China Products: Ya Want Quality? I Got Quality.
Not sure if this is truth or urban legend, but word is that if someone requests a lean pastrami sandwich at New York's famous Carnegie Deli, the waiters will reply, "Lean? Ya Want Lean? Ya want lean, I'll bring you a turkey sandwich." Not entirely sure why but that story popped into my head when I read a Los Angeles Times article today on how prices of Chinese products will be rising now that customers are demanding those products meet U.S. safety standards.
Quality? Ya want Quality? Ya Want Quality, I'll have to bring you something a little more expensive.
Anyway, to a certain extent, it is somewhat of a shame that something this obvious is a news story, but the article, entitled, "Fixing Chinese goods will be costly," really does do a nice job of explaining Chinese products' price/quality linkage.
The article begins by noting that "for years, American consumers have enjoyed falling prices for goods made in China thanks to relentless cost cutting by retailers such as Wal-Mart and Target," but those days are over. U.S. retailers seem to be coming to the realization that "some of China's product "quality breakdowns are a result of financially strapped factories substituting materials or taking other shortcuts to cover higher operating costs:"
Now, retailers that had largely dismissed Chinese suppliers' complaints about the soaring cost of wages, energy and raw materials are preparing to pay manufacturers more to ensure better quality. By doing so, they hope to prevent recalls that hurt their bottom lines and reputations. But those added costs -- on a host of items that include toys and frozen fish -- mean either lower profits for retailers or higher prices for consumers.
Prices for merchandise from China are likely to creep noticeably higher over the next 12 to 18 months after having declined steadily in the previous three years. "Most economists believe" manufacturing prices will have to rise at least 10% to reflect China's current production situation, though it is not clear how much of the increase will be passed on to consumers.
The article then goes on to detail how a number of companies are stepping up their inspections of China product. For example, Costco's recently increased "inspections and monitoring of its private-label Kirkland brand as well as other goods the company imports directly:" will eventually have to result in rising prices:
That increased vigilance, as well as new quality controls put in place by many manufacturers that supply Costco, probably will result in modest price increases on some products being produced now for sale next spring and summer, said Costco Chief Executive James D. Sinegal."It probably is just a penny here and a penny there. We're not seeing big incremental cost increases, although that may come," Sinegal said. "I don't think we have a choice. A product is either safe or unsafe. If it is more costly to ensure that the product is safe and being produced properly, somebody has to pay the cost."
Ronald Boire, president of Toys R Us North America sees the same thing, but believes "the consumer is willing to pay those costs because the products will be increasingly safer over time." Wal-Mart says it is "expanding testing and oversight of toys in the wake of the recent recalls but declined to comment on price issues."
Most Chinese factories have been squeezed by increasing wages, rising commodity prices, and an appreciating Chinese Yuan.
The article notes that "U.S. companies that buy goods from China are scrambling to identify their subcontractors, requiring audits and spot testing, narrowing their network of factories and in some cases replacing longtime Hong Kong and Taiwanese middlemen with their own staffs to build relationships with suppliers." Kent Kedl, executive director of Technomic Asia, "a Shanghai firm that consults with foreign companies manufacturing goods in China" sees this as "a maturing of the supply chain." I wholeheartedly agree.
A few years ago, when we would lecture our clients about the potential dangers of using middlemen and the need to conduct at least some due diligence on their suppliers, many of them just seemed to tune us out. They are all listening now.
The article concludes with the example of Skyway Luggage Company, which now makes all of its products in China. "It built two factories in Guangdong province to have better control over quality. It also does business with four contracted facilities in the Shanghai area." Its president and COO, William H. Wilhoit, said Skyway's "compliance program included testing every batch from a new supplier in its first two years, then random and unannounced inspections by Skyway staff and a third-party company, Bureau Veritas." Skyway too is at the point where it is going to have to raise its prices if it is to "remain profitable."
Skyway though is also "gearing up to open a factory this fall in Vietnam, where wages are lower" and where Skyway will be able to "get the same quality stuff on the shelf and make money."
To quote Arthur Kroeber from his article, Lessons for China Inc., in the August 20, 2007, hard copy of the China Economic Quarterly (CEQ) [not online], "It is now clear that part of the China price resulted from the shift of production from jurisdictions with strong regulation and high compliance costs, to those with light regulation and low compliance costs."
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Comments
I was talking to someone in the contract manufacturing business in Hong Kong on this last week, and his opinion was that clients like Disney and Walmart were unlikely to be paying more to their suppliers (although he thought it quite possible that they could use the opportunity to raise prices in the US). Essentially he thought the people likely to be bearing the brunt were the middle men, stuck between massively powerful buyers and suppliers who had no option but to pass on cost increases. This led to an interesting discussion on how far you could squeeze the middle men before they started looking to supply someone other than the big buyers, and the varying impact on different types of product.
Posted by: Duncan | September 10, 2007 2:12 AM
I strongly agree with the last quote from Arthur Kroeber. Not only does the movement to factories further inland explain how the China price has been maintained, the regulatory environment out here, or lack thereof, also explains the quality problems and the difficulties companies are having determining who exactly is producing their goods. A lot of companies are hitting the wall working with rural governments who are protecting their local producers.
Is there such a thing as a Chinese 'bubba', Dan?
Posted by: robert | September 10, 2007 2:12 AM
Dan,
The part about your post that struck the strongest chord with me was the part calling for greater due diligence on the part of the U.S. companies. The Chinese are savvy manufacturers. Between working on contracts and nailing down manufacturing for a partner, I'm convinced the Chinese can build quality products, as long as you tell them exactly what you want with great specificity and find a manufacturing partner who understands what you want. Sure poison dog food and toothpaste, and lead painted toys are surely breaches of just about any contract for these goods. But my first thought when these incidents were reported was not the low quality of a Chinese factory, but that there were too many assumptions on the parts of the U.S. engineers and attorneys as to the expected quality which led to fatalities that make Michael Vick look like a model of restraint.
So I'm guessing that the solution is that we use the insurance system of higher consumer prices to protect these massive corporations from their own lazy business techniques?
Posted by: William Lewis | September 10, 2007 11:41 AM
I read that story first thing this rainy morning in Iowa.
I'm in mind of the words of my stepmother, who was born and grew up in the USSR. She did quite well for herself in the US but one time she told me "You know what the great weakness of the capitalist system is? Someone will always do it cheaper than you can."
That goes a certain way towards explaining the story. Apparently some in China do not yet realize that if you live by the lowest cost you will die by it sooner or later.
Also, what I'm getting from this dialectic is that the wisdom of W. Edwards Deming has not taken deep root in China's manufacturing culture. Apparently the idea that it is much better to build quality into a product than to add it on after the fact is honored more in the breach than the observance.
It's a funny old world. I never thought that China would get Walmarticated as quick as this. What goes around truly does come around.
Posted by: Robert Luedeman, attorney at law | September 10, 2007 12:09 PM
Enjoy your insights into China; I recently posted an article on my site a friend of mine wrote on living and working in China. You might appreciate it: http://www.thebostonbachelor.com/2007/09/09/accounts-of-an-american-in-china-the-knife-and-the-heart/
The Boston Bachelor
www.TheBostonBachelor.com
Posted by: The Boston Bachelor | September 10, 2007 12:21 PM
@Duncan, I would personally have no problem with the Chinese trade companies feeling the squeeze. They've been raking it in, hand over fist, for the past five years.
Posted by: robert | September 10, 2007 5:03 PM
About quality of chinese product, two interesting Administrative Provisions about food and cosmetic (i use google translation, it's not so good but it help to undersand the meaning
Posted by: rambijey | September 13, 2007 11:54 AM
A significant sum of the price increase should be the direct result of foreign companies paying a dedicated production management team on the ground in China overseeing their production and ensuring that goods are delivered on spec.
American manufacturing jobs did not flee to China, because the level of Chinese quality conciousness or quality standard regulations were equal to or superior than American mgfs. The Great China Flight occured because Americans love a great deal and US companies responded by cutting a transpacific corner - taking manufacturing to China. Yes, manufacturing in China is a risk, but the rewards are high and can be safe if executed properly.
Proper execution of a sound manufacturing program in China does include having the right representation on the ground. Many foreign firms are either undercapitalized or more often too cheap to invest in proper representation beyond their Chinese trading company. I view China sourcing like investing in the stock market. There are many people who day trade, but majority turn their personal investments over to a money manager or broker. Why? Because either they do not understand the market or simply just do not have the time to manage their money right. In my view the market opportunity is China and the investment is the production of goods, that will provide financial return.
Overall, I hope that most foreigner importers do not become bamboozled by price hikes. Please get a grip on your China Supply Chain. Consumers should not have to pay the price for negligent foreign importers cutting corners in China.
Posted by: RMitchell | September 30, 2007 3:49 PM
I stepped into this blog through another article...
Very interesting...
I live in Taiwan and China for over 15 years, doing international trading business for 29 years.
In China, there is a saying going more or less like this:" You get what you pay for"...
I read and hear loud about quality controls, laziness on the part of the western customers..etc..
But the main real reason is just plain GREED; it is too simple to put the blame only on the chinese manufacturers....
It is not even because the factories try to cut corners; it is often because they are been "strongly requested" to use lower ingredients or manufacturing processes..
In my particular field, metal fasteners, I can tell you that chinese customs check the quality of steel used in exported fasteners very carefully,for each shipment...and this, long before the quality problems surfaced in USA...
Also, there is a limit to how much price decrease you can achieve by delocalization: if you make rattan baskets, with 90% product value in labor, sure China is (was , now it is vietnam) a perfect choice . If you manufacture nails by machines, with steel at world rates nearly same everywhere, and one worker running 20 machines at a time, do you think you can reasonably ask for 5 times cheaper than the same nails made in East Europe for example?
Disclaimer: I am a caucasian, not a chinese
Posted by: Alain | July 16, 2008 12:59 AM
As a chinese, i have to say it's really a chaos in China imports. Importer should really understand you get what you paid for. If you after high quality products, then prepare to pay more. It's just the common sense
Posted by: Chris | September 15, 2008 9:21 AM