Total recall

Back to the factory with it...

Panasonic knows a few things about localisation in China. For example, fridges are often made with decorative doors because they serve as status symbols for rural folk, displayed in living rooms. Washing machines might also need to handle the rinsing of vegetables.

But a little local knowledge hasn’t saved the Osaka-based company from a public relations disaster. In early August, Panasonic recalled more than 365,000 refrigerators in China due to faulty temperature control components. According to the Shanghai Daily, the fault affected freezers experiencing high temperatures or excess humidity. In certain extreme conditions, some units were going up in smoke.

Recalls are not unheard of. Last November, Samsung called back 32,000 refrigerators. LG had similar problems – on a much smaller scale – in February. Panasonic’s current difficulties are of a different magnitude, and become the latest in a string of high profile quality control scandals for Japanese consumer companies. In 2008, Sharp was discovered to be selling a poorer quality of LCD television to Chinese shoppers compared with the same model sold in Japan and Hong Kong, for instance. That led to a media backlash. Similarly, Toshiba had to recall several LCD models of its own under similar circumstances.

Fairly typically, the media tends to look at such situations with a patriotic eye, claiming that Chinese product quality is gaining fast on its international peer group. The People’s Daily proudly announced last week that, while foreign brands have been hit by defective products, no domestic home appliance company has needed to conduct a recall. Given the reputation for some Chinese goods in overseas markets, that might sound surprising. Nor does it address the issue of why foreign brands have failed quality standards. Was it a result of design flaws or production shortcomings, for example? And how many of the faulty products might have rolled off Chinese factory lines?

Still, Japanese appliances will probably take a reputational hit with Chinese consumers as a result. Panasonic has recorded a drop in sales since the news broke on the latest recall. Perception matters too, as many Japanese firms are looking to China to drive their sales growth.

The indications are that some may be suffering, including Panasonic. Its refrigerators held only a 2% market share in China in the first half of the year, trailing other foreign brands like Samsung, LG and Siemens, says Zhongyikang, a Beijing-based research firm. Panasonic washing machines are also losing ground, their share of the market falling from 11% at the beginning of this year to 8% currently.

The electronics giant boasts one of the most extensive distribution networks among Japanese companies in China, as well as more than 40 factories and production facilities. But analysts say its extended product range and relentless focus on cost-cutting have distracted management, ceding some markets to more focused, agile players like Samsung and LG Electronics.

Meanwhile, domestic brands like Haier and Midea are wresting back market share from foreign manufacturers. By 2009, Haier was in control of one-third of the Chinese market (by unit sales) in refrigeration and laundry appliances, as well as one-quarter for air conditioners.

“Japanese companies were high-end brands in the past mainly because of their cutting-edge technology and superior quality,” Xu Dongsheng, Secretary-General of China Household Electrical Appliances Association told the 21CN Business Herald. “Now [they] only focus on cutting prices and have stopped investing in research and development. It is only natural that they are surpassed by Chinese and South Korean companies.”

Perception or reality, it’s an interpretation that will worry Japan Inc, especially with the recent symbolism of the country losing its ranking as the world’s second-largest economy to the Chinese (see China Ink). The Japanese reputation for quality was earned over decades. But losing it – particularly among China’s burgeoning market of youthful and relatively inexperienced consumers – could be a more rapid experience.

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