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 Chinas 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 Chinas 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 cant see beyond the next purchase order.
One reason for the short-sightedness may have to do with
Chinas 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 owners
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
ones 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
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.
Chinas 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: Chinas Great Business Challenge (July 25, 2007).
All materials copyright of the Wharton School of the University of Pennsylvania.