Chinese puzzle: Examining the implications of Chinese product recalls, part 2

December 17, 2008

Anne Tsui, is not an expert in supply chain management. She doesn't study manufacturing, either. But as she watched and read the coverage of China's struggles with product recalls -- recalls that have affected everything from children's toys to pharmaceuticals, car tires to cosmetics -- she couldn't help get the feeling that something was missing.

Specifically, the facts behind the story.

What was really driving the problem? Who was really at fault? And was China really a greater offender than other manufacturing nations?

These nagging questions eventually pushed Tsui to organize an academic forum about the topic through the journal, Management and Organizational Review (MOR), for which she serves as editor in chief. The forum brought together researchers from various disciplines to attempt to answer some of the most basic questions surrounding the China recall mess, including this one: Has Chinese product quality actually deteriorated, or not?

Opinion, it turns out, is split. Some argue forcefully that Chinese products have suffered in recent years, or at the very least, were never of high quality in the first place. Others believe the country is being unfairly singled out -- victimized, in a sense -- simply because it happens to be the world's leading manufacturer at a time when product recalls in general are on the rise.

"One argument is that there are simply more recalls worldwide, and that happens to include China," says Tsui, a W. P. Carey professor of international management. "The second idea is that the incidence of recalls in China is no more or no less than any other country. In fact, the data reported in the article by Beamish and Bapuji in the MOR Forum is that proportion of defective Chinese toys is no more or less than those made elsewhere.  So then the question becomes: Why single out China? Just because it happens to have a bigger market share?"

Of course, Tsui also understands that, ultimately, it's irrelevant whether or not China is being treated fairly by the press and by consumers. The fact is, these incidents have happened. They have generated massive press coverage, and as a result, many consumers have labeled Chinese products as unsafe.

The question now becomes what China does about it.

The Chinese manufacturing powerhouse -- a powerhouse fueled by a workforce estimated at up to 100 million -- is staring down what is likely to be the most significant challenge of its meteoric rise to power: Salvaging the image of the "Made In China" label.

In the second part of Knowledge@WPCarey's two-part series about China's ongoing struggles with product recalls, we ask W. P. Carey experts what challenges China must overcome, and what policies it must put into place, if it hopes to ever stem this tide of product recalls, improve its manufacturing infrastructure and, ideally, restore worldwide consumer confidence in its products.

"China is a newcomer to the world of business, and it happens to be a very strong new kid on the block," Tsui says. "So people are paying more attention to it. We don't have a definitive answer to [what's behind the recalls]. But the issue is, we have to do more analysis, and more in-depth data-based research studies, rather than just going with our emotional response."

A 'Steep Learning Curve'

Thomas Choi says it's important to remember that China is relatively new to the manufacturing game.

That's sometimes easy to forget, given the nation's massive industrial might today. Massive really is the only word that fits: The province of Guangdong alone is home to about 18 million factory workers (that's more than the entire U.S. manufacturing workforce) and has seen its GDP jump from $165 billion in 2003 to $422 billion in 2007. 

But Choi notes it was only 20 years ago that China launched its first major international business venture -- a partnership with Volkswagen. The German carmaker launched its Chinese operation in 1984, long before China was open to the Western business world. The early entry has paid off for Volkswagen, which today is on the cusp of grabbing nearly 20 percent of the Chinese market.

But success did not come early for Volkswagen in China, Choi notes. As Volkswagen quickly learned in the early days of its new partnership, Chinese suppliers and manufacturers were facing a "very steep learning curve."

"Even the Volkswagen people struggled mightily with China on the concept of quality," says Choi, a W. P. Carey professor of supply chain management. "Teaching the suppliers the concept of quality was very difficult, given their communist background."

The problem, says supply chain management professor Joseph Carter, is that China's economic development in the past 30 years is not one that has emphasized high-quality, precision manufacturing. China made its mark in the business world by supplying low cost products -- not top quality products. Essentially, says Carter, Chinas has never been given a reason to strive for six sigma precision, until now.

Japan, for example, has developed a culture of quality over decades, Carter says. "I spend about a month a year in Asia, and often in China. And you know what? Many Japanese companies won't even source products made in China. If you're dealing with a Japanese firm and they find out one of your sources is located in China, they hesitate to do business with you. It's not simply political. It's that they don't trust the quality. You have that dynamic going on."

"I don't think Chinese product quality has deteriorated," he adds. "It is improving. I just think the manufacturing base needs more time and guidance to provide consistently high quality products at the level necessary to complete successfully against Asian manufacturing powerhouses like Japan and Korea."

 

Such a leap forward certainly is possible. Japan, after all, proved it.

As MOR Forum contributors Jay B. Barney of The Ohio State University and Shujun Zhang of the Sun-Yat-sen University in China note in their paper "Collective Goods, Free Riding and Country Brands: The Chinese Experience," Japanese brands in the post-War period had the same reputation as those from China today: Low-cost, low-quality. But by the 1980s, that had all changed. Partly because of market forces and partly because of a concerted nationwide effort, Japan built a reputation as a supplier of truly cutting-edge, high-quality goods, Barney and Zhang say.

"In industry after industry, Japanese firms went from producing among the worst, least sophisticated products to producing among the best, most sophisticated products," the authors wrote. "This process has been thoroughly documented in several industries, including the worldwide motorcycle, automobile and consumer electronics industries, to name just a few. Over time, as more Japanese firms manufactured highly differentiated high quality products, the brand 'Made in Japan’ began to shift as well. Where once it promised low quality and low prices, by the early 1990s, it promised high quality, sophistication and technical superiority, at least in some markets."

Changing the culture

So what is it going to take for Chinese goods to earn the same respect as those made in Japan, or even Korea?

Carter says the answer isn't all that simple. Not for a nation with such deeply ingrained problems as China. But he says he has a good idea of where China should start: The nation, he says, must find a way to instill in buyers confidence in the products it is selling.

That means more than simply ensuring quality at, for instance, those massive plants in Guangdong. It also means ensuring quality all down the supply chain. Right now, China can't guarantee that, Carter says, and buyers know it.

"Once I'm dealing with one supplier, I'm also dealing with the supplier’s suppliers," Carter says. "So I'm not only dealing with the company, but I have to deal with the lack of visibility and transparency and figure out who they're sourcing from -- is it suppliers in China, or Thailand, or someplace else I don't even know about? That visibility is lacking. And really, with a lot of the problems we see, it's not the company that actually made the finished product, but rather one of the suppliers whose parts went into the product. It's about transparency throughout the supply chain." 

This is the conclusion of the Forum article "All Supply Chains Don’t Flow Through: Understanding Supply Chain Issues in Product Recalls" by the Indiana University authors Marjorie A. Lyles, Barbara B. Flynn and Mark T. Frohlich. These authors considered the Chinese concept of "guanxi" (special relationships) as both the cause and potential solution to the deep supply chain program in China.

For his part, W.P. Carey professor of economics Lin Zhou says China simply must do what it has pledged to do: Step up enforcement of manufacturing regulations and punish those who break the law. The issues, he commented, stem from "the vacuum of any moral code when everything has lost its authority, including religions, political thoughts, etc. Hopefully, the enforcement of laws and regulations will help to ease the problem."

In a sense, Zhou's argument mirrors that of Forum participant Yadong Luo of the University of Miami (Fla.), who argued in "A Strategic Analysis of Product Recalls: The Role of Moral Degradation and Organizational Control" that China’s product recall problem could be traced to "degraded moral standards" in Chinese business that have fueled "illicit and immoral business practices." As Luo wrote: "The illicit nature of massive recalls mirrors the lack of integrity at corporate, business and product levels. Adherence to the law and contract is a prerequisite for corporate reputation and trustworthiness."

But Zhou says responsibility for improving Chinese product safety also lies with the companies buying those products. Zhou says "both exporters in China and importers can do more."

"The manufacturers must improve their production processes, while the importers should have better monitoring and inspecting practices," he says. "While it is in the best interests of most honest manufacturers to produce and market their products properly, laws and regulations can also be applied to those who deliberately choose to commit fraud against innocent consumers. These two forces become stronger as the Chinese economy grows. That is why I say the quality of Chinese products, on average, has been improving."

Choi isn't so sure about that. In fact, he says he isn't sure what to make of China -- its manufacturing problems, its culture, its hopes for the future. The reason for that, he says, is that researchers still so know little about this manufacturing giant.

Even as it has risen to become the world's leading manufacturing power, China has remained a mystery to outsiders. Until more sound, rigorous research is conducted on the country's business and manufacturing culture, as both Tsui Choi emphasize, that's not going to change.

"There's still a lot for us to learn about China," he says. "There's a lot of change going on in China. My sense, honestly, is that a lot of the data coming out of China is noisy. Ideally what we'd like to do is measure a system that is in somewhat of a steady state, collect data, analyze it, and make some intelligent comments that are rational. This is a situation where what one has to do is not look at just one or two [pieces of research], but multiple ones."

Bottom Line:

  • Despite a national effort launched in the summer of 2007 to improve oversight of manufacturing processes, China continues to struggle with poor product quality and recalls, including some with deadly consequences. Tainted milk was recently blamed for the deaths of three children.
  • Researchers are split on the question of whether Chinese product quality has deteriorated, but there seems to be general agreement that, until recently, the Chinese business culture since its economic reform, is not one that has emphasized precision manufacturing.

In order to improve its manufacturing processes and salvage the "Made in China" label, W. P. Carey experts believe China must work hard to improve quality all down the supply chain, as well as put into place tough new regulations -- and enforce them.