Not that China needed another black eye these days, but reports that tires manufactured in the country are missing a key safety component that's already caused two deaths certainly doesn't help China shed its growing image of shoddy products.
Some 450,000 Chinese-made tires -- a number that could balloon to nearly a million, depending on how many distributors have sold tires made at this factory -- are going to be subject to a massive recall that threatens to bankrupt the small New Jersey distributor that imports them. Foreign Tire Sales says it will begin a recall when it gets notification from the NHTSA. "We will wait to get their order and create a remedy plan and begin a recall," said a company spokesman. "When the money runs out, that's the end."
The problem is that a thin gum strip between the steel belts of a tire is allegedly missing. Foreign Tire says the Chinese manufacturer, a company that it's been doing business with for 10 years with no problems until now, stopped inserting the $1-a-piece strip, leading to tread separation. It was tread separation that doomed Firestone a few years back and caused a blowout in its relationship with Ford (NYSE:F), which had extended as far back as the Model T.
The Chinese manufacturer, the Hangzhou Zhongce Rubber Company, disputes the assertion, though Foreign Tires says it had admitted as much to the company in a report it gave to federal regulators. Foreign Tire was sued in May as a result of a crash caused by tread separation that led to two deaths. The company had been suspicious of the tires since 2005, when it began receiving an increasing number of customer complaints about them. The company undertook its own tests, and earlier this month it reported its concerns to the NHTSA, asking for assistance in recalling the tires. It estimates that this process will cost between $50 million and $80 million -- money Foreign Tire says it doesn't have.
Hangzhou Zhongce thinks the problem has more to do with China becoming a bigger player in the tire market than anything to do with defective tires. According to the Rubber Manufacturers Association, China accounts for 32 million units in tire imports to the U.S., the largest of any other country. Both Goodyear (NYSE:GT) and Cooper Tire (NYSE:CTB) have moved production facilities to China in the face of rising U.S. labor costs.
Tires, of course, are merely the latest in a string of high-profile product problems emanating from China. Toymaker RC2 (NASDAQ:RCRC) is probably relieved that tires may now be the focus of substandard manufacturing processes. Since it was discovered that its hugely popular Thomas the Tank Engine train toys were coated with lead paint -- a process its Chinese manufacturer also undertook on its own -- it has been the subject of consumer and regulatory ire. Lead paint has been banned in the U.S. for decades.
Before the toy problem, there was another cause for alarm: the use of antifreeze in Chinese-made toothpaste (the ingredient was mislabeled as a benign similar-sounding chemical). And then there was tainted pet food that contained a flame retardant as an additive.
Investing overseas can provide wonderful opportunities to profit from emerging markets and growing companies domiciled outside of United States. For my money, however, China has yet to prove itself committed to ensuring the health, safety, and welfare of its products, while the companies themselves walk a knife's edge of legitimacy in a Communist society. This requires us not only to carefully consider whether we want to invest in a company like game maker The9 (NASDAQ:NCTY), but also whether a company like Goodyear continues to warrant our investment dollars too.
Bill Mann, lead analyst for the Motley Fool Global Gains newsletter, recently visited China in search of market-beating investment opportunities. To find out which international stocks Bill is recommending, try the service free for 30 days.
Fool contributor Rich Duprey owns shares of Ford and Goodyear, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. RC2 is a recommendation of Motley Fool Hidden Gems. The Motley Fool has a disclosure policy.
