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Poorly Made In China

An Insiders Account of China's Production Game

Paul Midler

Why so many Chinese products are born to be bad

THE recent scandals about poisoned baby milk, contaminated pet food and dangerous toys from China have raised questions about manufacturing standards in the country that has become factory to the world. In China's defence, it was probably inevitable that as production grew so would the problems associated with it, at least in the short term. Similarly, it could be argued that China is going through the same quality cycle that occurred during Japan's post-war development or America's manufacturing boom in the late 19th century - but in an environment with infinitely more scrutiny.

A response to both these observations can be found in Poorly Made in China by Paul Midler, a fluent Chinese speaker who in 2001 moved to China to work as a consultant to the growing numbers of Western companies now replacing factories in Europe and America with subcontracting relationships in the emerging industrial zone surrounding Guangzhou. It was the perfect period to arrive. The normal problems of starting a business, such as getting clients or providing a value proposition, do not hinder Mr Midler, who had the benefit of being in the right place at the right time.

Not only did he quickly, and seemingly effortlessly, find customers, they were delighted with what they found in China. Factories will do anything to please. Prices are famously low and production cycles short. His clients returned from their initial trips to China stunned by how quickly factories became proficient and puzzled by how much could be done so well, so fast, so cheaply. They were right to wonder.

Most of Mr Midler's work is coping with what he calls 'quality fade' as the Chinese factories transform what were, in fact, profitless contracts into lucrative relationships. The production cycle he sees is the opposite of the theoretical model of continuous improvement. After resolving teething problems and making products that match specifications, innovation inside the factory turns to cutting costs, often in ways that range from unsavoury to dangerous. Packaging is cheapened, chemical formulations altered, sanitary standards curtailed, and on and on, in a series of continual product debasements.

In a further effort to create a margin, clients from countries with strong intellectual-property protection and innovative products are given favourable pricing on manufacturing, but only because the factory can then directly sell knock-offs to buyers in other countries where patents and trademarks are ignored. It is, Mr Midler says, a kind of factory arbitrage.

The first line of defence against compromised products are the factory's clients, the importers. The moment they begin suspecting a Chinese manufacturing 'partner' and want to discover what might be unfolding is the moment they become particularly eager to find people in China like Mr Midler. That suggests they want information. But, as Mr Midler discovers, they are finicky about what is found. When suspicions turn out to be reality, all too often they become unhappy - miserable about resolving something costly and disruptive, yet terrified about being complicit in peddling a dangerous product. This is particularly true if the problems could go undetected by customers. Better, to some extent, not to know.

Aware of these dynamics, Western retailers increasingly use outside testing laboratories for Chinese products. But this too, Mr Midler writes, is more form than function, since the tests are by their very nature more limited than the ways to circumvent them. The process resembles the hunt for performance enhancements used by athletes, where a few get caught but the cleverer ones stay ahead by using products not yet on the prohibited list.

It would be unfair, of course, to see all Chinese companies in this light. A few are gaining international recognition for quality, but in contrast, say, to Japan or America, this recognition comes at a cost to the firms themselves because it is accompanied by unpopular scrutiny and compliance. This odd situation became apparent when Mr Midler witnessed large, modern Chinese factories outsourcing work to smaller, grittier, facilities even though this meant forgoing the production benefits from economies of scale. The tiny outfits were in a much better position to skirt environmental controls and safety standards for products and workers.

The obvious way to clean up this mess - and to know whether it is really as pervasive as this book suggests—is through broader disclosure, but by whom? The Chinese press is sometimes revealing but typically controlled, as are foreign reporters. Many production problems are well-known within local manufacturing circles, Mr Midler says, but collusion is rampant and there are no rewards in China for whistle-blowing. Most of the people in Mr Midler's position would not dream of disclosing what they see and many testing laboratories protect their reputation by hiding, rather than revealing, what they test. As a result, if Mr Midler's perceptions are true, the primary source of discovery will come in the worst possible way - by consumers who buy Chinese products, only to discover their flaws themselves.

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Chinese did much to adapt to the foreigners, rather than the other way round. They adopted English names rather than force you to learn to pronounce their Chinese one. The meals and food different, but not that much different to Chinatown.

The tricks they play

Inspections and certificates worthless. Managers hid problems during walk-through. Certificators never came back for surprise inspection. One factory supposed to be supplying antibacterial soap. Sent sample off to HK lab; bad news, there's no antibacterial agent in the samples. To fix the problem, the factory made up 10 mixes with varying levels of the active ingredient. One sample passed. So the factory then sent that positive result to the States where it was tested and passed, and then went back to making the soap as usual.

Early investments by Westerners in Chinese factories were just frauds. (Definition of a 50-50 JV in China is where you lose 50% of your money in the first year and 50% the next.) Then recognized that these outright frauds were bad for the economy so the were stopped. But even then, the Western investors never made any money, even though they hated to admit it

Substitute. Inferior packing cartons. Lower quality ingredients. Underfill bottles. Changing the terms. Quoted 1.9rb per unit but then invoice says 1.99rb. Quoted in feet but then supply in meters.

Go out of your way to try to make other side lose their cool. When he's confused and angry, you get to see his true intentions (and prices).

Quality Fade - deliberately reduce quality of ingredients a little bit at a time until customer noticed, and then either restore to last step, or else demand a price increase.

Americans often got things cheaper. They would bring a sample to a Chinese factory and the factory would duplicate it at a rock-bottom price to get the order. But then they would produce twice as many as ordered, and sell the surplus at a higher price, into other markets. Didn't care too much if didn't make money on initial order, because they could make it up on the hidden production.

Especially true for markets such as beauty products where new trends emerged all the time. For the Chinese factory, the American company functioned as an unpaid trend monitor, giving the Chinese manufacturer up-to-the-minute information on hot new products.

There were other longer-term advantages for producing at very low profit margins. Firstly, it impressed buyers from other parts of the world. Secondly, it put the factory in touch with its customer's customers, leaving open the chance of eliminating the middleman (and taking most of his profit).

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