U.S. PRODUCT SAFETY COMPLIANCE: BEARABLE FOR THE

C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 002211

SIPDIS

STATE FOR EAP/CM, STATE PASS CPSC RICHARD O'BRIEN

E.O. 12958: DECL: 12/05/2018
TAGS: ECON EFIN EINV ETRD HK
SUBJECT: U.S. PRODUCT SAFETY COMPLIANCE: BEARABLE FOR THE
BIG, SQUEEZING THE SMALL

REF: HONG KONG 1989

Classified By: Consul General Joseph Donovan for reasons 1.4 (b) and (d
)


1. (C) Summary: In discussions with a Congressional Staff
Delegation to Hong Kong, Wal-Mart executives promised timely
compliance with all regulatory requirements under the U.S.
Consumer Product Safety Improvement Act (CPSIA) of 2008.
They assured the Staffdel that all food products on the
company's shelves are free from melamine. Smaller U.S. and
Hong Kong-based companies, however, are less sanguine about
their ability to fully comply with all CPSIA regulations.
While those firms support the education and outreach efforts
by the U.S. Consumer Products Safety Commission (CPSC),they
said a CPSC official should be posted in Hong Kong full-time
to assist CPSIA compliance efforts of firms operating in the
Pearl River Delta (PRD) region. End summary.


2. (C) Comment: Our recent conversations with manufacturers,
retailers and importers indicate a strong correlation between
a company's size and the intensity of its complaints about
the CPSIA's requirements. Smaller companies - especially
those with no operations in the United States - face greater
compliance difficulties and have been the most vocal critics
of the CPSC's regulatory requirements. Their product safety
procedures and regulatory compliance personnel are less
sophisticated than those of larger firms, and their costs
related to implementation of the CPSC's new regulations are
spread over a smaller revenue base. Enactment of the CPSIA
has therefore inadvertently provided the largest firms
operating in Southeast China (e.g. Wal-Mart) with a
competitive advantage. This will continue to be a
contributing factor in the manufacturing consolidation
process underway in the PRD (reftel). End comment.

Wal-Mart Confident About Its Food and Consumer Products
-------------- --------------


3. (C) During a December 4 meeting with U.S. House of
Representatives Committee on Energy and Commerce senior
investigators David Nelson and Krista Rosenthall, Wal-Mart
procurement officials described the company's efforts in
China to ensure food safety and compliance with the U.S.
Consumer Product Safety Improvement Act (CPSIA) of 2008.
Wal-Mart's Chief Operating Officer in Asia, Edwin Keh
(protect),said the company "focused intensely" on the
potential hazards of melamine in Chinese-produced food
products, immediately after becoming aware of the issue in
September 2008. He said, "We now test each shipment of food
and food products with a dairy component that is on its way
to America from China. We've also tested all the potentially
affected products on our shelves that were shipped before the
story broke." Keh expressed confidence that Wal-Mart's
stores in the U.S. and China now contain no food products
with melamine. (Note: Wal-Mart currently owns 107 stores in
mainland China, including three Sam's Clubs outlets. In
addition, the company owns approximately 35 percent of a
Taiwan-based superstore retailer (Trust-Mart) that operates
over 100 outlets in China. Market analysts expect Wal-Mart
to assume majority ownership of Trust-Mart by 2010 year-end.
End note.)


4. (C) Wal-Mart's Shenzhen-based Vice President of Quality
Assurance, Tony Judge (protect),told the StaffDel that
Wal-Mart intends to ensure timely compliance with all
regulations under the new CPSIA. He said Wal-Mart uses
third-party laboratories for all its product safety testing,
coupled with a large-scale physical inspection process that
uses third-party examiners. Judge said his company will
order more than 100 thousand individual inspections in 2008
of manufacturing operations owned by its mainland China-based
suppliers. He said, "Our testing and inspection costs have
risen dramatically this year. These are real and are truly
resulting in price increases to all large retailers in
America." Judge confirmed that Wal-Mart expects to achieve
full compliance with all CPSIA regulations thus far
promulgated by the U.S. Consumer Products Safety Commission
(CPSC). He said, "We began gearing up for the CPSIA months
before it was passed by Congress."

Other Companies Nervous About CPSIA Requirements
-------------- ---


HONG KONG 00002211 002 OF 002



5. (C) In contrast to Wal-Mart's confidence regarding the
company's full compliance with the CPSIA, other manufacturers
and importers voiced strong concerns about the law. At an
AmCham-arranged gathering of 45 procurement professionals
from U.S. and Hong Kong-based firms, corporate
representatives told the StaffDel of their respective product
safety compliance difficulties. Many said the CPSIA
regulations lack sufficient clarity, and they requested
further education and outreach efforts by the CPSC. A white
paper produced for the StaffDel by the local AmCham
recommended that the CPSC "permanently post in Hong Kong
and/or China an officer solely or primarily responsible for
product safety issues."


6. (SBU) A senior Hong Kong-based executive from a publicly
traded U.S. importer of apparel and footwear told the
StaffDel that his firm would "have difficulty" meeting the
currently published compliance deadlines under the law. A
senior procurement manager from a publicly traded U.S.
retailer of sporting goods said the new law does not allow
composite testing of finished products; it instead requires
testing of individual product components. He cited the
testing requirements for children's golf clubs as an example.
He said the CPSC's regulations under the CPSIA require his
firm to order 32 separate tests on the components of the
clubs, resulting in a significantly increased cost basis for
the final product purchased by consumers in the United
States. He said, "Companies here are just now realizing what
a bear the CPSIA is."


7. (SBU) Hong Kong-based toy manufacturers also expressed
their concerns about the CPSIA. In a December 3 meeting with
the StaffDel, the Chairman of the Hong Kong Toys Council,
Lawrence Chan, said U.S. importers and retailers are forcing
manufacturers in China to absorb much of the increased
product testing costs. Reiterating earlier comments to us
about the negative effects of product testing costs on
manufacturers' profit margins, Chan said, "This is all we
needed on top of the economic downturn."


8. (U) Staffdel Nelson did not have the opportunity to clear
this cable.
DONOVAN