August 15, 2007

The Problem of China's "Cutthroat" Competition

Link: China, Unregulated - New York Times.

What China needs is an effective and transparent regulatory system to enforce product safety standards. The United States and other countries can help with technical advice and warnings about what would happen if Beijing refuses to take it. But the dangers are too immediate to wait.

Right now it is the clear responsibility of companies that import Chinese products to guarantee their safety, and American regulators have to ensure they do it adequately. Neither is doing the job right now.

Mattel — this is its second major recall in a month of Chinese-made toys — says it imposes stringent rules on its Chinese suppliers, including what kind of paint they can use, and says it does random inspections of suppliers’ facilities. But in China’s cutthroat environment, in which the cheapest producer always gets the contract, these rules and spot checks are clearly not enough.

Companies like Mattel may need to station their own full-time inspectors with their Chinese suppliers — and make clear that they’ll take their business elsewhere if those suppliers refuse to go along.

American regulators, who are constantly playing catch-up, must also do a lot more to ensure the safety of Chinese-made goods, sending their own personnel to China to perform inspections of factories and test goods before they are shipped.

Unfortunately, the Bush administration, which disdains America’s regulatory system, has cut personnel and squeezed budgets at both the Food and Drug Administration and the Consumer Product Safety Commission, impairing their ability to monitor the quality of products made in China or, indeed, anywhere else.

At a time of ever-rising imports, the F.D.A. has lost hundreds of food scientists and field inspectors. And the White House is proposing cutting the agency’s budget next year, in real terms. The C.P.S.C., which sets safety standards for toys and many other consumer products, must inspect tens of billions of dollars worth of goods sold every year with only about 100 field investigators and compliance personnel. And it has suffered a 10 percent cut in its budget in the last two years.

Mattel should review not just its safety procedures (about which the New York Times raved less than a month ago), but also its payment policies to its suppliers. Perhaps Mattel took advantage of the "cutthroat" competition among factories in China and managed to squeeze its supplier to a rock bottom price? And perhaps this led to the supplier cutting corners to make its profit margins? Perhaps even the supplier squeezed its own input suppliers such as the paint provider, which in turn provided leaded paint? If Mattel is paying its Chinese manufacturer, say $2, for every Barbie produced, but selling them for $20, perhaps the deal is too good to be true? After all, the cost of living, and the cost of electricity and other inputs besides labor, is rising in China also.

Without doubt whoever intentionally chose to use leaded paint on products destined for children deserves the world's opprobrium, regardless of whether they felt financial pressures to do so. The blame extends further: Mattel and other American companies need to examine how they exploit the hyper-competition among Chinese suppliers; a deal that leaves no room for costs to rise or that makes it otherwise impossible to make money by producing a safe product should be resisted by American importers.

Posted by Anupam Chander on August 15, 2007 at 09:59 PM in Globalization | Permalink