The China Code

Manufacturing in China seemed like a good idea. Then came poisonous pet food, faulty tires, and toxic toys. What to do now

by Jeremy Quittner

• View Slide Show

In 2006, a 4-year-old child died after eating a piece of costume jewelry routinely given away with purchases by sneaker manufacturer Reebok. The cause of death: lead poisoning. "I was shocked a child had died," says the owner of a nine-person jewelry manufacturing company in New York. Although her company's products were not involved, the entrepreneur wanted to be sure the necklaces and bracelets she was making in China were safe. She had them tested and discovered the lead content was off the charts. Stunned, she phoned her Chinese manufacturer and demanded the lead be removed.

Business owners have been getting a lot of unwelcome surprises from overseas. U.S. product recalls have increased about 85% since 1990. Items made in China are not the only ones that have been faulty or tainted, but as that country has entrenched itself as the global factory, it has become the key trouble spot. About half of the 467 products recalled in 2006 were made in China, according to the U.S. Consumer Product Safety Commission, up from 110 in 2000. In August, Mattel recalled almost a million toys that were made in China and decorated with lead-based paint. That followed recalls of pet food tainted with melamine and toothpaste laced with an ingredient found in antifreeze. And Foreign Tire Sales, a 13-employee distributor of tires manufactured in China, has recalled about 450,000 tires suspected of being defective. The company's Chinese manufacturer, Hangzhou Zhongce Rubber, has denied responsibility. Although FTS plans a court battle, U.S. decisions aren't often enforceable in China, and the company will likely have to shoulder the estimated $90 million cost of the recall. "I wasn't in tune to the fact that this could be a big problem," Richard Kuskin, the company's president, told BusinessWeek.

EVERYONE'S LIABLE
That kind of naivete no longer flies. The Consumer Product Safety Act of 1972 lumped manufacturers with retailers, wholesalers, distributors, and private labelers, making them all liable for faulty products, wherever they're made. Litigators will pursue every company along the supply chain.

Of course, China's manufacturing problems are not new. But outsourcing has brought what were once internal problems into the global market and into newspaper headlines. And with American and other foreign businesses looking for one thing in China--low costs--Chinese manufacturers have plenty of incentive to cut corners to keep costs at rock bottom. "[Small business owners] want to find the least expensive component for their product, so the products do what they are supposed to do without causing safety problems," says Alan Schoem, senior vice-president for the global product risk practice for Marsh, a risk advisory and insurance broker, and a former director of the U.S. Consumer Product Safety Commission's office of compliance. "But that is where problems occur in Asia." Everette Phillips, president and CEO of China Manufacturing Network, an outfit that aggregates small business manufacturing requests among a network of about 100 factories in China, says small businesses may inadvertently push the wrong buttons with their Chinese suppliers. "If you accept a price below material cost, [Chinese manufacturers] expect to make a profit, so they have an incentive to substitute materials," says Phillips. "A U.S. buyer would say they are cheating me, but they would say it is you who are cheating them." Further tangling the issue is that manufacturers that pass muster with you may themselves be using subcontractors that outsource materials that are inferior or downright dangerous.