February 2008 Archives

THE issue of 2007 must have been Quality Fade. A huge proportion of last year's China-related media coverage and all the consequent spats and convulsions flowed from some lead-painted toy, toxic pet food or other faulty products that had the label Made in China on them.

And the random reduction in quality of some Chinese products, which the whole world uses...(except probably soon for Martin Richenhangen, whose leading tractor-making company has been consistently prevented by Beijing from attaining a majority stake in a Chinese state-controlled company. From FT.com, Richenhangen slammed Chinese manufacturing for, among other things, its obsessive copying of other companies and for not working hard enough) ...fosters a sense of foreboding about the quality of future supplies, which could at any time fall prey to short-term planning by Chinese factories.

What makes the phenomenon of Quality Fade so interesting is the seeming deliberate malfeasance inherent in the process, and how this illuminates the interplay of economic conditions in China. The term was coined last year in the wake of a host of product quality issues by Paul Midler (audio interview at China Talk Radio here) who described it as the deliberate and secret habit of widening profit margins through a reduction in the quality of materials...(W)ith each successive production run, a but more of the necessary inputs are missing. Seeking cost savings, suppliers push the limits until they are caught, or until disaster strikes. As manufacturers in China are subject to a government able to act without restraint or controversy, factories operate with a sense of urgency, hence they have become excellent at the 'short game' to compete at the lowest prices in order to ensure profitability over the short term.

Midler's views elicited a host of responses. While acknowledging quality fade as a problem in China (telling his customers that the fade usually sets in with the fourth shipment), Dan Harris at the China Law Blog saw a less gloomy outlook as the product situation in China is slowly improving and will continue to do so as China's economy evolves. Quality fade is driven by economics, he argued, and occurs in order for Chinese manufacturers simply to survive for a few more months in the face of currency re-evaluation, competition, tax reform and the end of VAT rebates. In addition, much of what is described as Quality Fade Harris sees as inevitable odd mistakes resulting from the increase in products produced in China, and instances of bad products are by no means confined only to China, despite that the media have created a frenzy about faulty products sourced from China.

At Smart China Sourcing, David Dayton recently outlined two types of Quality Fade, the willfully dishonest variety described by Midler, and a more common 'natural' quality fade over time, the result of an inadvertent slide in various aspects of the manufacturing process, such as standards, production equipment, testing procedures and instruments, and so forth. Yet ultimate responsibility for ensuring product quality, Dayton argued, lies with the buyer to remain diligent in maintaining quality control. Importers are often hypnotized by the opportunity and hospitality offered by China, and under the China sourcing spell, we too often check our good sense at the door.

Quality Fade starts with the supplier, Dayton posits, but ultimately has to stop with the buyer, who holds the final responsibility. A straightforward solution to either type of Quality Fade is to hire third-party inspectors, who should catch many of the problems. Another solution is to build your own production facility and hire and train your own staff, although this could take years and a lot of money. Yet the bottom line is, according to Dayton, at some point you must have a degree of trust with your supplier... Trust but verify is excellent advice, but verification will never be 100 percent. Some element of your QC is necessarily left to trust in the relationship.
The People's Daily on Tuesday proclaimed that China and the E.U. were leading the 'Third Industrial Revolution,' a view espoused by Jeremy (or Jereny as horrendously misspelt in the article) Rifkin, an economist and author of 17 books on environmental, energy and economic issues. The E.U. and China, Rifkin posited, have made binding commitments to renewable energy. For its part the Chinese government pledged to have renewable energy rise to 15% of all energy consumption by 2020, which would supposedly make it a leading light in the so-called Third Industrial Revolution.

Facing menacing environmental concerns and eager to present itself as a progressive nation in sync (or harmony if you will) with the environment, China has invested in more environmentally-friendly policy initiatives (such as tax breaks for makers of greener products) and in providing technological support for developing efficient and sustainable energy from renewable sources (see description of report on China energy industry). Yet the impact of global supply chains on economic, social and environmental conditions in sourcing countries remains a battleground in the debate on corporate social responsibility.

In China, a slew of recent unsettling instances ranging from product quality and safety issues to cases of slave labour have, however, intensified pressure for ethical and sustainable sourcing. Ethically-sourced products, moreover, are moving into the mainstream, and market research has indicated that customers are increasingly seeking out greener products. A survey (see also summary here) conducted in 2007 of shoppers in 15 countries found that more than half of global consumers prefer to purchase products and services from a company with a strong environmental reputation. Shoppers in China, by the way, reported the greatest interest in environmentally responsible purchasing, with 67% preferring greener brands.

So if the customers want it, then surely they must be given it? Starbucks (and more recently Wal-Mart) famously put their best foot forward when the company implemented a scheme to pay farmers handsome prices for their crops, forging long-term relationships with them, offering technical support and contributing to social development programmes (see Food Production Daily article). There is undoubtedly a toll to pay for companies treading the path of sustainable righteousness, yet as added costs and the maintaining of ethical standards and codes of conduct are swallowed up in the unassailable trend of sustainable sourcing, we will advance further down the road of the imperative.

In a publication entitled Beyond Monitoring: A New Vision for Sustainable Supply Chains, the organization Business for Social Responsibility recently put forward a new organizing framework for companies to ensure ethical supply chains. Seeking to integrate labour and environmental considerations more fully into companies' procurement efforts and to re-emphasize the role of workers and governments, the framework rests on four pillars:

  • Buyer internal alignment of purchasing practices with social and environmental objectives
  • Supplier ownership of good working and environmental conditions in their workplaces
  • Empowerment of workers who take a stronger role in asserting and protecting their own rights, and
  • Public policy frameworks that ensure wider and more even application of relevant laws
So while we may think of the immeasurable ways the first two industrial revolutions changed our world and our planet, bringing great advances in our standard of life as well as damage to our environment, all I'll say is BRING ON NUMBER THREE!  
China's strength lies in its workers. Millions of migrants leave their homes and villages to work in factories and cities at low wages, for long hours, making the products that are snapped up and sent to every part of the globe. It is an unbeatable process that has been instrumental in catapulting China to the verge of superpower status as the 21st century unfolds. Most of these workers can expect to see their families only once a year, when they have to brave the spring break rush, which FT.com depicted on Thursday as the world's largest human migration (bigger even than the Islamic Hajj pilgrimage). Yet the worst snow and ice storms in 50 years have played havoc with China's power grid and transportation network, meaning that millions of migrant workers in southern Guangdong province greeted the start of the year of the rat still away from their homes. Desperate to relieve the strain on the country's rail network, the Chinese government attempted to entice workers to cash in their tickets and return to their factories for the holiday. Overworked, underpaid, and now even deprived of their holiday, China's migrants can take a bow.

In the face of such challenging conditions Chinese labor organization is politically weak and largely unorganized; the most explosive labour grievance in China, however, is simply not getting paid. Workers will endure very demanding conditions and the lack of independent unions, as long as they get paid, yet rampant problems of nonpayment of pensions and wages have led to persistent unrest among migrant workers. In its 2007 report on the Workers' Movement in China for 2005-2006, The China Labour Bulletin concluded that
China's workers' movement in 2005-2006 was characterized by continued disputes and protests by urban workers laid off from privatized former SOEs and also predominantly by migrant workers in the private sector... [T]he inability of the government and unions to enforce the law or effectively implement their own policies meant that the lives and working conditions of workers across the country for the most part failed to improve; indeed for many workers, the situation worsened... For migrant workers employed in the private sector, disputes and protests arose largely from specific and blatant violations of their rights. The single most important cause of labour disputes in this period was the failure of management to pay wages on time. Often an entire factory could go for months on end without being paid, and this led to widespread strikes, protests and street blockades.

Interestingly, Ching Kwan Lee* contended that although Chinese workers are aware of their common predicament and aspire to legal rights as citizens, they find the public identity of the "unprivileged masses" the most empowering and effective:
[T]he mode and logic of worker activism in China deviate from what are conventionally conceptualized as class citizenship struggles. Chinese workers' cellular activism is predicated not on horizontal social solidarity or the idea of a judicial, rights-bearing, individual subject, but on the moral and economic entitlements of the subordinate masses in a hierarchical political community led by the central state authority. As disadvantaged masses, workers want more, not less, state intervention and regulation to restrain the market.

Eventually China's seemingly endless supply of migrant labourers willing to work for long hours and low pay (and without even Spring break holidays) will recede. In fact, China Success Stories has listed rising labour costs as a major reason why souring from China will be more expensive in 2008, and FT.com on Tuesday quoted the chief financial officer of Hasbro (the world's second largest toymaker) saying the company expected a 14-15% increase in the costs of made-in-China products in 2008 due to higher labour-, commodity- and currency costs.

So at least China's migrants are getting a bit more pay, IF they get paid at all.  

* Ching Kwan Lee, "Made in China": Politics of Labor, Law and Legitimacy, Woodrow Wilson International Center for Scholars, Asia Program Special Report, No. 124, September 2004. (link      

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