Misplaced Assumptions

China's quality challenge begins with misplaced assumptions and perceptions on both sides, attributable in part to the speed with which many companies from developed countries embraced offshoring. The result was an inescapable "trade-off between cost and quality" says David Lee, partner and managing director in BCG's Beijing office, and a supply chain and procurement specialist. He recalls executives at a Chinese ball bearing company offering three prices: top quality at high prices, "acceptable quality" at lower prices, and, at the lowest price, "something that will turn and not freeze by the time the customer gets it."

Foreign buyers often tend to make strategic mistakes that end up hurting quality. For instance, many assign procurement managers to lead contract negotiations with suppliers, says Benjamin Pinney, a principal in BCG's Shanghai office. "They have a procurement mentality and focus purely on price negotiation, and it's an arm's-length transaction," he says. Because their expectations are based on their experiences with home-country suppliers, they don't always follow up with their Chinese vendors to monitor processes and quality testing.

This enthusiasm for cost-saving deals can impede buyers' ability to correctly gauge the risks or understand the context of operating in China. "Companies were in a rush, working with whichever suppliers were at hand or feeling their way in the dark, not knowing what they were getting into," Pinney says. With little to lose, Chinese suppliers would readily agree to meet quality standards. "In the great rush to China over the last 10 years, players on both sides of the fence were incompetent."

Many foreign companies didn't understand how much support a Chinese supplier often needs, and many expected to achieve quality benchmarks without investing in their suppliers. Few stepped back to ask what incentives their suppliers had to adopt the desired production systems and practices. So it wasn't surprising that some Chinese suppliers took shortcuts that compromised quality. One recent controversy over quality defects in Chinese-made toys came about because of design flaws and the use of raw materials that weren't approved by the foreign buyer, Lee says. Such defects can be difficult to prevent, especially if only a few suppliers are performing badly. But it adds to a perception of China as a source of poor quality. "It is a small drop in the bucket, but it is still a drop," Lee notes.

Blame shouldn't automatically be ascribed to Chinese contract manufacturers, some experts caution. Marshall Meyer, a Wharton management professor whose research focuses on China, points to a 2008 paper by Paul Beamish of the University of Western Ontario and Hari Bapuji of the University of Manitoba, titled, "Toy Recalls and China: Emotion Vs. Evidence." The authors write that the "vast majority" of toy recalls in the United States from 1988 to 2007 "were due to flaws in product designs conducted in the corporate headquarters of toy companies, rather than to poor manufacturing by factories in Asian countries." The researchers note that "the recalls have increased over the years, due both to design and manufacturing flaws." Meyer says he is "not sure" whether he agrees with Beamish and Bapuji's assessment. "There is a fair amount of design work done in China, including original equipment design."