The Hindu Business Line : Higher standards will find their level

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Higher standards will find their level

Companies and governments need to follow higher standards, wherever they find them. If they don’t they will only be participating in a race to the bottom.

C. Gopinath

We need to take a break from all the discussion about the financial crisis and impending recession that my last two columns were on. Not because it is not important but the gloom will still be there when we return.

Meanwhile, other events have been taking place that require our attention. The big news that got pushed to the inside pages of the world’s newspapers was the milk crisis in China. Several milk-based products produced in China were found to have been contaminated with melamine, an industrial chemical.

The addition of melamine, normally used in plastics, fertilisers and cleaning products, fools testing procedures into believing that there is a higher protein content of an otherwise weak product. Among the products that were contaminated were milk powder, baby foods, and yoghurt. Most of those hurt by this in China have been children. A few have died, several dozens were diagnosed with kidney stones, and over 90,000 are reported to be sick.

Pets in America died earlier this year because a pet food manufacturer there imported melamine tainted wheat-gluten from China. About 11 countries, including the European Union, Singapore, and Australia, have banned Chinese milk-based products. The crisis is still being dealt with and the Chinese government has now issued a recall of all products made before September.

News reports now suggest that the Chinese company, the Sanlu Group, making the tainted baby food was receiving complaints as early as March. A New Zealand company, the Fonterra Dairy Cooperative, which had invested in the Sanlu Group, was putting pressure to go public with the product’s problems. (The products of 21 other companies have also been found to suffer from similar contamination.)

I don’t believe that Chinese dairy farmers knew all about melamine, or even where to get it from. We still do not know how the melamine got into the products. Some commercial enterprise along the way was possibly looking at an unethical way of profiting from a product that is global and in a market that is global.

Why was the product manufacturer so hesitant to reveal that there were problems with their products? Perhaps a desire to cover up the problem thinking it was local, and the fall-out could be ‘managed.’ Moreover, the government of China had apparently forbidden the Chinese media from reporting on several issues till the Olympics were over, so as not to cause a bad image! The government forgot that public interest cannot be contained through government fiat.

Times have changed from when the government of China could decide how and what its people thought about. The government and some of its manufacturers forgot that they do not operate by local standards any more, and are going to pay the price in terms of shattered mage for some time to come.

The Ranbaxy instance

Let’s come closer home. In mid-September, the Food and Drug Administration of the US government announced that it was banning imports of low cost generics made in some of the plants of Ranbaxy Laboratories in India based on doubts about the company’s production practices. The government agency said it was concerned about the ability of the manufacturing process used to meet purity standards. The quality problems were found during an inspection in early 2006, so it is a wonder why it took so long to issue this ban.

Drug imports in the US were affected, and a serious doubt has been created in the minds of the consumers about the quality of Ranbaxy products. Meanwhile, the US government has announced that it has dropped legal action against the company because of cooperation received, although the ban on imports seems to be still in place. The nature of dispute between the company and the FDA is itself in dispute.

In a global market, the higher standard will show its head where it is least expected to. Even if the company has a valid dispute over whether the standard they are required to meet are truly higher, meeting the perception of a higher standard becomes as important.

Fighting corruption

My third, and last, example is about corruption. Prosecutors in Switzerland have alleged that Alstom SA, the French engineering giant, spent several hundreds of millions of dollars making illicit payments abroad. These were operated through a Swiss slush fund. The bribes were given to secure public sector contracts in Asia and Latin America. One of Alstom’s main competitor, Siemens, has been facing a similar probe in Germany and has paid fines to settle charges that it bribed officials in Libya, Nigeria and Russia.

There are two parties to corruption — the givers and the receivers. For a long time now, the receivers have been subjected to shame and scrutiny. The culpability of the giver has always been downplayed — after all, the argument has been ‘that’s how business is done there.’ The US and EU have passed laws to prevent this practice by its companies but enforcement has been spotty.

Transparency International, the NGO fighting corruption by highlighting it, has recently come out with a ranking that suggests that the leading economies of the developed world are not serious about tackling corruption. Only Canada, out of the Group of Seven leading industrialised countries, appears in the top 10 least corrupt nations. Many countries have slipped in the rankings over the years, leading TI to charge that there is an ‘engrained complacency’ in tackling corruption among the developed countries. Many in India are familiar with the press reports about foot-dragging by European governments in investigating or revealing information connected with the Bofors scandal.

These bribe-giving companies, and perhaps their governments, are trying to follow different standards for their business overseas as compared to their domestic environments. In today’s era of globalisation, information is available freely. Products and ideas travel far and wide, with increasing speed.

Sooner or later, the bugs crawl out from underneath the carpet and everyone sees them. Companies and governments need to follow the higher standards, wherever they find them. If they don’t they will only be participating in a race to the bottom.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. blfeedback@thehindu.co.in)

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