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Globalization, Competition and My Wet Basement
In New England, a dehumidifier is pretty much a required appliance in spring and summer. That goes double in my neighborhood, which was built on swampland in the 1950s.
Last spring, I received a notice that my dehumidifier – U.S.-branded, but manufactured in China – was subject to a safety recall. Apparently there were some instances of similar units catching fire. By shipping back certain parts, I was entitled to a gift card and discount coupon towards a new one. Grumbling, I removed the parts, sent them back, and waited for my coupon. After it came, I shlepped out to the store, shopped for a new dehumidifier, and shlepped the new unit home.
And six months later, I received a notice in the mail that – you can’t make this stuff up – my new U.S.-branded, Chinese-manufactured dehumidifier was being recalled due to a safety defect that caused similar units to catch fire.
I finally got around this morning to requesting the “return kit” so I could go through the process once again. What surprised me is that the recall is affecting 13 brands, all produced by the same Chinese manufacturer:
On September 12, 2013, Gree, in cooperation with the U.S. Consumer Product Safety Commission and Health Canada, announced a recall on dehumidifiers manufactured by Gree Electric Appliances of China and were sold from January 2005 through August 2013. The dehumidifiers can overheat, smoke and catch fire, posing fire and burn hazards to consumers.
This recall involves … dehumidifiers with brand names Danby, De’Longhi, Fedders, Fellini, Frigidaire, GE, Gree, Kenmore, Norpole, Premiere, Seabreeze, SoleusAir and SuperClima.
In principle, I am a fan of globalization. In theory, it allows U.S. consumers access to a wider range of goods and services, at higher quality and/or lower cost. But something has broken down here. I’d be willing to pay more for a higher-quality product, made locally, but that choice simply isn’t available to me. Instead we have faux competition, in which there are 13 brands but the consumer gets only one choice. And this happens without attracting any scrutiny from U.S. antitrust regulators, who are otherwise quite vigilant. It seems manufacturers may have figured out a way to hack our antitrust laws.
And as a result, we rely on people in faraway lands for the safety and reliability of what we put in our homes. While the U.S. offers the global marketplace its skills in design and marketing – like Apple products “designed in California” – we rely on other countries for their skills in manufacturing. Just as the U.S. has lost the capacity to put a man on the moon, apparently the U.S. has lost the capacity to produce small appliances.
In principle, an American company could subject a foreign manufacturer to audits and build in contractual penalties, safeguards, and incentives. But in the end, is that enough? If the manufacturer doesn’t operate in a broader culture of safety and reliability, one which values the end consumers as the company’s friends and neighbors, won’t we always be responding with recall after recall?
Published in General
Here’s a situation I face as a manufacturer:
I can buy a given cable harness from a US cable house for $25.00 at quantities of 50k. I contact a Chinese cable house for the same harness, and I am quoted at $4.50 at quantities of 1k.
Why the discrepancy?
It’s not just labor (the labor component of that assembly at the US company is about 50%). China is getting its materials at lower price.
Why?
Blame various import duties, taxes, quotas, and other forms of US protectionism.
Although that is always a problem if the manufacturer is at a distance, which most are, it is clearly worse in the case of China. One might wish for a re-birth of American manufacturing as a response, but one is chastened by Skipsul’s comment.
I worry, too, about the lack of consumer information. Maybe the multi-vitamin is put together in the US, but who manufactures the ingredients? According to this article, (and I’ve seen this elsewhere, too) China cornered the market on vitamins and many drugs some time ago, but you’d never know it from the label. Given China’s rampant pollution, this is pretty scary stuff.
Per Skipsul, the wage issue is way overblown. He hits on many of the problems facing companies that want to service the US market.
Even exporters are penalized. Look at CAT in the news re: tax avoidance and the Star Chamber that Carl Levin is dissembling for it.
In our business, we have to add 85% as overhead to cover the cost of government paperwork and auditing. Sound like a lot? We’ve actually managed to bring it down a bit recently.
If you wonder why Northrop charges $2 billion for fighter, it’s government regulations. If they could just build the darn airplane it would be a quarter of the cost.
I think it’s also worth considering the consumer demand side of this question.
Chinese factories can produce high-quality goods if their contractors demand it – even if they can’t do so nearly as well as American factories might.
The question is what consumers want. There will always be a trade-off between price and durability of manufactured goods. Even though we imagine ourselves as always demanding the highest quality, I think quite a bit of evidence suggests that most consumers are willing to take a reduction in durability for an even bigger reduction in cost – even though they might not be cognitively aware of their decision.
I certainly agree that unburdening American manufacturing would lessen the cost-durability gap, but the market is always about tradeoffs, and what we think we value isn’t always what we end up buying.
Is the dehumidifier one buys today truly worse than the dehumidifier one bought 25 years ago, or is it simply more likely that it’ll be recalled?
In other words, what is the actual, genuine probability that your dehumidifier was going to catch fire?
How do I decide that the opinions of the U.S. Consumer Product Safety Commission and Health Canada have any real merit?
How do I know that a humidifier made 25 years ago wouldn’t also fail an inspection by these two government agencies?
Better still, 25 years ago did we even HAVE a government agency to “inspect” dehumidifiers?
Here’s another factor regarding product reliability:
All of the good chemicals and metals are banned!
25 years ago a dehumidifier could use freon. Freon works superbly well at low pressures, so the compressors didn’t have to be as tough. Today’s coolants are:
– corrosive (they eat certain plastics and metals, so there goes your sealing)
– less effective (your compressor has to work harder, at higher pressures, and will overheat)
– substantially more expensive
On the corrosion issue, lead solder is now mostly banned, cadmium is banned, wire coatings have to be halogen free – in short, all the good stuff that made old consumer products last forever, be easily repairable, and be manufactured here without a boatload of EPA permitting – well, it’s all banned.
Don’t care if it’s made by swiss craftsmen with loving care in artisanal coil shops in the pure Alpine air, the substance restrictions mean that it just won’t have the durability of old.
This wasn’t a failed inspection; it was a recall (or better, two recalls) after products caught fire. It’s all reactive, after the fact.
And I had the same initial thought as Misthiocracy. Should I bother replacing the unit, or just take my chances? Are these agencies potentially overreacting, engaging in bureaucratic CYA rather than any meaningful cost-benefit analysis? This recall was voluntary, so I surmise that no actual defect (or specific cause of the fires) was ever found. But as a risk manager I’ve seen too many people dismiss real risks out of a combination of ignorance and arrogance, and as a consumer, I just can’t be bothered to do the primary research.
There are common reports of Chinese factories producing high-quality goods initially, then cutting corners progressively over time in an attempt to increase margins. It’s not merely a matter of demanding quality, but riding herd in a culture where conscience or personal pride isn’t enough to keep vendors honest.
Consumer demand can only react to producer choices. Sometimes manufacturers misgauge consumer demand and don’t recover, or high costs of entry prevent the market from recovering. Reliability for new washing machines is notoriously awful, and there is actually demand for used older machine, yet no one makes durable new ones. I think it’s conceivable that we’re seeing market failures in household appliances (though I wouldn’t claim to know the cause).
Meaning that more of it will end up in the landfill, totally negating the intention of the hazardous materials bans in the first place.
Of course, it’ll be a landfill in China, so who really cares?