Drywall can corrode US-China links
By Benjamin A Shobert
Horror stories of Chinese-made products laden with unforeseen quality problems
have been in ample supply in recent years. But the recent problems with Chinese
drywall - panels used to create interior walls - are different and more
symbolically potent problems for US-China relations than those posed by tainted
dog food or lead-laced toys.
Drywall panels are made of crushed material sandwiched between two thick sheets
of paper. [1] The Chinese product appears to be damaging sensitive household
electronics, corroding domestic
heating and ventilation systems and copper tubing, as well as causing health
problems for homeowners where it has been installed.
The American home, long an idealized version of what it means to achieve the
American dream, has had a rough couple of years; beset by mortgage defaults,
foreclosures, and plummeting real estate values, what once seemed to embody the
most American of values now seems more burden than reward.
Into this volatile mix steps the problems with Chinese-made drywall, which
manages in one fell swoop to bring together growing American frustration with
low-quality Chinese goods and anger at the pressure of what it means right now
to be a homeowner in America.
Just as the Japanese economic threat in the 1980s found its symbolic potency
when the success of Japanese carmakers over their US counterparts was taken to
indicate supremacy of the Japanese economy in its entirety, so too might the
Chinese drywall generate a similar critical mass as the connecting fiber
between two very dynamic and dangerous cross-currents within the US.
The Consumer Product Safety Commission (CPSC), tasked by the US government to
determine the extent of the problem with Chinese-made drywall, stated in its
most recent report, published on November 23: "We now can show a strong
association between homes with the problem drywall and the levels of hydrogen
sulfide in those homes and corrosion of metals in those homes."
This causal relationship confirms what has long been speculated, that imported
drywall from China, specifically products brought in from 2001 to 2007, emits a
gas that is damaging for any number of materials, with a particular proclivity
towards copper. Last week, the CPSC also released two more detailed and
technically augmented status reports, one on "HVAC, Gas Distribution and Fire
Safety Equipment Installed in Homes with Chinese Drywall"; the other an
"Analysis of Electrical Components Installed in Homes with Chinese Drywall."
The lengthy titles should not distract from the potentially damaging findings
each is respectively tasked to evaluate: the first looks at components such as
"flexible connectors and copper piping" which route gas through the interior of
a home. Obviously, corrosion from drywall in this case could lead to the
build-up of gas that is toxic, flammable and can result in explosions.
The first preliminary report did not find corrosion in lab testing beyond what
would be generally expected; however, the same report did find corrosion from
actual samples taken from Chinese drywall environments that is consistent with
exposure to hydrogen sulfide. These two points will be evaluated in further
detail in the coming months, with particular emphasis on how longer-term
exposure will impact the copper components in gas distribution and fire safety.
The second report offered much in the same way of conclusions: actual samples
taken from homes with Chinese drywall showed corrosion on copper wires.
Additionally, data released in late October from the Interagency Task Force on
Chinese Drywall state that in chamber studies, " ... higher emissions of total
volatile sulfur gases from Chinese than from non-Chinese drywall" were found.
Cumulatively, the picture is now almost complete, and it appears inevitable
that Chinese drywall will be proven to be the common link to a host of
seemingly random electronic failures and personal health hazards, all
intimately and unmistakably issues that take place within the American
homestead.
It remains unclear how many homes are impacted by the unacceptable Chinese
drywall. Most of 2,100 homeowners who have complained of health and other
problems that might be related to drywall live in Florida or Louisiana, where
imported material was used in reconstruction after hurricanes in 2004 and 2005,
according to a Bloomberg report this month. Various sources suggest the number
affected could be several times larger. It is likely that the full size and
scope of the problem may not be clear until a root cause can be identified.
As of now, the CPSC's findings have been focused on quantitatively determining
whether a problem exists that can be definitely linked to Chinese drywall. Once
that is done, the task will shift and it will become necessary to identify what
caused the problem, so the necessary tracing can be done from Chinese factories
to US homes.
Finding the root cause will not be easy: theories range from a tainted water
source at the originating manufacturing site, to the possibility that mined
versus synthetic gypsum, used in the filing of the panel "sandwich", was used
(the latter having a lower level of strontium, which is a highly reactive
element), or that the drywall was unknowingly damaged in transit, possibly
absorbing sea water while being shipped.
The best-case scenario, at least from China's perspective, is that the problem
can be identified as limited to a discrete group of material.
As is always the case in China, the process of identifying what caused the
problem will be overseen by a government eager to limit its negative press, and
is likely to quickly assign blame. Unfortunately, and especially if the root
problem is found to be related to polluted water or another environmental
concern, Beijing may be especially unresponsive.
It is here that the process is likely to have its most ugly and unfortunate
outcomes: the ability to connect damages owed to American homeowners to Chinese
drywall companies is infinitely small.
While it would be an interesting and possibly superb strategic and public
relations move on the part of the Chinese government to establish some sort of
settlement fund (with monies provided by the offending Chinese companies as
directed by the government in Beijing) to compensate American homeowners for
their losses, this is an unlikely outcome.
Consequently, Americans will seek recourse at two venues: their insurers and
their builders. It is all but inevitable that the financial liabilities imposed
by faulty Chinese drywall will drive many builders out of business. Earlier
this year, a Virginia construction company was ordered to tear out Chinese
drywall from a hotel that was a little over a week from being opened. A host of
legislation is developing in anticipation of similar issues, ranging from the
Drywall Safety Act of 2009 to a series of state-specific actions being pursued
by legislature in states most severely impacted by this problem.
As the CPSC studies continue, the full geographic exposure and the number of
homes built with bad installed drywall will come to be understood, but it
appears the majority of those affected are homes built in Florida, Louisiana
and Virginia.
Assuming builders will not be able to shoulder the burden of paying homeowners
the cost of replacing their home's wiring, electronics and drywall, the next
logical place for compensation to be pursued will be homeowner insurance
companies, a realization that is already driving many insurance companies to
begin excluding these claims pre-emptively. The trend, at least thus far, has
been for insurance companies to stipulate that problems related to Chinese
drywall are pollution exclusions and are not claimable.
The ramifications from this problem are only now beginning to become obvious.
The historic economic justification of pursuing lower-cost, but at times
admittedly lower-quality products, from China is under attack. This is not
necessarily because China can no longer offer a compelling price advantage, but
because even the most aggressive of entrepreneurs has to begin to think more
broadly about potentially unforeseen problems that could significantly increase
the total cost of doing business with a Chinese supply base, or maybe even put
him out of business entirely.
Companies that have operated successfully in China have always been those that
are actively involved in their supply chain, many that have deliberately
elected to no longer manufacture a particular part of their product line but
that managed to transfer their process and product expertise to competent
companies in China, and actively managed their quality and compliance with
industry standards, viewing this as an ongoing and perpetual commitment to
high-quality production.
Battlelines are already being drawn with regards to this problem and what it
does, or does not, say about China's modernization. In all likelihood, findings
of actual malice may never be found on the part of anyone. The drywall issue
may be, in the surest use of the phrase, a mistake born of unintended
consequences.
However, three main points are likely to be drawn from this experience: first,
problems such as these continue to show what happens when portable
industrialization, the ability for whole industries to relocate into emerging
economies because technology allows them to, outstrips the new host country's
management aptitude and culture, or ability to fully internalize the
expectations of their export economies.
Yes, technology has made it possible to fast-forward economies into the modern
age as never before; but science absent understanding can ultimately be
counter-productive, and it is a legitimate criticism of China's growth that
quality problems like those seen in this drywall problem, exhibit some
disconnect in this area.
Second, issues like this change the entrepreneurial calculus that has motivated
many newly minted business people to go to China absent full appreciation of
the risks inherent in their products or markets. One of the beauties of doing
business in China has been the ease with which new products can come to market:
tooling costs are lower, unit prices are more attractive, and fewer questions
about quality standards get asked. The focus is on cost, cost and cost.
But doing business in China requires more sensitivity to up-stream concerns
than many businesses appreciate, as the Chinese drywall problem illustrates.
Third, this experience has an impact not only on Americans - consumers and
business people - but also on Chinese, in particular the businessmen and women
who own the companies selling into North America. As the American economy has
faltered, Chinese businesses have looked within their own borders like never
before, with the need to find domestic consumers and develop unique domestic
products as a means of replacing the increasingly soft demand from their once
vibrant export economies. As quality crisis after crisis piles up, many Chinese
businesses are beginning to wrestle with how best to grow their own companies.
Yes, exports will always be a critical part of their business, but selling
within their own borders - the expectations they understand, the customers they
know, the distribution channels the already play in, the quality standards they
can easily adapt to - are beginning to look more and more attractive.
A too-close focus in the United States on how these quality defects impact
people there can lead to the US forgetting that the Chinese are also watching
and wrestling with where they can be most successful with limited resources.
It should come as no surprise if the Chinese drywall crisis prompts not only
increasing frustrations of American consumers with Chinese products, but a
dampening on how Chinese businesses view the opportunities of selling into, and
supporting the needs of, more developed economies.
Note
1. Drywall is known by many names, including gypsum board, plasterboard and
wallboard. In homes around the world, it is used to form interior walls and
ceilings. Drywall is manufactured by placing gypsum, a very soft mineral,
between two sheets of paper, then drying it in a kiln.
Benjamin A Shobert is the managing director of Teleos Inc (www.teleos-inc.com),
a consulting firm dedicated to helping Asian businesses bring innovative
technologies into the North American market.
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