Product Toxicity and China: Insights for Investors

Wednesday, December 12, 2007 10:49
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Focusing on the difficulties of transparency within the supply chain, Melissa Brown of Association for Responsible and Sustainable Investment in Asia (ASRiA) sat down for an interview covering a lot of the angles surrounding the integrity of supply chains in China.

I highly suggest taking your lunch break to watch the 15 minute clip, and then think about some areas you feel may be at risk within your supply chain. I have listed the 7 questions she was asked along with a few bullets on what she said… and added a few thoughts of my own in italics

[youtube width=”425″ height=”335″]http://youtube.com/watch?v=94kzlYsYee0[/youtube]

Questions asked during this clip are:

1) How easy is it to get details about Asian companies?
– Need to have a sense about what is know and how to compare
– Need to use different tools – policies are not set the same way, available resources can be limited

Getting information about Chinese firms is not terribly difficulty, it is about time and the amount of money one is willing to spend. One can approach firms from different angles, as a buyer, as a supplier, through a friend, through Alibaba.. you can even stake a factory out for a week. But it all comes down to how much time you want to spend, and the budget you are willing to allocate

2) Can a big buyer like Wal-Mart simply demand nontoxic products from China?
– There are questions about implementation. If they push this onto suppliers, there is a view you cannot get it. It will push it underground.
– Need 2 or 3 years when acting as a big buyer
– supply chains are complex in China, and it will take time

One interesting phenomenon we have seen is that factories may often have 2-3 firms who have different codes of conduct. For smaller firms, it is an impossible task to bring standards that are beyond the largest buyers, and even large buyers may have a tough time if the supplier has just invested in someone else’s code of conduct.

3) Can independent auditing solve the product toxicity problem?
– Problem is that the methodology doesn’t work.
– Joke: there is a new badly treated labor force, and it is that of the audit force.
– is constant cat and mouse game, and they are not given the time they really need
– there are a lot of tools out there to fool/ game the system (software in particular)
– many suppliers feel that buyers don’t understand their constraints and are not willing to pay to fix the problems

Externals are simply one step, and typically because these externals call to make appointments, their effectiveness is minimal. they rarely understand the process, or know what to look for, and should their be a problem they are rarely in any position to do anything. The only real audits that count are the ones that should be happening on a regular basis by your in house team.

4) Can Chinese government regulation solve the problem?
– The Chinese gov’t is trying to develop new tools.
– it takes years, if not decades, and China has just started.. but there is a belief by many that China will react strongly on this issue.
– public role is becoming a strong catalyst and Beijing understands this

As I said during the recent product safety issues, the government role is one that should be left to drafting laws. We are talking about commercial issues, and any efforts by the relevant governments should be to encourage and enable industries to self police themselves.

5) Are Chinese consumers aware of product toxicity concerns?
– The Chinese media has been really really active in this area. the government has given them a green light
– The internet has been very important and active discussion is occurring
– Chinese consumers in Beijing, Shanghai, Chengdu, Wuhan, and other cities want exactly the same things as those in Amherst, San Francisco, or Chicago
– Foreign corporation don’t fully understand their risk profile in Asia
– It usually takes a scandal

This is one of the most important questions I think of the entire interview. It is important because for many governance issues, the sole actor in improving conditions has been the government. they force regulations down the pipeline and then follow up when and where possible. however, in the last 18 months I have seen a dramatic increase in the activity of consumers, and I think that as their voice grows the risk of non-compliant parties getting skewered grows as well.

6) What is an example of a product scandal in China?
– P&G SKII
– This scandal showed the capabilities of the government, the reaction of consumers, and what companies need to know and do
– When there is a scandal, you go after those who have the deepest pockets, and in some cases that is the foreign company
– foreign companies often are unable to navigate a scandal

Add to that Dell, Dumpling restaurants in Beijing, Nestle, and a host of other products that Chinese consumers have blogged, SMSed, and marched all over

7) What is an effective strategy for curtailing product toxicity issues in the China Supply Chain?
– Technical assistance and training
– if discussions focus on price and time to market, buyers are not going to performance in areas that may have problems
– Companies need to start looking for supply chain partners, not just suppliers. it needs to be a partnership

Simply put. Invest the time and energy into building a partnership and a quality management system. With outsourcing (even domestically) comes increased risk as control over the product and process is lost. Without a system in place, bad product will make it into the market. Invest the time and energy required to build a solid system and you will greatly reduce the chances that your products will end up on the front page of the newspaper.

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