The label “Made in China” is not instantly recognized as a seal of quality in the Western world. Many consumers would usually associate it with mass production, poor workmanship, etc. and they are not necessarily wrong. Cheap mass-produced goods still make up a big share of China’s exports. But China has caught up in the recent years to the extent that many of its economic sectors can now keep up with those of developed Western countries or have even surpassed them.

With its “Made in China 2025” campaign, China wants to transcend its low-cost producer image and become a major player in the production of innovative and modern high-tech products by the year 2025. Besides facilitating innovation, modernizing industry sectors and other actions, the government has also set the goal of improving product quality.

This means that more and more Chinese companies will start to implement quality assurance or quality management systems in the future, for example, according to the international ISO 9001 standard. Today, China is already the world leader when it comes to the number of ISO 9001-certified companies. More than 30% of all ISO 9001 certificates worldwide were issued to Chinese companies in 2016. The main reason for this is that ISO 9001 certification can improve the sales opportunities for Chinese suppliers. An implemented quality management system builds trust and is also a prerequisite for many overseas customers. In addition, the demand for high-quality products is also increasing in China’s domestic market, which makes quality assurance and management more attractive and important for companies that sell their goods in China as well.

In light of current trends, it seems that the goal of improving product quality set forth in the “Made in China 2025” campaign can be achieved, but reality doesn’t look quite as promising. Many companies are still lacking effective measures for assuring the quality of their goods. Some of them may refrain from such measures to reduce costs, for example, by using different materials as those stated in the contractual agreements, while others even attempt to forge certificates.

This kind of behavior can be attributed to different factors. On the one hand, certain cultural and social characteristics in China can contribute to a different interpretation of quality as well as to a different hierarchy of priorities. On the other hand, there are some general flaws with quality management and its implementation, even when using international standards, such as ISO 9001.

Cultural differences and their effects on quality

Of course, the following characteristics aren’t exclusively limited to China. However, due to China’s economic, social and cultural history, they are embedded in Chinese society more deeply than in Western countries.

“Quality fade”

Especially in the Chinese manufacturing sector, there is a tough price war, which has been going on for decades. To attract customers, producers sometimes cut prices to such a degree that profit margins become pitifully narrow. If a customer is found, the so-called “quality fade” often occurs. This means that the quality of the products decreases over time. The reason for this is that the supplier searches for ways to increase his profit margin, which is usually achieved by cutting costs at the expense of the product quality. As the term “quality fade” suggests, the first deliveries may even surpass the customer’s expectations, while over time the quality progressively declines. In the worst case, this might even lead to product failure.

Another reason for “quality fade” is that a lot of Chinese companies value short-term profits over long-term success through relationship management and improving product quality. When effecting “quality fade”, the supplier hopes that the deficiencies won’t be noticed by the customer or that the customer just accepts them. In most cases, the complaints procedure and receiving reworked products or refunds would take considerable time and effort, especially where the deficiency is detected only upon receipt of goods. The Chinese price war and the pressure of finding customers also compel some companies to make overly optimistic promises. Often, the promises cannot be kept, which results in quality issues or delays in delivery.

Saving face

An important cultural difference between China and the Western world, which can also affect the way in which a company addresses problems, is the importance of the “face” in Chinese culture. In this context, “face” roughly equates to a combination of honour, status, reputation, etc. which has to be saved and maintained. Losing “face” is a taboo for Chinese people and can be caused by public humiliation or personal failures, for example. Humiliating others and making them lose “face” can damage their own “face” as well, for example, when openly criticizing a colleague in front of others.

In practice, this can lead to conflict avoidant behaviors and to a delayed addressing of problems. It can also result in Chinese partners not seeking clarification when questions arise, thereby causing misunderstandings. For Western companies, which usually adopt a more direct approach to tackling problems, this can be very hard to understand and can even pose a serious risk if critical problems are swept under the carpet.

Guanxi

Another fundamental concept is the importance of “guanxi”, which means a personal network of contacts and connections. Exchanging different kinds of favors is not unusual, which might foster nepotism and corruption in some cases. “Guanxi” can also affect the quality capabilities of a company, for example, where decisions are based on personal favors instead of an evidence-based approach. This could be the case when an external auditor or an employee in quality assurance does not work objectively because of “guanxi”.

Problems with the implementation of quality management measures

The decision to implement a quality management system is often driven by extrinsic reasons, such as a customer demanding it or to attract new customers. It can become problematic if there are only extrinsic reasons and no intrinsic reasons, for example, own conviction, striving for improvement, etc. In this case, QM is often considered as a necessary evil by the management which takes a lot of effort. Since leadership is one of the key principles of QM, the effectiveness and efficiency of the system is dependent on the leaders communicating the purpose and aims of QM within the company. A lack of commitment results in an ineffective and inefficient system. If a customer requires that a quality management system be implemented, the most common solution is certification according to the ISO 9001 standard. The certificate serves as proof of the company’s quality capabilities. But due to the flaws of the standard and the certification process, even certified quality management systems can be ineffective and inefficient.

  • Conflict of interest between company and auditor

The company that wants to be certified according to ISO 9001 must hire an external auditor. This might cause a conflict of interest, for example, if the auditor decides to ignore an infringement because he fears that he will not be hired again should he resolve against the issuance of a certificate. This kind of relationship is also susceptible to bribery.

  • Certificate is only a snap-shot of the system

Quality management systems according to ISO 9001 only have to be audited by an external person once a year. Some companies may therefore maintain the QMS only for the purposes of the audit because they think that continuous maintenance would be too much effort.

  • General formulation

The ISO 9001 standard is written very generally in order to be applicable to most companies and sectors of the economy. Usually, a company takes a tailored approach to fulfil the requirements of the standard so that the quality management system is well integrated. But due to the general wording, it is also possible to implement the standard with less effort and in a slapdash and unsystematic manner, leading to a more inefficient and ineffective result. For the auditor, it can be difficult to spot since it would be too time intensive to check the system meticulously down to the smallest detail during the audit.

  • Scope

An ISO 9001 certificate doesn’t necessarily mean that all processes of the company conform to the standard. The certification is only valid for a defined scope. The scope of the quality management system can be limited to a certain production line, factory or even to a certain product.

  • Validity

Certificates are only valid for a certain period of time. In the case of ISO 9001 certificates, the validity period is 3 years (with mandatory surveillance audits in the first two years and a re-certification audit in the third year). Expired certificates are passed off as valid certificates by some companies, as customers may easily overlook the expiry date.

Another validity-related problem is the use of fraudulent certificates, especially in China. In most cases, companies merely send a digital picture of the certificate to their customers. This can be forged easily by using image processing programs. For the customer, it can be very hard to verify a certificate, especially when the company name or other information is written in Chinese.

What to look out for?

In practice, problems associated with product quality arise from a combination of issues. Cultural characteristics could lead to a different understanding and evaluation of product quality, which in turn could lead to a poor implementation of quality management standards and measures. Therefore, the products end up not matching the requirements of the customer. It might not even be intentional in many cases, but it can nonetheless have a severe impact on the customers’ business.

It is crucial for companies to exercise their common sense and sound judgment. Sadly, there are a lot of companies which do not follow this advice and are lured in by the low prices and great promises of the suppliers. The cross-jurisdictional nature of the exchange can also make it very hard to raise claims against the supplier.

Here is some useful advice for doing business in China:

  • Verifying documents

When looking for a Chinese supplier, you should verify the provided documents, such as business license, certificate of incorporation, etc. This should include checking the authenticity of the documents to avoid falling for scams. Certificates based on international standards for management systems, such as ISO 9001 or ISO 14001, should also be checked in terms of their scope and their validity period.

  • Visiting/auditing companies on the spot

It is strongly advisable to visit your partner’s factory in China. First of all, you can check if the company has the required capacities and quality assurance measures. In the case of quality problems, you can also perform audits yourself. You can also use the visit to strengthen cooperation with your Chinese partner.

  • Sales agreement

The sales agreement should include detailed information on quality and compliance requirements as well as the production time. It has to be in Chinese language and must be made under seal and signed by legal representatives from both parties. By doing so, you ensure that your partner is aware of the legally enforceable terms by which he is bound, and you also have a legal basis for actions in case of nonconformity.

  • Communication

To counteract conflict avoidant behaviors, you can try to actively encourage your Chinese business partner to ask questions so as to avoid any misunderstandings.

  • Testing before shipment

If you are buying goods from China, you should always check them before the shipment, especially when they are shipped overseas. Testing the products after arrival complicates and extends the complaint process significantly. Where possible, you shouldn’t pay the whole amount in advance so that you have a bargaining chip if there are legitimate complaints.

  • Translator

For negotiations, contracts, visits, audits, etc., you should always have a fluent Chinese speaker with you to prevent loss of information and misunderstanding.

What can we do for you?

With your interests uppermost in our minds, CW CPA can help overseas companies navigate the cultural and administrative minefield and analyze the feasibility of setting up operations in China. For more information, please contact Ms. Delilah Li (delilah.li@cwhkcpa.com)

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