I remember being surprised at the time. While my friend's business is large, he is a fairly typical distributor who operates in a relatively small area of just one or two states, not the sort of candidate I typically would envision as a direct importer of products. So when I asked him what he was bringing in and what the motivation was, he replied, "Brake rotors, and the margins are real good."

In my role as consultant to automotive aftermarket companies, I warned him that there is a lot more to being a manufacturer than just manufacturing. I pointed out things like application engineering, cataloging, quality assurance and, most significantly, having a partner with deep pockets in case of a catastrophic failure. I asked, "What are you going to do if someone is hurt or worse in a vehicle with your brake rotors on it?"

He replied, "Everybody is doing it. What risk can there be?"

That conversation came back to me recently as I watched an item on a cable news station. The story was about Chinese products and it literally made me sick to my stomach. It opened with a string of dangerous products that have been finding their way to our shores. Tainted toothpaste. Contaminated seafood. Toys with lead paint. Toxic pet food. And while the problems with toothpaste, shrimp, toys and dog food seem a million miles from the aftermarket, this particular report was literally right on our street. It focused on defective Chinese tires sold in the United States — perhaps as many as 450,000 — that either had missing or insufficient gum adhesive between the layers of belts. In one instance, according to this news report, the layers of tires had separated on a vehicle traveling on a Pennsylvania highway and caused the driver to lose control, killing himself and his passenger.

The report indicated that the National Highway Traffic Safety Administration (NHTSA) is in the process of initiating a recall of those tires. Along with the tragic loss of life, there was a wrinkle to this story that added to my nausea.

It involved Foreign Tire Sales, Inc. (FTS), the New Jersey distributor that had reported the problem to the NHTSA. They were the direct importer of the tires experiencing the separation problem. FTS had attempted to get the Chinese manufacturer, Hangzhou Zhongce Rubber Co., Ltd., to do something about the problem, but were getting nowhere. In an attempt to do the right thing and distance itself from the problem, FTS reported what it knew about the tires to the NHTSA. I checked the NHTSA Web site and discovered a letter dated June 11, 2007, from FTS in which it disclosed what it believed was the problem with the missing or insufficient adhesive. FTS even included a report from an independent testing lab it had commissioned, confirming what it suspected. In that letter, FTS also pointed out that it was simply the distributor and did not have the financial resources to fund a recall. 

So much for doing the right thing

Imagine how the folks at FTS must have felt on June 26 when the officials at the NHTSA sent them a letter formally declaring them to be "the manufacturer" and demanding that they recall the 450,000 tires.

Any retailer or distributor doing any direct importing needs to read that letter (a copy of which can be found on the NHTSA Web site). Space prohibits reproducing it in its entirety, but here are a few of the chilling passages with the "legalese" edited out:

Although your report states... that FTS... is not in a position to conduct a recall due to a lack of financial resources... FTS is responsible for providing notice... and a recall for all tires that contain a safety-related defect.

The National Traffic and Motor Vehicle Safety Act... defines "manufacturer" as a person "manufacturing or assembling... motor vehicle equipment or importing... motor vehicle equipment for resale." Therefore, FTS is a manufacturer with respect to those tires.

The FTS report which indicates that FTS has decided that the tires contain a defect... constitutes a notification by the manufacturer required by (the Vehicle Safety Act). Accordingly, as a manufacturer of the tires... FTS has the legal responsibility to provide... a remedy for the defect.

FTS' statement that it is not in a position to conduct a recall is not acceptable. The Safety Act does not provide for any exceptions... a company that chooses to import vehicle equipment into this country accepts the same responsibility for compliance with the Safety Act as any other manufacturer.

You say you are not a manufacturer, but we, the federal government, say you are. You warned us about the problem, so we say that constitutes legal notification that you are aware of the problem and intend to pay for it. You say you can't afford to do a recall, but we don't care and you must.

And I didn't even get to the part about the $16 million in potential penalties over and above the cost of a recall, which FTS estimates at between $50 million and $80 million.

Who is the manufacturer?

Can you imagine being the retailer, program group or distributor receiving that letter? You have just been threatened with the full weight of your federal government to comply with a "remedy" that most certainly will bankrupt your company.

That brings up a broader issue: Where is the actual manufacturer in all of this drama?

According to The New York Times, Hangzhou Zhongce, China's second biggest tire maker, disputed the implication there were manufacturing defects with its tires. In fact, it hinted that a recall might be an effort by foreign competitors to hamper the company's exports to the United States.

The Times quoted Xu Youming, a manager of legal affairs at Hangzhou Zhongce, as saying, "This is concocted out of thin air. The structure of a tire can't be decided by an individual. Any change in the structure requires technical assistance. Zhongce couldn't possibly leave out the gum strip on purpose."

This is not a China issue, but is an important issue regardless of the country. I want to be very clear I am not suggesting that importing products from China is a bad idea or all products made there are suspect. What I am suggesting is it's a risky proposition for retailers and distributors to do so.

A fan of it or not, the oversight that our government imposes on makers of products does work to keep the general population safe. I am well aware that there are camps that feel there is too much regulation and oversight and those that feel there is not enough. But that oversight combined with the public relations nightmares that can accompany a product quality fiasco seem to be enough to keep North American-based manufacturers on their proverbial toes.

The cultural, social, political and legal systems in China are profoundly different than in North America. To think our perspectives on any related matters would match is naïve at best, but is better considered as foolhardy.

This takes me back to what I said to my friend last year: Manufacturers do a lot more than just manufacturing. North American companies that import Chinese products provide important services that add value, ones that should be increasingly evident in light of this case. These are services like making sure the part fits properly, assuring the part fits the vehicles it is cataloged for, confirming the product was made to the appropriate specifications and, not insignificantly, protecting everyone in the supply chain in the event of catastrophic failure. When a reseller goes it alone, it must assume these product management responsibilities for itself, and that is something I don't think very many are considering at all.

Going it alone is fine for resellers when we are talking about fuzzy dice or running boards. The exposure for non-safety related products, while not completely without risk, is probably juice worth the squeeze. But when a product failure can potentially end a life, that is an entirely different situation.

From the mouth of experience

I thought it might be enlightening to speak with someone who had been down this road. I know several companies that have been in the process of migrating much of their North American-based manufacturing to low-cost countries, so I spent some time with a couple of people who are actively engaged in the exercise.

"I can tell you this. If we had just accepted the products that we were offered by the first suppliers we found, we could have been in the market with a full line offering in a matter of 60 days," says one director of global sourcing. "But after testing the products to the SAE spec, the rejection rates were staggering: in the range of 30 percent."

He stressed the defined supplier quality assurance processes that manufacturers use to certify and verify both their vendors and the product they purchase. "The processes and testing regimens we have developed over the years are there to provide both ourselves and our channel partners with a significant measure of assurance against a catastrophic product failure. I suspect few buyers and resellers have such capabilities."

I asked a purchasing manager what the real cost differential was between using an established manufacturer as a partner and buying direct. "When the costs are normalized for special fees and expediting, and the additional cost of liability insurance, I suspect the difference typically averages around 10 percent. With some lines it could be more or less, but that is probably a good average."

This is a serious question that people in the aftermarket need to ask themselves. Is making 10 percent, or even 15 or 20 percent, extra profit worth risking your business? Without people on the scene in China, or the wherewithal to test and validate products, I suggest that is the risk many in the aftermarket are taking. More significantly, can you imagine having to live with the knowledge that you contributed in some way to someone's death?

I suspect that the executives at FTS might have made a different decision if they knew how things would turn out. Their misfortune needs to be an important lesson that everyone in the aftermarket takes to heart.

Bob Moore is president of Bob Moore & Partners, a consulting firm that specializes in the automotive aftermarket. Moore can be reached at [email protected]