Cablegate: Amway or the Highway: Qa in a Risky Business Environment

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FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6333
INFO RUEHOO/CHINA POSTS COLLECTIVE
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UNCLAS SECTION 01 OF 02 GUANGZHOU 000870

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E.O. 12958: N/A
TAGS: ETRD ECON EINV PGOV CH
SUBJECT: Amway or the Highway: QA in a Risky Business Environment

1. (SBU) SUMMARY AND COMMENT: Amway is confident that its Quality
Assurance (QA) program enhances the quality and safety of its
products. As in its dealings with Wal-mart, the Chinese government
seeks Amway's advice on ways to elevate safety standards and educate
Chinese companies. Across-the-board, U.S. companies today are
playing a major role in shaping the consumer product/QA environment
domestically and globally for Chinese-made products. This presents
an opportunity for the USG to leverage Chinese policymakers'
receptiveness to U.S. business advice and expertise. This is
another in our series of cables of interviews with U.S. and Chinese
companies regarding consumer product safety and standards. END
COMMENT

Amway Sources Locally and from its U.S. Operations
--------------------------------------------- ------

2. (SBU) Amway's Director of Technical Regulatory Services Hong Min
Xu told us that the company generally relies on local Chinese
suppliers to provide the raw materials, intermediate goods, and
final goods for Amway's cosmetics, cleaning supplies, and household
products. For some products, however, Amway buys the raw materials
but assembles the final product at one of its China-based production
facilities. In contrast, Xu explained, 99 percent of Amway's raw
materials for its food products come from U.S. suppliers; that way,
Amway can be assured that it is providing high quality goods.

Good QA is Good Business
------------------------

3. (SBU) Amway's market strategy for China relies on a robust
quality assurance system. Eighty QA engineers audit suppliers'
quality systems, product quality, and capacity at all levels of
production, including raw materials, intermediate goods, final
goods, and packaging. Amway, which received ISO 9001 certification
from United Laboratories (UL) and BSI, has in the past required its
Chinese suppliers to have similar certification. In recent years,
Amway has raised its quality standards beyond ISO 9001 to guarantee
the quality of products sold worldwide. While Amway generally uses
U.S. quality and safety standards for its worldwide operations, Xu
said, meeting this standard is sometimes impossible from
country-to-country. However, Xu assured CongenOff, though without
further clarification, this does not result in a lower level of
safety or quality.

4. (SBU) Amway maintains a list of "qualified suppliers" for its
cosmetics, detergents, and other household products. To become a
"qualified supplier," a supplier goes through a 6-month to 3-year
audit. Amway conducts regular inspections and audits of it
"qualified suppliers." If a supplier fails to meet standards 2-3
times, Amway removes it from the firm's list of "qualified
suppliers." Amway also operates a Product Response System (PRS)
used to elicit feedback from customers. This enables Amway to
investigate instances of product failure and design solutions to
prevent future occurrences.

Amway to go "Made in China" for retail worldwide
--------------------------------------------- ---

5. (SBU) While Amway's China operations currently do not export
products to the U.S., Xu volunteered that Amway would like to begin
sending its products to the U.S. and other markets. In fact, prior
to the pet food scandal, Amway had plans to export it "softgel" food
supplements; this has put this on hold for the time being. Xu
personally believes that Amway management now views one level of QA
standards for all of its operations as a way to increase
competitiveness and mitigate supply chain risk.

Amway's QA investment has paid off
----------------------------------

6. (SBU) Xu was pleased that Amway had taken his advice and
invested heavily in a quality control system, worldwide production
facilities, and testing laboratories. This investment has resulted
in local and national recognition. Xu explained that the national
government has recognized Amway's testing laboratory as a national
laboratory and frequently asks Amway to conduct tests on its behalf.

Advice on Standards Given to the Chinese Government
--------------------------------------------- ------

7. (SBU) Xu noted that the Chinese government frequently seeks out
Amway expertise on international standards and ways to revise
Chinese standards. He commended, with pride, that nearly fifty
percent of his department's work consists of providing this expert
advice. His work brings him into contact with the Ministry of
Health (MOH), the Administration of Quality Supervision, Inspection
and Quarantine (AQSIQ), the State Administration of Industry and
Commerce (SAIC), and the State Food and Drug Administration (SFDA).
To date, Amway has assisted the Chinese government in shaping and

GUANGZHOU 00000870 002 OF 002

creating some 170 technical standards.

8. (SBU) Amway has also organized seminars on technical standards
and safety regulations for these Ministries. One recent seminar on
international regulatory standards included European Commission
officials, U.S. scientists, and other technical standard experts.
Amway sometimes works with the Cosmetic Ingredient Review (CIR) and
trade associations - the Council for Responsible Nutrition and
International Alliance of Dietary Food Supplements Associations
(IADSA)- to advise the Chinese government on the Codex Alimentarius
Commission's list of standards. Xu acknowledged that other foreign
firms - Roche, Mead Johnson, Johnson & Johnson, Nestle, Heinz, P&G,
Avon, and Este Lauder - also advise on international standards.

Too Many Cooks Spoil the Broth
------------------------------

9. (SBU) Xu pointed out that many - actually too many - Chinese
government agencies are involved in creating and enforcing product
and safety standards. In Amway's case, nine agencies determine
whether the company's products are acceptable. He complained that
these agencies or, in some instances, different divisions with these
agencies, issue conflicting standards and interpretations. He also
believes that many Chinese agencies do not have the expertise to
develop and enforce standards.

10. (SBU) Five years ago, Xu said, the Chinese government actively
sought to create sound technical standards and regulations. The
government looked at different standards and regulations around the
world as examples. In the area of cosmetics, for example, China has
adopted the essence of the Cosmetic Ingredients Review's (CIR)
recommended standards, as well as those of the European Union's.
For food, China has generally looked to the U.S. standards as a
model. Standards for other products have been an amalgam of
internationally recognized and domestic standards.

11. (SBU) China has grown weary of what it believes to be
increasingly complicated and trade distorting standards in the
European Union and the United States, Xu said. Additionally,
Chinese companies, seeking a competitive advantage, have lobbied the
Chinese government to adopt standards so limiting that only their
company can benefit. Xu observed that these two factors have led to
a decline in Chinese standards and stalled reform.

GOLDBERG

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