Brands encounter the China Syndrome

Stuart%20SmithLittle Johnny may not be getting that Thomas the Tank Engine topping his Christmas wish-list this year, and all because the Fat Controller in China didn’t do his job properly. Highly toxic lead paint, tiny magnets that kids can dislodge and swallow, instantly flammable children’s pyjamas, and subsequent massive recalls by well-known toy brands – these are all uncomfortable and highly negative reminders that China is unmistakably the new Workshop of the World.

The question is, who will pay the ultimate price for little Johnny’s disappointment, Brand China or such global brands as Mattel, Fisher Price and Toys R Us that have brought this toxic problem to our doorsteps?

Formally, legally, there is little issue over where the responsibility lies. It is the importer into Europe or the USA, whether brand owner or retailer, who will carry the can for any injuries sustained as a result of negligence. Punitive sums of money may find their way into the hands of class-action litigants, a witch-hunt of executives will result in a corporate unwanted list (or even, as in the case of the Chinese executive responsible for the deadly Mattel dolls, suicide).

But the problem won’t end there, however much all the participants may wish it to do so, because these ‘solutions’ are far too simplistic. It is not a matter of individually culpable brands, still less individuals themselves, being held to account just because they can be. The problem is systemic, and a byproduct of globalisation. But who’s going to take responsibility for it?

To be sure, the Chinese authorities will fret over the negative reaction to “Made in China” caused by the toxic scandal. It is one of a series of scandals – another being the sweatshop conditions under which much Beijing Olympics merchandise is being manufactured – that is denting the reputation of the country abroad.

Hobson’s choice
But in one respect at least, they won’t be that worried. They know that where manufacturing is concerned, most Western mass brands have little choice when looking for a supplier but to use China as their base. The scale of operations is now so great that no other economy could handle it cost effectively.

For, make no mistake, the toxic scandal is not some isolated example of incompetence, but a symptom of a widespread malaise that is very difficult to treat. All the more so since East and West find themselves in an unhealthy symbiotic alliance.

One of the primary functions of a brand is to provide consumers with a reassurance of consistency and quality at the point of sale. Ironically, this is exactly what it can’t do, with any real certainty, when relying on China for its manufacturing outsourcing. Much manufacturing depends on nebulous sub-contracting, and typically a sub-contractor may, in order to achieve economy of scale, supply several rival brands with much the same mass-produced product. For example, some recently recalled faulty Nokia batteries actually originated at a Chinese factory owned by Japan’s Matsushita. Similarly, Nike, Adidas and Puma all use a common shoe manufacturer (Taiwanese, as it happens, not Chinese) and Apple, H-P and Dell a sub-contractor called Hon Hai (http://www.economist.com/displayStory.cfm?story_id=9645770).

Conspiracy of silence
Such commercial practices encourage a conspiracy of silence. On the part of the brand-owner, because it would not wish to admit in public that it lacks ultimate control over its own manufacturing process. On the part of the contractor, because only anonymity and discretion guarantee that it can simultaneously sell what in all essentials is the same product to several rival brands.

One of the casualties of this highly margin-effective process is accountability. If you don’t own the manufacturing plant, it’s very difficult to insist that standards are tailored precisely to the requirements of your brand and your markets. To be sure, you can produce a detailed rule book and insist on factory inspections. But how effective are these? Not greatly so, judging from the number of current recalls.

The trouble is, erosion of public trust will have to be severe indeed before brand-owners wean themselves off their China dependency. A more reliable corrective mechanism will be for China to create its own cohort of global brands (it has made a start with PC manufacturer Lenovo and washing-machine maker Haier), which will end up doing the necessary policing of quality control – it being commercially expedient to do so in international markets.

Until that time, some way off, little Johnny will just have to lump it at Christmas time.

Stuart Smith, Editor

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