Chinese imports and product liability coverage

September 24, 2007

Recalled toys sit in the foreground as Sen. Richard Durbin, D-Ill., calls on a witness during the Senate Appropriations subcommittee hearing on Capitol Hill in Washington, Wednesday, Sept. 12, 2007, to discuss toy safety standards. (AP Photo/Susan Walsh)

Mattell Chief Executive Officer Robert Eckert waits to testify on Capitol Hill in Washington, Wednesday, Sept. 12, 2007, before the Senate Appropriations subcommittee hearing on toy safety standards. In the foreground is a poster listing recalled toys for 2007 that was used by
another panel of witnesses. (AP Photo/Susan Walsh)

Product manufacturers are constantly looking for ways to stay competitive in a global marketplace and sourcing products and manufacturing capability from countries outside of their local economy is a common competitive strategy. While this helps to contain costs, it is very difficult to maintain adequate controls on raw materials and manufacturing methods and this, in turn, can lead to defective products inadvertently introduced into the marketplace.

Nothing illustrates this better than the recent wave of recalls of Chinese manufactured goods. These products making the nightly news — everything from toxic toothpaste to toys covered in lead paint — are just a few examples of the literally hundreds of products that are recalled each month. In fact, in the month of August alone, there were nearly 20 product recalls, according to the U.S. Consumer Product Safety Commission.

The deluge of product recalls from China, while unacceptable, is, nevertheless, not unexpected given the rise in imports from China as noted by the Commission:

• The value of U.S. imports of consumer products manufactured in China in 2006 was $246 billion – comprising approximately 40 percent of all consumer products imported into the U.S.;

• The value of U.S. imports from China increased about 293 percent from 1997 to 2004; and

• Relative to recalls of all imported consumer goods, the share of consumer product recalls from China and Hong Kong increased from 41 percent in 1999 to 63 percent in 2004.

Since U.S. demand for inexpensive consumer products is not likely to subside, manufacturers and importers will continue to be pressured to source materials from China and the rest of Asia. This means that brokers and insurers will need to become more diligent in assessing the past, current and future products manufactured as well as the adequacy of the design, testing and certification, material purchasing, quality assurance and regulatory compliance at the plant.

This increased diligence is necessary because U.S. courts have no jurisdiction outside the country and, therefore, domestic importing companies have none of the normal recourse against non-U.S. manufacturers. Depending on the specific policy language, if a product causes injury, an insurance company will defend the importer and, if appropriate, pay indemnity for the claim. However, if a product is deemed to be unsafe and a product recall is warranted, the insurance policy will not cover the expense associated with the recall as it is part of the industry’s standard product recall exclusion.

Unfortunately, domestic importers or companies who contract manufacturing to Asian plants may not be aware of who is actually making their product. Many times, manufacturing is further subcontracted and controls diminish accordingly. There is the danger of inadequate communication of the specifications; lack of material, component or sub-assembly testing and acceptance procedures; lax control of sub contractors and their work methods and quality systems.

Product recall plans

Brokers and insurers are now asking domestic importers for details on their recall plan to ensure they can quickly identify and retrieve products, communicate to the public and take corrective action to address the issue. A recall program is a systematic procedure for identifying and tracing specific parts or products and should be developed before a crisis/need requires that product(s) be returned for repair, replacement or destruction. The Consumer Product Safety Commission has a publication titled Recall Handbook that specifies the basic components and procedures involved in recalled products regulated by the CPSC. Other products may require more stringent recall plans and the level and immediacy of the recall is entirely dependant on the regulatory requirements and possible consequences of the defective products.

Some basic recall program elements include:

• A written company policy statement that includes recall procedures and who is responsible for authorizing one.

• A formal product safety committee to formulate policies, audit product safety performance and provide recommendations to top management.

• Labeled components, parts and completed products to identify the company name, model and serial number, date of manufacture, etc.

• A record keeping system for products and the materials used, suppliers, contractors, distributors and consumers.

• A method to break down any product into its raw materials and components.

• Procedures for stopping production, shipment and sales of recalled products.

• When dealing in a retail situation, develop a system to assure that recalled products taken off the sales floor are not inadvertently put back out for sale by uninformed sales staff or merchandisers. Teach lead salespeople and department managers to ask customers if the products being returned for exchange or refund have been involved in accidents or near accidents.

• A plan for notifying customers, distributors, dealers and company personnel in writing of a product recall. Insurance carriers and governmental agencies should be notified when applicable or legally required.

• Program testing, without actually recalling a specific product, to check the program’s effectiveness and budget expected costs of implementing a recall to minimize financial problems if an actual problem occurs.

Quality control

Importers should realize that it is unrealistic to expect the manufacturer to pay serious attention to product safety if the importer is constantly pressing for the lowest price and tendering for the cheapest bid in each batch of products made in Asia. This is even more so on consumer electrical appliances, toys and other products that the manufacturer trades on a very thin margin.

To ensure that the manufacturer adheres to the proper level of quality control, importers should ask for proof of the manufacturer’s commitment on products safety through Quality Control/Quality Assurance programs, laboratory test reports and field monitoring/complaint follow-up procedure. Finding the right partner through research, relationship building and implementation of audit procedure is the key to success.

Importers can use their brokers and insurers as a resource for:

• Help with product safety program development, recall initiatives, checklists, etc.

• Help with market research on recalls and product safety data specific to their product line.

• Information about the region and local product safety initiatives; and

• Information on proper insurance arrangements with overseas suppliers.

While China as a country may have one of the greatest uptakes of companies gaining ISO9001:2000 accreditation; for every audited and accredited factory that takes pride in their product and their quality assurance and control measures, there will be many other firms that do not. However, even with ISO accreditation, product quality issues can occur. Depending on the volume of orders with a company, repeat business to some firms may not be essential. Keep in mind that if quality problems do strike with one company, they may simply shut their doors and the owners reopen under a new name and at a new site just weeks or months later. This is yet another reason why it is so important to thoroughly research any potential overseas manufacturer.

Importers can help mitigate their risk by knowing who is making their product. If subcontractors are used, how are these qualified and how are the specifications? The experience and the track record of the manufacturer is a key indicator of the quality of the product they have made. In a country such as China, relationships and having people on the ground to oversee and randomly check on your interests is important. Until an importer can find a manufacturing partner that has an ongoing commitment to meeting the required specifications and quality levels demonstrated so that a level of trust can be developed, nothing will replace having someone on the ground with the company’s interests in mind.

Finding quality partners

The good news is that even though the recent news focus is on poor quality manufacturers, there are many world-class Chinese companies who are manufacturing and distributing products that are at least the equal of any products that may be (or at one stage were) made in the West. Major European and American manufacturers realize this and with the right controls and procedures in place they can duplicate and often better, not just in price, what they could manufacture domestically. The differentiator for these global players is that they have taken the time, effort and spent the necessary resources to identify Chinese manufacturers with the right quality culture.

These non-Asian manufacturers have sought out those manufacturers in China that realize the importance of quality processes and have extended these to the complete chain-of-custody for their products, from incoming raw materials and any sub-contractors who may carry out work for them, through to finished goods and how they are packed, shipped and delivered. These companies are also cognizant of the fact that quality does cost money and they will advise their customers that below a certain level specific quality requirements or other performance specifications will not be met without some detriment.

The quality manufacturers differentiate themselves by not being cheapest but by being dependable and trustworthy business partners. Knowledgeable and informed customers will realize this and will respect the line that separates defined quality from uncertainty. Depending on the product, that line may be separated by many dollars or, for mass-market consumer items, a few cents. Overseas companies who have worked in the Asia Pacific region and have developed local relationships and knowledge of the market will also know that for every quality manufacturer there will be hundreds of cheaper alternatives who will promise the same specification, quality and service.

Topics USA China Manufacturing

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