06 August 2007 00:00 [Source: ICB]
China is scrambling to address the global uproar over tainted exports. What should chemical companies do to ensure product quality and reliability?
Doris De Guzman/New York
CHINA'S RECENT export scandals and the country's own shaky product safety system are resulting in a global tightening of regulations on product safety, supply chain accountability and increased testing and inspection of imported ingredients.
Toothpaste with diethylene glycol (DEG), pet food contaminated by melamine, seafood infused with antimicrobial agents and wooden toys coated with lead paint are some of the products from China being recalled and banned, especially in the US. The Chinese government is reportedly shutting down and revoking the business licenses of companies involved in the tainted exports.
Many industry sources attribute China's growing product safety problems to inexperience. Companies dealing with Chinese suppliers should pay careful attention to their qualifications, they warn.
"It is important to remember that China is a developing country, and its economic, legal and social systems are stressed by this rapid growth," says Mark Silver, president of US distributor and spcialty chemicals producer Special Materials Company, based in Princeton, New Jersey. "These stresses will generate some failures like we have seen recently."
Not only the speed, but also the very nature of China's economic expansion creates difficulties, Jay Timmons, senior vice president, policy and government relations, for the National Association of Manufacturers, told the US Senate Commerce Committee in mid-July.
"The Chinese industry has evolved rapidly, built on a foundation of hundreds of thousands of small, unregulated factories and farms," he pointed out. "Even when the Chinese government expresses a willingness to act, it may lack the resources, experience and personnel to carry through on its intentions."
About 67% of all US product recalls are of imports, and the majority of them are from China, according to the US Consumer Product Safety Commission (CPSC). The agency valued US imports of consumer products manufactured in China last year at $26bn (€18.8bn), comprising around 40% of all US consumer product imports.
Between 1997 and 2004, China's share of US consumer imports rose by 300%.
"The issue of Chinese imports cannot be adequately addressed by any one remedy, but rather a multipronged approach," CPSC acting chairman Nancy Nord told the Senate Commerce Committee. She said the elements of this approach were "dialogue and initiatives with the Chinese government directly working with Chinese manufacturers increased surveillance and enforcement activities at the borders and within the marketplace and modernization of our governing statutes."
The EU is also expanding its product safety monitoring of Chinese imports.
Last year, 48% of all notified dangerous consumer products, such as toys, electrical appliances, motor vehicles, lighting equipment, and cosmetics, were Chinese imports, according to the European Commission. Spain recently recalled two brands of Chinese toothpaste said to be tainted with DEG.
"It is clear from available figures that Chinese products and, in particular, Chinese toys, are over-represented among dangerous products found on the market," the Commission reported. "Improvements in the safety of Chinese products therefore have an important effect."
Chinese products exported to the EU last year were valued at €191bn ($264bn). The growth rate of Chinese exports in the region in the first quarter of this year is more than 26%, according to the Commission.
THE COST OF LOW PRICES
The ability to offer cheaper products has been China's greatest asset, but it is also the country's greatest liability. "In many ways, we are not surprised about these recent issues," says Kent Kendl, general manager of Shanghai-based consultancy Technomic Asia's China operations. "China's unrefined manufacturing process management, coupled with the pressure to achieve low costs in a very competitive environment, often leads to process shortcuts and poor quality control."
"It has been all about price, and the desire for lower prices creates the problem," says Charles Hinnant, president of the US's Charkit Chemical, a Norwalk, Connecticut-based chemical distributor. "Companies have seen their reliance on Chinese and Indian chemical producers grow tremendously over the last few years. While some importers have begun to get comfortable with their suppliers, these recent events give companies a reason to reevaluate their purchasing policies."
Viachem, a US specialty chemical and food ingredient distributor based in Plano, Texas, says it does not typically deal with end-user customers focused primarily on price. "These are the businesses that are being harmed by these quality issues," says Mike Efting, president of Viachem.
"My own opinion, based on my 12 years of experience with Chinese chemical makers, is that there is far more to the 'China price' than meets the eye. The type of problems being experienced with materials coming from China highlights the need to work with qualified partners who can be trusted to pay attention to details when it comes to product safety," he adds.
Food ingredient and chemical distributor Univar says it has a strict process for screening new suppliers before representing their ingredients. "Any reseller of Chinese food and pharmaceutical ingredients has a responsibility to ensure that the ingredient producers they are sourcing from are adhering to high standards of product quality consistent with Western requirements," says Jane Wells, vice president of marketing at Univar USA, based in Redmond, Washington.
Several organizations and government agencies worldwide are launching initiatives to strengthen quality assurance and ensure product and ingredient safety from China.
The CPSC has developed a special China program that coordinates with China's General Administration for Quality, Supervision, Inspection and Quarantine to increase product inspections. Another program notifies Chinese government officials when Chinese manufacturers are involved with a product recalled in the US.
The Commission says it also aims to prioritize identifying Chinese manufacturers of dangerous consumer products found on the European market and to pass the information to Chinese authorities for follow-up action.
The Natural Products Association (NPA), based in Washington, D.C., recently launched a new testing program designed to test the purity and composition of Chinese raw materials used in dietary supplements. The ingredients will be tested by the US Pharmacopeia laboratory in Shanghai.
"China is a major player in this area," says David Seckman, NPA executive director and CEO. "The program represents a significant departure from the current process, where US companies must rely on a test by Chinese laboratories or test samples themselves."
NSF International, a nonprofit testing agency, is working with the Chinese government to provide education on US food safety requirements, as well as to weed out suppliers who could potentially export contaminated products to the US.
"As with any country, including the US, there are suppliers that can take food safety and quality very seriously and there also suppliers that take shortcuts that can compromise food safety," says Tom Chestnut, vice president of NSF International's supply chain food safety and quality programs.
"We believe the best means [with which] to provide continuous improvements with food safety in the supply chain is identifying problems and taking corrective actions at the point of origin," says Chestnut.
Companies are also advised to take steps beyond government requirements.
"Purchasing professionals and the standards they invoke their supplier to adhere to have more clout than any government imposed restrictions," says Charkit's Hinnant. "I am sure in the long term these issues will be resolved through economics, so I hope the US government will not interfere by imposing unnecessary regulations."
"The only way manufacturers can begin to ensure the safety of the chemicals, ingredients and other products they import into the US is to take the horse by the reins and do the legwork," says Gary Rushlo, client business partner for SoftBrands, a global enterprise resource planning software developer for the food, beverage, chemical and pharmaceutical manufacturers.
THE PRICE OF SAFETY
"No matter who or where your supplier is, there's always going to be some risk. Sourcing from China isn't any different than any other situation. No matter where you're sourcing from, you want to make sure your suppliers meet your standards," says Rushlo.
The need for more quality testing equates to added costs, which could impact demand for Chinese materials. "There is obviously a cost to the increase in transit time and unplanned shipment delays caused by additional government inspections. Because the import business is very competitive, these costs will eventually have to be passed along to the end users," says Wells.
"We do see some decline in the purchases of Chinese sourced ingredients from the midsize and smaller food companies. They typically do not have the resources to perform their own inspections and are not familiar enough with China to understand what is available," she adds.
"In our industry, new government regulations are sure to add costs or remove competitive ability from traders who are focused on commodity sales," notes Efting. "We do foresee that this will increase the costs to other distributors that have not been worrying about ensuring the quality of their ingredients before this crisis."
SCALING THE WALL
Technomic Asia recommends three practical steps for foreign companies dealing with Chinese suppliers:
1. Follow the six d's: due diligence, due diligence, due diligence.
Companies should get as much information as possible, not only about the quality of their production but the quality of the company itself. Direct visits, reference checks and the like are basic due diligence steps that need to be done.
2. Wait for the 10th shipment.
Subsequent quality can begin to slip as the supplier gets sloppy and tries to reduce costs. Spend a lot of time testing and checking quality through at least the first 10 shipments. Learn the capabilities and commitments of your Chinese suppliers. They should, in turn, learn the standards and practices of their foreign customer.
3. Do it yourself.
The ultimate responsibility for managing quality is the foreign buyer of the Chinese products. They should assume that they are working without a net in terms of government oversight by, for example, making regular visits, putting people on site for long periods of time and doing significant training.
CURING THE CHINA SYNDROME
As pressures mount from the US and the EU, China is working to improve the product safety by removing corrupt officials, shutting plants, revoking licenses and establishing food and product safety standards.
"In the wake of these quality scandals, the Chinese government is making new commitments to increasing regulations as well as better enforcement," says Kent Kendl, general manager of Shanghai consultancy Tecnomic Asia. "The recent execution of a former drug and food safety chief, Zheng Xiaoyu is a signal to both other suppliers and to the international community that China is concerned about the growing number of safety quality cases."
Zheng was sentenced to death in May for accepting bribes to approve substandard medicines, including an antibiotic responsible for the death of at least 10 people.
"Chinese regulators now more than ever need to remain vigilant," says Felicity Wang, spokesperson for the American Chamber of Commerce in the People's Republic of China. "Given China's huge increase in exports and domestic consumption, it needs more and better-trained regulatory staff to monitor factory compliance with the law. This will make sure that consumers have access to legitimate and high-quality products," Wang adds.
In a statement made last month, China's foreign ministry spokesman, Qin Gang, said China is willing to cooperate with other countries to ensure food safety and quality for foreign and domestic consumers.
"Exaggerating, complicating and politicizing relevant issues should be avoided," said Qin. "We believe that through our unremitting efforts, Chinese products can continue to have [their] due share globally. 'Made in China' should not be labeled as 'watch out' for consumers, but stand for safety, good price and high quality."
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