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Coping with 'Made in China' Scandals

When access to became a reality, international enterprises with famous brands lined up to take advantage of the resources and market China had to offer. Doing business in and with China allowed many of these companies to expand their businesses and increase their profits to unprecedented levels. This growth and expansion came at considerable cost for some. Issues with the quality and safety of some Chinese products and ingredients have impacted the profits and the goodwill of brands that had taken decades to build. Companies like Mattel ( (MAT)), Nestlé, Procter & Gamble ( (PG)), and Mars have already realized such an impact as a result of lead contamination in "Made in China" toys and melamine contamination in Chinese-made pet food and milk products. Because of these incidents, varying standards in manufacturing processes conducted thousands of miles away can no longer simply be chalked up to cultural differences. As companies become more and more aware of the risks associated with Chinese manufacturing and sourcing, the responsibilities of all involved with the production and sale of a product around the world become more intertwined. Global enterprises need to take an active and protective role in ensuring that products associated with their brands meet their safety and quality standards and that their goodwill and good names are protected, not just in China but around the world. As has been well-publicized by now, in 2007, Chinese wheat gluten and rice protein contaminated with melamine resulted in the largest pet food recall in U.S. history. The fallout included more than 100 class actions in the U.S. and Canada and a devastating blow to consumer confidence in the pet food industry, a $6 billion business that includes virtually every major U.S. supermarket chain. The next year melamine added to raw milk to boost protein readings led to at least five infant deaths and more than 50,000 cases of melamine-related illnesses in China. Reputable news sources reported that the figures for infant deaths and kidney-related illnesses could be much higher than originally reported based on later updates from Chinese authorities. The incident led to product recalls throughout Asia, including products sold under famous international brands. Brand Risk These scandals most likely won't be the last. Even if they were, though, consumer confidence will likely require a fair amount of time to recover from such repeated blows to the "Made in China" brand, as well as to brands that were never previously associated with China in the minds of most consumers. The growth in international trade and the possibility of negative brand impact underscore the significance of dealing with the challenges of using suppliers and supplies from developing countries to meet growing consumer demand for high-quality, low-cost products. The frequency of such crises and the strength of public reaction have made several considerations clear. It's critical to have comprehensive strategies for understanding and managing operations, production, economic development, and relationships with key stakeholders and consumers in the countries where operations are taking place. Multinational corporations can consider the following practices to address the risks raised by doing business in developing countries. From a pragmatic point of view, a global corporation's long-term success working with or operating in a developing country like China necessitates a broader, more activist ethic: sustaining a successful foreign operation by consistently and sincerely recognizing and striving to meet the changing needs and expectations of the host country, its agenda for development, and consumers wherever in the world they are located. Product safety problems and less-than-successful management of the ensuing crises have shed light on the shortfalls and disconnects between operating abroad successfully and fulfilling those changing needs and expectations. Giving Back Demonstrating a desire to offer more than jobs to a host country generates a favorable reputation. Sometimes charitable donations and other acts of corporate social responsibility and sustainable development of the local economy help to engender brand goodwill in the host country, similar to the notion of "giving back" in the U.S. Benevolence is also helpful for building social capital and avoiding negative commentaries in Internet blogs and the "court" of public perception, as evidenced by reports of slow or "inadequate" charitable contributions made by some large companies after the Sichuan earthquake. Navigating the Landscape Operating in various jurisdictions with numerous complex and evolving regulatory requirements and standards requires heightened awareness and a sincere effort to become knowledgeable of local practices and laws. Look for opportunities to participate in seminars and other avenues for learning about laws, regulations, and solicitations for comments and opinions on drafts of legislation. China's business community can take such opportunities by commenting on draft legislation, submitting white papers, and participating in informational exchanges between organizations that represent foreign-based businesses and Chinese officials and authorities. Multinational companies must develop relationships with key political stakeholders involved in developing, implementing, and enforcing regulations to enhance preparedness and foster an effective public and government relations program. Emphasizing Compliance Unable to ignore the damage caused by past incidents, companies can help protect their brands by taking active measures to emphasize and monitor compliance. Look to lessons learned by intellectual-property owners in China, who learned to depend upon themselves, and not their Chinese partner, to protect their intellectual property. Likewise, the product safety scandals necessitate greater vigilance and active management at all points along the supply chain without acquiescence or delegation of ultimate responsibility to the Chinese supplier. Most Chinese suppliers do not enjoy the same brand awareness, consumer confidence, rights, or revenue as multinational companies and their incentive to do so is not great; they must cope with higher costs and a demand for higher quality while making enough to continue operating. Looking at Contracts Contracts with realistic enforcement provisions are a good start in the effort to protect brands, as they can serve as meaningful guidance for acceptable behavior of the supplier and the company. It is critical that both parties fully understand clauses in contracts involving foreign parties. Companies must also be ready to enforce rights in a contract, including the right to inspect facilities, require proof of certifications, perform audits (books and process), require compliance to standards and guidelines, and seek indemnity or reimbursement. Just as important, companies must actually follow through by visiting facilities and inspecting the processes, plants, materials, subcontractors, storage, and other aspects of production. These companies should provide for approval and control where needed to help ensure product and process safety. Knowing Partners, Suppliers, and Employees A necessary part of brand protection is due diligence. Although limited, China has sources for researching companies, parties to suits, and potential key employees. While there will always be suppliers who engage in deceptive practices, companies without programs in place will have little chance to work within the supply chain to correct deficiencies. Take precautions when evaluating partners and candidates for employment in key positions. These parties are in a position of influence and control over the product and process. In sum, it is just as important for companies to take steps to protect their brands with respect to operations or suppliers in China as it is in the U.S. The issues with melamine and other product quality problems mean that multinationals will be charged with taking greater control, if they were not previously. The key is risk management, including promptly and knowledgeably addressing and managing crises. It is both necessary and expected.
LaRhonda Brown-Barrett was an intellectual-property lawyer in the Shanghai office of Sanders & Dempsey.
Mark C. Goodman, a trial lawyer in the San Francisco office of Squire, Sanders & Dempsey, served as the court-appointed liaison counsel for defendants in litigation stemming from one of the largest recalls in U.S. history relating to allegedly tainted ingredients from China.

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