Confronting China's Quality GapHarold L. Sirkin
My daughter returned to college in New York this fall. During the summer she kept many of her belongings in an off-campus storage facility. Everything was secured with a new "Made in China to U.S. quality specifications" lock from a well-known U.S. company. When we went to retrieve her stuff at the beginning of the semester, the lock wouldn't open. Though we couldn't detect anything wrong with it, we were afraid she might have accidentally bent the key. So we tried the key on another lock nearby manufactured by the same company, just to see if the key was bent. Surprisingly, not only did my daughter's key fit, it opened the other lock, giving us access to somebody else's stash. We immediately closed the other lock, since it wasn't ours, and left to deal with our problem. Fifty dollars later, with newly purchased bolt cutters in hand, we liberated my daughter's belongings. I later called the lock company's customer help line and was told they had received other such complaints about this same model of lock. They offered an apology and a brand-new lock of the same model. I accepted the apology but turned down the replacement. When we need another lock, we'll get it from another company. Quality MattersThere is a simple lesson here: Quality matters, even when you're talking about a simple, everyday keyed lock costing just a few dollars. Many companies have successfully outsourced production to China, achieving cost savings of 30% or more and quality standards equal to or even exceeding their U.S. production. These successes have not always come easy. They often have involved significant investments in quality control—building quality into the entire production system, from design to manufacture, assembly, and inspection. Some companies have focused excessively on cost savings, shortchanging quality. And as sure as Monday follows Sunday, it will eventually come back to haunt them. Two years ago, after a spate of alarming news reports and product recalls, the U.S. Consumer Product Safety Commission (CPSC) and its Chinese counterpart, the General Administration of Quality Supervision, Inspection & Quarantine (AQSIQ), concluded an agreement intended to resolve many product-safety concerns, such as the use of lead paint in Chinese-manufactured toys exported to the U.S. The then-acting chairman of the CPSC hailed the September 2007 agreement as "an important signal from the Chinese government that it is serious about working with CPSC to keep dangerous products out of American homes." The agreement also produced, according to CPSC's announcement, a Chinese pledge "to increase their inspections of consumer products destined for the U.S. and to assist CPSC in tracing hazardous products to the manufacturer, distributor, and exporter in China." Serious Problems RemainTwo years later, the safety issue is no longer in the daily headlines as it was in 2007—squeezed out, perhaps, by bigger issues—but serious quality problems remain. In August of this year, for example, more than 60% of all CPSC recalls—24 of 39—were for products made in China. The problem goes to the heart of globality. As CPSC Commissioner Nancy Bord told delegates to the OECD Conference on Corporate Responsibility this past June in Paris, "…21st century consumers everywhere find themselves using products imported from everywhere. Boundaries no longer have any meaning as far as consumer expectations are concerned. Sound corporate practices…[are needed to] protect the consumer regardless of where the consumer is, regardless of where the product was made." Christopher Tang, professor of management at the University of California at Los Angeles (UCLA), estimates that U.S. corporate outsourcing increased some 70% over the last decade. Despite the global recession and the wishful thinking of Western labor unions and protectionists, the globality trend will continue. Consumers will continue to demand a smorgasbord of products, at all price levels, and they'll continue to abandon products that don't meet their expectations. Low-cost goods will remain in high demand, but quality will count more than ever. And China and the other low-wage countries in Asia, Latin America, Eastern Europe, the Caribbean, and the Pacific will continue to produce a growing share of the world's manufacturing output. U.S. businesses, consumers, and government agencies spent $1.84 trillion on imported goods last year, the Census Bureau reports, even in the midst of an economic downturn; the comparative figure in 2004 was nearly 20% less: $1.5 trillion. This trend is irreversible and recessions and recalls will not stop the process. Corporate ResponsibilityWhat we need to stop, however, is buck-passing and buying into the false belief that government is responsible for keeping consumers safe. Government safety agencies can help, to be sure. But the real responsibility lies in corporate board rooms and with managers along the supply chain. In market economies, it's their job to provide quality products at competitive prices. And it's their responsibility to protect their brands and reputations, and monitor and manage the products that bear their corporate logos and names. It's easy enough to point fingers at shoddy manufacturers in China and other rapidly developing economies (RDEs). But frankly, when a business has quality problems, it has itself to blame. Just because a U.S.-based company's manufacturing facility or supplier is in China, thousands of miles from headquarters, doesn't mean the company isn't responsible for the quality of the factory's output. And the "Made in China" label also doesn't absolve retailers of their responsibilities. While government has a role, executives need to understand that "the market"—which requires transparency and includes the free exchange of information about safety, efficacy, quality, and price, among other concerns—works. If there are quality or safety concerns about a company's products, the market will respond. I walked away from a certain company's substandard lock. Millions of others make similar choices every day. If a company wishes to protect or recapture its reputation for quality products, it will do more than point fingers, issue apologies, and offer replacement products. Problems are rarely somebody else's fault. It makes little difference who actually produces a given product; if your company's brand name is on that product, the quality problem is yours. The lesson for global businesses is simple: You are responsible for the safety and quality of the products that carry your brand, wherever they may originate. You are responsible for testing products that carry your brand, and you are responsible too for certifying the accuracy of those tests. Don't blame your suppliers. Don't point your finger at "the Chinese," at CPSC, at AQSIQ, or at anybody else. They can't and shouldn't do your job for you. What Managers Can DoSo what should executives and managers do to accept responsibility and fix the problem? First, recognize that outsourcing from China and other low-cost countries, for all of its many benefits, also carries risks. One of the greatest of these is that quality will suffer, hurting your brand. You must guard against this at all times and invest in managers, training programs, equipment, and quality-control measures that make the words "Made in China to U.S. quality specifications" mean something. Second, recognize the fact that safety and quality are your responsibility, not the CPSC's, not China's, not your suppliers'. Any products that have your brand name on them will be judged by consumers by the same quality standards regardless of where they come from: Mexico, China, Michigan, or Ohio. Consumers have expectations and many choices. If you let them down, they'll go elsewhere. Third, recognize the fact that the Chinese, like the Japanese and South Koreans before them, will get very good at what they do—and will, as they advance in quality and technique, become your competitors. This is already happening in some industries. Remember, it wasn't that long ago that Sony (SNE) was seen as an upstart, and LG (LGLG:GR) and Samsung were unheard of. Today they are all global leaders, known for producing some of the highest-quality products in the world. Focusing on quality, then, helps keep you ahead of the competition, even as the competition advances. Today's corporate executives need to have eyes and ears everywhere. They need to manage aggressively to eliminate unnecessary risks and reduce quality defects. They need to understand that investing in quality is investing in their company's future. The era of the global supply chain is here. Live with it; manage it; take responsibility.