Made (poorly) in China

Local and foreign advertisers wrestle with fallout over tainted exports

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BEIJING--Scandals involving unsafe Chinese-made products have tarnished China's international image, and created massive problems for consumers, multinationals and Chinese advertisers hoping to become global brands.

“The safety scandals are definitely a hurdle to overcome,” said Tom Doctoroff, JWT’s CEO, China in Shanghai. “They have raised questions about the basic reliability of Chinese products and brands and the spate of problems will ensure that this perception is a lingering one.”

The consequences have been costly and tragic since last March, when the first in a string of recent incidents involving Chinese exports was made public. Over 100 kinds of contaminated dog and cat food, such as Procter & Gamble Co.’s Iams and Eukanuba brands, had to be recalled in North America, Europe and South Africa because they caused renal failure in pets.

Since then, problems have unraveled in a number of categories. Last week, U.K. retailers discovered children's jewelry imported from China contained dangerous levels of lead. U.S. toy giant Mattel announced Aug. 1 that it was recalling one million Fisher-Price preschool toys after it found they contained excessive levels of toxic paint. Cheap Chinese tires missing a safety feature were blamed for a fatal traffic accident in New Jersey on June 26.

Last May, over 10,000 tubes of Chinese-made toothpaste sold under the Excel and Mr. Cool brands were recalled in the Dominican Republic after it was found they contained diethylene glycol, a lethal chemical used in antifreeze and brake fluid. In Panama, dozens of patients died after consuming tainted cough syrup.

Multinationals beef up testing procedures

In the wake of these discoveries, consumers and marketers around the world are scrambling to make sure consumer products are safe. Mattel has told consumers it plans to ramp up safety checks for production of its toys. The toy maker’s website describes a new three-point safety check system requiring testing of every batch of paint, unannounced random inspections and testing of finished toys before they reach the consumer.

But it’s an uphill battle. China has become the world’s factory for nearly every kind of product and it can be an opaque operating environment for foreigners who can’t speak the language and lack the resources to closely monitor production practices. At the same time, costs are rising at home, encouraging many factory owners to cut costs--and corners.

“Nearly all [multinationals producing goods in China] are reviewing and revising their issues and crisis management plans and bracing for a possible incident,” said Richard Burger, a senior VP at Ketchum in Beijing. In the past, for example, marketers ran tests on samples of products.

“What they didn’t realize was that the factories would later change the formula to cut corners and use a different type of paint on their toys or add a new chemical to the toothpaste,” said Mr. Burger. Today, multinationals are testing every new batch of products as they roll off production lines. “What makes this so frustrating for the multinationals is that they thought they were safe.”

Beijing reacts with arrests, propoganda

China's one-party government knows it has an image problem on its hands, as unsafe products have alarmed consumers around the world and made them wary of the “Made in China” label.

“I do believe this has impacted China's image,” said Scott Kronick, president, China at Ogilvy PR in Beijing. “The way they respond will clearly determine how it is perceived [outside China]."

China has grown at “breakneck speed,” explained Mr. Kronick, so “controls have not kept pace. We have had broad level discussions with the Chinese government and they are taking the whole quality of exports issue very seriously. The issue comes in the area of coordination among the many different industries involved and the Chinese government is addressing this now.”

After initially denying the problems and then blaming international media for exacerbating the situation, China’s government has taken several steps to address the problem. The government shut down more than 180 illegal manufacturers, set up a five-year plan to address exports and arrested the factory owners and managers responsible for the most serious infractions.

In the Mattel case, for example, the government banned exports by the owner of the responsible factory, Lee Der Industrial Co. A few days later, the company's co-owner, Hong Kong businessman Zhang Shuhong, hung himself in a company warehouse.

And Zheng Xiaoyu, the former head of China's ministry of food and drug safety, was sentenced to death on May 29, after he was convicted of taking bribes from eight pharmaceutical companies to approve unsafe and untested medications.

Over the past week, China's government has taken more public steps, such as selecting a troubleshooter, Vice Premier Wu Yi, to lead a 19-member panel that will examine ways to solve the country's problems with food and product safety. Beijing officials also launched a weeklong series of propaganda programming on state-run Chinese television on Aug. 19, dedicated to defending the country's reputation as a producer of safe goods.

When the pet food problems erupted, the official response was “petulant, passive-aggressive, a lot of denial. After they realized it was not just an issue of pet food and that internationally, China was under a bright spotlight, they grew more concerned,” said Scott Silverman, regional director, Asia/Pacific for Godfrey Q & Partners in Beijing.

Miller "not concerned" about Snow in U.S.

Overseas, meanwhile, a number of marketers are betting (or silently praying) that killer pet food, contaminated toothpaste and poisoned toys aren’t enough to permanently scare consumers away from the “Made in China” label.

Miller Brewing Co., for example, is planning a U.S. rollout of one of China’s top-selling beers, Snow, for the fourth quarter, and a Miller spokesman said it won’t be doing anything differently in the wake of last week’s latest China-quality scandal, in which Mattel issued its second lead-paint-based toy recall. Nor, he said, is Miller worried the issue will hurt sales.

“We are not concerned,” he said, adding that the brand is aimed at markets with large Chinese populations that ought to be familiar with Snow. “Given the current U.S. consumer demand and success of ethnic foods and beverages, we believe the product positioning is still strong enough to have a successful launch and our plan is to go full-steam ahead.”

The toy industry—which typically pulls in about half of its $22 billion annual sales during the fourth quarter—is looking to minimize the fallout before its crucial holiday season by emphasizing that the recent recalls at Mattel are product- and company-specific.

“Brand China” image tarnished

Chinese marketers looking to expand their business overseas may not be able to gloss over public suspicion so easily.

The mainland’s budding brands could “find themselves lumped together in consumers' minds with the producers of melamine-laced cat food and lead-lined toys. That may not hurt immediate prospects, but it will leave them much weaker when negotiating for space on America's shelves,” said David Wolf, president-CEO of Wolf Group Asia, a Beijing-based communications advisory firm.

Some companies that could be affected include Lenovo Group, the world's third-largest personal computer maker; Haier, which produces household appliances; sportswear manufacturer Li Ning Co.; China Mobile Communications Corp., the world's largest mobile phone operator based on subscriber numbers; and electronics manufacturer TCL Corp.

Apart from Lenovo, which jumpstarted its global expansion by acquiring IBM’s PC division in 2004, most Chinese firms moving overseas have been building their reputations organically.

Li Ning, for example, now sells its shoes and apparel in Southeast Asia, Spain and Russia, and Haier’s refrigerators and air-conditioners are sold throughout the U.S. in retailers like Wal-Mart.

“Under other circumstances, this might have proven enough. The near- and mid-term prospects of these and other branded Chinese producers, however, will depend on them being more proactive and distancing themselves from the tarnished reputation of ‘Brand China,’” said Mr. Wolf. “Brand China is no longer an asset for [China’s] emerging multinationals.”

Until now, most Chinese products have earned a reputation among U.S. consumers as being cheap-but-good, much the way Americans once regarded products made in Japan.

While China’s largest international brands like Haier “are so established that there is already trust in what they do,” said Viveca Chan, Hong Kong-based founder of WE Worldwide Partners, an independent ad agency that helps Chinese brands grow overseas, “the problem arises when they enter the higher end of the market.”

Scandals are "tip of the iceberg"

Japanese and South Korean brands such as Sony, Toyota, Honda and Samsung have all evolved into global brands, so history suggests Chinese companies following in their footsteps, focusing on quality and innovation, are also likely to prosper over time if they can overcome the widespread concerns about safety cropping up today.

China's current good intentions follow a decade of slack control, but attitudes do seem to be changing, largely because China is eager to clean up the country's image in the 12 months leading up to the Olympics.

Japan was also known for inferior products at one time, but has transformed the country's image with cutting-edge cars and consumer electronics products. South Korea has nearly achieved the same feat.

“I believe the central government is more than sufficiently concerned. They are scared to death,” said Mr. Burger. China's “bread and butter--or rather rice and tofu--is manufacturing products for export. If the world loses faith in Chinese exports, there will be ripple effects throughout the world.”

Unfortunately, he added, the recent problems involving Chinese exports are “probably the tip of the iceberg. With so little regulation and a shady system of checks and balances, the only thing surprising is that it took so long for this scandal to surface.”

Tips for avoiding Chinese burn

The “Made in China” label that once meant inexpensive is quickly coming to mean unreliable. “Any product made in China is now vulnerable,” said Helio Fred Garcia, New York University professor of crisis management. “You don’t want to be the company that seemed not to care when the world noticed that Chinese products were unsafe.” So what’s a marketer to do?

Plan in Advance.
Larry Smith, president of Institute for Crisis Management, said marketers should have three crisis-management plans ready—operational, communications, and business-recovery or continuity plans. “In my many years, I’ve only seen one company that had all three. Most have an operational plan because it’s required by their insurer or their industry. Less than half have a communications plan, and even fewer have a business-continuity plan, which is still relatively new,” he said.

Don’t Delay.
“The worst thing you can do is delay telling the consumer or deny,” said Ted Morris, senior VP-global alliances at BrandIntel. “Rather than panic, take the plan you should already have in place and mobilize.”

Monitor Your Program.
Be sure to tweak or change your crisis program as necessary. “This is exactly why you should be using a brand-monitoring service,” said Cymfony Chief Marketing Officer Jim Nail. “You can find out what the core issue is for consumers. How are your messages being received? … Just going to Technorati or Google and doing a search is not enough.”

Don’t Start Blogging About It.
You’ll likely be seen as opportunistic, Mr. Nail said. However, if your company already has a blog and is established in the blogosphere, use it as one of the ways to keep connected to the community you’ve already built.

Don’t Overlook Consumers Beyond the Obvious Core Market.
While the concerned may initially be pet owners or parents of young children, don’t assume they’re not talking to others about it. “This kind of thing has a lot of word-of-mouth,” Mr. Nail said.

Contributing: Advertising Age reporters Jack Neff, Jeremy Mullman, Beth Snyder Bulik, Megan McIlroy, Emily York

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