Poorly Made in China: Challenges for Auto Exports

(MoneyWatch)  Talk about a wake-up call! As Chinese automakers such as BYD ("Build Your Dreams") prepare to sell cars in the U.S. as early as this year, I was intrigued to come across Paul Midler's Poorly Made in China (Wiley), named one of the best business books of 2009 by The Economist. Midler's account has credibility not only because he lives in China and speaks Chinese, but because he also has more than 15 years experience working on the intersection of American importers and Chinese manufacturers.

The book recounts numerous incidents in which factory owners appear more interested in covering up product safety challenges than addressing them. Midler watches as a worker with a serious skin condition fills hand lotion bottles, then asks the plant manager about it. "How is anyone going to find out?" she replied.

"In my time as a manufacturing specialist, I've worked with hundreds of factories," Midler said from Hong Kong. "As far as why I wrote the book, I suppose that certain things I'd seen made a strong impression. While there were thousands of others working in manufacturing, no one seemed to be able to describe what was happening. After a while, I began to recognize patterns. It would have been more prudent to stay in manufacturing, but after a certain point, I felt it would be better to tell the story than to go on living it."

Midler's book is well-timed, because of the melamine scandals involving tainted Chinese products, from toothpaste to toys. China's General Administration of Quality Supervision, Inspection, and Quarantine responded to the first wave of recalls with a long-overdue product recall system. The most recent melamine scandal involved, announced today, involves the recall of 170 tons of contaminated milk powder. Melamine, a chemical used in making plastics, can make the protein levels in milk appear higher.

BNET Autos: Your book posits a less-than-scrupulous attention to quality control and consumer safety issues on the part of Chinese manufacturers. Given Toyota's current problems, what does this augur as Chinese carmakers prepare to enter the U.S. market? Paul Midler: China most certainly does have a quality challenge. Some of the problems there are due to error, and some are due to a lack of education. The factories would like to do a better job, but they are prevented from doing so due to external factors. Unfortunately in China's case, there are also instances of willful misconduct. The melamine cases involved unscrupulous actors who found a way to circumvent third-party testing controls. This was not a mere accident, but an artful effort. I'm not sure whether China's automotive ambitions might be hampered more by accidental failures or willful manipulation, but there has already been talk in China of quality issues in the automotive sector.

Do you have an opinion on the build quality of Chinese cars? Any that stand out as particularly well built or particularly shoddy? I think that it's a little early to pick horses, but as with all Chinese manufacturing, those companies with a vested interest in protecting their brands will tend to do better than others. China's automotive industry, like so many other sectors, is characterized by intense competition. Already intense competition has been blamed for pricing pressure, which in turn led to a number of quality problems. One thing to keep an eye on will be the general competitiveness of the auto sector in China.

Does China have a consumer safety agency? Anything akin to the U.S. National Highway Traffic Safety Administration (NHTSA)? I'm not familiar with the agency names, but Chinese car companies do test their products. I'm not aware of cases involving the auto industry, but you do get some falsification of documents in China. Anyway, even if China doesn't do a good job of testing its cars, most importing nations have rigorous tests that must be conducted. Chinese car companies will have to learn how to meet safety standards in order to match the level of quality that foreign markets expect.

Have recalls become a routine part of doing business for Chinese industry? Are recalls ordered by the government? Are there financial penalties? There is less of an inclination to recall products in China. I remember some of the recent recalls involving Japanese autos--prior to the accelerator pedal and braking cases. The response in China was more shock than comfort. Consumers ought to be comforted that auto companies are proactive in the area of recalls.

Just look at all of the major quality scandals that have come out of China since 2007. In too many cases, consumers were falling ill before anyone was willing to consider taking action. People have complained that it took Toyota a little time to get moving on their massive recall, but they did it. China's response to the new melamine cases has been shameful by comparison. They threatened their own journalists, warning them not to report details on the case. As far as penalties go, China executed two individuals involved in the 2008 melamine scandals, and now China is looking to remove hundreds of tons of melamine in the new cases.

When a product has defects on the Chinese domestic market, how is it generally handled? Do companies issue press releases? Chinese companies do not tend to issue press releases. While you could say that companies around the world are inclined to hide bad news, in China companies are even less forthright with information. The good thing about China is that its grapevine is fairly robust, so news gets out one way or another. Once consumers learn that something is going on, the press will report on it. This is the approach to openness in China.