Marginal Utility

by Tom Bozzo

(Burial of the lede edition.)

The reassuring headline of Nelson Schwartz's story was, "Companies in U.S. Increase Testing of Chinese Goods." They're almost proactive, "in one case... pulling merchandise from American shelves at the first hint of a problem." That's a relief.

Why care?

The spate of recalls and the rising volume of exports have highlighted another worry: the increasing dependence of the United States’s biggest food manufacturers on China for basic additives like apple juice [*], a common sweetener, and preservatives like ascorbic acid.

These little-known additives form the building blocks of many popular staples in American kitchens, keeping fruit from turning brown or providing the sweetness in breakfast bars. Food experts note, for example, that China supplies more than half of all the apple juice imported to the United States, up from a fraction a decade ago.

Other critical but common additives have followed an even sharper trajectory... More than 80 percent of ascorbic acid, better known as vitamin C and also used as a preservative, comes from China... Chinese imports of xanthan gum, used to thicken dairy products and salad dressings, account for at least 40 percent of United States consumption.

“This is a problem for the whole food chain, but it was a blank spot,” [food industry consultant Peter] Kovacs said. “They’re doing it now, but companies weren’t testing these additives before.”

Glad they're on top of things.

And many food makers are nervous to discuss what is emerging as an issue that could threaten the trust of shoppers in long-established brands.

No kidding.

For the companies, the problem is two-fold: figuring out exactly what to test for and maintaining control over their network of suppliers, even as they turn to China for vast quantities of imports at lower prices.

Or, how can the brand-destroying appearance of chiseling be avoided without incurring the cost of not chiseling.

Meanwhile, we're assured that at least one Thomas-compatible train line is safe:

[A]fter the Thomas recall last month, Toys “R” Us went back and had its own Imaginarium train line tested by an outside company. The toys proved to be safe.

“In the past we would have just reviewed prior test results,” Mr. Ruppert said. This time, “we just decided to take the next step: real-time, real-life review by an outside company.”

In parts of the world, that might be considered the first step.

That might have helped Foreign Tire Sales, the seven-person outfit on the U.S. side of the recent Chinese tire recall story. Their manufacturer had been contracted to make the tires with a gum strip that helps keep the tires' plies from separating; the tires originally passed tests indicating that they met federal safety standards. However:

In October 2005, the company said it became concerned because of a sharp increase in customer complaints about the Hangzhou Zhongce radial tires. In investigating the complaints, Foreign Tire Sales’ officials became suspicious that Hangzhou Zhongce was manufacturing the tires without the gum strips or with inadequate gum strips...

Tests of tire segments conducted by an outside firm were not conclusive but “seemed to indicate that there were no gum strips or insufficient gum strips in the inspected tires,” Foreign Tire Sales wrote in its June 11 report to the National Highway Traffic Safety Administration.

Hangzhou Zhongce admitted in September 2006 that it had “unilaterally decided to omit the gum strips” in the tires, the report says. The Chinese company was “generally unresponsive” when asked how many tires were involved and what they were going to do to resolve the problem, the report says...

In May [2007], Foreign Tire Sales conducted another round of road tests using 2005 Hangzhou Zhongce tires. This time, the tread separated after just 25,000 miles, the report said.

Mr. Lavigne [the Foreign Tire Sales attorney] said it appeared that Hangzhou Zhongce at times used no gum strips on the tires and in other instances, used half the amount of gum strip that was required by its agreement with the company.

So it took them "just" 19 months from when they noticed the rash of customer complaints to conduct definitive tests leading to the recall order. That's something to think about when politicians say they want government to move at the "speed of business."

A catch is that Foreign Tire Sales can't afford the recall, as it reportedly has no inventory and apparently no financial reserves to speak of. This implies one sense in which the cheap Chinese tires may have been too cheap: the price should have included a product liability insurance premium, in which case F.T.S. wouldn't be facing extinction (for what that's worth) and taxpayer wouldn't be facing up to a $90 million bill for the firm's lax oversight of its suppliers.


[*] As an added bonus, this article was accompanied by a remarkably useless graph. It shows a collapse in the share of apple juice imports from Germany and a large reduction in the share from Argentina, taken over (and then some) by China. But nowhere is there an indication of the quantity of imports or the import-vs-domestic share.

Labels: Moral Hazard, Outsourcing, Product Safety