In a recent post, I was wondering whether many importers calculated the fully-burdened cost of imports. Today, I came upon an interesting article on Knowledge@Wharton (Can China Meet the Quality Challenge?) where Mr. Pinney, from BCG Shanghai office, explains the roots of this situation:

“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.

But why didn’t importers adapt to this new system?

“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.”

Both manufacturers and buyers might be incompetent, but who is at fault? The purchasers, of course. They went into a totally different system without virtually any type of quality assurance. Then they got locked in OEM relationships and were forced to compromise on quality. Thousands of importers are still operating under such circumstances, and they will until they are forced to deliver products of a higher standard.

Then the article touches on the solutions for reducing quality risks. For example, the central government has audited 3,000 exporting toy factories, 600 of whom lost their authorization to export. Unfortunately, China is a very decentralized country, and Beijing has a hard time enforcing regulations. It will not work very well. Too many local official have an interest in the status quo.

So, where will the solution come from? We need to enforce strict standards in importing countries, and the buyers, in turn, will put pressure on their suppliers.

A direct correlation seems to exist between Chinese suppliers’ adherence to quality specifications and the degree to which their industry is regulated in the West. For instance, pharmaceuticals and foods tend to be more advanced in quality control “largely because of the pressures and incentives at the client end,” Pinney says. Similarly, Pinney sees significant quality improvements in the automobile and white-goods industries. Where the consequences of failure are less dire, quality levels are generally lower. “Quality improvements are the least far along as you move down the food chain into low-end electronics and toys,” he notes. “The downside to quality mess-ups is relatively small in shoes and textiles.”

Basically, developed countries should demand higher standards–and punish harshly the domestic vendors who don’t respect them. Then importers will have to do what is necessary: monitor product quality very closely, switch to more reliable factories, etc.