China Law Blog

Paul Midler, who coined the phrase, "quality fade," has a new blog called the China Game where he appears to be focusing mostly on China product quality issues. He has a post up entitled, "The New Bugaboo: Low Prices," where he argues the absurdity of blaming China's quality control problems on foreign companies seeking low prices. I agree and I disagree.

Here's Midler's summary of a couple of articles he sees as wrongfully excusing China:

Consider yourself in this situation: You ask someone to run to the store to buy you a candy bar, and you give him more cash than necessary. Keep the change, you tell him. The guy gets to the store and decides to shoplift the candy bar instead of paying for it. Are you responsible for this person’s unethical actions?

In an article titled “China Pays Steep Price As Textile Exports Boom”, the Wall Street Journal suggests that companies like Wal-Mart, Nike and Liz Claiborne bear responsibility for the unethical behavior of their suppliers. I had to read that one twice. The supplier is polluting, but the customer is to blame. No multinational ever suggested to its supplier that it pollute. That decision was made on the supplier side. And if the supplier felt pressure from “ever-lower prices”, it could have asked for a higher price.

McClatchy ran with “U.S. Businesses Share Blame For China Toy Recall” where the suggestion is also that we are to blame. All those recalls, you see, they were the fault of importers who had the audacity – the nerve - to source products at a competitive cost. The idea that price pressure is to blame is very much appreciated by Chinese suppliers, by the way. No matter what they might be criticized for in the future, thanks to arguments like this one, they can say that the devil made them do it. Got caught orchestrating quality fade? Found to be a major polluter? Treating workers poorly? “Wasn’t me,” they’ll say. “It was those damn low prices!”

Midler sees all of this as ridiculous because the goal of buying low and selling for what you can get is nothing new -- it's business the way business has always been done. He goes on to point out that China is in the midst of an economic boom and it is hard "to sympathize with suppliers who say they have fallen on hard times after learning of the supplier in the Mattel case" who is "worth over $1.1bn."

Midler then criticizes those who are saying "we can make all our problems go away by paying factories more." As Midler sees it, paying more money to a supplier who has behaved unethically sends that supplier the wrong message. He also doubts that someone who behaved unethically at $1.00 per unit will behave ethically at a $1.10 per unit.

Midler then proposes the following "solution":

I have a novel suggestion. Let’s look at unethical actions for what they are and not excuse bad behavior. It is not low prices that are to blame, in any case.

In typical lawyer fashion, I agree with Midler and I disagree with Midler. Everything he says is right, but only to a point. Certainly, his prescriptions are what I would teach and do teach my children and even my own employees. But, his so-called solution, though morally comforting, is not really a solution at all.

I just returned from a first rate Lexis/Nexis conference where I spoke on what foreign companies must to do prevent bad Chinese product. I focused on three things: 1) choosing the right partner, 2) using a good contract, and 3) constant quality control monitoring. During my talk, I discussed a new client who proudly relayed how his Chinese manufacturer had never raised prices on his product, even though the price of a key raw material had increased more than 30% in the last two years. He even remarked that he did not know how the Chinese company had been able to hold the line on its prices. I told him I knew how and I bet him that a test would show the Chinese company was using less than the required amount of this material in the product. I won the bet.

I also spoke on how in nearly all cases where foreign companies have come to my firm wanting to sue their Chinese manufacturer for bad product, the foreign company has been at fault for having either used an unqualified manufacturer in China, having failed to specify sufficiently the requirements of the product, or having failed to monitor its Chinese manufacturer. In every case I have believed the foreign company could have done more to have prevented the problem.

At the same time, I am by no means absolving the Chinese companies of wrongdoing. Indeed, in every case discussed above, I have felt the Chinese company was at fault as well. But, if you are a foreign company doing business in China you have to know by now that you simply must do more than just order your Chinese manufactured goods; you have the responsibility of protecting your company from bad product.

Should Chinese companies be doing more to produce good product? Of course. Should we be discussing the ethical issues involved in product production? Go right ahead. But if you as a foreign producer/importer want to be able to do more than just claim the moral high ground when things go wrong with your Chinese product, you have no real choice but to do everything you can to protect yourself from bad Chinese product and leave the moral debates to others.