Learning from the Chinese Recalls

I. Introduction

    Tires, toys, pet food, toothpaste, and jewelry… [1] These and others are all items that have been recalled by some manufacturers who outsource production to China.  Concern about product quality and the dangers of these recalled products has led to a firestorm of attention in the media.  Companies like Mattel, Del Monte, and Foreign Tire Sale have been quick to deflect blame onto their Chinese counterparts - but with so much at stake, responsibility must be shared. [2] Playing the blame game by simply placing guilt on Chinese manufacturers is not the solution.  Quality oversight has somehow failed, and although a variety of factors have led to this end, there needs to be shared responsibility in ensuring product safety. [3]

II. Background

    In a typical outsourcing arrangement, U.S. companies transfer a design and product knowledge to subcontractors in China. [4] These subcontractors then produce it for resale back to the original companies for sale to consumers under known brand names. [5] Many large companies have outsourced their manufacturing to China in recent years, to capitalize on the low labor and energy costs which in turn maximize profits. [6] While this arrangement is attractive for both parties, problems have arisen from the fact that outsourcing production under Chinese government is not properly overseen, and U.S. standards of safety and quality are not always met. [7] Chinese government standards for its manufacturing base are not as stringent as U.S. or European equivalents. [8] While product quality and safety should be internally tested by Chinese manufacturers, responsibility also lies with Western suppliers and retailers in ensuring product quality and safety to consumers. [9]

III. The Legal Scramble

    In our litigious society, the looming specter of potential law suits has led to a near scramble for corporations to find someone else to blame.  The stakes are high, and the courts are likely not only to hear such cases, but also to award large damages to plaintiffs. [10] The only sure winners are the lawyers, who have found lucrative new opportunities for future claims. [11] Many law firms are already considering potential class action suits against big brand names such as Mattel for defective toys and Tween Brands (owner of Limited Too and Justice Stores) for lead jewelry. [12] Such U.S. companies will feel the most repercussions for the sale of defective products, because Chinese manufacturers are usually smaller producers who will be unlikely to afford big judgments. [13] It is also more difficult to find liability with a small manufacturer in a foreign land, and monetary judgments by Chinese courts are often far less than their U.S. counterparts. [14]
    These new liability issues have forced outsourcing companies to seek advice on limiting potential risks and on how to avoid liability. [15] If a product can be shown as defective, most states in the U.S. will hold companies liable, even if it was unintentional or the company had no knowledge of the defect. [16] It is not a defense to plead ignorance, because “under product-liability law, one company often can be held 100% liable for all damages… regardless of its market share or the amount of tainted product it might have sold”. [17] While there have always been risks involved with outsourcing from the East, the recent recalls have brought liability issues to an entirely new level. [18]

IV. The Blame Game

    Fallout from the product recalls has been quick and hard.  In China, there have been factory closures, job loss, and even suicide. [19] In America, large companies such as Mattel have suffered loss of reputation and public outcry over dangers posed by these recalled products. [20] The public image of many of these corporations has been tarnished, as evidenced by one survey that showed 87% of the public did not trust Mattel toys for this holiday season. [21]
    Companies must be able to show that they had stringent quality controls in place that were somehow violated by Chinese manufacturers in order to avoid liability. [22] However, the reality is that many importers do not have such measures. [23] While Chinese manufacturers are far from blameless, they do not have the same incentives or pressures that U.S. manufacturers have in ensuring product safety . [24] American consumers do not buy a product knowing that is produced in China, but rather focus only on the brand name the product is marked with. [25] While some of the responsibility here lies with manufacturers who may have “cut corners” on quality standards, importers are also at fault for often outsourcing so much work to China with huge pressures for lower prices and low oversight. [26] Western companies must take the initiative in overseeing product safety.
    Neither Western importers nor Chinese manufacturers are solely accountable for poor products and their recall.  But both sides need to move past the blame game to determine a plan for the future.  These recalls are not the end of all importing and manufacturing relations between the two countries, and fault finding should be placed aside to be superceded by concerns for public safety. [27]

V. A Need for Reassessment

    Regardless of who is really at fault, the scandal of these recalled products has led to reassessment of product outsourcing regulations and liabilities.  Washington has a newly sponsored bill that “would require independent testing and certification of children’s products.”. [28] There has been recent discussion about dual China-US product safety liabilities and there will be a congressional hearing on the findings of lead-tainted childrens' products. [29] Commerce Secretary Gutierrez has also publicly stated that there will be discussions about the United States’ concerns with Chinese product safety at the APEC summit. [30] The Chinese government has also been hard at work; it announced new standards in safety reports for toys and in implementing a nationwide recall system. [31] However, for change to occur, it must ultimately begin within Chinese manufacturers and Western importers themselves.  While governments can impose stricter regulations, manufacturers and importing companies should independently set up a working standard for their products.
    There must be a risk analysis in realizing that there will always be exposure to liability through outsourcing. [32] While Chinese manufacturers are far from blameless, Western companies must realize that there needs to be more oversight and strict standards set in place.  Importers need to gain back customer trust by implementing stringent quality control systems and demonstrating an improved, safer product. [33] One of the methods currently used are unannounced visits by safety inspectors to Chinese factories. [34] It is becoming more common and more prudent for Western importers to maintain better control over a final product by being active in the manufacturing process, and making sure that instructions are followed so products are safe. [35]
    The Chinese recalls have had some unfortunate repercussions that most likely have not yet reached a conclusion.  However, shifting the blame from country to country is not the answer: both sides must work together to formulate a new plan to accommodate one another and ensure product quality and safety.

[1]  Shih-Fen S. Chen, Don’t Bash China For the Failure of U.S. Toy Makers, The Globe and Mail, Aug. 31, 2007.
[2]  Peter Lattman, Made in China, Sued in the USA, Wall St. J. Law Blog, July 2, 2007,
http://blogs.wsj.com/law/2007/07/02/made-in-china-sued-in-the-usa/.
[3]  Chen, supra note 1.
[4]  Id.
[5]  Id.
[6]  Chinese Whispers Over Toy Safety Alert, Yorkshire Post, Sept. 7, 2007. [hereinafter "Chinese Whispers"]
[7]  Chen, supra note 1.
[8]  Id.
[9]  Id.
[10]  Dan Harris, How to Protect Your Company From Bad China Product, China Law Blog, June 6, 2007, http://www.chinalawblog.com/2007/06/how_to_protect_your_company_fr.html.
[11]  Lattman, supra note 2.
[12] Jayne O’Donnell, Feds Focus on Lead in Kids’ Jewelry, Courier-Post, Sept. 6, 2007, §S. Jersey News, at B.
[13]  Lattman, supra note 2 .
[14]  Lorraine Woellert, Made in China, Sued in the USA, Bus. Wk., July 9 2007, 
http://www.businessweek.com/magazine/content/07_28/c4042003.htm#ZZZKQQKVG3F.
[15] Id.
[16]  Id. ("All you have to show is that the product was defective," says William Ruskin, a defense litigator with Epstein, Becker & Green in New York. "It's no defense to say, 'We didn't know.'").
[17]  Id.
[18]  Tom Braithwaite, Delays in Toyshops as Chinese Retest Stocks, Fin. Times Limited, August 30, 2007, §Nat’l News, at 3.
[19]  Chinese Whispers, supra note 6.
[20]  Id.
[21]  Id.
[22]  Harris, supra note 10.
[23]  Id.
[24]  Id.
[25]  Chen, supra note 1.
[26]  Geoff Dyer and Tom Mitchell, Testing Times: How China is Slowly Getting to Grips With Product Safety, Fin. Times Limited, Sept. 5, 2007, at 11.
[27]  Id.
[28]  O’Donnell, supra note 12.
[29]  Id.
[30]  Gutierrez says U.S. to Raise China Product Safety at APEC Summit, Inside Washington Publishers, Aug. 31, 2007, Vol. 13, No. 31.
[31]  Braithwaite, supra note 18.
[32]  Lawrence Richter Quinn, U.S. R.M.s Heed China Wakeup Call, but Most Take Global Exposures in Stride; Trouble With Some Chinese Imports Show Importance of Focusing On Local Risks, The National Underwriter Company, Sept. 3, 2007.
[33]  Chen, supra note 1.
[34]  Braithwaite, supra note 18.
[35]  Id.

Comments

[SuperChineze]

In America, the anti-Chinese is on the rise.

There has not been a single case of American who died as a result of Chinese led paint; however, each and every year, millions of Americans have died from cardio related illnesses as a result of made in USA foods. The Chinese Government must take every precaution measures against food imported from USA, and take punitive measures against American fast food restraunts in China. Moreover, genetically modified farm products from USA are barred from Europe. The Chinese people and the Chinese Government should overlook and examine the ramification of importing consuming products from USA.

Kowloon, China

[Christine]

An interesting update:

http://news.bbc.co.uk/2/hi/business/7006599.stm

Looks like the blame game may have some merit after all.