Economy and Government and Manufacturing & Technology and Media & Marketing

VIEWPOINT: Avoiding Chinese 'fifth-shipment' follies

September 24, 2007

The recent announcement by the Indianapolis company Gilchrist and Soames that it would recall its privately branded toothpaste because of concerns regarding its diethylene glycol content is a small part of a larger global concern about the quality standards of goods made in China.

The same week, Mattel recalled more than 9.5 million U.S. toys over concerns about the use of lead paint. Many Indiana firms rely on a steady stream of qualified products from China, so now seems a prudent time to review what local companies need to do to ensure that their Chinese supply chain remains viable.

In the short term, the emphasis of most media coverage has been an unfortunate mix of who is to blame for these recalls and whether such recalls should cast doubt on the integrity of China's export-led globalization. But the reality of China's development-or in certain areas its lack thereof-begs ownership of many of these issues on the part of U.S. companies.

Caught up in the ecstasy of China's embrace of free-market initiatives, it becomes all too easy to overlook the significance of the country's very recent transition from a centrally controlled economy to its current odd amalgamation of back-room government oversight and free-wheeling quasi-capitalism. Awash in the sheer size and explosive growth of the Chinese economy, we can forget that it was not so long ago that China's entire cultural and economic experience was formed around principles fundamentally at odds with many we take for granted.

The story is told of villages which, upon receiving word that Mao or another senior party official was to tour their area, would prematurely cut down their harvest and stack the bounties of their efforts along the roads they knew the officials would drive along. The result was to impress upon the government officer an agrarian bounty that was not the case, during some of the most severe famines China ever experienced. It is almost impossible to appreciate the incestuous influence this has on a culture's understanding of business principles.

While this is not the China of today, it is an important aspect of why these recalls happen: a culture long focused on externals at the expense of fundamentals will often cut corners, assuming the result is most important. This often leads to the confusion of what many people call the "fifth shipment," the almost inevitable receipt of previously acceptable product from China, which, on the fifth shipment, is found to be of poor quality. From the Chinese perspective, they are only doing what they have done to survive, namely to gradually ease standards until they meet resistance from the market, at which point they assume the minimum quality has been met.

Unlike their American counterparts, who view quality as fixed, many Chinese companies take a more fluid perspective. One of the essential lessons of these recent recalls is that it is an ongoing cost of doing business in China to anticipate and manage the risks of the fifth shipment and not take anything for granted.

As the product-recall stories mature, and as U.S. businesses wrestle with the analysis required to ensure that problems like this do not occur again, it will become more important to get to the bottom of how these problems developed, rather than a simple assignment of who is at fault. The likely outcome of such an internal dialogue at many organizations will be a realization that blame is to be shared.

American firms need to be careful, since too much assignment of blame on the shoulders of their Chinese manufacturing partners could chill trade relations between the two countries. While some may look positively at such a development, the reality is that few companies could survive a serious disruption in the flow of easily traded goods from China.



Shobert is managing director of Teleos Inc., a local firm specializing in taking products and technologies to market, with an emphasis on goods originating in China.
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