China in a catch- 22 situation

SL exports at +41%

Sri Lankan exports have surged in the 1st half by almost 41% as against last year which means that we are on track to cross the 10 billion dollar mark in 2011 even though the trade gap has widened given that imports have outpaced export revenue.

A noteworthy performance is that tea exports have increased by 11% but the worry is that in June the export value has declined and this adds to the supply chain woes hat has been highlighted in different media in the recent past. The good news is that the fisheries sector has performed exceptionally well with a 26% growth, which justifies the development that is taking place in the North-East in the area of fisheries infrastructure.

 

SL worry

The key issue facing Sri Lanka is that the exports to the US has increased by 35.9% to 1.06 billion dollars and given the economic downturn that is to be expected post the debt crisis brings in vulnerability to the export industry of Sri Lanka. This is further aggravated by the fact the EU is also in trouble with many economies struggling with its financial woes.

Safety issues

Whilst China has become the 2nd largest economy today, the fact of the matter is that it has an exposure of 1.15 trillion dollars US debt as at April 2011 and China accounts for one fifth of the import value of the United States which signifies the vulnerability that China is under post the debt crisis and the possible fall out of the US economy. This is in the back drop a labour wage increase of almost 30% experienced this year in China which will be passed down to a customer to make a business viable. This will further add pressure on the US consumer’s wallet.

In this backdrop China is yet coming out of the issues of safety that has clouded Chinese exports. The most recent being Mattel Incorporated in the United States having to recall 18.2 million “Made in China toys” for lead paint or swallowing hazards it included the popular kids toy Sarge truck, RC 2’s and iconic brand Thomas the Tank Engine.

Research revealed that lead paint was added to the paint to make the children’s toys look brighter and eye catching but long hours of exposure on kids – like when they are playing can be harmful to children as it causes brain damage. A point to note is that the United States have banned the use of leaded gasoline or the use of lead paint in household items where children are likely to come in to contact in everyday life.

However, from a marketing point of view Mattel should be congratulated on the speedy action taken by using its research team to identify the batch that had this issue and thereafter locating the Chinese company that supplied same. The company went to make a public apology and assurance that it had taken all steps to avoid exposing customers to similar hazards in the future. I guess it’s good case in point for Sri Lankan entities like the Ceylon Petroleum Corporation (CPC) on the low quality petrol fiasco that effected Sri Lanka and took away the shine of post war public sector efficiency

Lead – A Chinese problem

To my mind China’s problem with ‘lead’ in consumer products go far beyond painted toys saga. Reports revealed that Chinese firms use lead in a wide range of products and experts say children are suffering the various health issues that is baffling the medical fraternity around the world. The country is playing the game on the best cost strategy and with the consumer purse under pressure due to inflation are resorting lower price products. It is a dilemma between supply and demand that is creating havoc in the market place.

Beijing has prohibited leaded gasoline been used in the recent past and tightened standards for other goods. But there are practical problems for blanket coverage of this rule of law, as the land area to cover is large. It is said that one fifth of Chinese children tested, had unsafe levels of lead in their blood in certain provinces of China. In comparison on a sample of 310,000 US children ages 1-5 it was discovered that lead levels in the blood required treatment according to the VS centre for disease control and prevention. Further analysis had revealed that most get if from paint chips and dust in deteriorating buildings and not only children’s toys. Hence we can see the looming social responsibility issue that the world is up against apart from the debt crisis dilemma that is fast emerging.

Marketer’s problem

There is a school of thought that the responsibility of meeting foreign quality standards should not lie with Chinese manufactures and that it should go to the American brand owner who is responsible for marketing the product. There is some degree of truth in this argument unless clear technical specifications have been given by the brand owner to the supplier and the supplier not meeting this requirement. After all, contract manufacturing or popularly known as outsourcing is the norm around the world, based on the laws of comparative advantage. Hence one cannot hide behind the fact that marketers must have clear definition of the technical specifications based the identified consumer requirement. A point to keep in mind is that one mistake in today’s competitive world and consumer will switch to a competitor’s products.

The issue

If we dig into the problem more carefully, for instance if Mattel had only wanted colours of the toys to be very bright but had not specified technical aspects that can be technically interpreted to the use of chemicals, it is not fair to weight the total blame on the Chinese manufacturer who is following the guidelines that has been loosely crafted by the marketing company. Mattel must however be complimented for its quick efforts at damage control, which included both an apology and assurance that it had taken steps to avoid exposing customers to similar hazards in the future.

To avoid repeat of the problem Mattel also implemented new quality control rules including testing of each paint batch used in toys and past manufacturing tests of each products which is commendable. But I feel a stronger dramatisation of the problem would have been better, like may be the media invited to a central location and all recalled toys destroyed. This naturally will elucidate wider publicity across the world.

It also provides reassurance of the company’s commitment to meeting quality standards and confidence to the consumer to keep purchasing the product.

A lesson from US

If I may take one best in class real life was Perrier Mineral water in the US market. The brand was detected of having benzene that resulted due to a production process malfunction. However, the company very aggressive and withdrew all products from the trade and had a public display of the recalled products being destroyed which earned front page media coverage that the brand had not got even after all the media advertising the brand had done for years to be the market leader.

A particular technique used that really built credibility to the recall was that the company used a popular lobby group member to announce the withdrawal and used the same person to say that its was safe drink Perrier mineral once again after a absence of 3 months from the market place. When re introduced the brand share jumped by 3 percentage points that left a learning to the world that a consumer understands when a company makes a mistake but it should be genuine in the approach of correcting the problem. Hence a marketing blunder can be used to the advantage of the brand if the marketing strategy has been carefully crafted.

Legislations

From a country point of view, one way of avoiding the issue from a national sense is by establishing a consumer safety commission to regulate the industry. This should include the proper procedures being documented and maintained during the pre-test period and at test marketing stage followed by a three month post launch review that include verification reports from health authorities.

This should follow a detailed supplier verification process on a yearly basis with an audit so that one does not disgrace the country with such as a recall, that is very embarrassing to the bilateral trade arrangements that have been publicised as well as the loss to the brand that takes years to build.

Bubble bursts

Apart from the Mattel Fiasco, we saw many other brand taking precautionary measures by checking extensively merchandised manufactures in China. The popular retailer “Toys R” removed Hamco Vinyl baby bibs as excessive amounts of lead was discovered on the print. Wal-Mart stores also got on the brand by recalling selected batches of bibs made by Hamco.

Good news

Post the fiasco Mattel inc revamped their business operation with new staff and a new set of business procedures that has helped the organisation re build the credibility with a mum of tomorrow. The cost has been un imaginable. This is the cost of the Marketing blunder that happened in China. Hence, it’s better to avoid such image disasters than having to correct the problem is the pick up to the world of business especially if Chinese products will be somewhat pricy post the 30% wage increase in 2011.

The future

Given these developments the world will have moved from its love affair with cheap toys. May be we will see a stronger behavioural response by consumers moving out of the best price syndrome and moving to purchasing quality products paying a few bucks more for the sake of the loved one’s long term health.

Other trends that we will sure see will be that parents avoiding the “Made in China” label unless reassured by their trusted retailer. May be we will also see a push towards own country products to be given preference over cheap Chinese products like the initiative in Sri Lanka – Buy Sri Lankan products.

(The author is an award winning business personality and serves the International public sector whilst working on many key economic development initiatives in the country. The thoughts expressed are strictly the authors own views and not the views of offices he holds in Sri Lanka or internationally.)