Viewpoint – Top Five China Recall Lessons

Viewpoint – Top Five China Recall Lessons
(Industry Week)

Kick an anthill, you find ants. Dig a ditch, you find dirt. Inspect Chinese imports, you find defects.

You're muttering amen if you've ever done business in China. Unfortunately, disruptions and defects are the norm there, not the exception. We can expect more product recalls, from more companies in more industries, if only because we're finally looking.

Don't be the next Mattel. The trick is not to learn from experience, as Warren Buffett says, but to learn from other people's experience. Here are five lessons to consider.

1. Pride goeth before the recall.

If PR is a window on the corporate soul, then Mattel's publicity reveals a complacent giant, just weeks before the massive recalls hit. In a feature profile last July, the Internal Herald Tribune (IHT) portrayed Mattel as the gold standard in China manufacturing. Mattel had invested in China "before it was cool" and had the game beat, piped experts and Mattel's own staff.

A few weeks later, they were recalling millions of toys.

RC2 got complacent, too. After years of China sourcing, they just assumed that their contractors and subcontractors would keep delivering goods that complied with specifications.

The time to worry is when you've had some success under your belt. Conditions in China mutate daily, and no system is impregnable. Keep checking for breaches in your defenses. Don't assume that what happened yesterday will happen again tomorrow.

2. What you don't know, can hurt you.

Mattel owns majority stakes in more than half its China suppliers. What did that get them? As they say in Mandarin, bubkes. Clearly, ownership will not improve your oversight. Visibility will. Remember Mighty Mattel got blindsided by puny subcontractors.

Since a typical Chinese supply chain has sixteen parties or more, you've got to get a handle on who takes title of the goods and materials along the way. That's the first step in mitigating performance risk.

Map out the players in your chain. Then once you've established the lay of the land, try to stay alert to the shifting sands. In China, factories close in the middle of the night and move away. A subcontractor in your line-up may have been swapped for another without your knowledge – and it's that guy you need to be worrying about.

3. Don't rely. Verify!

I met a man who imported chairs from China. Containers would arrive piled high with chairs that broke when you sat on them.

No amount of clarification of the specs would do. The defective chairs kept coming. So the man institutionalized the Tush Test. If he hadn't sat on it first, the chair didn't pass inspection. While you don't need to be that, uhm, anal, the lesson here is that on-site verification at key points in your production cycle is critical to success.

Unfortunately for Mattel, headquarters relied on the QC reports from hindquarters. There was even a local Chinese manager on staff, specifically tasked to monitor the lead levels in paint. He was singled out in the pre-recall IHT article. (I'd hate to be that guy right now.)

Don't rely on inspection reports. Go see for yourself.

4. The world ain't flat.

Flat Worlders get their heads handed to them in China. Mattel thought it could run a plant in Guanjo as if it were in Gary. RC2 thought it could beam files to design engineers in Dongguan, then sit back and wait for quality merchandise to roll out of its 35 Chinese contract manufacturers.

In a flat world, these procedures could have worked. But I.T. is not the great leveler the pundits preach it is. So you can Skype an engineer on the plant floor. So what? You can't run your China supply chain from the click of a mouse. In China, paper, not packets, is still the dominant mode of information delivery and storage.

If anything, technology brings the chaos of China's operating environment right into your living room. And it's an ilk of chaos you've probably never encountered before. Just because Americans and Chinese both embrace the profit motive doesn't mean our fundamental assumptions about doing business are aligned. Bedrock concepts in the West that underpin contracts, financial reporting, and corporate governance – the very way we do business – are still quite new in China and have yet to be assimilated.

There's no parity in China and there's no flatness. To assume otherwise is to court disaster.

5. Opportunity knocks.

If it's still a crapshoot to make a Barbie doll in China that complies with specs, try building a car. Sure, the recalls have exposed a few companies that need to do a better job at QC, but Mattel and RC2 can improve. The real take-away from the outbreak of product recalls is just how far China still has to go before it can rival American industrial capability.

While China catches up, its consumer markets are booming. China's middle class already numbers over 160 million people. These new, urban consumers want all the amenities of a modern, middle class existence – or put another way: they want all the value-added goods and services that China is not good at making and that we're number one at making.

This basic congruence points to why China today is, far and away, America's fastest growing export market. Many U.S. industries – from raw materials to semi-finished to finished goods – are seeing double digit quarterly export growth to China.

And with the falling dollar making your goods even cheaper to sell overseas, now more than ever is the time to get in there. In China's growing consumer class, we have a once in a century windfall opportunity to make money and create jobs here at home.

As more and more products get recalled in the coming months, resist the urge to lean back. The lessons the recalls impart, you can take to the bank.

Jeremy Haft is the author of "All the Tea in China: How to Buy, Sell, and Make Money on the Mainland" (Penguin/Portfolio, 2007) and founder of BChinaB Inc, a China contract manufacturing and logistics firm.