Tuesday, 1 April 2008

Quality, price and reputation

As an economist who does work on "quality" in China the results of a survey by William Loft into the cost of buying mattresses from China with and without quality inspection is fascinating.

This survey as also been covered by China Law Blog and The China Game.

Here is the original survey which is worth reading.

Williams Loft Evaluates 12 Chinese Down Comforter Manufacturers -- Finds Quality Assurance Only Comes With Testing

Basically, William Loft contacted 12 companies and asked for quotes and then went back later asking for quotes but making it clear that an independent quality inspector would be employed to check the quality of the goods produced.

So what happened to the quotes? In 10 out of 12 cases they increased.

The question is why?

Clearly, it costs more to produce higher quality but given the request was for identical products, quality should have been equal and hence price should not change.

Possible answers include:

1. These companies usually cut corners allowing them to undercut rivals - an example of quality fade. Because the buyer is signalling its serious attitude to quality the firm provides the "real price" for a given level of quality.

2. The firm, by signalling its intention to employ independent inspectors, that it can afford to pay more and thus the price is hiked up on them.

3. The sellers increase their quotes as they see the buyer as "trouble" that will induce additional internal costs of monitoring and the potential for damage to its reputation from any returns or failed inspections. Thus the price rises to compensate for the extra hassle.

On average, Chinese manufacturers increased pricing 20% when told a 3 part inspection process was required. Williams Loft president, Will Robertson, reacts "It's surprising, but not unexpected. We know that very fine products can come from China; we just need to have a system in place to guarantee quality."

An additional WSJ on the quality of suits.

China's Challenge to Italy [WSJ]

Can a Chinese factory make an $800 suit that is just as good as a $1,400 suit made in Italy?

A few years ago, such a question wouldn't have been taken seriously. While production of most clothing has long ago moved to China, expensive men's suits -- those costing $800 and up -- have represented the last frontier in Chinese apparel manufacturing. Such suits, whose jackets are by far the most technically complicated pieces of clothing to make, have typically been made in Italy or North America, or London's Savile Row if the suit is custom-made.


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