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Company Formation, Tax and Trade
Issues
in Hong Kong and throughout China
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In this month's issue we discuss ""Made
in China" is losing
Consumer Confidence" covering
the following topics:
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Consumer
Confidence
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Local
Worries & Foreign Worries
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Manufacturing
concept of exporters in China
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Responsiblity
for the Product Defects
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see below........
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"Made in China"
is losing Consumer Confidence
Klaus Koehler, Managing Director,
Klako Group
The surge of defective imports
from China in recent months reached a peak last week when toymaker
Mattel Inc, recalled nearly a million Chinese-made toys coated with
toxic lead paint. The move prompted governments and corporations all
over the world to fix the problem quickly without slowing down the
surging process of globalization or triggering a trade war between
China and the rest of the world.
Consumer Confidence
China is facing a global crisis of consumer confidence
as the country's food safety watchdog acknowledged this week that
almost a fifth of the domestic products it inspects fail to reach
minimum standards. Following a number of contamination scandals, the
world's biggest exporter is struggling to prove that it can match
quality with quantity.
Local Worries
According to the General Administration of Quality
Supervision, Inspection and Quarantine (AQSIS), in the first half
of 2007, 19.1% of products made for domestic consumption were found
to be substandard. Among products made by small firms, the failure
rate was nearly 30%. The main concern is that these are not isolated
incidents. Officials have found hundreds of bottles of fake human
blood protein in hospitals and excessive amounts of additives and
preservatives detected in children's snacks. Mainland Chinese are
becoming increasingly concerned about food safety in general and the
trust deficit is enormous and growing.
Although with health and environment, consumer safety has been one
of the biggest victims of the rush to get rich. The domestic market
has probably been affected more than international trade because export
standards are higher than for goods sold in China. Last month, food
inspectors said paraffin wax, dyes, formaldehyde and cancer-causing
compounds were detected in food produced by unlicensed and small
producers.
Foreign Worries
While the worst violations are in the domestic
market, the repercussions are felt beyond the country's borders. China
fills the shelves of Wal-Mart, Tesco and Sainsbury's with low price
products. But as its world presence has grown, so have concerns about
safety.
In America there was a series of cat and dog deaths in the US that
was attributed to tainted pet food from China. Next in American and
Britain came the recall of more than 1 million Thomas and Friends
toy trains coated with poisonous lead paint from China. Then, Independence
Day fireworks were withdrawn from the US because of their dangerously
unpredictable sense of direction. In the EU, European customs officers
had seized fake birth control pills and HIV drugs from China. Foreign
consumers have reached a point where "Made in China" is
now a warning label.
Manufacturing concept of exporters in China
One of the problems facing China is that manufacturers
continue to deliberately widen profit margins through a reduction
in the quality of materials. Importers usually never notice what is
happening because changes in quality 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.
Even when importers catch suppliers in reducing quality, they frequently
do not do much apart from complain. Many quality problems are seen
as too minor relative to the difficulties involved in rectifying them.
Customers may not notice a product flaw, but they most certainly notice
when a product is not delivered on time. The chance of a product failure
is usually remote, but the penalty for late delivery is an almost
certain loss of business.
Some importers do attempt to fight back against the poor quality by
insisting a supplier replace substandard goods at the factory's expense.
However some suppliers can respond to such demands by terminating
the supplier relationship. Or the supplier can raise prices. Importers
may then counter and say they will switch suppliers, however the existing
suppliers knows this is an empty threat as finding new suppliers takes
time and cultivating the relationship takes even longer.
Suppliers, generally, know where they stand with the customer. They
have virtually nothing to lose and only margin to gain. And if they
have gotten away with it once, they will do it again. As routine,
suppliers apologize and promise with a handshake that it will not
happen again, and generally importers accept and just hope for the
best.
Responsibility for the Product Defects
The larger question is who is legally responsible
when a chemical used in antifreeze ends up in a tube of toothpaste.
Foreign companies are starting to find out as the lawsuits begin in
that the tainted ingredients may come from China, but the liability
is in the foreign country.
This lack of accountability has legal implications. When a product
is recalled, the importer pays the cost of that recall. It remains
next to impossible to take legal action in China, and only in the
rarest case can an importer successfully sue the supplier responsible
for the product failure. Since most suppliers are paid in full well
before goods leave the factory, the importer doesn't even enjoy the
leverage that comes with owing payment to the supplier. The average
importer has far less leverage than imagined.
The importers can seek indemnification from their Chinese exporters,
however generally few foreign lawyers in the foreign country contemplate
suing Chinese entities in Chinese courts, where tiny damage awards
and frequently hostile local judges often make litigation pointless.
One way or another, if importers want to stay in business, Chinese
exporters will have to become accountable for injuries to foreign
consumers and businesses.
Solutions
In an attempt to quell concerns, the government
is drawing up new safety rules for oral care products. Beijing has
promised to revise its inspection system for other products. Last
month, the government published its first five year plan for improving
food and drug safety. It closed 180 food factories in the first half
of 2007 and seized large quantities of sweets, pickles, crackers and
seafood tainted with formaldehyde, illegal dyes and industrial wax.
In June, the former head of China's food and drug agency, Zheng Xiaoyu,
was sentenced to death for accepting RMB 6.5 million in bribes from
pharmaceutical companies to expedite the approval of new drugs.
In August 2007 the government announced a nationwide effort to monitor
eight categories of products, including pork, farm produce, processed
food, pharmaceuticals and toys. The government has drafted a plan
to supervise the production process for industrial and food products
across the country. In the next four months all food manufacturers
will be registered; pigs shall only be slaughtered at designated places;
agricultural wholesale markets and export zones will be inspected.
Concurrently China has blacklisted more than 400 of its exporters
through the "Export Blacklist System". No details of the
punishment have been given. Additionally police have detained a further
17 members of a gang in Heilongjiang province producing counterfeit
medicines. In all, police have confiscated fake versions of 67 medicines
produced by 53 companies.
Amid the rising concerns over food security, China's State Administration
of Quality Supervision, Inspection and Quarantine (AQSIQ), now is
trying to make things easier by introducing a new quality mark. The
system began in 2001 and requires food companies to obtain production
licenses and put the QS (Quality Safety) logo on their products. The
labeling system now covers 16 categories of food products. Official
statistics show that around 71,000 food production licenses have so
far been issued in the 16 categories, accounting for 95 percent of
the market in those sectors.
Action has also begun foreign imports as these products are failing
the trust of Chinese consumers because of successive quality problems.
Part of Beijing's strategy has been to portray tainted food exports
as a worldwide problem. China has also banned imports of Indonesian
seafood saying contaminated shipments have been found. In July, it
suspended imports of chicken and pork from seven US companies, including
Tyson Foods.
Product Certifications
ISO14000, HACCP, QS, CQC
are examples of certificates that consumers can find on commodities,
intended to demonstrate that manufacturers or products meet quality
standards as certified by professional verification agencies.
In order to satisfy consumers, enterprises commonly get more than
one certificate, from compulsory ones such as CCC to voluntary ones
like ISO14000. In competitive markets companies seek certificates
in order to increase the brand value.
China has developed into the second largest inspection and verification
market in the world after the United States. By the end of June 2007,
domestic and foreign verification agencies issued over 390,000 certificates
on both system management and product quality. Professional certification
laboratories, which are specifically used to test product quality
and safety, have crossed 2,600 in China.
Consumers do have differing views on the reliability of the certificates
and the government is strengthening supervision and punishment for
both fraudulent certification institutes and companies that use illegal
or unethical means to acquire certificates. In January 2007, Certification
and Accreditation Administration of China (CAAC) declared five certification
institutes as illegal and abolished them. Another 11 are under investigation.
Outsourcing Inspection Services
When sourcing in China, as with any country,
quality should be of utmost concern, considering the rate of growth
the country has realized in the past decade. However higher quality
and safety does not happen by itself.
In the wake of quality problems, many are looking to third-party testing
as a solution. Outsourcing the quality control division has become
popular amongst companies expanding their operations. Quality control
can be complicated, demanding and a costly exercise for every company
doing it in-house. Outsourcing gives companies a choice of cost effective,
yet professional and risk absorbing service providers.
When considering a quality control provider, a company must consider
its own agenda and choose accordingly. Foremost is the intention of
their quality control efforts and their budget available for these.
One problem of outsourcing though, is that client firms often have
somewhat unrealistic expectations of what can be expected for their
budget.
When buying products in China companies must understand the price/value
relationship - what one will get for what they pay for. This in combination
with a more traditional approach of planning, design, technology transfer,
supervision and control all effectively lead to quality success. That
said companies should also think about conducting background checks,
factory and social compliance audits before beginning to work with
a new supplier.
Conclusion
With USD $546.7 billion worth of goods being
exported in the first six months of 2007, the credibility of "made-in
china" products must be restored. The government perceives that
the "deep rooted" problems regarding food and product quality
come particularly from a large number of small factories with substandard
equipment and poor management. Local government protectionism needs
to be dealt with, and weak enforcement must be shored up with more
resources. However foreign companies should take the initiative to
place control systems in their suppliers before shipment overseas.
If you require assistance with the above subject, please contact
us at info@klako.com with your detailed questions.
All information in this report is verified to the best of our ability
and is assumed to be correct at time of release; however, Klako
Group does not accept responsibility for any losses arising from
reliance on the information provided within.
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