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Eleven years ago, I bade farewell to my regular column, “Notes from the Orient” in GCI magazine’s sister publication Cosmetics & Toiletries magazine, but promised that I would occasionally write on important issues of interest to our industry. On my recent trip to Shanghai, before attending the Osaka IFSCC Congress in October, I witnessed an unfamiliar scene—the beautifully decorated and usually crowded SK-II cosmetic counter at a luxury department store was deserted. A note posted at the counter indicated that it would be closed indefinitely.
SK-II products, made by P&G Japan, are among the best known prestige cosmetics in Asia. The reporting of the discovery of 0.77 to 4.5 ppm of chromium and neodymium in SK-II products by China’s General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) triggered a closing of all SK-II counters in China for more than two months. Many experts in China believe P&G was an unlucky victim of an international trade dispute involving China and Japan. Clearly, the company suffered significant financial loss due to the closing of its counters and damage to its brand reputation.
P&G China recently announced that the problem had been resolved and “thanked” Chinese health authorities for their cooperation. I believe this incident will long be remembered as a lesson in crisis management in overseas marketing. Debate continues as to whether the company’s decision to close the counters was a responsible act to protect consumers or an unintended error caused by panic and confusion, fueling consumer anger and tarnishing the brand’s image.
SK-II Panic in China
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About a month after the AQSIQ report and closing of the SK-II counters in China, I attended a P&G press conference in Shanghai. An expert explained that chromium and neodymium discovered in SK-II products were technically unavoidable contaminants from raw materials, and the amounts, far below the levels internationally considered hazardous, were unlikely to pose any safety concern to consumers. According to tests conducted in Hong Kong, many well-known international and domestic brands of cosmetics also contain similar levels of these two metals. Even though the company was very sure that its products were safe and that there were no violations of regulations in manufacturing, the company returned money to customers who requested a refund. The company’s intention was to protect the brand’s reputation. Unfortunately, it appears this act of goodwill backfired, and the number of customers requesting a refund suddenly increased beyond the capacity that P&G staff could handle. For security reasons, P&G decided to close the counters and wait for things to cool down.
Thereafter, matters only got worse. Disappointed customers, many probably believing that the products were unsafe, sought retribution; a glass door at the P&G Shanghai office was shattered and threats were made against company staff. This made it even more difficult for the company to reopen counters and resume business.
In reading Chinese newspapers and talking to people in Shanghai, I was surprised at the degree of anger directed at the manufacturer of SK-II. Why didn’t P&G simply tell the truth and assure Chinese consumers that there was nothing wrong with the product? If this “selective enforcement” of cosmetic safety law was indeed used to retaliate against Japan for its government’s “selective enforcement” of food safety law against imported Chinese agricultural produce, as was widely reported by Chinese and Japanese media, why was P&G (which is not a Japanese company) targeted? Some experts speculated that it might be due to the brand’s strong Japanese image.
The History of SK-II
When I worked for MAX Factor during the 1960s in its Hollywood R&D lab, the company was still owned by the Factor family, and was successfully using its Hollywood connection to expand its business to many parts of the world—including Europe, Latin America and Asia. The company’s original policy was to market identical products globally. However, their big success in the Japanese market created demand for higher-priced products specifically designed for local needs. The company later decided to allow its Japan branch to develop its own products, and SK-II was created as a high-priced specialty product named after the original Secret Key toning lotion produced in the U.S. The product proved to be very successful, and a complete line of SK-II products later followed. To counter the success of many foreign brand cosmetics, some Japanese companies promoted their skin care products as being formulated specifically for Japanese skin. Since SK-II was created in Japan, the company also used Japanese imagery and Asian movie stars to promote the products, even after the company was acquired by P&G, and expanded the product line in many Asian nations. For this reason, many Asian consumers associate SK-II with prestigious Japanese cosmetic products. Over the past decade, P&G has invested heavily in promoting its beauty products in China, and now, reportedly, has an 18% share of the cosmetic and toiletry market.
Green Wall and Trade Wars
China has been very successful in exporting various products overseas in recent years. With an improved standard of living, Chinese consumers are also buying many imported luxury products from abroad. However, many Chinese cosmetic and toiletry manufacturers have lost market share to powerful multinational companies from Japan and Western nations. Since China is now a member of the World Trade Organization (WTO), the country can no longer impose heavy tariffs to effectively limit imported products, but there is no lack of other creative means to fight international trade wars. Four years ago, when BSE was discovered in Europe and Japan, the Chinese health authority banned importation of all cosmetics and raw materials containing bovine and other animal-derived ingredients—including a large number of common ingredients such as amino acids, collagen, hyaluronic acid and lanolin derivatives. All imported cosmetics required government reports and/or test results that certified that they were free from all listed ingredients.
The stated reason for the ban was to protect Chinese consumers, but it was widely reported in both Japan and China that the real reason was retaliation against Japan’s import restrictions on Chinese vegetables. Responding to complaints made by a Japanese farmers’ association that some imported Chinese spinach contained excessive amounts of pesticide residue, the Japanese government tightened the rules and increased inspection fees. A Beijing paper pointed out that the level of the chemical found in the rejected Chinese spinach was actually only one third of that allowed for Japan’s domestically produced radish. Chinese papers criticized the Japanese government for its use of “technical barriers” to restrict importation of Chinese vegetables1. Not surprisingly, it did not take long for the Chinese government to learn to use similar tactics in its efforts to protect weakened domestic manufacturers and to express its displeasure over restrictions on Chinese exports.
In China, this kind of nontariff trade barrier was originally referred to as jishubilei (technical barrier), but has recently been renamed lusebilei (green barrier) by the Chinese media, implying a creative use of ecological or safety concern to restrict importation. Headlines describing the claims lobbed in this trade war get public attention and sell newspapers, but also create confusion in the consumer’s mind as to whether the alleged “risk” is real or politically exaggerated. When a newspaper reported the finding that many well-known imported and domestic cosmetic products were also found to contain various amounts of chromium and neodymium, the headline implied that Dior and other famous imported cosmetics had also “contracted the SK-II epidemic!” A weekly magazine in Hong Kong reported that the incident was a clever use of the “green wall” to kill “two birds with one stone,” restricting Japanese imports and protecting domestic cosmetic manufacturers2.
But, again, why did an American company became a target and not other famous Japanese brands? Another variation of the “two birds, one stone” theory heard in Japan was that China was also unhappy with the U.S. government for pushing for a revaluation of the yuan, and the selection of P&G’s SK-II was a convenient way to send a message to both Japan and the U.S.
The current green wall scuffles are strikingly reminiscent of the complex and nontransparent rules enforced by the Japanese Ministry of Health and Welfare (MHW) in the 1970s and 80s, which plagued foreign cosmetic manufacturers trying to export products to Japan. In those days, the use of cosmetic ingredients was strictly regulated by MHW, and a time-consuming pre-approval process was required in order to use a new ingredient in cosmetics. Before 1982, only 431 ingredients were publicly listed as officially approved by MHW—although many in the industry suspected that there were about 2,000 previously approved ingredients that were kept secret by MHW. Under pressure from the U.S. and Europe, the Japanese government finally handed over a list of about 1,300 ingredients to the U.S. Embassy in Tokyo in 1983.
An Inconvenient Truth
On my flight back to Los Angeles, I saw An Inconvenient Truth, a documentary film on global warming. While watching the movie, I thought about the SK-II problem in China, and realized that P&G’s problem might have involved an inconvenient truth of its own. P&G did not violate any Chinese regulation in manufacturing the SK-II products, and the products were completely safe. Had the company been able to convey the truth to the public quickly, I believe that many customers would have understood the political issue and remained calm.
Unfortunately, this truth was an inconvenient one to handle because it conflicted with the Chinese government’s position. If the same situation were to happen in the U.S. under the order of the FDA, I am sure P&G would have immediately responded with a strong public campaign to defend its products. Likely, the company would consider taking legal action against the government agency. The problem P&G faced in China was that the incident took place in a foreign country where even a powerful multinational company must be very careful in telling the public something that contradicts the government’s position.
P&G took steps to protect its reputation by initially offering cash refunds to consumers, but this goodwill gesture apparently backfired as many consumers mistakenly thought that the company’s willingness to refund the money proved that the products were indeed defective or unsafe. The company probably hoped that the problem would go away or at least quiet down after the closing of all SK-II sales counters. However, SK-II products are very expensive in China—a bottle of lotion can go for $100 U.S. dollars, the equivalent of one month’s wages for many Chinese. One cannot blame a customer for becoming angry if she thought she paid a month’s salary for a bottle of defective lotion, and the company discontinued issuing refunds. In retrospect, P&G may have also underestimated the power of the Internet in China. Its inability to convey the truth, due to government restrictions, plus the adverse publicity fanned by angry customers denied a refund, generated a tsunami of bad-mouthing and strong public criticism of the company in the media, especially on the Internet.
Actually, a similar problem erupted two years ago when P&G was accused of using a dangerous chemical, sodium hydroxide, in their SK-II products. The company immediately responded by telling the truth that a small amount of sodium hydroxide was used for pH adjustment and insisted that the product was safe, refusing to offer a product return or refund. The controversy died out a few months later. This time, the company also knew that its products were safe but offered a cash refund. The hysteria this act generated resulted in the loss of P&G’s SK-II sales and cut off a valuable channel of communication with customers. This further angered the misinformed public, resulting in an even a bigger publicity nightmare for the company.
Clearly, P&G faced a very sensitive and difficult public relations problem in a foreign country. It is well to remember that sometimes it is impossible to please everybody. By being afraid of offending the government, P&G ended up offending its customers. In ancient times, it could be dangerous to tell an emperor bad news, but a failure to tell the truth could also invite the emperor’s anger. China is changing rapidly, and its people are realizing that the customer really is “king.” Making a mistake in knowing which king to heed can be costly, but in this complex world, knowing who the real king is can be a difficult task.
- TJ Lin, International Review, Frag. Jrnl, 2 (2002)
- Eastweek, 20–24, September 27, 2006