heed the warnings sent to us?
Weather the risk from the east is to American Business (as implied here) or to the American Consumer, the risk is large indeed, alternatives must be sought.

- Posted by Brad
July 30, 2007 10:42 PM

I think Mr. Williamson's comparisons ignore an important difference between defective laptop batteries, or automobile defects, versus such things as use of lead-based paint on toys, toxic food ingredients (such as recent ginger recall), and other contaminated food products. The lead paint and contaminated food problems are known issues that more related to poorly, or mostly unregulated industries in a developing country whose standards for such things are 50 years or more behind modern developed countries. It is one thing to make a battery design or manufacturing error by a high tech company like Sony that normally adheres to the highest standards, versus allowing companies in China to supply food products without any oversight or regulatory control.

I also do believe U.S. businesses have a responsibility to maintain rigid standards and oversight themselves on products that they source from China to meet our exacting requirements. American companies have no excuse for allowing unsafe products to reach our shelves when it comes to such controllable manufacturing issues as lead-based paint, or pesticide-laced food products. These are well known issues that should be handled by strict oversight, and never should be allowed to be in the process.

- Posted by Alan Z
August 2, 2007 9:23 PM

This is a time for the United States to think long and hard about why it imports so many of its products from other countries instead of producing those products in the United States.

If the United States produced their own toys, toothpaste, pet foods, vitamins, plates, cups, etc. etc., jobs in the U.S. would be plentiful, and the quality of these products could be more closely monitored.

I realize that cheaper products may be a desire of many consumers, and U.S. companies like getting work done by cheap labor, but the cost of doing this in the long run is much too high (less jobs in the U.S., poor and unsafe quality of products, etc.).

I say keep jobs and services in the U.S., and stop out-sourcing to the cheapest bidder.

- Posted by James Frank
October 6, 2007 4:20 PM

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