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Rein: China Furniture Scandal Has Important Lessons For Foreign Brands

Shaun Rein, CNBC Contributor|Founder HKSCKPVIamp; Managing Director, China Market Research Group
Thursday, 28 Jul 2011 | 3:35 AM ET

Another product scandal has hit China. But instead of exporting tainted products to America such as when unscrupulous executives sent foul-smelling drywall destined for homes in Florida or produced lead coated toys for Mattel, this time Chinese executives allegedly have been bilking their own countrymen.

Man and woman with shopping bags in mall
Sky View | Photodisc | Getty Images
Man and woman with shopping bags in mall

The state-owned CCTV news station conducted an exposé after an investigation into Da Vinci furniture, a Singapore-founded and Shanghai-based luxury retailer that sells Versace Home, Fendi Casa, Kenzo Maison, and Cerruti among other upscale brands to wealthy Chinese consumers. CCTV reporters not only found quality problems with the company’s products, often priced in the tens of thousands of dollars per piece, but the Shanghai Entry-Exit Inspection and Quarantine Bureau announced that the company’s “made in Italy” products were actually made in China.

The products were shipped to China’s border, and then suddenly became “imported” the next day after bribing local officials to certify them as imported or ‘Made in Italy’. The situation has caused uproar among Chinese consumers and has become a media circus as the government has been pushing for an end to quality control problems in Chinese factories and has allowed the media to report on the scandal.

At a press conference on July 13, the general manager of Da Vinci, Panzhuang Xiuhua, gave a rambling and tearful speech filled with weak excuses for her actions. She refused to take questions, which only angered consumers and reporters even more and caused them to take to micro-blogs on Sina in anger. Several people claiming to be consumers who had spent hundreds of thousands of dollars on furniture stood up and shouted recriminations. You can see pictures of the event here.

Rumors about the problem spread overseas quickly. On a business trip I took to Thailand, all the Chinese guests at the hotel I stayed at discussed the problem. One wealthy woman from Beijing who had shopped at Da Vinci told me, “I’ll never buy from Da Vinci. Who can trust them now?”

Chinese consumers are well aware of the risks of buying from some local companies. In interviews we conducted with five thousand consumers in fifteen cities last year, the overwhelming majority of consumers told my firm their biggest fear in life was buying toxic products that could harm their health. When buying critical products, which are ingested by children, consumers told me they would pay 20 percent or more for brands they trust. For products at home, they will pay an even larger premium if it is something that children will come into contact with.

In a separate study, my firm interviewed one thousand consumers in six cities in the last six months about home decoration. The biggest fear consumers had when buying furniture, was buying toxic products. They worry about furniture brands selling products with bad quality glue or toxic varnish.

The scandal engulfing Da Vinci, and by association its partners, shows western brands need to be very cautious about whom they choose to represent their brands or to whom they license products. It is common for western brands to enter China via partnerships or licensing agreements rather than doing it alone. Now that the markets are more transparent than even a decade, it might make sense for some foreign companies to take back ownership of their China operations as Starbucks did when it bought out its partners for control of its store operations in the country. Luxury retailers Ralph Lauren and Burberry did the same thing to manage their brand and operations better.

Companies like Pierre Cardin or Disney generate a ton of sales from licensing and have done well so far. But if brands are going to go the route of licensing or partnerships, they need to police their partners well. Brands like Versace and Fendi will most likely take a hit on their reputations because of their association with Da Vinci. Consumers might wonder if these firms’ furniture products are made in China and have quality control problems, and they might have the same worries about their luxury clothes.

Since Chinese consumers are so hypersensitive about poor quality products, brands must create trust with consumers and do everything they can to maintain it – even if it means charging more to ensure quality control. Da Vinci got the first part right. It built up a reputation for having the most luxurious furniture brands in the country. Yet their business is in serious jeopardy because it seems their high-quality brand image was based on a sleight of hand. For a company that sells products like furniture that people buy only once every several years (when they buy a new home or renovate an existing one), it will be incredibly difficult for Da Vinci to survive because consumers will skip them for at least one or two sales cycles.

Compared with their American counterparts, Chinese consumers are not only far more concerned and hypersensitive about quality control but are also much less forgiving. It is unlikely that brands tainted can bounce back the way Johnson and Johnson did after its baby Tylenol problems in the 1980s. The key lesson that companies operating in China should learn is to never do anything that can damage trust with consumers – ever.

Shaun Rein is the founder and managing director of the China Market Research Group (www.cmrconsulting.com.cn) a strategic market intelligence firm, and is based in Shanghai. He is the author of the upcoming book “The End of Cheap China: Economic and Cultural Trends that will Disrupt the World” published by John Wiley & Sons in the US.

He does not own shares in any company mentioned. Follow him on Twitter at @shaunrein.

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