As the choice of products and services available in China grows, consumers are becoming increasingly aware that the competition for their custom gives them greater bargaining power in the marketplace. With the growth in consumerism comes an awareness that if the higher prices paid by consumers are not justified by the goods and services they purchase, they can seek legal redress. New consumer legislation and the increasingly supportive attitude of consumer organisations, bureaucrats and courts towards enforcement are encouraging this trend. Foreign-invested manufacturers and retailers could find themselves the first in the firing line.
"The basis of the law is aggressive," says Mr. Victor Ho of the Hong Kong office of law firm White & Case, referring to China's 1993 Product Quality Law. "Consumers have two choices – either they can go to the bureaucrats and ask them to act as mediators or they can start something directly with the retailers or producers."
The Product Quality Law is not the only relevant law to have been passed in recent years. Others include a consumer protection law introduced in 1994, an advertising law (1995), an anti-unfair competition law (1993) and various price control laws. The first court to deal with cases exclusively related to consumer protection was established in Nanjing in 1993, while the first consumer rights legal aid fund was set up in Shanghai two years later.
But consumer rights are a relatively novel concept for the Chinese. In 1978, when China's economic reforms began, shortages of basic consumer goods were widespread. This was partly as a result of deliberate strategies of increasing production followed under the planned economy. With nearly 98 percent of retail outlets being state-owned at this time, it was very much a seller's market.
Only after 10 years of reform was this near-monopoly of the state challenged when private domestic firms were first permitted to engage in retailing. By 1995 privately-owned domestic retailers had captured a 30 percent market share. The growth of consumer choice was given a further boost in 1992 when foreign-invested retailers entered the scene.
Three million cases
The China Consumers' Association (CCA) was founded as long ago as 1984. The body, formed under the General Bureau of the State Administration of Industry and Commerce, aims to publicise and promote consumer rights as well as helping to organise mediation to resolve consumer disputes. The legal status and role of the CCA is enshrined in China's Consumer Protection Law. Since 1986 the CCA has organised national broadcasts each year on March 15 to mark International Consumer’s Day.
The day is also marked by many cities setting up telephone hotlines and special counters in department stores, and compiling product surveys. A monthly magazine China, Consumer is also published.
By late 1998, according to Ding Shihe, external relations director for the CCA, there were 3,110 branches of the CCA at or above county level. Including bodies set up in street committees, villages and department stores, the number of branches now exceeds70,000. While primarily state-funded, the CCA also raises some funds independently.
By the end of 1996 the CCA had investigated nearly three million cases covering a variety of areas including poor quality goods, dishonest advertising, false labelling, short weights, overcharging, food poisoning, wrongful body searches by store guards and breaches of contract. Nearly 530,000 cases were investigated in 1996 alone. Customers have receivedYn1.29bn (US$155m) in compensation over the past 12 years as a result.
Complaint or compliant?
Nearly all of the relevant laws have been introduced since 1992, so guidelines as to how they will be implemented remain sparse. The novelty of the very concept of consumer rights among individual consumers and among local administrations of industry and commerce adds an extra dimension of uncertainty to the way that they are interpreted in practice.
There may already be a considerable weight of consumer dissatisfaction yet to be released on retailers and manufacturers. A survey of 1,000 people in Shanghai and Beijing published in 1995 revealed that only four percent of consumers would consider complaining to a consumer association. By contrast as many as 40 percent said that they backtrack and accept defeat.
This apparent consumer passivity may have something to do with cultural factors inhibiting the expression of complaint.
However, widespread ignorance of basic principles of consumer protection certainly plays a role. A decade after it was formed, the CCA conducted a survey showing that 44 percent of Chinese consumers did not even know that they had a right to be compensated for physical and financial damages incurred as a result of using products and services. Thirty-five percent were not aware of any right of accurate information at the point of sale.
Others believe that conditions in China are ripe for a rapid growth in consumer rights awareness. Ms. Suk-ching Ho, head of the marketing department at the Chinese University of Hong Kong, points out that as long ago as the early 1980s comparative surveys showed that Chinese shoppers were more aware of their rights than their Thai counterparts.
"The steady growth of a rights-conscious consumer middle class in post-reform China has provided the optimal conditions for the operation of the consumer movement," Says Ho. She points to recent Gallup surveys suggesting a rise in importance of consumers' consideration of value, function and product information at point of sale compared with pure brand image as evidence of the development of consumer rights.
Where a considered consumer choice has been made it is more likely that grievances will be aired if the purchased product is faulty or does not meet initial expectations. "Contrary to popular belief, Chinese people can often be quite litigious," comments TK Chang of the Hong Kong office of law firm Coudert Brothers, who points to recent cases in Guangdong province involving McDonald's and Coca-Cola.
Foreign firms' international experience means that they are more accustomed than domestic producers to dealing with proactive consumers, and few question the need for laws designed to protect consumer rights. Indeed supporting consumer rights can be a valuable tool in building up consumer trust and confidence.
"Our policy of reimbursing [in cases of faulty goods], which is advertised by posters at our stores, is very much appreciated by consumers," says Mr. Jean Christoff Goarin, general manager of Carrefour China. "With appliances we can't go so far as we do in the West. While in the West warranties typically last for a year, in China three-to-six months is more common." Carrefour, which opened its first hypermarket in Beijing in 1995, now also has stores in Shenzhen, Shanghai, Tianjin and Chongqing.
But many claim that there is not a level playing field between foreign and domestic firms and that opportunistic Chinese consumers can appeal to a feeling that they are exploited by foreigners. This can result in consumer protection laws being implemented more vigorously against overseas firms.
"While it is true that awareness of consumer rights is growing, in some cases consumers are somewhat naive in their expectations," comments Gaorin. "Because you are a foreign firm customers sometimes believe they can get a very big payment from you saying “look I am going to the consumer rights association, you are going to have to compensate me."
Expensive snacks
Ho Xingbi successfully sued McDonald's in Shenzhen recently after her throat was cut while eating a McChicken sandwich. "The main reason we went to court was to tell McDonald's it should treat its Chinese consumers in the same way as its Western ones and use the same production standards as in Western countries," said Ho's husband Peng Changlong. "I don't believe they would dare to do things this way in the West." Peng said that they had rejected a Yn20,000 out-of-court settlement before a Shenzhen district court awarded damages of Yn77,000. The damages included Yn10,000 for hospital fees with the remaining Yn60,000 for what was termed ‘spiritual loss.'
Another pending Shenzhen case against McDonald's involved Xuan Yifu, who claimed that a McChicken sandwich served to him was raw in the middle. He hoped initially for Yn160,000 in compensation. "I know that if the same case came up in a foreign country, I might be able to ask for Yn1m or Yn10m," he said. "Some people even say Yn160,000 is too much, but any country needs a pioneer to break the norm." Xuan, who had kept the particular piece of chicken in his freezer and taped most of his conversations with the McDonald's management, eventually decided only to ask for a formal apology and symbolic compensation of three small coins – one from Hong Kong, one Chinese and one American.
Coca-Cola recently successfully defended two product liability cases in Guangdong but still found itself subjected to a barrage of negative media coverage. After the collapse of the cases, one involving a consumer alleging that he had found a spider in a bottle of Sprite, Guangzhou-based Nanfang Weekend printed stories suggesting that Coca-Cola had used connections to influence the court decisions. Other features printed in the newspaper included interviews with 10 people explaining why they do not like Coca-Cola. "In theory, it is more costly to risk the bad publicity than to pay a settlement, but sometimes we have to bite the bullet," said BC Lo, a vice-president of Coca-Cola China. Previously a consumer in Shanghai who bought an allegedly contaminated soft drink had attempted to sue the manufacturer for the cost of a Yn240,000 (US$29,000) apartment. "The difference with product liability in China is that it is an immature market where it is very difficult to limit liability," comments White & Case's Ho.
Vulnerable to complaints
Ho of White & Case feels that foreign firms remain highly vulnerable to both employee and consumer complaints. "They are definitely seen as a soft touch. With the perceived history of foreigners cheating the Chinese, political pressure can be brought to bear in such cases," he says.
"There was a case in a foreign hotel in Shanghai where the deputy general manager slapped an employee and broke the employee's glasses. Very soon afterwards a TV crew complete with cameras arrived at the hotel. In Shanghai, at least, there is almost a hotline in these cases. You know who to call."
The searching of suspected shoplifters is also an extremely sensitive issue in China and several consumers subjected to body searches have successfully sued for damaged reputation. Article 25 of the Consumer Protection Law states that “business operators shall not insult or slander consumers. A business operator may not search the body of a consumer or articles carried by a consumer and shall not infringe upon the personal freedom of a consumer.”
Some fear that consumer rights protection can deteriorate into just one more excuse for bureaucratic intrusion into business. In particular it gives the government an additional channel through which to control independently managed firms now that control of such firms through internal Communist Party cells and trade unions has been so much weakened. "The institutionalisation of the [consumer rights] movement in China was more a matter of governmental initiatives than of governmental responses to popular consumer actions," believes Suk-ching Ho.
"The emphasis of the CCA has been directed toward laying down the institution-al ingredients by establishing a network of consumer organisations and protective legislation… the CCA has to re-evaluate its focus and strategies. It must gear its future consumer policy pursuit by shifting from legislation toward a programme of consumer education," she adds.
Conflicting interests
Some of the consumer legislation itself reads as though it was not intended for individuals. "The penalties section of the Product Quality Law makes it seem like a bureaucrats' law rather than one designed for use in civil actions between two parties, although there are elements which do speak to individual consumers," says Victor Ho.
At times the agenda of controlling the market may also conflict directly with consumers' interests, he believes. One example of this is China's new Price Control Law passed in July of last year. While stating that most prices should be determined by the market, the law reaffirms the principle that some prices will continue to be guided or set by the government.
"Usually this means that prices are kept lower than they otherwise would have been," he concedes. "But recently, with retail prices dropping by much as 4-5 percent in some areas, the authorities have intervened to ensure that prices do not drop below a certain level."
Ho also cites the banning of multilayer marketing as a consumer law which had its origins in an administrative clampdown. He points out that indirect marketing techniques used by firms such as Avon and Amway were until recently accepted as legitimate. "The banning of pyramid selling began as an ad hoc action against a Taiwanese pyramid scheme which collapsed in Shanghai. This is an example of how the state still uses very heavy-handed techniques to regulate the market," he explains.
This is not to negate the legitimate role of the state in protecting consumer rights. Product liability laws and regulations are widely seen as an essential weapon in the fight against sub-standard and dangerous consumer goods. Nearly 70 percent of complaints handled by the CCA involve product quality.
According to official estimates, more than 900 Chinese died as a result of faulty household products in 1996. The biggest single cause of injuries was food poisoning. Six people were sentenced to death in 1997 for the methanol poisoning of 700 people in Suzhou and Shanxi province. Each year around 250 consumers are also put in hospital by exploding beer bottles, prompting Xinhua to describe bottles produced by state-owned breweries as ‘hidden bombs.’ Faulty gas heaters and electrical products are also common causes of injury or death. The manufacturer of one gas oven which exploded in a restaurant injuring 12 diners was ordered to pay Yn270,000 in compensation. In addition 35 percent of safety products such as gas leak alarms and safety belts were deemed 'unacceptable.’
Double your money?
The need for strong legal backing for consumer rights is underlined by the way in which censors have sometimes sought to cover up consumer goods scandals. As recently as September 1997 the president of the Beijing Youth Daily was sacked after the newspaper claimed that yoghurt drinks produced by the state-owned Hangzhou Wahaha Group had resulted in the fatal poisoning of several children.
While foreign manufacturers and retailers might feel that generally they have the edge over domestic producers in product quality, there is little room for complacency here. CCA surveys carried out in 1994 and1995 uncovered more complaints about foreign brands in all seven of the product categories researched.
"Enforcement aside, retailers might find that product quality laws are quite as strict as in the US," notes Donald B King, Professor of Law at St Louis University in the US.
The infringement of intellectual property rights can also have a bearing on consumer protection. One consumer in Tianjin seized upon a recent ruling allowing consumers who find they have bought fake products to return them to the store and claim double the price they paid for them in compensation. Wang Hai purchased 23 Sony cordless telephones in several Tianjin department stores in 1996 before launching a law suit against the retailers claiming that selling telecommunications equipment without a network connection certificate was banned. In this case, however, the court rejected Wang's compensation claim in September 1998, ruling that as he knew the telephones were fake when he bought them he was not acting as a consumer.
The 1993 Anti-Unfair Competition Law is also being used by manufacturers against rivals which seek to confuse consumers by imitating the packaging of branded goods. One famous landmark case here was brought in 1995 by the American food firm Kellogg's. The lawsuit was filed against a Guangdong-based company which launched a product onto the market called ‘Kongalu' printed in near identical calligraphy.
The most problematic area of consumer protection is in the services provided by state monopolies such as telecoms, transportation and medical services. Where consumer choice is limited, consumer awareness can rarely advance much beyond disempowered griping over the quality of service. In 1998 a passenger bound for Dalian in Liaoning province whose train was delayed for two-and-a-half hours failed in his bid to gain compensation. Zhang Hui and 1,000 passengers had paid extra fares for what supposed to be a fast train, reported the South China Morning Post. The court finally ruled that China's Railway Law simply had no provision for compensation for delays.
An unstoppable movement
Of course there are exceptions even here and Victor Ho believes that "consumers particularly in north China are increasingly seeing the exercise of consumer rights as a weapon against authority." One of China's largest personal injury-related payouts was awarded to a 31 year-old woman in 1997. A compensation payment of Yn260,000 (US$31,300) was awarded after a Beijing hospital left a bandage inside her body during an operation for appendicitis.
The rise of consumer rights in China appears unstoppable and is already impacting on both the state-owned and foreign-invested sectors of the economy. While the growth of such a powerful social force may create anxiety, it is inseparable from the development of a consumer culture demanding high quality and reliable products. Retailers and manufacturers will best be able to cope with the changes by training staff in consumer rights and customer relations in stores and manufacturing sites while developing good corporate citizenship at headquarters level.