The SK-II Affair

(Southern Metropolis Daily)

Chronology:

(Southern Metropolis Daily)  The Arrogance of Procter and Gamble.  Editorial by Fan Haidong.  September 23, 2006.

(in translation)

On September 14, the National Quality Inspection Department announced that many cosmetic products in the SK-II line of Procter & Gamble contained banned substances.  Over the ensuing weekend, there was a tide of product returns for SK-II everywhere, with "serious security incidents" occurring at some SK-II booths.  Yesterday morning, SK-II announced that it will temporarily halt the sales of SK-II products in China, but this did not temper the anger of the consumers.  Yesterday afternoon, the P&G Shanghai office was surrounded by a crowd of protestors and the glass on the front door was smashed.  Since the complaint channels were imperfect, the quality problems for SK-II could not enter into the legal process in a timely manner.  The net result was a direct confrontation between the mass of consumers and the multinational corporation, and this is now a very visible public affair.

The performance of P&G during the entire process can only make the media used the word "arrogance" for description.  When the news first came out, P&G issued a firm denial.  When the consumers demanded a refund, P&G insisted that the consumers sign a "dictatorial statement" that there were no quality problems.  As the incident intensified, P&G changed its position and said that it cannot exclude the possibility that banned substances exist but only that the substances did not come in the original formula.  Up to the announcement that P&G will temporarily halt sales, it still does not acknowledge any quality problems and therefore it refuses to make any promise for compensation.  The attitude of P&G is that they were arrogant towards the National Quality Inspection Department and they did not trust the test results; they were arrogant towards the Chinese consumers and they ignored the wave of protests in the belief that this was just emotional discharge that will not damage corporate interests in any serious way.

By common knowledge, when a product has quality problems, it is a major crisis for the corporation, especially a multinational corporation.  Apart from compensating consumers in accordance with the law, the corporation will lose its reputation, it will lose its consumers and it will lose the market.  But the multinational corporations in China continue to have scandals about product quality -- Bausch, Dell, Haagen Daz, KFC, Nestle ... these large corporations have different public relations methods and they do not seem to have suffered seriously.  They continue to sell well and make profits.  China is still lacking a system for filing class action lawsuits to protect the rights and interests of consumers against the large corporate enterprises.  Besides, the courts seemed to be passively "gentle" when it comes to hearing actual consumer protection lawsuits.  Thus, the corporations are unafraid of the divided and scattered consumers.  Absent any legal restraints, quality assurance is tasked to the national administrative departments.  This also means that the conflicts between corporations and consumers become social incidents that depend on the implicit social consensus, moral order and market forces.  Given the lack of trust in the Chinese corporations, even if there are quality problems, the Chinese consumers would still rather buy the products from multinational corporations.

But the special conditions in China do not imply that normal corporate morality is inoperative.  In a globalized world, a multinational corporation is facing the global market.  It has only a single image of trust in front of the consumers, and its most effective marketing took is often that image of trust.  Therefore, no matter where a scandal emerges, there will be a chain effect around the global market.  When China found the quality issues with SK-II, the large Korean department stores discontinued the sales of eight SK-II products.  Singapore is also starting its own tests.  If this incident continues to expand, then the SK-II brand in which P&G has invested so much may be defunct.

Besides, even if a product quality issue should not be equated with the question about corporate social responsibility and morality, it still does not mean the corporation can afford to be arrogant and negligent.  In a globalized economy, the multinational corporations are major bodies of economy, government, society and culture just like nations.  Therefore, international organizations have passed standards of corporate social responsibility for multinational corporations.  Consumer expectations for the corporations also far exceed mere expectations and demands on product quality issues.  Therefore, among the intangible assets of a corporation, moral capital is a very important item.  Thus, the various multinational corporations participate in charity projects.  For example, Google used the moral principle of "Don't do evil" to showcase its corporate image.  When Google sold its search records to a Brazilian court, many Google supporters were disappointed.  [translator's note: I believe that the description about the Google case is inaccurate -- Google yields user data about its Orkut community to a Brazilian court for investigating child pornography and racism, and Google has refused the US government's request for search records]

When faced with moral condemnation, smart multinational corporations will choose to reveal the scandals themselves.  For example, General Motors reported on its own that it had been fined for discharging waste products into the atmosphere.  Nike admitted that some of its suppliers had exploited the workers.  The fact is that actively admitting fault reduces the damage to the corporate image to a minimum.  By comparison, when faced with a quality problem, P&G was still hoping to get by and refused to admit it, thus losing the initial moment when it could direct the action.  Although this approach seems to have left some room for future explanations, it also damaged consumer interests and sentiments, and it also damaged the trustworthy image of P&G as an internationally famous corporation.  From the long-term perspective, this may not have been the best strategy.

Related Link: SK-II -- The Mob Makes China Cosmetics A Dirty Business  China Law Blog