Chinese puzzle: Examining the implications of Chinese product recalls — part one

In the summer of 2007, after a tumultuous year in which millions of Chinese-manufactured toys and other products were recalled for reasons ranging from high lead content to choking hazards, Chinese officials launched a massive campaign to restore worldwide confidence in the "Made In China" label. However, China's efforts to prevent product recalls haven't seemed to do much, and the roots of the problem — or even a basic understanding of its scope and causes — have yet to be defined. W. P. Carey professor of international management Anne Tsui recently organized an Editor's Forum in which leading business scholars examined the problem from various disciplines and perspectives. In a two-part series starting today, Knowledge@W. P. Carey will use the Management and Organization Review (MOR) forum as a jumping-off point to explore some of these questions, and attempt to answer them, through the expert analysis of W. P. Carey faculty and researchers.

In the summer of 2007, after a tumultuous year in which millions of Chinese-manufactured toys and other products were recalled for reasons ranging from high lead content to choking hazards, Chinese officials launched a massive campaign to restore worldwide confidence in the "Made In China" label. It was not a timid campaign. In fact, when the initiative was launched in August of that year, Chinese Vice Premier Wu Yi went so far as to compare the effort to a "war."

On the state web site, Wu declared: "This is a special battle to protect the health and personal interests of the public and to protect the reputation of Chinese goods and the national image." More than a year later, this "war" is not going well. In the months that have passed since Wu's dramatic proclamation, China's efforts to prevent product recalls haven't seemed to do much, as the nation has continued to suffer setback after setback with its domestically produced products.

Toy racing cars, flash cards, water bottles, dart boards, key chains, sleeping bags, children's makeup kits and model boats are among the dozens of toys that have been recalled since January of 2008 alone, according to the U.S. Consumer Product Safety Commission, but the problem is hardly restricted to toys. Since the wave of product recalls began two years ago, problems have turned up in everything from pet food to toothpaste, cough medicine and car tires.

And despite what China describes as a systemic campaign to stem the tide, the problems have continued right through this fall—with deadly consequences. In October, China was forced to recall all milk products produced by the country prior to mid-September in order to test them for melamine, a substance that can be added to milk in order to create false protein counts. Melamine-tainted milk had been blamed for sickening more than 50,000 children and killing three others through mid-October.

The same day that recall was put into effect, the government and the U.S. Food and Drug Administration announced that a bacteria-tainted herbal drug manufactured by the northeast China-based drug company Wandashan Pharmaceutical was responsible for three other deaths. China's problems have drawn harsh criticism from consumer groups and tight scrutiny from media around the world. Even still, the roots of the problem — or even a basic understanding of its scope and causes — have yet to be defined.

W. P. Carey professor of international management Anne Tsui, editor in chief of the journal Management and Organization Review, recently organized an Editor's Forum called "Made in China: Implications of Chinese Product Recalls" which examines the issues.

Leading business scholars examine the problem from various disciplines and perspectives, and through a series of papers, they managed to identify, for the first time, some of the most important questions about a business scandal that has piqued interest around the world: Has Chinese product quality deteriorated? If so, how and why has this happened? What is China doing to solve the problem? Is this enough? And what's the future of the "Made In China" label?

"The media coverage has not been very clear," Tsui says. "And that's because the coverage just doesn't have any research behind it. But still, all the public sentiment was, 'It's all China's fault.' The purpose of the forum was to bring together a group of experts who are knowledgeable about this topic and give us some insight — some kind of deep analysis for what happened and what the real situation is."

In a two-part series starting today, Knowledge@W. P. Carey will use the Management and Organization Review (MOR) forum as a jumping-off point to explore some of these questions, and attempt to answer them, through the expert analysis of W. P. Carey faculty and researchers. We begin with the most basic of all the questions raised by the wave of Chinese recalls: Has Chinese product quality actually declined? Or has China become, in a way, the victim of its own success?

Nothing new?

When Tsui asked that question of her MOR forum participants, she got five different answers. Some forum contributors argued forcefully that the quality of Chinese goods has deteriorated, pointing to lengthening supply chains from Chinese manufacturers and what they described as a general decline in Chinese business ethics in which the ends (sales) ultimately justify the means (shoddy quality).

Others argued just as strongly that Chinese products had not declined in quality. One contributing researcher noted that toys made in China are no more likely to be recalled than toys made elsewhere, while two others spread the blame beyond China to include overseas buyers, which they said have contributed to lax quality standards by accepted mediocrity in exchange for low Chinese prices. W. P. Carey faculty, for their part, believe the issue is a little bit too nuanced to answer in black-and-white terms.

A good example is the perspective offered by Joseph Carter, the Avnet Professor of supply chain management at the W. P. Carey School who spends about a month each year in Asian markets. Carter says he doesn't believe Chinese product quality has suffered at all in recent years.

The problem, he says, is that Chinese products were never of the highest quality to begin with. "These problems didn't really surprise me at all," Carter says. "Quality has been an issue in China for decades. The whole supply chain in China doesn't really have the culture of precision manufacturing. Honestly, it's interesting that we would even be surprised at the quality of products coming out of China. Because first off, we don't really source out of China for top quality. We buy it for low cost."

That's the way it's always been, Carter says, and unless Western firms stop buying those products, China won't have much reason to change. By buying these products, Carter says, foreign firms are essentially endorsing Chinese quality — or lack thereof. Even still, he says, the greatest impediment to higher quality in China may be Chinese culture itself. The country's business culture is not one that has ever put a premium on precision, Carter says.

This helps distinguish China from its Asian neighbors, such as business powerhouse Japan and rising power Korea. For years, Japanese saw its products derided in the West as cheap and unreliable. But that nation's business leaders—and even its government officials—realized that if Japan was to become a true business force, it could only do so by producing products that were respected. Korea seems to be following the same path.

What about China? "I see parallels," Carter says. "I've been at this long enough that I remember when Japanese products were not viewed as high quality. But Japan is a different culture, and they took it, really, as a national mandate to start making better quality products.

I look at Korea now, and it's the same thing. Ten years ago, it was difficult to sell a Hyundai in the USA compared to a Toyota or Honda. They were such unreliable cars. But today, Korea has raised their product quality to near-Japanese levels. Hyundai is competing directly with all brands, even Lexus. Now, that might happen in China, but it's sort of a progression to get there."

A bad rap

Count Lin Zhou among those experts who think China is getting a bad rap. Zhou, a W. P. Carey professor of economics, doesn't buy the argument that Chinese product quality has declined. In fact, he thinks it's flat-out unfair that China is even being subjected to such scrutiny. In a sense, Zhou says, China is suffering from success.

With its products reaching more people in more places than ever before, the country is also seeing those products under the microscope like never before, too. Once China became such a dominant manufacturer, he said, it was almost inevitable that it would run into these kinds of problems.

"I would not say that the quality of Chinese product has deteriorated over the years," Zhou says. "In fact, the opposite is perhaps closer to the truth. The fact that there seem to be more product recalls is probably a reflection of several things: First, we are simply buying more products from China; second, we have higher awareness as consumers concerning product safety; third, nowadays we have higher expectations of Chinese products than we had before."

Zhou's argument closely mirrors that of MOR forum contributors Paul W. Beamish and Hari Bapuji, who reported that toy recalls in general have been on the increase since 2004. And because China so dominates the toy market, they say, it's hardly a surprise that China has been most heavily impacted by these recalls.

They also say the extent of the problem has been overstated, noting that design flaws were more common than actual manufacturing flaws, and argue that while media coverage of toy recalls has focused almost solely on China, the reality is that non-Chinese goods have been recalled at a higher rate than Chinese goods. Like Zhou, Beamish and Bapuji believe China is bearing the brunt of criticism for a problem that extends far beyond its shores.

Is product safety important? Of course, Zhou says. But is China the only culprit when it comes to these kinds of problems? Of course not. To argue otherwise, he says, is simply untruthful. "By far the most damaging bad quality product on record is the subprime mortgages and the subsequent derivative financial products that U.S. financial firms have sold to the world.

Nothing else is even close," Zhou says. "I am not trying to point fingers. My point is that there is nothing special about bad quality goods from China. These things can and will happen in any country. The way to deal with them should be the same: strong incentives for people who do the right thing, and severe punishment for people who do the wrong thing. And we need better monitoring and better regulation."

Bottom Line:

• Over the past two years China has seen millions of its domestically produced products pulled from the shelves, including everything from toys and toothpaste to pet food and baby formula.
• In response, China in the summer of 2007 launched a massive campaign to restore the luster of the "Made In China" label. Despite a new government-led effort to increase product quality, however, China has continued to see products recalled. Most recently, the government had to recall potentially deadly milk products.
• The situation has led some academics and researchers to suggest that the quality of Chinese products has deteriorated. They point to lengthening supply chains that have brought questionable manufacturers into the loop and a culture among Chinese business leaders that promotes the idea that the ends (sales) justify the means (poor quality).
• Others, however, say China is being unfairly targeted. They say product recalls in general are on the rise, and that as the world's dominant maker of so many products, China has naturally seen more products recalled than other nations that manufacture fewer items.