How a Chinese supplier's bad decision turned into one importer's worst nightmare, and may mean the end of his business
Richard Kuskin was sitting in the dingy basement office of his Union (N.J.) import firm one day in May, 2006, when the phone rang. One of his distributors in New Mexico was on the line. There had been an accident involving an ambulance riding on Chinese-made tires sold by Kuskin's firm, Foreign Tires Sales Inc. The tires had blown out, causing the driver to lose control. No one was hurt. Still, the incident scared Kuskin. For several months he'd had a nagging feeling that his Chinese partner, Hangzhou Zhongce Rubber Co., had cut out a key safety technology. For Kuskin, the ambulance incident was like a flashing red warning light.
After hanging up, Kuskin called his engineer, Gary Eiber, and dispatched him to New Mexico with instructions to inspect the shredded tires. Then Kuskin called a product liability attorney. Kuskin knew the costs of a recall could crush his company, which has 13 employees and last year sold just 700,000 tires. He also knew that getting Hangzhou Zhongce to pay for some of the recall would be hard. Chinese companies aren't legally obligated to execute U.S.-ordered recalls, and, says Kuskin, his supplier was denying there was a problem. "I didn't sleep too good that night," he recalls.
There were more sleepless nights to come. Over the next few months, consumer complaints about faulty tires made by Hangzhou Zhongce and sold by Foreign Tire and several other companies trickled in. There were more accidents, including a fatal one that has sparked a lawsuit and prompted the Feds to recall 450,000 tires. The National Highway Traffic Safety Administration (NHTSA) is now weighing an investigation into whether FTS moved quickly enough when the first tire defects were reported. NHTSA is also looking into whether other tire distributors have also sold potentially faulty tires manufactured by Hangzhou Zhongce.
With the very real prospect that his company could go under, Kuskin has sued his Chinese partner in federal court for fraud, breach of contract, and recall costs. Hangzhou Zhongce, which declined to comment, has retained legal counsel and hired a Washington public relations firm. The Chinese company recently posted a statement on its Web site. It reads in part: "Until now we have not found the claimed defect as described by FTS. We believe our tires' quality is good."
The Foreign Tire saga reverberates well beyond the world of cheap replacement tires. Companies selling everything from toothpaste to toys to all-terrain vehicles rely on mom-and-pop outfits much like FTS to import products from China. In most cases, the federal government expects these firms to monitor and test goods for possibly dangerous defects. But the reality is that many small importers have limited resources and testing capabilities, and face only minimal requirements to perform tests. Kuskin, for his part, acknowledges that though his company tested tires, until the recent crisis the process was random. "It's so important for U.S. manufacturers and importers to test and inspect anything they buy overseas," says Sally Greenberg, a senior counsel with Consumers Union. "It's not so cheap to source to China when you have these quality issues."
Kuskin began buying tires from Hangzhou Zhongce in 1990, and has been riding the Chinese import wave ever since. The number of Chinese tires imported to the U.S. has grown quickly in recent years, growing fivefold to 32 million a year, or about 10% of the market, since 2000. Most are cheap replacement tires that sell for $100 or less. A company like FTS typically approves the manufacturer's design and mandates certain specifications. FTS sells to wholesalers, which in turn supply retailers. A consumer can find tires made by Hangzhou Zhongce under brand names like Vesta, Goodride, and Chaoyang at outlets large and small.
Kuskin seems shell-shocked, and gets defensive when telling his story. The 59-year-old entrepreneur is quick to say he's had only one other minor recall in 19 years. And though it didn't help, he expresses pride in the testing his company does, which he says involves driving tires for 40,000 miles for 40 days on hot Texas pavement. After that, the tires are sent to a lab, where they're analyzed for wear and breakdown. The test costs about $40,000, he says, and is not required by the Transportation Dept. "When these tires are made right," says Kuskin, "they're as good as any tire in the world."
But clearly some of them weren't being made to FTS's specifications. The first sign of trouble came in October, 2005, when FTS spotted a "sharp increase" in consumer claims. Kuskin says he didn't hear about a single accident and argues that there were claims on only 0.5% of the tires. That may seem small, but one major tiremaker says it considers warranty claims on more than 0.5% of one model to be "on the high side," and even when the number exceeds 0.1% "it starts drawing attention." Kuskin says he submitted the data to NHTSA and that it didn't see an issue either. "I wasn't in tune to the fact that this could be a big problem," he says.
But his engineer, an industry veteran, was suspicious that the tires weren't being made properly. And after the May, 2006, accident in New Mexico, Foreign Tire started asking pointed questions of its Chinese supplier. Eiber wanted to know if Hangzhou Zhongce was using a 0.6-millimeter gum strip—it prevents a tire's steel belts from separating from the rubber—in every unit. Kuskin says the company told Foreign Tire that the tires were fine. But when Eiber took apart the tires from the New Mexico ambulance company, he found no gum strips. Foreign Tire pressed Hangzhou Zhongce about the missing strips, but says its executives responded that the tires were not a problem.
It was time for a face-to-face meeting. Kuskin, Eiber, and the FTS's attorney flew to Hangzhou in September, 2006. Over three days of meetings, Kuskin says, they talked about problems with the tires, the possibility of a recall, and asked for documented test results that would prove the tires were safe. Then Kuskin says he pressed the Chinese to take responsibility for the recall and replace the defective tires. They listened, he says, but were noncommital.
The trip did unearth one revelation, Kuskin says. Hangzhou Zhongce told him that its chief engineer had decided to stop using the gum strips, which the company has since confirmed. Apparently the man didn't understand the significance of the technology, Kuskin says. "There is one engineer responsible for this whole mess," he adds. "That's the guy I am absolutely furious with."
Over the next few months, Foreign Tire says it sent six e-mails to Hangzhou Zhongce asking for information on the tires and help with a recall. On May 30, Kuskin wrote: "Problems do not go away because they are ignored. We notified you of two quite severe problems. I have heard nothing or very little on these subjects." Hangzhou Zhongce, says Kuskin, never directly responded to his questions. Nor, he says, would it say which tires lacked gum strips so FTS could recall them.
FTS decided to do more testing. It asked a tire distributor in Maine in early January of this year to find a few Hangzhou Zhongce-produced tires that were made in 2005. It took the Maine firm six weeks to find the tires and ship them. Kuskin sent the tires to Texas for another endurance test. After 20,000 miles, the tires failed. Kuskin got the test results on May 10.
A few days earlier, Foreign Tire was sued over a fatal wreck that had occurred in August, 2006. A van using FTS tires crashed on the Pennsylvania Turnpike. Two people were killed and another has serious brain damage. "It wasn't a good day for me," says Kuskin. On June 11, Foreign Tire alerted NHTSA about all of its findings and the government ordered a recall. NHTSA sent the importer a letter on June 26 saying the company's inability to afford the recall, which Kuskin estimates will cost $90 million, is "not acceptable." For its part, Hangzhou Zhongce says the tires aren't defective and questions whether a recall is even necessary. Attorneys for the Chinese firm met with NHTSA on July 11 and asked for a chance to prove that its tires are safe, says a person familiar with the meeting. The company also says incorrectly sized tires may have played a role in the fatal accident.
Meanwhile, the attorney representing the victims of the Pennsylvania crash is gearing up for a major legal battle. Jeffrey B. Killino, who works for the law firm Woloshin & Killino in Philadelphia, plans to make the case that Foreign Tire waited too long to issue a recall. "I'm going to build a case that they should be criminally indicted," he says. "It was my case that prompted the recall." Kuskin denies he waited too long to alert NHTSA and says his tires not only meet government standards but also that his firm volunteered that the tires failed its own more stringent tests.
As he ponders his future, Kuskin says he is trying to apply the lessons he has learned from his experience. "We didn't have a formal schedule" to test tires, he says, but now the company tests one a month. Kuskin also plans to write new contracts that would obligate Chinese manufacturers to help pay for future recalls and ensure that disputes are settled in Hong Kong, where the legal system is more sophisticated than China's.
As he takes out ads in newspapers urging consumers to turn in their recalled tires, Kuskin harbors hopes of making his Chinese partner pay. He says he has had "reasonable conversations" with the U.S. law firm recently retained by Hangzhou Zhongce. "We intend to be made whole by Hangzhou," he says.