Corporate reputations on the line in China

Buildings Brics:Campaign groups are putting pressure on western companies with operations in China over the use of cheap labour and toxic substances.

A woman holds a banner outside the Hong Kong stock exchange calling for better conditions for factory workers. AFP PHOTO / ED JONES
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Pay a visit to Sanlitun, a trendy shopping centre in north-east Beijing, and there is no doubt which outlet dominates: the Apple store.

Factbox: Production calamities afflict western brands

2007: Menu Foods recalled millions of packages of pet food after they were found to contain poisons. Many dogs and cats in North America died as a result of the scandal. The share price of Menu Foods tumbled and the damage to the firm was such that it never recovered before it was taken over by a rival last year.

2007: Mattel toys were found to contain excessive amounts of lead in the paint or magnets that could be swallowed by children, with millions recalled. Bizarrely, Mattel executives ended up apologising to Chinese officials over the damage to the reputation of Chinese manufacturing, because some recalls were said to be due to design flaws.

2011: A type of Lipton tea, owned by the Anglo-Dutch company Unilever, was found to contain excessive levels of heavy metals. The company blamed the soil in which the tea was grown, although some have said substances may have been added to increase yields.

2011: Western clothing brands including Adidas, Puma, H&M and Nike were named by the environmental group Greenpeace as using a Chinese manufacturer, Youngor, which has a factory near Shanghai that has discharged a series of toxins. Brands insisted work they contracted to Youngor would not result in the release of dangerous chemicals.

It is always packed with customers eyeing the latest, iPods, iPads and iPhones. Yet the story of Apple and China is not positive in every respect.

The US company has been the target of hard-hitting initiatives by campaign groups unhappy about the labour and environmental standards of the Chinese plants that make Apple products.

Students & Scholars Against Corporate Misbehaviour (Sacom), an organisation based in Hong Kong, has a campaign logo with the words "No More iSlave" accompanied by a picture of a worker hunched beneath an Apple logo and coughing up blood. The group says "Chinese factories are under intense pressure to cope with western demand".

One of Apple's manufacturers in China is Foxconn, a Taiwan firm that has come under scrutiny over labour conditions after a series of worker suicides.

Similarly, a report released by campaigners in August criticised manufacturers making Apple products for discharging pollutants.

It demonstrates the reputational risk faced by companies that source goods in China, or set up their own operations there, as a result of what are often regarded as substandard ways of operating.

And campaign groups freely admit that bigger western brands are more likely to be put under the microscope.

Debby Chan, a project officer with Sacom, says the likes of Apple are targeted because "they're more sensitive to their image", even though, at factories producing for domestic companies, "the situation must be worse". Groups say western brands are highlighted because campaigns involving them are more likely to achieve results.

"It's our campaign strategy because we think the brand-name companies, the western companies, they should be more responsible, and also because our campaign partners in Europe and America, they also raise concern," Ms Chan says.

"As a campaign group, when we target a company, we must have some expectation about the impact. … If we target a Chinese company, maybe there's not much improvement. The consumer campaign in China is not that mature.

"On the other hand, we have strong support from western consumers and they're eager to know their products are produced in what kind of conditions."

The quality scares that Chinese-made goods have often suffered also pose a severe reputational risk to companies. Several years ago, Mattel had to recall millions of toys after excessive levels of lead were found in the paint used in their production.

The pet food company Menu Foods was brought to its knees by a 2007 scandal that resulted in the deaths of many dogs and cats in North America that ate supplies from China containing substances such as melamine, the drug aminopterin and the industrial chemical cyanuric acid. Recalling tens of millions of pet food packages, at an estimated cost of US$45 million (Dh165.3m), was not enough to limit the scale of the disaster.

"I think it's fairly obvious they never did manage to recover from the recall. The company really was devastated," David Lummis, an industry analyst, said last year, when a humbled Menu Foods was taken over by a rival.

Others caution the risks associated with operating in China are not unique. Duncan Clark, the chairman of BDA Connect, a Beijing investment advisory firm, says key issues, such as ensuring products are not harmful and labour standards are properly enforced, can also crop up in other countries.

Factbox: Scandals by the numbers

53: Number of dog food brands that had to be recalled over the Menu Foods contamination scandal.

45: Estimated cost to Menu Foods, in millions of dollars, of its 2007 pet food recall.

50,000: number of textile mills in China, some of which produce goods for western brands and have been accused of releasing toxins into the environment

30: cost to Mattel, in millions of dollars, of the recall in 2007 of Chinese-made toys with excessive levels of lead in the paint

He says China is now highly "sophisticated" in terms of manufacturing, and labour laws are "much more restrictive", pushing the low-end manufacturing where abuses might be more likely to parts of South East Asia.

Yet even as manufacturing standards and labour conditions gradually improve, the popularity of social media websites in China means in some respects the pitfalls multinationals face in China are increasing.

"Any deficiencies or failures can lead to mass campaigns, especially in the area of social media," Mr Clark says.

"It's quite interesting. To some extent, Chinese consumers have much higher expectations of foreign brands than they have of domestic brands. They have very low expectations of domestic brands."

There are particular risks when a foreign company is perceived to be short-changing Chinese consumers compared with foreign counterparts.

Mr Clark says consumers may become angry if a product recall is ordered in foreign markets, but not in China. Chinese consumers may, he says, complain they are "being treated as second-class citizens".

Last year, Hewlett-Packard came under attack in China when it refused to acknowledge it was at fault after many users found their laptop screens died. Rather than issuing a recall or compensating aggrieved customers, the company blamed poor hygiene standards in Chinese university dormitories for the laptop failures, saying the machines had been damaged by cockroaches.

Natalie Tsao, a columnist on the China Daily newspaper, said the company's explanation had "grossly insulted its Chinese customers".

"Chinese people often believe they are discriminated against - whether true or not - and get extremely angry when, after comparing themselves with the rest of the world, they find their belief is justified," Ms Tsao wrote.

Yet when it comes to media outcry, it might be foreign companies that have reason to feel aggrieved, as it can appear they are subject to harsher treatment than local counterparts.

"There's a feeling that multinationals can be victims because local competitors are trying to find a way to compete," Mr Clark says.

State media sometimes appear to treat foreign companies more harshly, with recent reports suggesting officials were happy for this to happen because they wanted to end the perception that only Chinese firms were linked to safety or quality scandals.

This month Lipton tea, produced by the Anglo-Dutch company Unilever, attracted unwanted attention when one type of tea was found to contain excessive amounts of heavy metals. Less was said about teas made by Chinese companies that also breached safety guidelines.

Yet despite China being, in the words of Mr Clark, "a high-stakes game", with many potential risks, it cannot be ignored.

"Companies with global ambitions cannot afford to not be in this market," he says. "It's part and parcel of doing business - managing how your brand is perceived and how to deal with government."