China Makes iPads. So Why Does It Still Cut Corners For Its Own Consumers?

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Yuan Shuiling / AP

File photo of Chinese Foxconn workers checking integrated circuit boards in a workshop at the Shenzhen plant of Foxconn Technology Group in Shenzhen, China on May 8, 2010. China manufactures high quality goods like iPads and iPhones for export, but goods manufactured for domestic consumption do not meet the same standards.

Consumers in China are all too familiar with the realities of shopping locally. In the kingdom of “caveat emptor,” the buyer who doesn’t beware faces a daily gamut of frustration and disappointment with substandard purchases — clothes unraveling in the first wash, lids not fitting pots and pans, and kitchen gadgets exploding as soon as they’re switched on are as frequent as the scandals involving substandard, and often toxic, food and medicines.

Call it one of the paradoxes of modern industry: Countless consumer goods multinationals have built global empires by contracting out manufacturing to partners in China, generally without cutting corners or letting quality standards slip.

Yet for one reason or another, Chinese firms aren’t replicating that success at home. Shaking off the shackles of low-quality manufacturing is a mammoth challenge for many. But as China’s once formidable cost advantage shrinks and the country aims to reduce its reliance on exports, the need to address the issue is intensifying by producing more products that can collectively escalate the country up the “value chain” of manufacturing.

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“It is happening very slowly, but it is happening,” says Michael Clendenin, managing director of RedTech Advisors, a Shanghai-based consumer technology research and consulting company. “For every one Chinese company that is improving [product quality], there are probably 10 out there that are still cutting corners and two [other] new companies are coming into the market by cutting more corners.”

Get Rich Quick?

In 2007, the world woke up to what Chinese consumers had long contended with, when a number of Western multinationals, including toymaker Mattel, were forced to recalls all sorts of tainted or faulty China-made products. While regulators tightened policies and many corporate risk managers swung into action as a result, there is still no getting away from the fact that “some Chinese industries suffer quality problems — especially in food, where stories of contaminated or adulterated foodstuffs simply do not go away, despite numerous government initiatives to correct the problem,” says Wharton management professor Marshall W. Meyer.

Other industries — notably consumer electronics — are doing a better job of raising the bar. “Chinese companies that are playing at the higher end of the market understand slightly better how manufacturing works,” notes Paul Midler, a consultant and author of Poorly Made in China. Yet those companies seem to be in the minority.”Many manufacturers are not interested in making a quality product and building a long-term reputation,” he says.

One reason for that, he adds, is China’s booming real estate industry. A number of manufacturers “got into manufacturing mainly because they saw [the money they could make in manufacturing] as a stepping stone to real estate,” he says. In a roundabout way, that spells trouble for quality: “Compare two manufacturers. One wants to make a product to generate a small profit and have repeat business. The other simply wants your order so that he can [make enough money to] build a shopping mall. Which one will be focused on the quality and integrity of the product?”

But short-term gain may lead to long-term pain. “If Chinese brands want to have longevity, they need to improve consumer brand perception and build consumers’ trust,” states Thomas Isaac, commercial director of the global market research firm TNS in Hong Kong. “Trust comes from ensuring your products are good quality and durable. If there is a problem, you have to address it.”

(MORE: Why China Faces a Catch-22 on Financial Reform)

The problems are particularly glaring at companies whose managers suffer from the belief that the trade-off between cost and quality is inescapable. That’s the case in the country’s small, but burgeoning, electric bicycle business, according toEd Benjamin, managing director of Florida-based eCycleElectric Consultants. “A Chinese businessman boasted to me that he just made a lot of money by reducing the cost of materials. He thinks that he is a smart businessman,” he says. “In fact, he is destroying his business and destroying China’s reputation. In our ebike space, we still have a lot of old-fashioned businessmen who have not learned their lesson. Customers find a lot of trouble with inconsistent quality.”

Yet beyond the get-rich-quick ethos, other, arguably harder-to-address forces are at play, notes Meyer. For one thing, the huge number of small companies and widespread fragmentation of industries make controlling supply chain networks far more complex in China than in other developing economies, such as India. That’s compounded by endemic subcontracting — or cheng bao, as it’s known locally — which leaves companies grappling with layer upon layer of suppliers involved in making their products, according to Meyer.

Kazuto Suzuki, a professor of international politics and economy at Hokkaido University in Japan, points to China’s heavy focus on developing technology for military purposes, rather than civilians, as a key hindrance to upgrading quality. While the government has made huge strides in space and other military applications, commercial technologies have gotten short shrift. “In the military side, you have major military clients. In the commercial world, you have a huge market where you are not sure what kind of technology is needed or what kinds of products people want,” Suzuki says. “Chinese companies don’t want to invest in uncertain technologies. It is less risky to copy technologies that are established or proven to be profitable.”

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