What China can learn from the ashes of my boat

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Not a day passes without me screaming at televisions, pepper grinders, lawnmowers or Tupperware. Such poor design. So badly executed. If only Steve Jobs or Sir James Dyson had made you, damn it!

Hence my sadness at the news that Apple cars will remain a dream. Who didn’t want to see what the maker of the iPhone — the most popular, elegant and functional product since the Post-it note — could do with automobiles?

They would have driven themselves perfectly out of the box. A superb finish taken for granted. Such high standards are no doubt behind Apple’s decision to cancel the project — too many corners would have to be cut.

Quality is an amorphous concept yet its importance to value seems obvious. With the arguable exception of Microsoft — I have spent more hours watching its hourglass than my kids growing up — the biggest companies in America all make the best products in their fields.

Likewise in Europe’s Stoxx index, ASML is the globe’s highest quality builder of lithography equipment, Novo Nordisk of diet drugs and LVMH of luxury goods. In the top ten, not even Nestlé piles ’em high and sells ’em cheap.

The exception country-wise is Japan — but only because its long obsession with quality even overwhelmed any focus on shareholders. And sector-wise, there is still the odd mega bank around, despite them trailing far behind best practice at everything.

I was pondering the issue of quality and China’s woeful stock market performance even before my boat was destroyed by fire on Monday. The cause was a Chinese lithium-ion battery overheating or exploding — as more than 1 per cent of them now do globally, according to Gitnux data. Luckily no one was killed. Memorable, but not a great advertising slogan for a country with a poor reputation for quality.

In a recent European survey by GfK, more than 40 per cent of respondents said China was their least-preferred country of origin when it came to buying a car. How come? Low quality, roughly a third of them answered, while almost half also said they “distrust the country in general”. A fifth reckoned the cars were not safe.

Whether China deserves this reputation is beside the point. Indeed, the survey admits that most respondents confused Chinese vehicles with Japanese, South Korean and even French ones. In a blind testing, few could tell the difference between the cars.  

But prejudice is everything. As Robert Pirsig noted in Zen and the Art of Motorcycle Maintenance: “Quality is neither mind or matter, but a third entity independent of the two . . . even though quality cannot be defined, you know what it is.”

Or rather, we think we know. And thus investors suffer behavioural biases with regard to quality too. For example, an International Journal of Research in Marketing paper shows that stock prices are marked down more when a company’s products fall in quality than they rise if quality improves.

Companies use brands as a way to counter what is known in microeconomics as the adverse section problem. Customers, knowing they have less knowledge about a product than the seller, rightly ask: why should I buy something you’re trying to flog me?

Brand loyalty is one way to mitigate information asymmetry. I couldn’t tell you how the inside of a mobile phone works, nor a lithium-ion battery. But provided there is an Apple logo, I don’t care. No wonder Chinese carmakers rushed into joint ventures with established western marques.

Why then purchase a yacht-bomb from an unknown manufacturer? Because the other way to entice nervous customers is to sell products so cheaply that poor quality is sufficiently compensated (although not in my case).

This is usually a good long-term strategy too, as Clayton Christensen observed in his book The Innovator’s Dilemma. Competitive threats to incumbents mostly come from below, starting cheap and gobbling their way up the quality curve.

Beijing’s Made in China 2025 policy encourages just that. Unfortunately, however, trust deficits take a long time to close. They can also jump boundaries, from products to politics to finance, as the survey above showed.

Recent viral videos of angry Chinese buyers smashing up defective robot vacuum cleaners may seem trivial. But they add to the lack of trust in local stocks which are already down 15 per cent over the past 12 months. Last year foreigners bought the least Chinese stocks since 2017, according to Bloomberg data

As I salvage a melted compass, I can’t blame them.


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