The Danger of Low Price at Any Cost
In the past few months, a number of health and safety problems with goods coming out of China have been making headlines. Pet food containing wheat gluten; toothpaste containing hazardous materials; children’s toys coated with lead paint; and most recently, defective automobile tires, have all found their way into the US market. While it may come as a shock that such clearly unsafe products can infiltrate the US markets, I am surprised, quite frankly, that it hasn’t happened more often.
Every year, hundreds of billions of dollars of goods are being exported from China to the US. These include everything from food items to toys, clothes, electronic goods and auto parts. A substantial portion of these products are manufactured by multinationals with operations in China, or by a growing number of Chinese companies that have adopted the latest manufacturing practices and adhere to international quality standards. However, a significant portion is also manufactured by state-owned enterprises or the hundreds of thousands of small, privately held companies that have sprung up in recent years which have no concept of either. To them, the US and other developed countries represent a virtually unlimited market for their products—as long as their prices are low enough, that is.
On the other side of the ocean, importers and distributors see a way to gain market share by offering low prices, and have tapped into an endless supply of hungry manufacturers in China, anxious to gain access to the large developed markets of the West. Given the large numbers of potential suppliers—Ted Fishman, author of China, Inc, estimates that there are 85 million private companies in China, more than three times as many as in the United States—competition is fierce, driving margins and prices to the bone.
Given this dynamic, it is no wonder that defective goods are getting into the hands of unsuspecting consumers. With serious health and safety issues at stake, it is not enough to criticize the manufacturers in China. Importers and distributors must accept their share of responsibility and stand behind the products which they sell.
Take the case of tires. On June 26, the Wall Street Journal reported that a fatal auto accident had raised concerns about tires imported from China. The tires were manufactured by Hangzhou Zhongce Rubber Co. and distributed by Foreign Tire Sales Inc. (FTS), located in Union, New Jersey. It seems that a thin layer of rubber, known as a “gum strip,” which is added between the steel belts in a radial tire to give it added durability, was eliminated. The result, the treads separated, the car crashed and two people were killed and two were injured.
Who’s to blame? Certainly, Hangzhou Zhongce if the allegation that the gum strip was missing is true.With rising raw material prices and little give on price, eliminating the gum strip may have been seen as a way to cut costs—to disastrous effect. Even if the allegation is not true, a company’s production system must be sufficiently robust to enable it to determine the actual root cause of the failure, and then identify any other parts in the system that may also be a risk. “Traceability” is a key requirement for manufacturing in today’s global economy, but it doesn’t seem to have been an objective in Hangzhou.
But what about FTS? Did they audit Hangzhou Zhongce’s facilities to determine that its manufacturing methods meet international standards? If they are selling safety critical items, don’t they have a responsibility to do so? Now that a problem has been identified, it is imperative that similarly defective tires are recalled. But, FTS admits that it cannot afford the $64 million cost of a recall. How can a company sell such products, but not have the financial resources through insurance or otherwise to protect the consumer if a problem occurs? Hangzhou Zhongce is not alone in acting irresponsibly—there is plenty of blame to go around.
The fact is that the drive for low price at any cost, and China’s emergence as the workshop to the world, are powerful forces. They are a large part of the reason why the world has enjoyed low inflation, despite strong economies everywhere. But, responsibility exists on both sides of the ocean to ensure that the consumer doesn’t pay the ultimate price for this prosperity.