Why do foreign brands ‘Break Bad’ in China?

One of the major suppliers of famous multinational brands like McDonald’s and KFC was recently found using old meat to produce fast food. The news dragged foreign fast food chains into another wave of public outcry, with “get out, foreign fast food” appearing on the Internet.

If I remember correctly, this is the third straight year that KFC’s parent, Yum Brands Inc., was exposed in scandals involving supply chain quality. In 2012, Yum was reported to have used hormones to raise fast-growing chickens in just 45 days, implicating its KFC chains. Last year, Yum’s Little Sheep Mongolian Hot Pot & Grill restaurants were found using chicken, fox and rat meat in place of lamb, damaging its business. These three crises all resulted from problems with upstream supply companies.

Multinational retail chains have also been badly hit. In 2013, the Chinese stores of Britain’s Tesco were found to be selling fake lamb that was 95 percent duck. Also that year, a Beijing branch of France’s Carrefour was reported to be selling beef balls with no beef in them. In January, American retail giant Walmart had to recall donkey meat at some Chinese stores because regulators detected fox DNA in it.

So what’s the problem?

First, let’s look at the issue from the point of view of the attribution theory in social psychology. Psychologist Harold H. Kelley thinks attribution on an issue should depend on at least three factors: consensus information, consistency information and distinctiveness information.

Consensus information examines most people’s behavior in a similar situation. So, if food safety problems only happen to foreign brands, then we should blame these multinational companies. However, if the problem also occurs to domestic brands, then we probably should not. Consistency information looks at the consistency of one’s behavior. So if foreign companies have a consistent problem with food safety, then it’s their problem. But if they have only been involved in scandals in recent years, then the issue is not only about “foreign brands.” Distinctiveness information asks whether the behavior varies across different situations. So if foreign brands have similar issues all over the world, then it’s definitely their problem. However, if the problem only happens in China, then we cannot put the blame on foreign brands as well.

Now we understand this is not an issue involving foreign brands, but an issue of foreign brands in China. Like the old saying goes, an orange that grows in the south of the Huai River would be orange, but if it grows in north of the river, it would be trifoliate orange. Foreign brands have become “trifoliate orange” on our soil, and this is to the shame of our food regulators and Chinese society.

What has gone wrong here?

One of the core competitive advantages of these multinational companies is a mature and efficient supply chain management system, which enables them to sweep over the world market and build vast business empires.

In the supply chain management system, the most important aspect is the quality audit of suppliers. This not only includes strict inspection of products, but also the evaluation of the whole production process. Commercial giants such like Walmart have their own independent audit departments, while some smaller brands trust third-party audit organizations. Walmart also asks third parties to perform reviews.

Walmart conducted 894 examinations of suppliers and more than 6,000 professional inspections on suppliers’ food in China in 2012, according to its own statistics.

In theory, if supply chain management was effectively carried out here in China, these multinational chains would not have been drawn into supplier quality scandals in recent years.

So why isn’t the system working here?

It’s simple to explain, if we look at the issue with some economic common sense. In order to add value to shareholders’ investments, these companies need to lower costs, increase prices and expand in the market. The latter two are very difficult, so controlling costs is the ultimate choice.

For retailers, the largest portion of costs is purchasing from suppliers. A strict audit of suppliers increases their cost, which in turn weakens retailers’ ability to negotiate procurement prices.

The purchasing department and quality audit department have a conflict in their responsibilities: one tries to lower the price while the other tries to guarantee quality, which inevitably raises the cost. In most of the cases, foreign retailers try hard to lower costs in order to compete with domestic brands.

For suppliers, the audit would also hurt their profit-making ability. In order to ensure a profit, they find ways to save costs. That’s why U.S.-funded Shanghai Husi Co. Ltd repackaged expired meat to sell.

The system also relies on adequate opportunities for workers and consumers to have a say, and independent supervision by the public. But in China, these things rarely happen.

Another important factor is the lack of punishment when companies do wrong. In Europe or the United States, retailers have to perform comprehensive audits of suppliers because a quality issue or sweatshop scandal would destroy them. Companies that fail to survive a public relations crisis are weeded out of the market. A consideration of social responsibility is not done out of any high morality; it’s a life jacket in mature market competition.

But in China, such scandals do not bring about a catastrophic result. The key issue here is we do not have strict law enforcement of food safety issues. In 2008, many of China’s major milk producers were found to be producing and selling melamine-contaminated milk, causing babies to develop kidney stones. Sanlu Group Co., which was at the center of the scandal, went bankrupt afterward, but many other companies survived.

The “trifoliate orange” phenomenon is a natural result for multinationals. The Global Times has criticized “famous global brands that don’t pay full attention to Chinese consumers, and lack the tension of treading on thin ice like when in Western markets.” Its chief editor, Hu Xijin, and his team probably treat European and American enterprises as angels. Actually, they are only driven by their interest-chasing instincts.

 

*Read the original article here

About the Author

Ana Fuentes
Ana Fuentes is The Corner Editor-in-Chief. Currently based in Madrid, she has been a correspondent in New York, Beijing and Paris for several international media outlets such as Prisa Radio, Radio Netherlands or CNN en español. Ana holds a degree in Journalism from the Complutense University in Madrid and the Sorbonne University in Paris, and a Masters in Journalism from Spanish newspaper El País. You can contact her at: anaf[at]thecorner.eu

Be the first to comment on "Why do foreign brands ‘Break Bad’ in China?"

Leave a comment