as Underwriters Laboratories (UL),  Intertek Testing Services (ETL) or the Canadian Standards Association (CSA). Both the Wall Street Journal and the New York Times have suggested that the solution to China’s quality problems lies in greater  vigilance  on  the  part  of  importers,  but  the  question remains: If  professional third-party testing agencies are failing to catch product failures, how is the average importer expect- ed to do so? After all, third-party testing agencies have far bet- ter resources, and their people are much better trained. Private quality assurance programs may also be put in place, but  suppliers  can  circumvent  such  controls  as  well.  In  one case, after a load of  plywood was rejected at one factory, the supplier  simply  mixed  a  portion  of  it  with  product  that  was perfectly  good  in  later  shipments.  Working  the  bad  into  the good is a common way for a factory to reduce loss. A suppli- er can bury sub-standard product knowing full well that ware- house  workers  in  the  U.S.  do  not  have  the  time  to  examine each piece that comes in. And detailed contracts cannot suc- ceed in bridging any moral gap. In order for supplier relation- ships to work successfully, there must be a basic level of  trust. GET RICH QUICK In an effort to reduce risk, American companies are also look- ing to suppliers that are larger and seem more capable.  The unfortunate  fact  about  China’s  larger  factories,  however,  is they charge more for product than smaller factories do. It is as if  economies of  scale do not apply in China. There are sever- al reasons why  China  suffers  from  such  a  problem,  and one has to do with the role government plays in manufacturing. Where a small factory may have been funded entirely by the government,   future   expansions   are   more   often   privately financed.  Making  the matter worse are extremely short pay- back  periods  on  private  investment.  Many  factories  hope  to pay off  investments in as few as three years. One of  the worst things  an  importer  can  hear  is,  “We  want  to  show  you  our most  recent  expansion.”  The  more  a  supplier  invests,  the quicker it raises prices. There is a sense of  urgency in China, the feeling that one must work fast before the window of  opportunity closes. For facto- ries,  that  means  taking  shortcuts  on  quality.  Many  factory owners can’t see beyond the next purchase order. One  reason  for  the  short-sightedness  may  have  to  do  with China’s political environment. The one-party government does what  it  wants,  when  it  wants.  And  while  there  may  be  some advantages to a government that can operate without restraint or controversy, such a system limits predictability and leaves the  business  sector  keenly  aware  that  it  is  subject  to  the evanescent  whims  of   officials  who  may  or  may  not  know which policy is best. The U.S.  administration has recently been applying pressure on China to revalue its currency in order to close the growing trade  gap  between  the  two  countries.  To  appease  the  U.S., China has responded by reducing the tax rebates it offers to manufacturers. For some suppliers, the tax rebates have con- stituted a major portion of  their bottom line. Massive and sud- den changes such as these only confirm the factory owner’s paranoid suspicions that the manufacturing opportunity could disappear at any moment. No one in China is sure how long anything will last — a situation that keeps many focused on the immediate present. Chinese  manufacturers  that  engage  in  quality  fade  unfortu- nately subscribe to the view that business is about increasing one’s share of  the pie rather than growing the pie over time. They  often  focus  on  extracting  profit  through  short-term maneuvers that inevitably militate against long-term develop- ment.  This  approach,  it  should  be  noted,  contrasts  sharply with the success  strategies  of  such  economies as Japan and Korea, which focus on building market share and developing strategic relationships. PLAYING IT SHORT Some blame quality problems and product recalls on the relent- less pursuit of lower prices. Importers most often go to the cheap- est supplier, so the supplier who quotes low and quietly cuts cor- ners on quality is the one who wins. Honest suppliers who prefer to quote higher and offer a better quality product lose out. The supplier who obfuscates catches orders first — and most often. Chinese suppliers are excellent at playing the short game. When an importer discovers a quality problem late, the factory turns around and suggests, “But you signed off on the original produc- tion sample yourselves.” When goods arrive damaged in the U.S., the factory claims that the importer has been making up the story in order to lower import costs. Arguments like these work in the short term. Over the longer term, however, importers get wise, and alternative markets start to look increasingly attractive. China’s quality situation is by no means hopeless.  Japan was known  decades  ago  for  making  inferior  products,  but  that changed. The key to turning the situation around is to incorpo- rate a habit of  quality into the culture. China, however, has not shown that it has any interest in doing so. Recent accusations of  unreliability in Chinese products are now being met with tit- for-tat claims that U.S. products are faulty. This is an unfortu- nate strategy for China, and it means that we will continue to see quality problems. China will not be able to succeed so long as manufacturers are competing in a race to the bottom. Paul Midler has been involved with China for more than 15 years, and in the course of his manufacturing career, has had dealings  with  thousands  of  Chinese  factories.  He  is  also  a writer and occasional speaker on China. (#15637) Reprinted with permission from the Knowledge@Wharton (http://knowledge.wharton.upenn.edu) article, “ ‘Quality Fade’: China’s Great Business Challenge” (July 25, 2007). All materials copyright of the Wharton School of the University of Pennsylvania.