A version of this article was originally published by Knowledge at Wharton
Stung by consumer backlash and stiffer penalties for piracy, counterfeiting and contamination, China is working hard to overcome its reputation for poor quality. Scandals involving contaminated food and drugs, and toys tainted by lead paint, have made quality a Chinese government priority.
Although the government is building stronger regulatory agencies and writing tougher standards, spotty enforcement means quality will need to be addressed both by Chinese suppliers and foreign buyers. The challenge for Chinese manufacturers is how to invest in quality control and processes without losing their advantage as low-cost producers. For their foreign partners, the challenge seems simpler: how to set and enforce effective quality benchmarks.
How are quality standards being introduced and how might China's manufacturers and their foreign business partners meet those goals?
China's quality challenge begins with misplaced assumptions and perceptions on both sides, attributable in part to the speed with which many companies from developed countries embraced off-shoring.
Foreign buyers often tend to make strategic mistakes that end up hurting quality. For instance, many assign procurement managers to lead contract negotiations with suppliers, says Benjamin Pinney, a principal in BCG's Shanghai office. "They have a procurement mentality and focus purely on price negotiation, and it's an arm's-length transaction," he says. Because their expectations are based on their experiences with home-country suppliers, they don't always follow up with their Chinese vendors to monitor processes and quality testing.
This enthusiasm for cost-saving deals can impede buyers' ability to correctly gauge the risks or understand the context of operating in China.
Many foreign companies didn't understand how much support a Chinese supplier often needs, and many expected to achieve quality benchmarks without investing in their suppliers. Few stepped back to ask what incentives their suppliers had to adopt the desired production systems and practices. So it wasn't surprising that some Chinese suppliers took shortcuts that compromised quality. One recent controversy over quality defects in Chinese-made toys came about because of design flaws and the use of raw materials that weren't approved by the foreign buyer. Such defects can be difficult to prevent, especially if only a few suppliers are performing badly. But it adds to a perception of China as a source of poor quality.
Blame shouldn't automatically be ascribed to Chinese contract manufacturers, some experts caution. Marshall Meyer, a Wharton management professor, traces quality issues to the traditional Chinese subcontracting system that has "multiple layers, with fourth- and fifth-tier subcontractors," making it difficult to control supply chain networks.
Regulation can be effective if it is enforced nationally and locally, Meyer says. The overarching problem is that Beijing "cannot easily enforce regulations ... and the ability of the central government to impose regulations locally remains limited."
Eager for redemption, China's regulators nevertheless are becoming more aggressive. In a recent statement, China's cabinet outlined plans to strengthen the food-monitoring system, for example. The effort includes representatives from government departments on health, agriculture, quality supervision, industry and commerce administration, and food and drug supervision, according to the Xinhua News Agency.
More generally, a groundswell of public concern over quality has catalyzed the government's reforms. Public sentiment inside the country -- aided by technology -- also is driving efforts to improve quality.
Supply chain quality issues raise China's risk profile, Boston-based think tank AMR Research noted in a survey of 130 global companies this year. China was the top contributing region for nine of 15 risks examined, including supplier and internal product quality failure, security breaches and intellectual property infringement. Other risk factors for China cited in the survey include volatile energy and commodity prices.
Managing supplier relationships is one critical area for working with Chinese companies. Setting up small, on-the-ground procurement teams with weak local relationships isn't as effective as adapting to local conditions, Pinney says. Companies that succeed with China sourcing "invest in localizing their teams, processes and quality controls," he notes. "They become more flexible and adapt their operations to local conditions." As a result, local suppliers and manufacturers absorb the right systems and processes either as joint venture partners, by watching and learning, or by hiring select talent from foreign companies.
With combined efforts from several quarters, quality is getting dramatically better and is being policed much more aggressively. Stricter regulatory enforcement would help, but the most important regulations may not be in China. A direct correlation seems to exist between Chinese suppliers' adherence to quality specifications and the degree to which their industry is regulated in the West. For instance, pharmaceuticals and foods tend to be more advanced in quality control "largely because of the pressures and incentives at the client end," Pinney says. Similarly, Pinney sees significant quality improvements in the automobile and white-goods industries. Where the consequences of failure are less dire, quality levels are generally lower.
Companies must make it abundantly clear to suppliers -- verbally and contractually -- that meeting quality expectations is as important as meeting cost and delivery targets. In other words, buyers must provide incentives to Chinese suppliers to do the right thing. Incentives may not be effective, however, without corresponding penalties.
The general push toward higher-value products "over time will lead to a restructuring of industries and a shift away from high labor-low value products," Pinney says.
Many experts seem confident that quality issues are just the growing pains of an accelerating economy. China "can make high-quality products" and often already does, Meyer says. "Look at an iPod made in China. It has the highest standards of quality. It says 'Designed in California, Assembled in China' on the back of the package."