'Don't make excuses for poor quality Made-in-China'

Discussion in 'China' started by RPK, Aug 26, 2009.

  1. RPK

    RPK Indyakudimahan Senior Member

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    'Don't make excuses for poor quality Made-in-China' - dnaindia.com

    'Don't make excuses for poor quality Made-in-China'


    As a fix-it man for overseas importers and retailers sourcing from China, Paul Midler, a Chinese-speaking Wharton MBA grad, gained a unique perspective into the Made-in-China story

    That experience, during which he worked with hundreds of Chinese factories, made him an eyewitness to the manipulation of product quality by factories and the other ways in which they bamboozled overseas businessmen and partners. In an interview to DNA, Midler, author of Poorly Made in China, reveals the dark secrets of the Made-in-China story. Excerpts:

    How widespread is the problem of 'Quality Fade' (a gradual fadeaway of quality) in China?
    It's very widespread. When there was a problem with lead-painted toys coming out of China in 2007, the media said, 'China has a toy problem'. When there were problems in China's dairy industry, they saw it as a 'dairy problem'. When it was tyres, they said, it was a 'tyre problem'. There were others: toothpaste, petfood...

    The problems in those specific areas came out of a certain behaviour among manufacturers in China. The instances of quality failure in the headlines are not the root problem, but the symptoms of the root problem, which is a certain attitude towards business, customer service, business ethics... the question of how you conduct yourself with somebody who is considered your partner. And that is something China is struggling with.

    Why did not these 'symptoms' -- lead-painted toys and melamine-tainted baby milk powder -- serve as a wake-up call for foreign importers and Chinese manufacturers?
    People in the West don't want to believe there's a problem in China. They try to brush it aside and make excuses for China. These are people I call "China enablers": those who enable bad habits and patterns of behaviour. The US, as a big buyer, should be doing more, but people are making excuses for China, saying, 'China's not developed enough', or 'They're poor', or 'They were forced to do this'. This doesn't help the situation. The Chinese manufacturing industry doesn't want to 'lose face', and people who deal with China want to be polite; there are no frank discussions about quality in China. There's nobody who thinks 'What can do to make things better in China?'

    How much of the problem is because profit-minded importers are beating down the 'China Price' excessively?
    If you're dealing with someone who is unethical, and if you're suggesting that that someone is unethical because the price is too low, my view is this: if they're unethical at a dollar, they're not going to suddenly become ethical for $1.20. The really unethical player would convince you to pay more and will still deliver bad products.

    Chinese manufacturers are savvy business owners. They know how to prevent counterfeit goods from being passed on to him; in some cases, he may know how to engage in counterfeiting. I've a difficult time believing suppliers who say, 'We didn't know we bought things that had lead in it. We didn't notice.'

    What are the most common manufacturing 'tricks of the trade' you've encountered?
    The business strategising aspect of China manufacturers is as interesting as the Quality Fade. Manufacturers are generally very quick to agree to certain conditions and terms: it's part of the success of the China model. Low-balling on the bidding to win projects is common anywhere. What's really striking about China is that you have operators that bid below any expectation of profits. I call it 'Profit Zero'.

    So, how do they find their profit margins? The key is to capture the customer. They know that down the road they can engage in some 'price creep', ratchet up the price in different ways. They do it just before the order can be produced, saying they need another 10%, which moves some of the profit margin from the importer to the factory in the short term. Then, over a series of time frames, they reduce the quality in small, incremental amounts that the customer doesn't notice. Meantime, they're learning about the business. They say, 'Maybe I don't make any money on Customer A, but I can take this knowledge and information and I make money on Customer B.' That's also part of the business strategy.

    There's a willingness to move fast, they're eager to please, they price low. Yet, a lot of American importers that go to China end up regretting it because a deal with one of these factories is never as good as it is in the beginning. Things tend to get worse over time. That's a bad sign. If there's hope for the China-US relationship, you'd think there'd be signs of the relationship getting better over time. With China manufacturing, it actually gets much worse over time.

    We're being set up for being taken advantage of.

    Why don't importers switch manufacturers or countries -- to India, Vietnam, or Bangladesh?
    India vs China is an interesting case, and there's been a lot of chatter about that. But one of the problems with India is lead time. Think about this: if China is competing with India in manufacturing, why are there so many Indians sourcing from China? I've had Indian clients; they could be sourcing from India, but they say they can't wait six months for a product to be introduced.

    Vietnam is in a similar situation. The labour there is cheaper, but unless you control your own production, it's a nightmare to get anything done. No other country has put together what China has. Take China's clustering phenomenon. You want to purchase knives? You go to a city that has nothing but knives. No other country has not just economies of scale and levels of convenience.

    China's infrastructure is all set up, right down to a larger number of agents on the ground. In many cases these middle-men are the guys who make the decisions about where the product is to be made. They are the real deflationary heroes, more than the factory owner who makes the product or the retailer who sells it. It's he who keeps prices down, who threatens to move to another factory when things don't go well...

    But that never happens...
    They say it all the time: it's just a Western habit to bang on the table and threaten to walk away, but they never do. And the factories know this: they're aware of American negotiating tactics. It never happens.

    Also, in the past 10-15 years, there's been a lot of disintermediation. The customer who was importing $50 million worth of products from China is now competing with five different customers who are importing products for $10 million each. That's a proliferation of importers, and in such a situation your buying power shrinks, and your prices go up. All these importers were made to think that things are so easy in China that they can bypass the intermediary and come out ahead. A lot of people who go to China directly realise it's too late because they've already burnt their bridges with the intermediary.

    Why haven't US consumer protection agencies been able to filter out low-quality goods from China?
    One, these agencies are resource-constrained. The US Consumer Product Safety Commission just doesn't have enough people. But even if it had, it can't inspect everything that comes into the US: the volume is too large. Most industries are self-regulated...

    The other problem is that when it comes to poor quality, you have to know what you're looking for. In China, you're dealing with a partner who is not straightforward with you. A lot of counterfeiting goes on. With hindsight, everybody says, 'Why weren't we looking for melamine in milk?' But a year ago, nobody even knew what melamine was. When you send, say, a shampoo sample to the lab for testing, you can't just tell the lab to make sure there's no bad stuff in it. Labs charge by the screen, and want to know what screens to run. You have to tell them what you're looking for. And each of those tests adds to the cost.

    You also make the point that at some stage, some importers don't want to know about quality problems.
    Factories have their ways of making things cheap, and they don't always disclose their production secrets. Sometimes we don't want to ask. That way, we don't know what they're doing, so if something bad happens, we can say,

    'We didn't know.' But if we ask and we find out they're using some chemical that's not legal, we have a problem: now we know.

    You were on the ground in China (on behalf of importers). You speak Chinese. You had access to factories. Why could you not prevent these manufacturing tricks?
    In matters like this, there has to be trust; there's no other way to do it. For me to guarantee what's in a shampoo, I shouldn't have to stand in the factory on the days that they were mixing the shampoo, test every ingredient, ask them what they were putting in... There has to be a level of trust...

    And you can't trust Chinese manufactures?
    I won't say you can't trust all manufactures. But in China, it's not just the number of quality failures that's worrisome, it's also the kind of quality failures. It goes beyond just accidents in the factory or negligence; it also goes beyond worker 'laziness' or a factory owner 'cutting corners'. 'Cutting corners' is too benign an expression to describe some of the things that go on in China, where some people are going out of their way to 'slip one past the inspectors', as the melamine-in-milk scandal showed. Not all the quality failures are alike: some of them are more unethical than others; but it doesn't get any worse than the melamine case. Dozens of companies were involved, which means potentially hundreds of people knew about it. Children were dying. So why didn't people talk? Why aren't there whistle-blowers in China? It's because employees don't want their factory or China to lose face, so they think it's better to sweep it under the rug.

    You claim that the most bullish China analysts are the ones who don't want to live in mainland China. What does the lived-in, grassroots experience of mainland China tell you that faraway analysts don't see?
    Right now, we're in the middle of an economic crisis. When the book was being written, there was a much bigger gap between my understanding of the problems in China and the outside-in view of China as this paradise of investment or opportunity.
    How do you have Wall Street analysts being so bullish on China when they've never seen what goes on over there and the problems there are in China? One of my friends is a Hong Kong-based analyst. Like a lot of analysts, he talks about how he will move to Beijing (or Shanghai), but like a lot of analysts, he's waiting for the "right time". They never do it because in mainland China, the education system, the health system, pollution... it's bad. It's a huge irony; analysts are very happy to write about this fantastic phenomenon called China, but they just don't want to be there...

    A great example is (US investor) Jim Rogers. He famously sold his Manhattan home and announced he was moving his family to China because that's where the global economic focus was shifting. Yet, after considering many Chinese cities, including Shanghai, Dalian and Qingdao, the 'China bull' finally settled in Singapore! There wasn't a place in all of China that he would live in: imagine that! That's the problem: there's been a lot of bluster and a lot of boasting. You have to be a little frank with what you have here...

    Hasn't the Made-in-China story been a force for good in any way at all?
    People talk about the good that China does... But I have a difficult time saying big positive things about China. People say China kept costs down for a lot of countries. But you go to Cambodia or Laos, and you can't find anything that's not made in China today. From a trade balance perspective, I don't know if those countries are well off...
     
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