Winning Trade Wars With Quality

We stand on the brink of a fundamental change in the relationship of business and government for consumer protection. The past dozen years have been punctuated by acrimony and confrontation. Government agencies born, or reborn, in the early 1970s flush of consumerism found enough flagrant examples of deceptive advertising, unscrupulous marketing, unsafe or defective products, unfulfilled warranties, and inadequate servicing to justify zealous regulation and litigation. Businesses whose autonomy was suddenly threatened found enough evidence of regulatory incompetence or na�vet� to fuel their self-righteous resistance.

The battle lines were drawn. Trench warfare ensued, with regulations fought out for years within highly formal proceedings, before hearing officers, commissioners, administrators, and appeals courts; in re-hearings, remands, subpoena challenges, enforcement proceedings, recall orders, endless consent negotiations; in congressional lobbying, grass roots organizing, heated debates within appropriations and oversight committees, eleventh hour compromises, and at least two days when one regulatory agency-the Federal Trade Commission-had to close itself down.

We have created a billion-dollar industry comprised of lawyers, lobbyists and Washington representatives, who feed off the battle. The longer, more arduous, and more dramatic the confrontation, the richer this industry becomes. Hostility breeds hostility, until the combat provides the sole means through which business and government communicate with each other.

All this would be merely sad rather than tragic, had it not taken our attention away from a far more serious battle that U.S. companies are losing: the battle for competitive survival in the world economy. In industry after industry, consumers in America and elsewhere are turning their backs on U.S.-manufactured products in favor of foreign competitors: 27 percent of the automobiles sold here are now manufactured abroad by non-U.S. companies, 30 percent of our sporting and athletic goods, 30 percent of microwave ovens, 90 percent of CB radios and motorcycles, almost 100 percent of video cassettes. The list goes on and, in fact, gets longer year by year: radial tires, home calculators, televisions, food processors, premium beer, cameras, stereo components, digital watches, pianos, bicycles, outboard motors. These particular consumer markets are among our fastest growing.

Why are we losing this battle? Some lay blame on cheap foreign labor, or on "dumping" at prices below those prevailing in home markets. But foreign wage rates are rapidly catching up with our own; Japan's labor costs art now on a par with ours. And many of these imports sell here at prices comparable to or in excess of American-made counterparts. By the mid-1970s Japanese and West German autos had lost any price advantage over their American-made competitors, although the Japanese have regained it in the past two years. French-made radial tires are as expensive as those produced here.

Some lay blame on government regulation. But imports must meet the same standards as American products in order to be sold here. And in any event, health, safety, and environmental regulation is as strict-if not stricter-in Japan and West Europe as it is in the United States.

Some blame foreign trade barriers, making it more difficult for U.S. manufacturers to gain access to world markets. But foreign trade barriers have been reduced rapidly since the late 1960s.

Part of the problem is our failure to invest in future productivity. Japan's personal savings rate has been averaging about 20 percent a year while our own has fallen to less than 4 percent. This is partly because Japan's social security system did not begin paying out until recently so people had to save more for their retirement years. Last year, Japan's per capita investment in new plant and equipment was twice our own. The proportion of gross national product going into research and development has been rising rapidly in Japan but falling in the United States.

But another part of our problem, perhaps more serious over the long term, doesn't show up in national accounts and can't be measured in terms of savings and investment. That problem is the increasing consumer dissatisfaction with our products.

We are losing the battle for competitive survival, in part, because too many of our products are less reliable, less durable, and less efficient than the imports. Too many of our products are poorly designed, badly assembled, carelessly shipped. Too many of our products provide inadequate instructions, warnings, or disclaimers. Too many of our products fall apart too soon, need inordinate repair, are too expensive to use and maintain.

We're losing the battle for competitive survival because, all too often, "Made in U.S.A." has become a symbol for "second-rate."

While American business has been worried about price competition from abroad, the real battle has become one of competitive quality. While American business and government have been fighting tooth and nail over consumer protection, other countries have been using consumer protection to improve industrial performance and enhance their national reputation for commercial quality. A quick survey bears out this observation.

Japan

"Made in Japan" used to mean "cheap imitation." Then in the late 1950s the Japanese government established a program of rigorous quality standards and inspection, awarding a Japanese Industrial Seal only to products that made the grade. By the mid-1970s "Made in Japan" had become a symbol of painstaking quality.

Japanese producers emphasize the minimization of mistakes, preventing defects and ensuring product reliability before an item leaves the factory. Strict testing and retesting of product design and construction have resulted in as few as one-quarter to one-half as many product failures as experienced by U.S. and European companies, according to government and private surveys of major consumer products.

Another major reason for Japan's recent high marks lies with the innovation of the Quality Control Circle. Under this voluntary program, workers participate in small discussion groups, learning quality control techniques and methods of identifying, investigating and solving production and quality problems. An estimated one out of nine Japanese workers belong to a QC circle.

These QC circles, which draw from the workers' energy and ingenuity, have enabled Japan's industries to build on American technology to _establish themselves worldwide with automobiles, color televisions; and audio equipment. Japan has gone further however,, by pioneering solid-state technology and turning out cheaper, energy-efficient products to meet the demand of the post-1973 conservation-conscious consumer both at home and abroad. Coupled with a lesser concern for short-term profits and shareholder gratification, Japanese industries use their QC orientation and are building for the future (with the aid of government-sponsored R&D) with rapidly growing market shares in such advanced products as computers and semiconductors, both industries in which the zero-defect philosophy is dominant.

Although product quality enforcement is almost fully self-imposed, Japan also has Industrial Standardization Laws that strictly regulate product safety, labeling, and quality standards. Certain items are required to pass rigorous tests before they may receive government marks of approval. The government performs on-the-spot factory inspections to ensure compliance. These standards and practices help consumers choose satisfactory products. They also maintain Japan's reputation for international eminence in many industries. Many advertisers may now boast that their products are imported from Japan, and rightfully so.

Sweden

Similarly, Sweden's Board for Consumer Policies, a quasi-government body, has established rigorous standards for product grading, along with detailed product information for prospective purchasers-features that' have earned Sweden a reputation for quality automobiles, boats, vacuum cleaners and hand tools. Sweden emphasizes providing information to consumers, cooperation among government and industry, and establishing consumer councils, whose purpose is to ensure adequate representation of consumer interests. To further these objectives, business has agreed to conduct extensive product testing; provide detailed, informative labeling; and complaint services for dissatisfied consumers have been implemented. Schools and adult centers offer consumer education programs and several radio stations provide air time for home economics programming.

The Public Complaints Board, administered by the Board for Consumer Policies, has several divisions handling different problem areas. Each division is composed of a judge who acts as chairman, and several members representing both consumers and industry. These boards provide alternatives to time-consuming and costly court procedures, and enable the consumer to file a complaint free of charge in a less formal, more flexible setting. Although compliance with a board's order is voluntary, the process makes manufacturers aware of product defects through a non-adversarial proceeding which allows them to concentrate on improving quality, rather than defending themselves against liability. Where appropriate, a consumer may bring a complaint under the Marketing Practices Act, which prohibits marketing activities deemed to conflict with sound commercial standards.

France

A steadily rising proportion of the French budget has been set aside for consumer affairs. The National Consumer Committee, a private organization whose chief task is to bring all segments of the economy together around the conference table, has succeeded in fostering cooperation between the business community and government consumer agencies. Business and industry representatives are included in government consumer councils that deal with problems ranging from quality _ control to unfair contract clauses.

The Service for Quality of Industrial Products promotes programs for consultation between business and consumer interests in an effort to standardize labeling and comparative testing procedures. These programs are designed to promote labeling, coordinate quality control efforts, and serve as a check on the accuracy of product information. Compulsory labeling requirements under the Consumer Protection Act apply to French wines, vermouths, aperitifs, spirits, various foodstuffs, and other consumer goods.

In addition, the government established the National Testing Lab to increase information for consumers about product quality and reliability. The lab also serves as an outside check on quality control. When necessary, the French Bureau of Consumer Affairs has the authority to ban dangerous products and issue civil penalties for deceptive advertising.

West Germany

West Germany, meanwhile, has pioneered exacting standards for product performance and consumer information, thereby boosting its world sales of cameras, furniture, and household appliances.

When adverse consumer response is noted, business, labor and government act swiftly. The publicly-financed Consumer Institute sponsors studies, comparative testing and education programs. The institute also brings complaints concerning product quality and both deceptive packaging and product claims. Business has agreed to establish conciliation and arbitration boards to foster consumer redress. Headed by an unbiased chairman and composed of representatives of the industry concerned and consumer groups, these boards also serve the valuable. function of channeling information to manufacturers with a view toward improving quality control and overall performance, in the marketplace.

While all the evidence is not yet in, there seems little doubt that the attention to consumer protection in these countries contributes to their improved product quality. Consumer protection is part of national marketing strategies in these countries. Government and business, working together, have identified markets in which they have a competitive advantage and devised strategies to penetrate and capture those markets by giving consumers what they want. Government and business, working together, have insured product quality and provided reliable product information. They have built a reputation for dependability-a reputation that carries over from product to product, strengthening their overall competitive position.

While American business and government have been at war with one another over consumer protection, foreign businesses and governments have been quietly waging economic war on us-and they are winning. We have deluded ourselves into playing a zero-sum game, refereed by federal judges, when the real game is in the marketplace, refereed by millions of consumers.

Of course, there are unscrupulous sellers whose activities harm the reputations of all others. We see this in the developed world when manufacturers ship and sell goods they know are inferior or harmful; we see it even more pointedly in the less developed countries when companies "dump" the goods deemed unsafe for use in their host industrialized countries, or simply provide lower quality in products destined for use in Third World countries. '

Government should come down hard on these companies. Responsible businesses have a strong interest-certainly a greater interest than most have so far displayed-in working with government to identify the worst violators. There will, of course, continue to be product hazards that only manifest over the long-term-such as disease induced from cancer-causing agents-and defects that-are difficult for consumers to evaluate. Government has a responsibility to act here as well.

Responsible businesses also have a duty to alert consumers and government to such problems as soon as there is reason to believe they exist, and to develop quick means of remedying them. Too many major marketplace hazards-from the Firestone 500 to the Kepone disaster-have spread because companies have held back information on product dangers. Failure to sound the alarm in these circumstances should be among the most serious regulatory offenses in the future, with criminal or other penalties applied to managers who cover up hazards.

American business, meanshile, has deluded itself into spending millions of dollars to stall new regulations and fight product recalls. But it cannot stall the inexorable march of consumers away from products that disappoint them. Products that are unsafe, defective, or shoddy, that fail to live up to their advertising claims, or that neglect to disclose important information to their purchasers, often will lose the battle of the marketplace regardless of the outcome of protracted government litigation.

This point is perhaps most clear in the relationship between giant firms and the less affluent nations. In their dealings with both consumers and workers in those countries, many multinationals are seeking to maximize their immediate advantage, providing little (and sometimes misleading) information, lower quality goods, and less attention to safety. Beyond the question of social responsibility, these activities, over the long run, can threaten the companies' self-interest by creating a bitter legacy of distrust. As incomes increase, and more information and selection becomes available, consumers can be expected to turn away from these products.

On May 12, 1980, the United States government levied a fine of $50Q,000-the largest ever assessed under the Motor Vehicle Safety Act-against a major U.S. tire manufacturer for marketing a tire that it knew did not meet federal safety standards. Is it mere coincidence that while that manufacturer was failing to correct the problem-before the government even knew that the problem existed-a foreign tire manufacturer captured a one-half-billion dollar share of the U.S. tire market?

Or consider the endless battle waged by American auto makers over the government's auto fuel economy standards-only to have fuel efficient imports claim the allegiance of more and more cost-conscious consumers.

In ways such as these, and in countless others, American business has engaged in regulatory battles while losing the competitive war.

Equally self-defeating is the tendency of many businesses to regard consumer complaints as a nuisance that wastes valuable corporate time. They leave to public relations specialists in consumer service departments the job of placating the complainers, hoping that the government doesn't get involved.

The fact is that consumer complaints are one of the most important marketing assets available. They can serve as early warning devices-signalling that brand loyalty may be in jeopardy unless certain changes are made.

Of course, the danger exists that a close, cooperative working relationship between business and government will lead to-or at least create the appearance of-regulatory "capture" by business. Not so many years ago public confidence in the ability of our regulatory agencies to protect the public interest was undermined by disclosures of secret deals, holiday weekends financed by regulated businesses, and seductive promises of future employment for regulatory commissioners. Indeed, much of the formal and legalistic apparatus with which we are now saddled is in direct response to these sorts of abuse.

But the notion of a unitary, non-partisan public good to which regulators aspire, as distinct from that which motivates the best managers and most enlightened marketers in American business, has only limited relevance to the realities of international competition. Surely the government must guard the welfare to ensure that consumers are getting truthful and adequate product information, safe and efficient products, and the warranties they are promised. Yet if American business is to survive in an increasingly competitive world economy, these are precisely the goals that business must strive to attain.

What is good for business may or may not be good for consumers. But as our foreign competitors have learned all too well, what is good for consumers is bound to be good for business. Consumers today are more concerned about product reliability and safety than ever before. Awareness of these issues in Third World markets will continue to grow. Marketing strategies that focus on quality and performance, that elicit feed-back from consumers and make fine-tuned corrections in products, that provide consumers with clear and useful information about product attributes, are bound to succeed in the 1980s. They will succeed here in America, and they will succeed in the expanding markets of Western Europe and Asia.

Robert B. Reich is Director of Policy Planning at the Federal Trade Commission.