China-Manufactured Products and the 'Quality-Fade' Debate

Recent international attention (and concern) over China's product regulatory oversight has prompted at least some discussion of what leads China's manufacturers to cut corners on quality in the first place, and whether the situation will improve. This past week, several blogs picked up an article by Paul Midler (President of the consulting firm China Advantage) that was published on Knowledge@Wharton entitled "'Quality Fade': China's Great Business Challenge."

In addressing the issue Midler focuses on the specific problem of 'quality fade'--"the deliberate and secretive habit of widening profit margins through a reduction in the quality of materials," he writes--

Importers usually never notice what's happening; downward changes are subtle but progressive. The initial production sample is fine, but with each successive production run, a bit more of the necessary inputs are missing . . . Some quality issues are not all that serious, but others are downright frightening . . . Suppliers push the limit by taking more and more out of the equation until they are caught, or until disaster strikes.

Midler weaves in two anecdotes to illustrate the phenomenon--the first involving a Chinese cosmetics manufacturer that switches to low-quality cardboard boxes for its shipments (relatively minor), and the second, a Chinese aluminum construction materials producer who had downgraded the weight of the components it was manufacturing by up to 90% (an error that could cost lives). And, Midler points out that when quality problems are discovered by importers, those importers are faced with the difficult dilemma of whether to try to rectify the quality issue with the supplier (which may, or may not, work), or try to find a new supplier (possibly causing substantial delays in production).

Midler also cautions against putting too much faith in third party quality control testers--again, illustrating his point with a story:

I recently worked with one supplier that was encountering difficulties making a quality liquid soap for export to the U.S. To get around problems the supplier was having with laboratory results, the supplier created 10 random samples and sent them to the same lab for testing. Nine of these samples failed, but one passed. The supplier took the one test result marked "passed" and sent it off to the customer. The U.S. company never knew about the failed results, and a purchase order was promptly issued.

In Midler's view, the willingness of some Chinese manfucturers to systematically downgrade the quality of their products can, at least to some extent, be traced back China's one-party system. Their 'short-sightedness' results from a "one-party government does what it wants, when it wants . . . 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."

Dan Harris, over at CLB (and yes, the new boss of our own dear Travis Hodgkins), has written a particularly thoughtful response to Midler's article. While Dan agrees with much of what Midler relates, when it comes to ascertaining why downgrades are widespread, Dan's view is somewhat more forgiving. He writes:

Quality fade is a major problem in China. However, the reason why this is happening is not so much so Chinese manufacturers can rake in big margins, it is so they can survive. Many Chinese manufacturers have no margin whatsoever. With currency revaluation, massive competition, tax reform and the end of VAT rebates, huge numbers of Chinese manufacturers are operating at a loss. They are doing the quality fade in a desperate attempt to stay alive for a few more months or years. China is in a desperate situation of pursuit of the absolutely lowest price. China's manufacturers cannot continue this race to the bottom and continue to survive. At some point, they will need to shift to higher quality goods at a higher margin. This shift is already happening in the market as a whole and I have seen individual Chinese companies make this shift as well. Just this month, a client of mine was told by his Chinese supplier that the supplier could not continue to maintain expected quality without a price increase. My client wisely went along with this. I have seen companies fight a price increase when they had to have known there was no way quality could be maintained without it.

So it seems the question here is -- is the Chinese manfucturer trying to unilaterally capture a greater profit margin, or are the US importers insisting on prices that simply can't a support a quality product? One commentator over at Techdirt relates a story about a US company he worked for that was importing China-manufactured products:

If you looked through all the merchandise it was tough to find anything that was not manufactured in China. Everything they sold looked great. The problem is if you looked closely [(]and you did not need a scanning tunnel[l]ing electron microscope to realize that[)] most of the stuff was pretty poorly manufactured[][--] manufactured so poorly to the point that in all the decades I worked in retail sales I never saw so many returns. It soon became clear to me it really was not the fault of China. It was the fault of the company I worked for who I'm sure was saying to the people who were manufacturing these things[, "]Make them look as good as possible while making them as cost effective as possible.["] My feeling is China can build things as well as anyone else. It[']s the responsibility of people who purchase things for resale from China who bear a great deal of the responsibility.

The answer is probably that both situations occur, and perhaps in conjunction with one another. It seems an importer should be able to realize when it is acting culpably in this respect. As for those importers that feel they are simply at the whim of their supplier, check out Dan's tips (scroll to the bottom of the article) for setting up a relationship with a Chinese manufacturer.