China Syndrome: Protection Is Essential

Manufacturing across the far reaches of the globe in countries such as China is an idea that has been widely embraced. However, it would have been naïve to think that the process would proceed seamlessly without encountering some major bumps along the way. The commitment to the development of China as a vital outsourcing option and a partner in manufacturing processes remains strong, but domestic manufacturers should acknowledge the hurdles that must be overcome.

Statistics point to potential trouble spots. Since 1990, U.S. product recalls have increased about 85%. The U.S. Consumer Product Safety Commission indicates that approximately half of the 467 products recalled in 2006 were from China. Certainly, such problems are not unique or even new, but several highly publicized incidents have put the manufacturing industry on notice.

Key point: Under the Consumer Product Safety Act of 1972, liability for defective products may extend to the manufacturers as well as retailers, wholesalers, distributors and private labelers. A lawsuit may be pointed at any party in the supply chain, thus giving manufacturers cause for concern. To compound matters, U.S. judgments against foreign producers may not be enforceable abroad, leaving the U.S. companies holding the bag.

Frequently, product defects can be traced in part to the incentives Chinese manufacturers have to keep costs as low as possible. Of course, U.S. manufacturers want to utilize the least expensive option without creating safety problems. But their counterparts in China may substitute materials in order to meet budgetary constraints. This situation can be worsened by other subcontractors participating in the process.

To ensure that each product component meets federal and state requirements, it is important to trace the components back to the original source and check their legitimacy. This can be difficult due to additional outsourcing by Chinese factories. Take measures to validate that a Chinese manufacturing partner is the one actually doing the work. When possible, obtain certification of all production aspects.

In addition, perform testing at several junctures during the production cycle. To ensure a higher degree of accuracy, testing may be conducted by an independent third party.

Obviously, establishing a level of trust and reciprocity is a top priority in such arrangements. This can be facilitated with the assistance of knowledgeable business advisers and other professionals. Once a long-standing relationship has been established, Chinese manufacturers may benefit from the expertise provided by their U.S. manufacturing partners.

Finally, pay careful attention to the wording and legal ramifications of contracts with Chinese counterparts. In the past, some U.S. manufacturers have been hurt by using standard documents with boilerplate legalese. Each situation should be addressed individually to take into account the particulars of the arrangement and any unusual situations.

Bottom line: It can be advantageous to pursue opportunities in China and other countries abroad, but U.S. manufacturers must take sufficient steps to protect themselves should contingencies arise.

December 2007