Lessons on the Importance of Quality Control Checks

Last month McDonald’s was rocked by a quality control scandal that has seriously tarnished the fast food giant’s image in Mainland China and throughout the world. In an abhorrent lack of health and safety standards, the company’s meat supplier was exposed for improper food handling procedures, affecting nearly 2,000 McDonald’s outlets throughout the country.

A reporter from a Shanghai news outlet filmed workers in a factory operated by Shanghai Husi Food, a subsidiary of U.S based food conglomerate OSI Group blatantly violating food health and safety standards. Along with handling meat and chicken with their bare hands, workers jokingly referred to the product as ‘foul meat’, while taking meat that had fallen on the floor and adding it back on to the production line. The factory was also caught forging production dates on more than 4,300 cases of smoked beef patties.

Thankfully no one had fallen sick as a direct result of the tainted meat supply, and the plant has since been closed with six employees in custody for questioning. OSI group is conducting its own internal investigation, promising ‘swift and decisive action’ for those responsible for this scandal. The company ineffectually tried to explain that this scandal with due to a lack of communication and control with the subsidiary group Shanghai Husi Food. McDonald’s was quick to respond by cutting ties OSI Group and has signed partnerships with new meat suppliers.

Consequences however have been severe, as the restaurant patronage and profits have substantially dropped in Asia. McDonald’s stated that their global sales forecast is at risk and admitted that sales in the region have dropped by 7.3%, with global sales at their lowest since 2003. The local government did not take too kindly to the affair either. In Shanghai, the city’s most senior leader and party secretary Han Zhen said authorities would deliver severe punishment to those responsible.

This dangerous and needless incident is a result from this lack of proper management in the quality control and quality assurance departments of McDonalds and OSI Group. By failing to do proper QC/QA checks, the two companies have lost credibility, profits and consumer trust. While their response to this scandal was timely and appropriate, the enormous damage to the company’s reputation is nearly irreversible at this point.

However, at the expense of these guilty companies, an important lesson can be learned from this ordeal. We can see that difference between good and poor quality control and quality assurance is paramount when sourcing in Asia, as any failure can lead to severe demise in credibility and profits. Whereas McDonald’s and OSI Group’s approach was an example of poor practices in QC/QA, professional companies are inclined to use thorough and skilled methods that would have prevented a situation like this from ever happening.

As part of our commitment and service to our clients, ET2C is a company that uses such thorough methods. With over 10 years in experience in the QC/ QA field, our company believes that product quality and safety is essential to the service we provide to our clients. Along with routine factory audits, ET2C commits to inspecting every order before it is shipped to our client’s stores. If we identify any defects in an order, we will request that the factory take the necessary corrective action immediately whilst providing our clients with the transparency and confidence that the products are suitable for their needs. This includes detailed reports and open communication channels. Our teams work hard to ensure that our clients will never face a product quality issues such as McDonald’s and OSI Group has recently. For more information around our Quality Assurance or Quality control services, please contact us.
      

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Learning from the failure of Shanghai’s FTZ

It’s been nearly a year since China’s first free trade zone was launched last year by Chinese Premier Li Keqiang along with a flurry of lofty promises. Located in Pudong district of Shanghai, the zone in its current state is split up in four different quadrants totaling an area of 29 square kilometers. Aptly referred to as the ‘China (Shanghai) Pilot Free-Trade Zone’, the project is slated to be expanded to a sprawling 1,210 square kilometers upon on its completion, however hopefully by that point the Zone will live up to its promises.

The conception of the Free Trade Zone was to use it as a new frontier to test numerous economic and social reforms for the changing Chinese economy. The area within the zone is technically considered to be immune from Chinese law, which in turn exempts the business transactions within from normal rules and regulations. The zone was to relax financial requirements for corporate establishment, allowing foreign enterprises to operate in China with little red tape. Further promises on developments on arbitration, foreign currency exchange and taxes were made, signaling many potentially lucrative opportunities for businesses within the Free Trade Zone.

Purported to be a ‘Mini-Hong Kong’, the Zone was part of an effort to reinforce Shanghai’s image as a global financial center. So far, according to figures released by the Shanghai government, nearly 10,445 businesses have already registered in the zone, and of that about 12 percent are foreign companies. Foreign banks have also opened up branches in hopes to take advantage of the relaxed rules on currency exchange. Bankers hoped to take advantage of new rules that would remove the time consuming and costly practice of needing to have all currency transactions approved by the State Administration of Foreign Exchange.

At this point however it seems the foreign banks, as well as most other companies that were seeking to operate in this Zone have been severely let down. While it was understood that these reforms and changes would take some time to come in effect, the near total lack of substantive changes has led to dismay and cynicism amongst bankers and many others. “They [the government] promised the world to us but have delivered almost nothing,” said Richard Cant, the regional director for law firm Dezan Shira & Associates in Shanghai. Regulators have given some leeway, in that companies in the zone are able to open special accounts to enable international cash flows, however these transfers are anything but free and open. Financial authorities still regularly monitor currency transfers closely and even retain the power to suspend them, and contrary to promises made earlier the transfer cost is still subject to the rate put out by the Bank of China. Many have given up hope, and the chance of this project living up to its potential as a mini-Hong Kong seems to be a far cry at this point. Stocks have reflected this notion of fading enthusiasm as well. Prices for the Shanghai Waigaoqiao Free Trade Zone Development Co. stock rose from RMB 14 per share in late July 2013 to an all-time high of RMB 64 in the days before the Free Trade Zone’s opening. Earlier this month it dropped back down to RMB 28.

In all fairness, investors should have been wiser and showed a little more caution when considering whether to buy into the Free Trade Zone. For the past two decades, Chinese policy makers have maintained a reserved approach to any financial reforms that have potential to destabilize the economy. The idea that the foreign exchange regulators in the Chinese government would suddenly allow funds to quickly enter and exit the country was nothing more than wishful thinking, especially considering the relentlessly tight grip the government holds on such affairs. Media and analysts have also noted that there seems to be a disagreement between the central government in Beijing and city government of Shanghai on just how fast these reforms should come. Shanghai is eager to have the Zone functioning at full financial capacity in order to bring much desired business to the city, however authorities in Beijing remain apprehensive. Authorities in the capital don’t want to give Shanghai too much of a head start over other regions in China, and have responded with indifference by acting slow on governing regulations for this project.

All the bold government promises for reform and the ensuing disappointment aside, this tale of broken promises for Chinese market liberalization was routine and predictable. While an innovative and potentially beneficial project, the high hopes and tall tales proclaimed by the government provided severe skepticism amongst those who have been doing long term business in China. Over the past 14 years that ET2C has operated in China, we have noticed that these types of promises from the government are routinely one-sided, and do little to serve the interests of foreign companies. Instead of waiting for a market liberalization that may never come, we have worked tirelessly on understanding the bureaucracy of China and how to manage the red tape that comes along with it. Although an idea like the Shanghai Pilot Free Trade Zone is good in theory, ET2C remains committed to more pragmatic solutions for our customers to help them succeed in China, and more broadly across Asian markets.

      

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Vietnam Economic Trends Indicate Stability & Growth

Vietnam’s economy continues to perform well throughout the first half of 2014 as multiple indicators signal a robust and growing nation. Not at all deterred by an overblown international incident with China over a sea border dispute, the country continues its solid record in economic development.

While Vietnamese rubber and food exports to China decreased slightly in May and June, exports to other trading partners significantly increased. Trades with Australia and Oceania were especially strong and showed a 31% increase over last year, while all other regions displayed double digit growth rates.

This significant growth rate can largely be attributed to currency manipulation by the Vietnamese. The Vietnam Dong was devalued for the first time in a year, leading a GDP rise of 5.25 in Q2 compared to a year earlier. The government continues to bolster their economy in an attempt to expand their economy to 5.8 percent growth rate for this year. Currently Vietnam’s trade surplus stands at $1.3 billion and local stocks are said to be at their best since 2009.

Naturally, foreign brands are seeking to join in on Vietnam’s economic prosperity. Although the streets of Hanoi are already lined with a seemingly endless amount of cafes, Starbucks feels optimistic about adding three more coffee shops to as part of their Vietnam expansion. The coffee chain already has eight stores in Ho Chi Minh City and feels that their focus on “meaningful service with passion and care” will help them stand out in Vietnam. Apple also views Vietnam as a new country full of potential, with reports that some Vietnamese are willing to spend more than two months’ salary on an iPhone or iPad in order to acquire recognition and increased status that comes with owning this expensive product.

The growing Vietnamese economy will certainly continue to make the country a stable choice as a trading option. Furthermore, these promising signs of economic improvement precede a growing a commitment to infrastructure improvement and overall ease of business within Vietnam.

Moreover, with this news we can note that severe geo-political situations, such as the one last month with China which resulted in riots and looted factories, can only cause minor problems in the health of the manufacturing sector.  John Pallis, the director of the ET2C Vietnam office noted that currently all factory operations are back to normal and stated that the rioting caused minimal disruption to local supply chains. With this, it seems that these quarrels with neighboring countries will not disrupt the economic prosperity of the region, allowing Vietnam to reinforce its strength as a manufacturing nation.

      

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Bullish Indian Economy Attracts FDI from Japan

Reports on India’s financial numbers continue to promise economic prosperity for the nation. Indicators are up in almost all sectors as the government’s promises for economic upheaval continues to inspire the nation.A swath of hopeful predictions are being made for the nation, as India’s exports are expected to increase from $40 billion at present to $85 billion in 2023 which will ideally allow the nation to achieve a GDP growth rate of 7 percent per annum.

Other countries have taken note of India’s bright prospects, as Japanese investors have ranked India as the top choice for investment potential in comparison to other emerging markets. As part of the Japanese government’s goals for their economy, the country is seeking to triple infrastructure orders for India to about $300 billion within the next 10 years. Japan feels their country will be an important investor in India’s much needed infrastructure, stating that with their regional experience they will have an instrumental role in bringing India into Asia’s elaborate cross-country manufacturing supply chain.

This is good news for India, as newly elected India Prime Minister Narendra Modi  is eager unblock stalled infrastructure products and seeks to promote growth by creating new high-speed train lines and smart cities. With ambitions from Shinzo Abe to boost the Japanese infrastructure-system export orders, Japan is natural answer that can help revitalize India’s stagnant economic growth. Leaders Modi and Shinzo are reported to already have established a good rapport on personal level, and analysts have posited “bilateral economic relations between Japan and India are set to blossom.

While news on FDI generally promises a brighter for future India, the implications for Japanese investment are diverse. Firstly, as the Japanese have a wealth of expertise in infrastructure development, the newly created work by these foreign investors is certain to be reliable and capable to deliver quality products. With this pedigree, foreign buyers can trust that their sourcing orders will be at the same standards as any other manufacturing nation in South-East Asia. Furthermore, Japanese infrastructure is bound to expedite India’s capabilities for manufacturing and export, while alleviating pressure on the Indian government.

By allowing the Japanese to focus on key manufacturing areas, India will consistently improve its abilities to receive and expedite orders. Our Indian office noted that some of these investments have already provided great changes in Bangalore. Hari Sankar, the office director noted these changes in the automobile and telecommunications sector in surrounding areas are already improving the ability to source. Overall, this genuine cooperation between India and Japan is sure to bring increased success to the region.

      

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BRICS choose Shanghai for Development Bank HQ

This month the BRICS group met in Brazil to sign an agreement on the establishment of an independently funded government infrastructure-lending bank. The BRICS groups, an association between five emerging but powerful economy nations (Brazil, Russia, India, China and South Africa) are seeking to set up an institution that can offer developing nations structural loans for developing nations. The bank’s headquarters is to be set up in Shanghai, China, where it will be run in cooperation from all member nations.

Aptly named as the ‘New Development Bank’ (NDB), the BRICS hopes to provide an alternative to the American and European led World Bank and International Monetary Fund. Established in 1944, these institutions have been notorious for predatory lending and unfair interest schemes. The NDB pledges to focus their lending efforts more so on job creation and poverty alleviation rather than the economic restructuring that the World Bank and IMF demand from client nations. With that being said, the Western institutions have reacted positively to the news, stating that the introduction of this new bank can only help expedite global poverty reduction.

Analysts were pleased to see the BRICS nations, which in themselves very diverse culturally and politically, agreeing on such a large project.  However, the plan was not without controversy. Some voices from member nations are concerned about China’s ability to wield power an unequal amount of power as their economy is larger than all other BRICS nations put together. Rules however were set in order to prevent such a situation, as each member nation will contribute an equal amount to an initial $50 billion. This fund will increase to $100 billion over time, and the bank will limit itself to lending $34 billion in total each year.

Particular rules of operation over interest rates, investment in private projects and other provisions have still yet to be solidified before the lender can become active. The bank is expected to make its first loan in 2016, however will be ready by next year in order to help its members if they were effected by a sudden exodus of foreign capital.

The opening of the NDB is quite a substantial effort to bolster the BRICS nation’s status, and a great step forward fostering greater support between the five members. This move, coupled along with other deals between the nations, signals a strong desire for a multi-polar world.

Much has been said regarding a supposed anti-Western ulterior motive for this institution, stating that this bank serves to turn the global balance of power away from the United States and Europe. However in response to these allegations, the BRICS’ stated that their aim is to fill in existing gaps in the global financial system while giving developing nations a stronger voice. The effectiveness of this banks remains to be seen, but there is no doubt the rhetoric and geo-political maneuvering behind this bank is strong.

      

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Chinese Domestic Brands Continue to Strengthen Internationally

Fostered by government protectionism and increased consumer spending, domestic Chinese brands have enjoyed boundless success over the past decade. The first half of 2014 saw some of China’s most powerful companies make substantial deals abroad in order to strengthen their international business operations. The evidence is clear in the stories of companies like Alibaba,

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Obama seeks to sign Trans-Pacific Partnership by November

In May US President Barrack Obama visited Abe Shinzo in Tokyo to discuss a massive transnational trade agreement. The Trans-Pacific Partnership is a relatively new working agreement that seeks to manage trade, promote growth, and regionally integrate the economies of the Asia-Pacific region. It is an expansion of the 2005 Trans-Pacific Strategic Economic Partnership Agreement, […]      

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Chinese – Vietnam Relations Sour over Territory Disputes

Recent antagonism between China and its southern neighbor Vietnam has severely hampered relations between the nations, inciting riots against in Vietnam and a plethora of rhetoric from Beijing. Earlier in May, an encounter between Vietnamese vessels and Chinese ships near an oil rig in disputed waters of the South China Sea ended with the sinking of a Vietnamese fishing boat. Denying claims of responsibility, a senior official in Beijing fired back in saying “Vietnam’s disruptions of the Chinese company’s normal activities have seriously violated China’s sovereignty, sovereignty rights and jurisdiction, gravely affected the normal order of production and operation and the safety of China’s rig, and caused unnecessary troubles for China-Vietnam relations.” The rig, owned by state-run China National Offshore Oil Company (CNOOC) Group is roughly 150 miles (240 km) off the Vietnamese coast and 206 miles (330 km) from China’s southern Hainan Island.

China is Vietnam’s largest trading partner and it would seem the Vietnamese dependence on Chinese exports cannot be ignored. According to government data, bilateral trade between the two countries rose 84% to $50.2 billion last year from $27.3 billion in 2010. Chinese raw materials are essential to Vietnam’s manufacturing sector, and as of now it seems that only the tourism sector has suffered due to this incident.

Talks regarding a settlement over this dispute have yielded limited results, however analysts believe that a strongly shared mutual desire for regional economic prosperity will quash this feud soon. The Economist recently pointed that despite rioting and looting by the Vietnamese, the government is focused on maintaining the country’s image as a reliable, low-risk investment destination.

      

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India’s New Government is Promising for Manufacturing Sector

In May India concluded a month long election that is primed to have historic political and economic changes for the country. Analysts are calling it a seismic shift, claiming it is arguably the most important election ever for the nation. Corruption and the economy were the biggest issues for this election. Since 2012, the Indian […]

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