Chinese Product Recalls Illustrate Importance of Ethics in Offshore Relationships

Ann All

While geographic barriers these days don't present much of an obstacle for global companies that wish to do business with each other, cultural barriers may be another matter.


Sure, there is periodic concern when differences in what is considered "ethical" among trade partners result in unwelcome media attention. Remember the heat that Wal-Mart and Kathie Lee Gifford took when a flurry of stories emerged concerning the dismal working conditions in overseas factories where Gifford-branded clothing was produced?


Yet corporate ethics remains largely an abstract "big picture" concept that gets short shrift in contract negotiations -- and in ongoing management of supplier relationships. This disconnect is coming keenly into focus with the growing unease over numerous product recalls involving goods produced in China -- from pet food to children's toys to tires to toothpaste.


China's offshoring star continues to rise -- despite a problem that the author of this fascinating Knowledge@Wharton article calls "quality fade:" Chinese manufacturers' deliberate dilution of quality in the name of boosting their profit margins.


Quality fade is enabled by several key dynamics, notes the author, a businessman with 15 years of experience in China. And suppliers and their customers share the blame.


Some U.S. customers appear more willing to risk poor quality -- or even dangerous -- products than the more immediate loss of competitive advantage they could suffer by cracking down on suppliers. "The chance of a product failure is usually remote, but the penalty for late delivery is an almost certain loss of business," writes the author.


In an effort to keep the best suppliers to themselves, customers don't share details about their experiences -- good or bad -- with other customers, which makes it fairly easy for unscrupulous suppliers to evade detection.


Fearing intervention from the Communist government and/or outside groups like the World Trade Organization, Chinese suppliers are eager to profit before the boom goes bust -- even if that means scamming customers.


China has a long record of looking the other way, although that may be changing. The government is adopting a tough stance on enforcing product quality guidelines, dramatically illustrated by its recent execution of the head of its food and drug safety agency.


And Western companies are pushing reform to help protect their business interests in China, the EVP of IT services firm DarwinSuzsoft told IT Business Edge in a May interview, Western Influence Boosts Outsourcing Opportunities in China.


Though his remarks specifically address the issue of intellectual property in software development, it seems to us they could also apply to other ethical concerns:

The multi-nationals have come in and really cracked down on the government in terms of protecting their investments in China. And the WTO and other spotlights on China have helped guide China's position. Last year, they had the highest judicial claims on record for infringement. So that means they are now actually prosecuting cases.

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