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ICG Risk Blog - [ A China facet: Defective materials and products driven by greed and ineptitude ]

A China facet: Defective materials and products driven by greed and ineptitude

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Our clients are familiar with our longstanding forecast of Chinese 'thrifting' in materials, coatings and platings, more so when they occur on interior surfaces, on in internal components, where testing is more difficult. Such thrifting occurs frequently in Chinese supply chains, often evidenced by multiple, substandard parts from different suppliers in the same subassembly.

This thrifting is matched by an aggressive IP theft/harvesting by the Chinese as these same materials areas are key to significant cost and structural improvements in sectors such as autos and elsewhere. Often the US/EU supplier possessing these skills is a tier two or three almost completely unaware of the attack. This bifurcation is understandable as the thrifting and the thefts are being executed by different entities with different goals in the greater Chinese supply chain. No one ever said that China was not a land of contrasts.

Unrecognized by many, the risk has been there

In advising clients that they cannot rely on their Chinese supply chain to enforce part quality, Harris & Moure states that the problem is not new and that they must "take action to ensure the safety and quality" of their products in order to minimize their liability:

Dangerous Chinese products were entering the United States and Europe long before the Melamine pet food tainting hit the news.  But that incident and those which quickly followed it (bad toothpaste being the most prominent) mean everyone is now on notice these issues are real.  From now on, it will be impossible for any Western company to plead ignorance.  Western companies that refuse to take proper action will increasingly be subject to to severe penalties, even including punitive damages, where such damages are available.  In other words, any Western company that does nothing to assure the safety of its Chinese products and then steps into court claiming it had every reason to trust its Chinese supplier (based on faith alone), is likely to face real anger and major damages.  Plaintiff's class action lawyers in the United States should be and are salivating.

And get this straight, we are not just talking about food products here, though that is the most obvious and prominent right now.  If you are selling Chinese bikes, do you know whether the nuts on your seats are really strong enough to withstand a 200 pound Westerner?  If you are selling Chinese electrical goods, do you know if that Underwriters Laboratory (UL) sticker is counterfeit or not?  Is the plastic in your Chinese made baby item really nontoxic?  Will your cigarette lighter explode?  Are you certain the fake fur on your coat is not from a dog?  The time for complacence is over.

As any automotive supplier has painfully come to know, PPAP (Production Part Approval Process) and APQP (Advanced Product Quality Planning) proficiency is thin in China beyond already established suppliers to long standing automotive OEMs and tier one suppliers. As one cascades down the part and commodity chain, production values are problematic:

Sure, greed factors into why Chinese suppliers make defective, even harmful products. But often it's because of just plain ineptitude. If you visited a typical Chinese factory, you'd see why. It lacks capital, technology and know-how. Its workers place obedience over quality. And it sits along an endless chain of middlemen.

On average, it takes China 17 separate parties to produce a product that would take us three. Unlike Japan in the 1980s, little companies drive China's economic growth, not big ones. China's industries are composed of hundreds of thousands of tiny factories and farms -- plus traders, brokers, haulers and agents, all of whom take control of the goods and materials but add little value to the product. With every additional player in the chain, the cost, risk and time grow. Effective quality control in this environment is difficult.

So is effective cost control. Despite cheap labor, making goods in China is often more expensive than in the U.S. Far from being a bottomless ATM of cheap consumer goods, China is a risky, costly and time-consuming place to do business.

Yet polls show a majority of Americans believe China has mastered basic manufacturing -- and it's now barreling into our high-tech backyard. That's false. As the product recalls demonstrate, China can barely make low-value goods reliably, much less higher-value ones. The problems are structural, not the result of a few bad apples.

Faults in areas more critical than toothpaste

China has fundamental faults in essential fabrication materials; start with steel:

Steel imports from China that fall apart easily are making U.S. manufacturers and constructions firms more than a little nervous. Reports of failures during initial fabrication and questions about certification documents will mean closer scrutiny... The biggest concern is hollow structural sections widely used in construction of skyscrapers, bridges, pipelines, office, commercial and school buildings. This high-strength steel is also commonly used in power lifts, cranes, farm equipment, furniture and car trailer hitches.

Chinese high-strength steel tubes and pipes are also a potential problem. They're used extensively in power plants and in large industrial boilers, and must withstand enormous pressures and hellish heat around the clock for weeks or months on end... Inferior high-strength steel could cause catastrophic failures of buildings, pipelines or in power plants' boiler tubing...

"Most of China's 800-plus steelmakers are small fabricators who have no idea what quality is about, so there is a risk that some guy with a welding torch buys some hot-rolled coil steel and just welds it together"

As critical material failures occur regularly in key Chinese infrastructure projects, what makes a US purchaser is going to fare any better? Witness the recent failure that occurred at the 300MW Huadian Datong Power Station Unit 2, Qinghai Province, when the HP main steam line, supposed to be seamless Grade 91 pipe, failed (photos here and here), killing two and scalding one. The failure path was consistent; note that the Chinese government has now banned Chinese pipe for critical power plant applications:

"It is very important that we deal with reputable companies and know the origin of the materials we supply. The material that failed was supplied by a company in Houston TX, called S.M.A.N.T,who certified it as US pipe when it came from questionable sources in China. These details have been confirmed by the Bechtel QA Manager of Power. Bechtel China has also conducted an investigation and the supply chain is ugly due to the extent of how many agents, brokers, and mills are involved. The Chinese Government has stepped in and has called for a formal investigation. The Chinese Government has also banned Chinese made pipe for use in major power plant critical applications. Thus far there is evidence to support that over 30 plants contain similar or other "fake pipe" all over China."

Comissive-omissive chain of actors in government and industry

The Chinese government believes "that more than 40 [Chinese] plants have used the [bogus, noncompliant] Hyrdatic or SMANT pipes." The analysis was:

  • The cost of bogus pipes is only 40% of those imported and margin from a 2x600MW could be 70 million RMB or 9 million USD.
  • Sometimes they do import some genuine product but only a small portion to cheat inspect and examination.
  • The trader and dealer actually know the fact of forge and share the interest together with the counterfeiter, however, they pretend as to be deceived once the reality was disclosed.
  • Normally, owners order the critical pipes directly and then lack of strict inspection and examination.
  • For Huadian Datong Power Plant, the pipe trader, Huadian Piping Engineering & Technology Co is actually a related firm to the owner, both of which under the same umbrella of Huadian Group, one of the five major IPPs (State controls most of shares)
  • Plentiful plants built simultaneous with aggressive schedule furnish markets to low cost fake pipes.
  • Legal and administration penalty is too insignificant to deter to counterfeit manufacture.

A list member added this comment:

Fake seamless pipes is a huge racket prevalent in China. There are any number of unscruplous manipulators in this trade. Last year I had an export enquiry for seamless pipes. My rates were high obviously by 20%. I was asked to quote a lower price,and win the bid. Thereafter I was asked to supply good original samples for approval. Thereafter I could supply fake ones just by placing the stamp of original manufacturer. I refused. The Chinese guy accepted and to this day the orders go to him and the business goes there. [Question as to who the writer was working with] Government tenders are always cornered by the traders,middlemen and are considered a largessse doled out to political beneficiaries. This is a standard practice in Asian countries.For government is the biggest buyer.

Yet:

Imports of specialized structural pipe and tubing steel from China are soaring, up from almost nothing two years ago to 102,000 metric tons in the first six months of this year, according to American Iron and Steel Institute data. China now provides about 25% of U.S. supplies of this high-strength steel, making it the second-largest source behind Canada. U.S. steel mills supply about 16%.

On the heavy fabrication side, caution and the recognition of need to aggressively test are emerging, albeit not widely enough; too much product is still being accepted at face value. This on Chinese steel products from the Boiler and Pressure Vessel engineering Forum:

One of the vendors we deal with regarding boiler pressure parts is Chicago Tube and Iron (CTI). They (CTI) will not purchase tube mill products from China unless the customer specifically requests it. I happen to be in the CTI shop an an audit for our parts and one of the floor guys showed me a batch of tubing from China. It was poor quality - surface finish and tolerances...

The general feeling is that if the Chinese can sell an item and the "value added" (i.e. heat treatment) cannot be easily determined from a visual inspection, then they will try to get away with it...

As a fabricator on the Gulf Coast, we are seeing most users/buyers specifying Domestic,Canadian, Western European, and Japanese manufacture for materials. Many are adding a "melted & manufactured" clause in their specifications. Substantial AMLs [Approved Manufacturer's Lists] are now the norm and Chinese materials are generally excluded due to poor quality which relates to risk...

There is quite a bit of seamless tubular manufactured in the US, from Chinese hollows. It makes sense, the size control, heat treating and NDT are all controlled on this end. And you save some money on the starting hollows. The guys that I know that are doing it are sending people to witness every manufacturing run in China...

Confronted, China assumes the role of aggrieved party or the bully

The CCP suppresses bad news, news that would embarrass the party or its luminaries; when it cannot suppress, it goes on the offensive as the systemic issues resist correction. Witness China's sustained data suppression over the SARS and Avian Flu outbreaks.

In each emergency or embarrassing discovery, China shatters the rules of good public relations and crisis management, doing few or none of the following:

  • Prepare to engage fully
  • Have all the facts
  • Take immediate action, minimizing danger to human life
  • Tell the truth
  • Show care and sincerity
  • Use common sense

To larger states such as the US, the initial response to the recent appearance of poisonous diethylene glycol (DEG) in toothpaste and cough syrup, killing more than 100 in Panama is typical:

"So far we have not received any report of death resulting from using the toothpaste. The U.S. handling (of this case) is neither scientific nor responsible," China's General Administration of Quality Supervision, Inspection and Quarantine said in a statement posted on its Web site over the weekend. "All the toothpaste exported to the United States had been registered by the U.S. Food and Drug Administration for marketing in the States."

While such stonewalling does nothing to resolve matters and establish trust, this response received by smaller states is instructive:

In dealing with product safety complaints from the United States, China has sought to convince a concerned American public that it has reformed and is doing all it can to ensure the safety of its products. But its dealings with other, less-developed countries or those in vulnerable political positions are a different story, according to Husniah and officials in the Philippines and Malaysia...

Chinese food-safety officials argue that the recalls and bans by other countries amount to technical trade barriers that attempt to legitimize what would otherwise be unfair trade practices.

But to a regional state as prominent as Indonesia:

Indonesian officials accuse China of pushing shoddy products and inferior standards on poor countries that have no choice but to depend on it for cheap goods, aid and investment. They say that China, in closed-door meetings, has refused to share basic information, attempted to horse-trade by insisting on discussing disparate issues as part of a single negotiation and all but threatened retaliatory trade actions. The Chinese respond that their products have been the victim of unfair trade actions.

Examples:

After hearing about dangerous Chinese products elsewhere, Indonesia this summer began testing popular Chinese-made items on its own store shelves. What it found has added to the list of horrors: mercury-laced makeup that turns skin black, dried fruit spiked with industrial chemicals, carcinogenic children's candy.

The Chinese government called up in August saying it had a possible solution. [The] the Chinese suggested Indonesia lower its safety standards. [Head of Indonesia's food and drug safety agency] Husniah said she was "very upset and very surprised." "I said to them, 'I respect your standards for your country. I hope you respect ours.' "...

In the Philippines in July, a state-owned Chinese company threatened to sue for defamation after the Philippine government released a public warning saying a popular brand of candy was contaminated with formaldehyde. In Hong Kong, China pushed the territory to reconsider its recall of toothpaste contaminated with a chemical that other countries said might be poisonous but that China argued was present at levels safe for human consumption. It then ordered Hong Kong to submit a report on how and why it called back the toothpaste.

In Malaysia, a ban on fungus-infested nuts and dried fruit with a carcinogenic sweetener from China was met with a Chinese alert on litchi-flavored yogurt from Malaysia that it said didn't meet labeling requirements. Malaysia has long had a history of food safety issues with Chinese products.

When the smaller states do not relent, China enacts countermanding measures;

[Soon after the Indonesian meetings], China had announced a ban on Indonesian seafood. Husniah said she accused the Chinese of taking retaliatory trade actions. "You banned our seafood because of our public warning about your products"... She said Chinese officials denied this was the case...

Days after the Philippines announced the problem, the Chinese government enacted its own recall of banana chips from the Philippines, saying they contained high levels of sulfur dioxide, which is used as a preservative but can be toxic at high levels. China dispatched representatives all over Asia to talk to food inspectors in other countries...

One is left with the impression that China is more aggravated than repentant, and that it will continue to sell defective materials and products where possible. This does little to build trust that China will move to rectify its defects.

Next: A China facet: White light vehicle cloning driven by absence of indigenous vehicle designs and packaging

New Threat From China: Shoddy Steel Imports
By Jim Ostroff
Kiplinger Business Resources
September 7, 2007
Mirror

PRC tries to clean up image in Sydney
FIGHTING BACK: Hu Jintao pointed out that 99 percent of exports from China to the US, EU and Japan from 2004 to the first half of this year were up to standard
By Jessie Ho
STAFF REPORTER, IN SYDNEY
Taipei Times
Friday, Sep 07, 2007

Importer to recall Chinese-made car fuses
Auto parts company alerted regulators to fuses that don't blow when they should and could cause fires.
By Peter Valdes-Dapena
CNNMoney.com
September 6 2007: 11:34 AM EDT

Asians Say Trade Complaints Bring Out the Bully in China
By Ariana Eunjung Cha
Washington Post
September 5, 2007

AISC Requests Data from Independent Testing of HSS
From American Institute of Steel Construction, Inc.
September 04, 2007

Steel Products from China
thread794-195299
Boiler and Pressure Vessel engineering Forum
Eng-Tips Forums
Aug 18, 2007

Also these threads:
Fabricated Vs Forged Flanges-National Board Report
thread292-11849
Chinese steel tube
thread404-187383
origin of material
thread794-188022
Stainless Steel Pipe
thread378-70822

Massive Subsidies and the Great Protectionist Walls of China
By Peter Navarro
FT Press
Aug 17, 2007

China the defective-product king
Beijing's attitude about quality of its goods reflects its Maoist legacy.
By PETER NAVARRO
The Orange Grove
Tuesday, August 14, 2007

Cracks in the Great Wall of China
Nicholas Vardy
Global Guru
7/25/2007 12:01 AM ET

The China Syndrome
By JEREMY HAFT
WSJ
July 16, 2007

Dangerous Made-In-China Products: 2007 Timeline
by Jefferson
Who Sucks?
July 7, 2007

Dangerous steel
Felix Weinstein
Tower crane engineer Felix Weinstein argues that steel impurities are threatening the safety of cranes. Steel produced in ingots from recycled steel is most at risk to contamination. The only solution is extra testing.
Craines Today
July 2007
Mirror

The End Of Cheap China
Fiducia
July, 2007

450,000 Truck Tires Made in China To Be Recalled in US
Posted by chinaview on June 26th, 2007
Status of the Chinese People

original report from DiGiTAL50.com

FDA and The Crisis of China's Poisoned Products News
By Gordon Gibb
Lawyers and Settlements
June 17, 2007

China says US toothpaste warning irresponsible
Reuters
Mon Jun 4, 2007 12:33AM EDT

How To Protect Your Company From Bad China Product
Posted by Dan Harris
China Law Blog
June 6, 2007 at 08:52 AM

P91 failure in China - 3 fatalities
thread330-172967
Boiler and Pressure Vessel engineering Forum
Eng-Tips Forums
11 Dec 06

The China Syndrome: How Subsidies and Government Intervention Created the World's Largest Steel Industry
Alan H. Price, Christopher B. Weld, D. Scott Nance, Paul Zucker
Wiley Rein & Fielding LLP
July 2006

Growing experience with P91/T91 forcing essential code changes
By Jeffrey F Henry, Alstom Power Inc and ASME Task Group
COMBINED CYCLE JOURNAL
First Quarter 2005

Bird Flu: Communicating the Risk
by Peter M. Sandman and Jody Lanard
Perspectives in Health
Pan American Health Organization (PAHO), WHO
Volume 10, No. 2, 2005

Commentary: While China Stonewalled
Business Week
APRIL 14, 2003

Product Quality Law of the People's Republic of China (Amended on 7/8/2000)
Ministry of Science and Technology of the People's Republic of China
(Adopted at the 30th Meeting of the Standing Committee of the Seventh National People's Congress on February 22, 1993, and amended at the 16th Meeting of the Standing Committee of the Ninth National People's Congress on July 8, 2000)

Gordon Housworth



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