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A New Age Of Protection For Chinese Consumers

Marina Leung

Marina Leung 11 May 2014

In March, China amended its long-standing consumer protection law for the first time since 1993.  Big changes were made to coincide with the central government’s goal to move from an economy that relies on exports  – the current driver for China’s high GDP – to one spurred by consumer consumption. 

China is looking to align consumer rights with international standards to build buyer confidence among Chinese consumers – the most skeptical in the world. In fact, a recent Cohn & Wolfe global study – From Transparency to Full Disclosure – found that Chinese consumers are by far the most demanding when it comes to company honesty and transparency of safety compliance methods. It is not uncommon for them to express militant anger when product scandals arise.

In China, the State Administration of Industry and Commerce (SAIC), which oversees consumer protection, says about $607bn worth of substandard goods were sold between 2010 and 2012 in China. This coincides with recent high profile fraud cases, product safety scandals and internet scams.

The highest profile case came in 2008 when cheap infant milk formula tainted with toxic melamine caused six infant deaths and kidney problems for 300,000 babies.  Other recent product crises range from unsafe toys to toxic pork to the fast- tracking of certain pharmaceuticals for official approval.

Moreover, China’s e-commerce industry, which has grown exponentially over the past 10 years, is also the single largest source of sales and service complaints. Bain & Company   estimated that total e-commerce will reach $240 billion by 2015. Several Alibaba Group sites dominate the e-commerce industry in China, moving $150bn worth of merchandise in the past year, dwarfing Amazon and eBay combined (Alibaba filed for its US IPO this week).

The biggest changes to, and implications of, the law include:

Shielding consumers from spam and unsolicited calls by posing greater restrictions on collection and use of consumer data.  Even when such data is allowed, brand marketers may need to adapt marketing approaches, as the law itself is not clear about how such customer data can be used.

Making class-action lawsuits against retailer malfeasance easier to file (through state Consumer Associations and their local branches). All manufacturers will now need to undergo stringent review of product quality, after-sales service and any discriminatory pricing practices in other countries. For example, Chinese consumers criticized Apple’s warranty practices in China as not on par with those offered in the US.    

Allowing consumers to return products bought online, or from TV shopping channels, without cause, within seven days. (The unconditional return does not apply to products such as tailor-made items, fresh goods and downloaded software.)  Marketers must ensure their customer service teams can handle the increased volume. International brands have an advantage here as they already have the infrastructure in place compared to smaller local or regional merchandisers and retailers. 

Alibaba Group which owns China’s top online shopping platforms, Taobao.com and Tmall.com, has encouraged its merchants to extend the return period beyond seven days; 15,000 vendors on Taobao Marketplace agreed. In fact, some of them will allow for up to 15 days without a reason for the return.

Taobao is also tightening rules around maternal and infant products, requiring registration of products and certifications of authenticity and origin along with the mandatory seven-day return policy. A similar licensing system for cosmetic products is also in the works.

The amended law is a step forward for Chinese consumers, but will dramatically increase volume of after-sales transactions and, possibly, be abused by some consumers. This holds significant implications for product marketers.

The burden of proof over a defective/counterfeit product is now on the retailer’s side rather than the consumer side for the first six months after the sale. A growing group of vocal consumer internet activists will demand quick solutions from all companies.

Penalties for fraud and false advertising have been increased, so e-commerce sites especially must understand and verify the claims of all advertising they carry, or find a way to hold sellers responsible for the risk.

Celebrity endorsers could be held liable for promoting a product that causes harm to consumers. This puts the burden on marketers and agencies to be fluent in the law as it relates to fraud and false advertising. Here again, international brands have an edge. They are guided by international corporate governance standards on such matters. Moreover, they have been on the frontline dealing with exigencies put forth by government ministries all over the world with regard to consumer protection and heavily regulated products (pharmaceuticals, alcohol and the like).

Overall impact of the new law

These amendments should give consumers more confidence in buying goods, both in brick-and-mortar stores and online. This will also hopefully lead to increased consumer spending, while domestic demand also expands. While this is great news for companies, there is a danger that increased consumer rights to “regret” their purchases could lead to significant losses for sellers. 

The amended law will also lead to a significant cost increase for administrative and restructuring of operations among smaller merchandisers, which could deter smaller, less-established firms to enter or stay in the market.  In any case, most of these costs will most likely be passed onto the consumer.   

Reality check on implementation

The amended law will no doubt be of benefit to consumers and will also provide some control over the burgeoning online market place, but there are still questions. For example: How uniformly will the law be applied? Much has been reported about how state-owned enterprises, local firms and international firms may have been treated differently in the past under Chinese law. International firms are particularly concerned about unfair treatment.

The issue of corruption and graft in China – from the highest levels of society to the man on the street – is in the news every day. Enforcement in any country is a challenge, and in China the challenge is even bigger. With such a huge volume of online sales every day, it is difficult to track violations beyond the giants in the Alibaba Group. There are thousands of other online enterprises and they are growing rapidly. It is not likely that they can all be monitored.

In the end, while consumers will reap the benefits, the law opens another new chapter for international brands to embrace the challenge of doing business in China. They have much to lose if they do not re-examine their internal policies to ensure compliance with the new regulations and pre-planned strategies in dealing with consumer complaints.

More importantly, they should work to build a reservoir of goodwill with consumers to cement relationships with the media, relevant government authorities and the community by ensuring that their quality standards in China are on par with their operations in other parts of the world. 

Marina Leung is managing director and chief branding officer, Cohn & Wolfe Greater China

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