The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World (11 page)

After years of court battles, the restaurant near my office started making subtle changes. For a time the “b” in the subway sign over the restaurant was blocked out. Once that happened, customers started wondering what was going on. I asked one of the counterpeople, who shrugged and told me the sign was broken. I had my suspicions. When I went to another Subway outlet, the clerk told me that it was a fake Subway.

Employees at the fake Subway papered over other letters in the sign, a new one every month or two—a stalling tactic for the courts, but one that caused concern among more and more consumers. The lines started to thin, and word began to get out that the Subway was actually a fake outlet.

Years later, the restaurant finally took down the sign altogether. Today, the shop still uses menus identical to those at the real Subway located a block away in the Shanghai World Financial Center. The owners changed the sandwich wrappers, though; they now feature a new logo, with lettering practically identical to Subway’s but with a slightly different name: Starway.

The brazenness of some of the copying in China is breathtaking. Worse, from a consumer protection standpoint, is the poor enforcement. This business was able to operate for years, despite being found liable by a Chinese court for infringing on Subway’s intellectual property.

Contrary to Western opinion, which believes Chinese courts are stacked against Western companies, it is quite common in intellectual property infringement cases for Chinese courts to find in favor of Western brands and order penalties. The problem comes with enforcement—no one shuts down the infracting party. Additionally, many of the laws on the books don’t carry adequate punishments. Fines are simply too low to act as a disincentive to counterfeiters; often they pay them and carry on. One lawyer even told me that it was not worth suing a company. His legal fees would be more than the judgment, and anyway it was unlikely that a court order would stop the infringement. It was better to take your case to the consumer, he said, and get them to boycott fakes while buying the real thing.

Where the law failed to stop the fake Subway and shut it down, consumer activism did not. As word got out that the Subway store was actually a fake and not undergoing renovations (this is what staff told customers), fewer and fewer people ate there. Now at lunchtime there are no lines at the sandwich counter, even though the food and prices are the same as two years ago. Consumers do not want to eat food from a fake brand, because they are worried about the safety of the products sold.

I was talking about the shop with a Chinese financial services executive who works in the area. Disgusted and indignant, he said, “If that owner was willing to cheat Subway so much with all their money and lawyers, that owner would be willing to sell me bad-quality food. Who knows what kind of meats they sell? I will never eat there again because the food might harm me.” The owner of that fake Subway might have made a lot of money for years by cheating Subway and consumers, but his store is now devoid of consumers, and he is stuck with a long-term lease. Meanwhile, at the Shanghai World Financial Center, the real Subway continues to do brisk business, with lines dozens deep often extending out the door.

How can you trust a restaurant to sell genuinely safe food when penalties for blatantly flouting the law are so light? In an environment with a weak judicial system and unscrupulous food executives, it is little wonder that Chinese consumers have become extremely cautious about what they eat. Many younger people, like Emily, look to KFC and McDonald’s to provide food that is at the very least safe, if not exactly healthful.

The same fears about buying expired, tainted, or poor-quality products inform shopping choices at the supermarket. My own personal experience as a parent in China mirrors the problems and fears that many young parents have shared with me. In 2007, after my son Tom was born, I flew to Hong Kong or America every three months to buy baby formula. Back home in Shanghai, my wife Jessica and I bought only imported baby food, even if they were several times more expensive than domestic alternatives, and only at supermarkets like Jenny Lou’s (a high-end shop catering to expatriates and wealthy Chinese) that we trusted not to label jars falsely as imports, or to intentionally sell expired or poor-quality products. It was exhausting thinking about not only what food to buy, but also which brands and sales channels I could trust when shopping for my son. The purchasing process became a major topic of conversation between my wife and me at nearly every meal.

My firm’s research showed me that many Chinese parents are similarly frustrated, and spend lots of money and time to try and mitigate the chances of giving their children poor-quality food. One Beijing father in his thirties told me that he only shops at the French hypermarket Carrefour because he trusts them to sell only genuine items. “Smaller supermarkets might sell expired goods, or even fake ones,” he continued. “You can’t just buy based on brand anymore—there are too many fakes. You have to use a trustworthy store as well.”

Cross-border baby formula shopping trips like the ones I used to take are now so common that in Hong Kong, it has become nearly impossible for locals to buy formula, because parents from mainland China are always buying it up. Mothers in Hong Kong complained that they often could not find formula for their children, and rules have been implemented to limit the number of cans that one person may buy. I used to spend entire days visiting a well-worn path of stores to restock my son’s three-month supply, bumping into other parents from the mainland doing the same thing. Hong Kong police often report arrests after fights break out in stores, as desperate mainland shoppers try to snatch up the last cans.

Hong Kong’s Independent Commission Against Corruption reported that 18 people were arrested in May 2011 for skirting the quota on baby formula purchases. Chinese entrepreneurs would work with supermarket staff to buy cans in Hong Kong to ship back to China, to sell through word of mouth or online to Chinese consumers. That’s right—desperation for safe food is so high that gangs are moving away from drugs, pirated DVDs, and prostitution to sell baby formula.

When it comes to children and babies especially, Chinese parents are willing to do anything within their budgets to ensure that they are buying something safe and nontoxic. As my wife and I found out, buying baby products in a country with constant product and food safety scandals, involving everything from lead-painted toys to pork masquerading as beef, is a scary prospect.

Many parents—ourselves included—turned to Internet forums in droves to seek advice on trustworthy and nontrustworthy baby-product labels. The problem is that fears are so high, and the market so rife with rumors, that it is hard to know what to trust anymore. A rumor on a microblogging site is enough to destroy a company’s reputation and bottom line.

There are dozens of websites enumerating the pros and cons of different brands, and warning against labels that are commonly counterfeited or may be tainted. One mother commenting on a forum warned against buying Nestlé baby formula because she feared the fact that the brand had factories in the northeast, China’s rust belt. She worried that pollution from all the heavy industry in the region would seep into the soil and contaminate the grass the cows grazed. Other mothers disagreed, saying Nestlé was trustworthy because it is a foreign brand and therefore less likely to cut corners in the production process than domestic Chinese brands. Some mothers spoke knowingly about certain labels and expiration dates that indicated counterfeit products. As it turned out, these seemingly irrational fears for our newborns were not as crazy as they seemed.

In 2008, a year after my son was born, the whole country was engulfed by the news of a scandal that halted the country’s milk supply chain. Thousands of babies became sick due to tainted milk, because unscrupulous people were adding melamine—a chemical that can cause cancer or damage to reproductive systems—to falsify that the dairy products had sufficient levels of protein during quality checks. Sales of imported yogurt shot up as desperate parents feared all dairy supplies produced in China. More parents travelled abroad to buy food if they could afford it. Many switched away from dairy products altogether to soy milk. Breastfeeding became popular again, with some poorer women selling their breast milk to feed babies with wealthier parents.

Despite government efforts to crack down on the dairy supply chain that had produced this catastrophe, finding trustworthy milk in China can still be a harrowing experience. Three years after the original scandal, the government in 2011 shut 50 percent of the dairies because officials were finding that many producers, mind-bogglingly, were still adding melamine. The government has been forcing more consolidation in the industry to ensure better oversight. In August 2011, the government announced it had arrested 2,000 people and shut 4,900 businesses to clean up the food supply chain. Yet that is likely a small drop in a bucket because the problems are so immense.

Safeguarding the food supply chain for export and internal consumption is an area that the Chinese government absolutely needs to work on if it wants to keep the support of the people. It needs to write new laws and enforce them better, or else confidence in and support for the government will wane. Hefty fines and jail terms as well as capital punishment need to be increased to serve as real deterrents. Situations like the fake Subway operating for years despite a judicial ruling against it can no longer be allowed, and simple fines are not enough.

Part of the problem is that laws set by the central government are not always carried out by local officials, because of outright corruption or inefficiency. Far too often, local officials are not arrested or sacked en masse. Instead, the government metes out a severe sentence to senior officials in the hopes of scaring the entire bureaucracy. That strategy rarely works, so a more broad-based and transparent enforcement system needs to be implemented to stop problems and regain consumer confidence in the food supply chain.

These problems, however, provide opportunities for market-oriented brands that understand the evolving Chinese consumer to launch supply chains and marketing campaigns that engender trust. They must never do anything to harm their reputation, as Ajisen and Walmart did, and they need to spend more money up front to ensure safety. Their initial investments will pay dividends in the long term with profits and brand loyalty.

Chinese dairy brands like Mengniu and Yili have already responded to the demands of the market. They understand the need to prove to their customers that their supply chains are safe, and they are investing heavily to modernize their production facilities and advertise these improvements. That is why Mengniu is charging more for their yogurt products than foreign brands: to emphasize their high quality. Western fast-food brands such as KFC understand that consumers like Emily patronize them because they trust their quality control as much as the food’s taste. Their advertising campaigns emphasize health to allay consumers’ fears about dining out and then dying from eating toxic products.

Consumer demand for better quality is forcing companies to end the practice of a Cheap China. Financially it is more beneficial to sell healthy and safe products at a premium, than to focus on cutting costs at the expense of product quality.