Product Recalls and Chinese Consumers

The Wall Street Journal reported yesterday that many of the toys that were recalled in the U.S. last summer remained on stores' shelves in China:

The situation is a reminder that often the people most at risk from China's public-health and safety lapses are the Chinese themselves. It raises questions about the responsibility of multinational companies to keep dangerous toys off the shelves in parts of the world where consumer-protection laws are weak and the threat of legal liability is relatively low--but also about their ability to do so.

The article says that if companies are not diligent enough about ensuring that products are destroyed after a recall, many factories will try to make up costs by distributing the products in the local market. The lack of law enforcement and information distribution related to recalls facilitates the process.

Nonetheless, a McKinsey survey from October 2007 found that Chinese consumers still trust domestic brands over foreign brands:

According to the survey results, 53% of the 6,000 residents interviewed said they preferred Chinese brands, up from 46% when the survey was last conducted in 2005. Only 11% said they had a "strong" or "moderate" preference for foreign brands and nearly half of respondents said they would shift to a local brand if it offered a similar level of quality or price.

But it's unclear whether or not McKinsey's survey accounts for the tremendous income inequality in China. Similar research conducted by the China Market Research Group found that quality does in fact factor into the decisions of Chinese consumers. According to BusinessWeek:

...the China Market Research Group, has conducted more than 1,500 in-depth interviews with consumers in first- and second-tier cities over the past four months. Our findings run counter to McKinsey's. We have found that in light of the quality-control problems in China, the trust that Chinese consumers place in foreign brands is at an all-time high and increasing. Nearly 75% of consumers said they would prefer a multinational's product if they could afford it and if the product directly affected their health...

The concern that Chinese have over the safety of what they buy combined with increasing trust in foreign brands and rising disposable incomes has created a huge opportunity that multinationals can leverage. The market is clearly shifting toward the premium segment. By emphasizing that their products are safer and premium, foreign companies will continue to tap into China's emerging 250-million-strong middle class.

The article says that the role of multinationals in ensuring product safety must be to refrain from engaging in price wars with Chinese competitors. But what about the responsibility of Chinese firms and government officials?

Susan Aaronson, author of Trade Imbalance: The Struggle to Weigh Human Rights Concerns in Trade Policymaking, recently spoke at the Carnegie Council, and suggested that the Chinese government may find that improved human and labor rights are a prerequisite to the continued productivity and economic growth needed to pull the rest of the country's population above the poverty line.

But the China Market Research Group survey suggests that if more Chinese citizens develop the financial means to reject cheap, unregulated products, in the long term, Chinese firms will start enforcing quality control and labor rules to meet market demands.

Can these two ideas be reconciled?

Labor Protections Have Come A Long Way in America and China

Amid discoveries of child and slave labor in China, it is important that Americans remember their own history. The Wall Street Journal relates the struggle the U.S. Congress had with the U.S. Supreme Court over child labor protection in the United States in an article today entitled "Lemonade Stands? Children Used to Toil 14 Hours, Every Day," by Cynthia Crossen.

"In 1916 and again in 1918, Congress passed laws trying to discourage child labor. The Supreme Court found both unconstitutional. So in 1924, Congress passed a proposed constitutional amendment giving the federal government the power to regulate the work of people under 18. Its opponents called it the 'federal youth control amendment.'" I guess early 20th century spin doctors were trying to make child labor protection sound unAmerican. According to the WSJ article, this amendment is still technically pending.

Twenty years later, the federal Fair Labor Standards Act of 1938 limited child labor and withstood challenges from the Supreme Court. Was it because America had gained a conscience? It had something to do with civil society complaints about working conditions. But it also had to do with technological advances, making child labor less useful. "By then, market forces and new technology were already moving young children out of the labor force."

Will China take 20 years to crack down on child labor? In today's article, "Will China Enforce New Labor Laws?" Jude Blanchette of the Christian Science Monitor says the government appears more willing to enforce child labor laws after new provisions to go into effect on Jan. 1, 2008 were passed on Friday.

"As is always the case with China's laws, the real question will be in whether the new laws are enforced, how they are enforced, and against whom they are enforced," says Dan Harris, an expert at the law firm Harris & Moure. But, he adds, "there is a feeling the new labor law is more likely to be enforced than the old and, in particular, will be enforced against foreign companies."

"Since its emergence as an economic powerhouse more than 20 years ago, China has been dogged by criticisms of poor working conditions, the use of child labor and willingness to placate multinational corporations. "

Twenty years--it seems history is repeating itself.