Govindraj Ethiraj: Lessons from China's recall episode

DOUBLE EDGE

Six months ago, over an elaborate dinner at a Thai restaurant in Shanghai, Angela described her life in China to me. She lived in a fairly tony part of the city and hit the night spots, when she got the time or had the energy. A typical day for her involved driving hundreds of kilometres, visiting factory after factory around Shanghai.

Angela is German and works as a senior quality control manager for a well-known European chain of stores. Her job involves visiting factories and suppliers in and around Shanghai as well as along the east coast of China. Every other week, she boards a China Southern flight at Shanghai's gleaming Pudong airport and flies off to the southern province of Guandong, where she visits more factories.

Spending entire days walking up and down the production lines was physically and mentally challenging, she said. Worse, according to her, "most of the factories located in and near villages have no proper toilets".

Last week I spoke to her again, asking whether the Mattel toy recall controversy had affected business. "It's not affected anything as such but we are getting a lot of questions from our German buyers," she says. Mattel recalled 1.5 million toys globally after a European retailer found lead paint in a consignment of toys.

Two weeks later, Mattel recalled another 20 million toys in the US and outside, including the popular Barbie dolls for possible danger from lead paint and small magnets, which could be swallowed by children.

A few days after the China recall, reports surfaced in the Indian media about Indian toy manufacturers potentially benefiting from the bad press about Chinese manufacturers.

Several questions, some of which have been posed already, come to mind.

First, who is ultimately responsible for the quality of the products? Second, who drives quality control? Can the firms to whom manufacturing is outsourced be "responsible" or trusted?

Third, is it possible to have error-free manufacturing? And finally, can India really benefit from the Chinese problem?

I put these questions to Angela (who spent three years in a similar position in India before leaving for China) as well as a few garment exporters in India. I got somewhat similar answers.

First, the ultimate responsibility for the product rests with the company that owns the brand. Contracts between the corporations and the suppliers clearly stipulate the materials to be used and not to be used. For instance, lead-based paint for toys or azo-dyes for garments are forbidden. The problem, as I learnt, is not with the contract. It's with the implementation. Over time, the principal as well as the supplier loses interest.

An Indian garment exporter told me how he lost a huge order a year and a half ago when a large consignment was rejected because there were some banned dyes and chemicals used in processing the cotton in the shirts. "It's not just the garments, even the buttons have to go through stringent checks," he says.

Was it his fault then? Yes, it is, he says, but the principal does not check, either. At least not always or not until they face some pressure back home, typically from environmental groups.

The Mattel example shows that the toy giant "over-trusted" its suppliers who obviously used paints they should not have used.

Angela says there is no choice but to strictly monitor the factory floors and the raw material flows. But that approach has its problems. "It's cost, cost, cost," she says. The cost of quality control is rising.

"And not every company wants to keep an expat like me on ground." The thumb rule is simple. The lower the product or per unit cost, the more difficult it is to maintain or afford to maintain control. Moreover, Angela says her visits to the smaller factories have shown that most of them just don't comprehend the safety concerns of the western consumers. "They don't understand or they don't care. You can't change that easily."

The solution she says is simple. Maintain even larger teams of quality assurance and control professionals. Ideally they should work for you as opposed to farming the work out to laboratories, which is what usually happens.

Angela feels, as do some of the Indian suppliers, that beyond a point, no third party manufacturer can be trusted to adhere to your norms, particularly when your consumers are in a totally different geography.

The flip side is that costs will balloon. After the recalls, Mattel announced a strict three-point plan for pre-shipment product checks and testing. What this will do to the margins hitherto enjoyed is anybody's guess.

Is this an opportunity for India in some way? My sense is that it's very limited. As is well known, India's biggest constraint has nothing to do with China "" it is the sad state of infrastructure. "Imagine if something were to dent China's over 20 per cent share of global textile exports. Even if they lost 1 per cent, that would mean a 50 per cent jump for us. Are we in a position to handle it," asks a fairly large exporter out of India.

And that assumes that Indians have a better reputation when it comes to consistent quality. Angela says Indians have matured, in some ways faster than the Chinese. "The problems I see today at the factories are what I saw in India six or seven years ago," she says.

This is what the garment exporter had to say on competition between India and China, "I don't know whether India has much opportunity here but I have learnt one thing. When it comes to doing business, both Indians and Chinese are the biggest jugadhus around."