Rising Above the China Bashing

There is a lot to be gained in trading with China, despite recent high profile cases of adulteration.

By Paul Altaffer &
Grant Washington-Smith

The recent media attention and resulting public outcry over quality issues in China is causing major economic and political changes in the way trade is conducted. At stake is whether the U.S., and as a result the Western world, takes on a more restrictive view of trade with China. The economic backlash over the adulteration of raw material by Chinese manufacturers is understandable, but is it deserved? Do the U.S. importers, finished goods manufacturers and even the retailers deserve to share in the responsibility? Were these circumstance foreseeable, and hasany risk mitigation been deployed to avoid such an occurrence now or in the future? Finally, how do the Chinese view these allegations of cheating and what does the future hold for China as a supplier of quality nutraceutical ingredients?

China: The ‘Least Cost’ Producer

China has long been regarded as the “least cost” producer for almost everything a consumer needs—from clothing to cars to nutraceutical ingredients—so it is not surprising that it has played a major role in the vertical integration strategy of businesses worldwide spanning most major consumer segments.

Given such an important role in global commerce, which is played by the Chinese manufacturing sector, it might seem surprising that food scares resulting from product adulteration have occurred, like the recent melamine adulteration of wheat proteins, or more recently the diethylene glycol (DEG) adulteration in toothpaste. Indeed, even the nutraceutical industry has been the source of many similar stories, especially since China rose to prominence as the “least cost” producer of many botanical extracts and nutraceutical ingredients back in the late 1990s—from the spiking of synthetic ephedrine analogs into ephedra extracts and the spiking of synthetic caffeine into guarana extracts, to the inclusion of soy isoflavones in red clover extract.

But some fundamental questions should be asked, such as, why does this happen in the first place? Is it the result of poor production methods or the result of a more malicious business practice? Why would an industry so dependent on ex-ports to the West even risk such practices, deliberate or otherwise?

On the face of it, there appears to be a strong case against many Chinese manufacturers for what could be considered deceptive or deliberately misleading business practices. However, it would simply be wrong to assume that this is the only side of the story.

Why Businesses Engage in Deceptive Behavior

Business ethicists have reported in published studies, over many years and a-cross many industries, on the evolution of dubious business practices, such as price fixing or product adulteration. Interestingly they all appear to have a common theme, which implies that these deceptive practices occur under two specific conditions: 1) commodity pricing pressure and 2) low risk detection.

Since China’s rise to prominence in the nutraceuticals industry in the late 1990s, it goes without saying that most have viewed Chinese manufacturers as producers of low cost commodity ingredients, thus satisfying the FIRST of the two major conditions outlined by business ethicists for questionable behavior. Over the past decade it has been a race to the bottom when it comes to manufacturing costs and ingredient pricing, often at the expense of quality.

As an example, several years ago, despite the availability of resources, an Australian contract manufacturer refused to use its HPLC capability (high performance liquid chromatography) during the QA (quality assurance) auditing of incoming raw materials in favor of far less sophisticated methods. One might ponder why it didn’t want to look too closely at its raw materials, but that’s now a matter for the historians, as Pan Laboratories was later suspended from operating and became the subject of one of the largest product recalls in Australian history. The company was also responsible for changes in Australian law, requiring a tightening of the regulatory requirements for complementary and alternative medicine manufacturers. Again, the conditions of questionable ethics are at work with Pan Labs operating in a highly commoditized market, with a low risk of detection. Unfortunately, it took the hospitalization of 20 consumers of Pan-manufactured product to realize something was terribly wrong.

It is important to keep in mind, however, that being the lowest cost producer does not always guarantee that quality will directly suffer. Using another example, both McDonald’s and Starbucks are considered the “least cost” producers in their respective industries, and regardless of whether one likes these products, it would be hard to argue against the quality standards of reproducibility, food safety and cleanliness, etc., which is built into each and every cheeseburger or cappuccino these companies produce. What makes these two companies stand out in the commodity end of the market are the strengths of their business processes and the strengths of their brand. In the aviation industry, Southwest Airlines is another great example of a least cost producer prospering in a commodity market through innovation in its business processes, further strengthening its brand.

The dietary supplement market, with the exception of some notable examples, has not prospered on the relative strengths of its brands. Instead, it has remained largely production driven, with a focus on getting costs of production down and volume into distribution channels as high as possible. This has lead to further downward pricing pressure on the supply end of market. With almost an “auction” type of procurement mentality, sales have been awarded to the lowest bidder, where price has been the primary, if not the only consideration. As a result, far less thought and effort has gone into supply chain traceability and validation of ingredient production. This sets up the SECOND condition of unethical business practice—the ability to get away with it.

Making the Best out of Trade with China

While some Chinese manufacturers have been the perpetrators of product adulteration or mislabeling, they have been able to achieve this within an environment that the West has tolerated, perhaps not directly, but at least indirectly by not requiring a higher degree of quality.

It would be wrong to assume that the Chinese themselves are not being proactive. Pearl Lin is the managing director for ACFF (Atlantic Coast Functional Foods), a manufacturer and exporter of nutraceuticals based in Beijing, China. When asked whether she felt the hysteria over quality issues in China was justified, she replied, “No, definitely not. We must look at how much progress China has made over the last 10-15 years in terms of its reputation for quality, service and delivery. ‘Made in China’ no longer automatically implies low cost and low quality. It now means that China is competitive in many areas.”

The Chinese government, at the central and regional levels is taking steps to improve the Chinese manufacturer’s reputation on a global basis. For example, in response to the recent melamine concerns, a new Shanghai-based food safety initiative has been created to establish a rapid response food testing system to step up the tracking and prevention of harmful food and beverage products. Of course, these measures also provide an assurance for China’s domestic consumers who also have concerns over food safety and quality.

In 1998, the Chinese central government mandated that all pharmaceutical manufacturers follow GMP standards by the end of 2004, which also includes the processing and manufacture of Traditional Chinese Medicine (TCM). By 1999, only 5% of the 6000 Chinese pharmaceutical companies had achieved GMP standards. By the end of 2004, approximately 4000 Chinese pharmaceutical companies were GMP compliant, with the remaining 2000 having been shut down by the authorities. Today, all Chinese pharmaceutical companies must be GMP compliant. In addition to the manufacture of TCM, the majority of Chinese pharmaceutical companies are generic drug manufacturers. These are important considerations since the Chinese Pharma industry has the technology infrastructure, the know-how, the quality standards and the capacity to produce high quality botanical extracts and nutraceutical ingredients, which can ultimately be tableted, bottled and labeled in a turnkey operation.

Despite the actions of some Chinese manufacturers, a lot of companies still view China as a strategic part of their sourcing operations. Some have even developed direct relationships with supply partners in China, including the maintenance of offices and agreements that allow for the direct control of quality procedures. Companies like RFI Ingredients, Blauvelt, NY, invest considerable resources toward the development of quality practices among its supply partners and see that the quality of its products and ingredients, while intrinsically linked with perceptions of the consumer retail brand, are also implicated with the wider issues of sustainability, the environment and safety. For these companies, quality assurance comes down to the issue of transparency, traceability and consistency.

But not all companies have the luxury of maintaining operations in the markets that they source from. One innovative solution might be to partner with dedicated sourcing companies that specialize in traceable sourcing and supply chain auditing. Ingredient sourcing from China can be tricky because of the difficulty in ascertaining where a manufacturing facility is and if in fact given ingredients did originate from it. As such, a viable support service could bridge this security gap for food, beverage and dietary supplement manufacturers in North America.

While the adulteration of foods and the associated risk to public safety is no laughing matter and should be dealt with appropriately, it seems that China bashing has recently become fashionable. One does not need to look far to find other major instances of adulteration or problems with the food supply, which have nothing to do with China. It is therefore too easy to use these recent cases as a platform for taking a protectionist view with respect to China. The natural products and nutraceuticals industries have a great deal more to gain from responsible trade development with China than from indulging in collective hysteria.NW