P&G pulls SK-II from stores

And other news in Greater China

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GUANGZHOU--Following two weeks of controversy and media attention, Procter & Gamble shut down all department store retail counters selling its SK-II product line in China. Earlier this month, banned substances that can cause skin allergies and other health problems were found in the product by a government agency.

Although the U.S. consumer goods manufacturer--and China’s largest advertiser--expects to resume sales of the premium skin care range soon, P&G is reacting to a report from China's Guangdong Entry-Exit Inspection and Quarantine Bureau.

The government agency detected banned substances, including chromium and neodymium, in nine SK-II products. The announcement created massive public attention, leading to lines of consumers seeking refunds at each of the 97 sales outlets for SK-II in China.

Regardless of what sparked the government’s decision to halt the import of SK-II in China, the situation reflects how quickly a backlash can spread through the country, through print media as well as online discussion groups and blogs. It also shows how much power China’s government still has over western marketers.

Late last week, a small group of protesters outside the company’s Shanghai office smashed a window in a “temporary flare-up of emotion that was quickly under control. There was no serious injury,” said Charles Zhang, a P&G spokesman in Guangzhou.

“We are still offering refunds to consumers, all valid consumer refund requests will be honored, but now through a toll-free telephone hotline rather than at stores,” said Mr. Zhang, senior manager, external relations.

“Things are quieting down now, but I have no idea when the sales counters will re-open,” he added. “On the government communication front, we are still communicating with the relevant authorities for further clarification of our compliance with government regulations.”

In a statement last week, P&G denied adding harmful chemicals to any of its products, including the pricey SK-II range. However, the company added, both elements commonly exist in water and food, and the level deemed safe by the World Health Organization is more than 100 times the level found in SK-II products by Chinese inspectors.

In addition, minute traces of the same elements have been found in products sold by other cosmetic marketers like Estee Lauder, Lancome and Christian Dior in nearby Hong Kong, according to local news reports there, without resulting in any problems with officials.

Industry observers, speaking confidentially, said they suspect the Chinese government has political or cultural motives for blocking SK-II, sold by P&G in China for several years.

“I’m not sure how it happened or why, but the scary part is that this happened to a company like P&G, that is so respectful and regularly meets with the government. P&G over-tests its stuff and all special claims go through its legal department. It is ridiculously careful,” said an ad agency executive who handles P&G brands in China.

“The thinking is that it could have been an issue the government had with P&G or even with Japan,” he added. Anti-Japanese sentiment has existed in China since World War II.

SK-II was created in Japan and although it is now owned by P&G, it is still marketed as a Japanese product. Asian women commonly believe they have better skin than Europeans and admire Japanese products and trends, making SK-II’s Japanese heritage a potent selling point. As a result, many SK-II consumers, and even government officials, do not realize it is owned by an American company.

“Until the situation is resolved,” the agency exec added wearily, “P&G is being respectful and hoping the PR crisis will blow over soon.”

China’s Online Advertising Landscape
HONG KONG--With 82.6% of China’s internet users now declaring the internet to be their main information channel, according to the China Internet Network Information Center, the country’s quasi-government Internet overseer, advertisers increasingly are going online to communicate with Chinese consumers.

So far, auto manufacturers, PC makers and consumer goods marketers are the most committed to online advertising in China, based on the latest results from the Nielsen//NetRatings online ad tracking service, AdRelevance.

NetRatings began monitoring China’s top web sites in May 2006, and initially counted 587 online display advertisers that ran nearly 1,500 campaigns consisting of more than 3,700 banner ads. By the end of July, the number of advertisers grew by 39% to 817. The number of campaigns and banner ads increased by 34% and 55%, respectively, to 2,276 and 5,785.

The company estimates China’s total online display advertising for the three-month period May-July 2006 totaled $190 million (1.5 billion RMB). That figure is closing in on the level of spending in China’s magazine marketing, $240 million (1.9 billion RMB) for the same period, according to Nielsen Media Research.

China’s automotive, package goods, and computer and electronics industries were jointly responsible for almost 60% of the adspend during that three-month period. In July, the best-performing online marketer was China Mobile, the country’s leading mobile phone service provider, with 3.1 billion ad impressions.

In the auto industry, Nissan Motor Corp. was the top advertiser with 2.5 billion ad impressions. Founder ranked at the top of the computer and electrical category (1.6 billion impressions) and Coca-Cola topped the list of online display advertisers in China’s package goods industry (1.5 billion).

EBay, meanwhile, ranked third overall with 1.8 billion ad impressions. Volkswagen was in sixth place with 1.4 billion, followed by the Chinese PC-maker Lenovo Group (1.3 billion), Mengniu Group dairy (1.2 billion), Intel Corp. (1.1 billion) and Toyota Motor Corp. (1 billion).

DaimlerChrysler may partner with QQ-maker Chery
DETROIT--DaimlerChrysler may produce subcompact cars under the Dodge brand for the U.S. market through a joint venture with Chinese car manufacturer, Chery Automobile Co., as demand for small, fuel-efficient cars rises.

DaimlerChrysler President-CEO Tom LaSorda told Advertising Age that the only way Chrysler could develop a profitable subcompact car is through a partnership, and the company is discussing possible joint ventures. He said he hopes to report a deal in the fourth quarter of this year, but declined to confirm rumors that Chrysler is in talks with Chery. “We never stated who our partners are. We are talking to potential partners in Western Europe and China,” said Mr. LaSorda.

DaimlerChrysler is eager to expand in the smaller car category, however. The automaker will post an operating loss of $1.5 billion in the third quarter after 12 straight profitable periods, Mr. LaSorda said, citing "bloated inventories of our light-truck products."

He acknowledged Chrysler Group "has had an even steeper hill to climb than others," because it has historically been the most reliant on light trucks--pickups, minivans and sport utilities. Those categories account for just over 70% of its U.S. sales.

The automaker's growth strategy is to continue to push outside North America and enter new small-car segments both at home and abroad, with much of the growth coming from the Dodge brand.

The Dodge Caliber, a so-called C-segment small-car entry and Chrysler Group's smallest, is the first Dodge designed from the start for world markets. Mr. LaSorda said Chrysler sold nearly 7,000 Dodge Calibers internationally in the first three months and U.S. dealers are clamoring for more. "Although we filled our dealers' initial orders, we can't immediately meet requests for additional allocation," he said.

Chery has grown rapidly in the mainland with its QQ subcompact model, one of the popular cars in China for its size and affordable price of $3,500. The Wuhu-based company sold 167,400 units in the first eight months of this year, according to the China Association of Auto-making Industry. Chery is already producing cars in overseas markets like Russia and Iran.

At least one of DaimlerChrysler’s biggest U.S. rivals will not be pleased to see Chery expand in the American market, however. Chery went through a protracted legal and media battle with General Motors Corp. beginning in late 2004. The American auto giant claimed Chery’s QQ car was a copy of its Chevrolet Spark model in its exterior and interior designs. Also, the majority of both cars’ parts were interchangeable.

GM sought compensation and a public apology, but failed to stop Chery from making or selling the QQ in China, a market that offers little protection for intellectual property. GM abandoned its efforts late last year after both parties reached a settlement. The terms of the agreement were confidential.
--by Jean Halliday in Detroit and Normandy Madden in Hong Kong

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