China: The great cleanup

From tainted drugs to poison pet food, many scandals have rocked China. Now, Canadians are helping its exporters get back on track.

At the opening of China’s parliament, the National People’s Congress, in early March, Premier Wen Jiabao said his nation must do more to ensure product safety. The announcement followed months of scandals involving lead-tainted toys, toxic toothpaste, poisonous pet food and drugs. As the world’s largest exporter, Wen added, China’s future prosperity will depend on the strength of product-safety testing, which must meet international standards — and the country plans to create or update 7,700 national safety standards. “It is imperative,” Wen declared, “that the people feel confident about the safety of food and other consumer goods, and that our exports have a good reputation.”

With the 2008 Olympics in Beijing drawing closer, Chinese officials have gone out of their way to clean up everything from air quality to police behaviour. Product safety is also now a top priority. Wen’s speech came just seven months after Chinese Vice-Premier Wu Yi announced the government would take on inferior food, drugs and other goods in a “special battle.” The initiative, less colourfully known as the National Special Rectification Program for Product Quality and Food Safety, was created to help improve China’s tainted brand image.

The country’s producers have been struggling with international quality standards ever since China’s accession to the World Trade Organization in 2001. That move further exposed exporters to the rigours of product inspection in Canada, the United States and Europe. Domestic producers in China were also hit hard. With WTO regulations stripping away many import protections, vulnerable manufacturers were suddenly facing a downpour of top-quality products from the West. And while the government has been implementing new policies and oversight bodies, correcting decades of shoddy production has been slow. “They want to come into the world market to be global, but their manufacturing technology is outdated and their management structures are outdated,” says Moma Veselinov, an international consultant and quality auditor with Toronto-based pharmaceutical company PharmEng International Inc. (TSXV: PII). “In some cases, the technology is there but management is lacking and the awareness of the people working is low.” Veselinov has helped multiple pharmaceutical companies in China meet international standards. “They are 50 or 60 years behind us in common health knowledge, and it’s not easy to jump over that kind of gap in six years. You cannot just switch the mind.”

Under the rectification program, Chinese officials attempted to fulfil 20 lofty goals between August and December of last year, including licensing 100% of food producers, monitoring 100% of wholesale food markets and inspecting 100% of raw materials for export. In January, China’s General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) claimed the objectives had all been reached, stating that “the illegal practices of using non-food materials and recycled food to produce or process food products have been eliminated.” And yet at the same time, the group was busy launching a new round of crackdowns, targeting unlicensed food production and sales. This time, no expected date of completion was offered. As a result of this kind of doublespeak, Chinese testing, inspection and licensing is unlikely to be recognized in the international marketplace anytime soon, creating roadblocks for exporters and a government looking to restore consumer confidence.

Foreign companies that source product from China and drive a huge portion of the country’s economy are growing increasingly worried about safety risks. When goods are sourced globally, all parties involved are responsible for ensuring quality and safety. According to Peter Pliszka, a product liability lawyer and partner at international law firm Fasken Martineau in Toronto, this means that the domestic company that designs or sells the products is usually targeted in lawsuits, rather than the foreign manufacturer. “The big issue is determining who can be sued easily and inexpensively,” he says. “The plaintiff’s lawyers here in Canada or the U.S. would typically never name the Chinese manufacturer because it is much simpler for them to just name the domestic company that designed or sold the product as the defendant.” In such cases, western companies usually have little recourse against their Chinese manufacturers, either because of a lack of assets or differences in legal systems. “The best thing that these companies can do is investigate their manufacturing operations in China and, if necessary, train on proper quality-assurance and quality-control methods to reduce the potential of something going wrong.”

It’s a strategy that is being embraced not only by western distributors but also by Chinese exporters and the Chinese government. “China is striving to change, but they cannot do it by themselves because they have not been exposed to our standards,” says Veselinov. “They’re lacking all this global knowledge, and all of a sudden the economy is global and they’re disoriented.” Those willing to provide direction are finding eager customers looking to meet tough new domestic regulations in China, break into lucrative foreign markets or, for international distributors, ensure the safety of their Chinese-sourced products. And with the total cost for overhauling the country’s beleaguered food chain alone pegged at more than US$100 billion, there’s a lot of money to be made in helping China win its quality battle.

While “Chinese medicine” is a term generally reserved for herbal remedies and other practices on the fringe of western medical thinking, China produces a staggering share of the active components in everyday Canadian, American and European drugs. In 2006, it exported US$10.6 billion worth of bulk active pharmaceutical ingredients for western medications. The country produces 70% of the world’s penicillin, 50% of its acetylsalicylic acid (ASA) and 35% of its acetaminophen. But before a single milligram ends up in North American factories for tablet production, Chinese suppliers must receive approval from the U.S. Food and Drug Administration (FDA) or Health Canada — a golden ticket, considering drug prices are three to five times higher in Canada and the U.S. than in China or poorer markets such as Africa.

This is where companies like PharmEng enter the picture. Producers hire the Canadian consulting firm to lead them through inspection and validation, with the ultimate goal of gaining GMP (good manufacturing practices) status and export approval from European, Canadian or American officials. “We can help manufacturers to increase their quality level, do all the co-ordination for making submissions to the FDA or Health Canada and even introduce them to customers here,” says PharmEng founder and CEO Alan Kwong.

The process begins with a “mock audit,” a one-to-two week evaluation in which Kwong’s company assesses a facility and its manufacturing practices — everything from the air system to cleaning methods to management structure. A report lists all the shortcomings, with an estimated cost to achieve GMP compliance for a given export destination. Depending on scale and the quality level going into the process, manufacturers can expect to pay between US$250,000 and US$5 million to meet regulations.

If they can’t afford the expense, PharmEng also offers consultants to help producers meet domestic regulations at a lower cost. The service is provided by Beijing PharmEng BRD Lixin PharmaTech Consultation Co. Ltd., which specializes in Chinese GMP and which PharmEng announced it was acquiring last May. Though the certification doesn’t allow for exports to major markets, companies wishing to maintain domestic sales are subject to increasingly diligent oversight by the Chinese government. In the wake of an antibiotic scandal that killed at least 10 people in 2006, China clamped down on drug manufacturers, stripping production licences from five of them and revoking GMP certificates from 128 others. (Zheng Xiayu, the former director of China’s State Food and Drug Administration, took bribes to approve the antibiotic and other untested drugs; he was executed last July.) “Those companies and facilities become a question mark now,” says Kwong. “That becomes a real good opportunity for companies like PharmEng.” Kwong says that PharmEng’s Chinese division will continue providing services to help companies meet quality regulations in China while PharmEng takes care of consulting on European GMP and U.S. cGMP (which adds the emphasis of “current”) regulations, allowing his company to capitalize on both sets of consulting needs. The strategy seems to be paying off: PharmEng brought in $2.8 million from consulting services in the third quarter of 2007, a 40% gain over the same period in 2006.

Yet, consulting Chinese clients, no matter how much experience they’ve had, often involves a complete overhaul of methods and organizational structures. “Safety is introduced by design and process, not by checking at the end,” says Veselinov. “We impose such high standards that every part of the process is done according to certain rules and regulations. It’s quality by design.” Equipment and infrastructure is upgraded, testing procedures are validated and staff is taught proper manufacturing and cleaning methods. “You can put together a beautiful factory, but training is what will make your quality level sustainable,” says Kwong. “It’s not just equipment, processes and computers — it’s people.”

Another important step in ensuring sustainability is the creation of a quality-assurance department to internally police procedures. If necessary, a hierarchy is also set up to reinforce authority, and links are created between certain departments to ensure strong communication.

Such large-scale changes make up the bulk of PharmEng’s work, but the smaller violations Kwong has witnessed provide the most vivid examples of what’s wrong in China. And while these slips might prompt consumers to reconsider their next easily popped painkiller, they’re often easily fixed. For example, in one facility where heat control was vital, Kwong noticed there were no sensors to measure or record temperatures. Instead, the equipment operator simply held his hand against the machine to gauge correct temperature, like a barista heating milk for a latte. It took only a few thermometers to solve the otherwise critical problem. At another facility, Kwong visited a lab where numerous chemicals sat in unlabelled bottles. Though a technician insisted he knew which colourless liquid was which, Kwong made it clear the FDA would not agree. When he returned the next day, every bottle was properly labelled. “Once they know the way it’s supposed to be, they can do the right thing,” he says. “They have the resources, and they can get 30 people on it as soon as you leave. It wasn’t that they didn’t want to do it, but that they didn’t realize it needs to be done.”

In rural China, far from the mechanistic assembly lines of factories, there live some 700 million farmers. When China joined the WTO, Chinese officials were gravely concerned that increasingly wealthy urbanites and the upper-end HRI trade — hotels, restaurants and institutions — would flock toward high-quality imports, burying small domestic producers. The Chinese government, in an effort to develop international quality standards and save vulnerable producers, turned to Canada for help. After a couple of preliminary planning missions, the Canadian International Development Agency responded with the creation of a $20-million initiative called the Small Farmers Adapting to Global Markets Project, operated under Agriculture and Agri-Food Canada. For the past five years, Canadian experts have been quietly chipping away at improving China’s food system in four key areas: safety, policy research, production and internal structures. “They approached us because Canada is one of the few countries that controls pretty much the whole food chain within one branch of one department,” says John Morrissey, a lead consultant on the project and former head of what is now the Canadian Food Inspection Agency (CFIA). “China had an interest in doing the same, because if you have a problem at the bottom — say, a toxin on a plant — you want to eliminate the issue at farm level, not just condemn it at the inspection stage.”

Since the project’s launch, many of the policy changes and strategies implemented by the Chinese have come from Canadian expertise and knowledge-sharing. “There’s no way any foreigner is going to tell the Chinese how to organize themselves,” says Walter Redekop, who led the project through 2006 before retiring. “But there was no reason why we couldn’t open the gate a little bit and let them study us. And that became our approach: to permit the Chinese to examine our organizational structures, our federal-provincial relationships and how we govern agriculture.”

While the project didn’t deal with producers directly, Redekop says the aim was to expose middle and upper management to proper practices, with the idea that lessons would be passed along to ground level. As part of that strategy, Morrissey says the most senior officials in China’s food-inspection system received training by the CFIA in Ottawa, which included lessons on food-system management, legislation, policy development and WTO negotiations. Even more influential was the Global Food Safety Forum, organized under the Small Farmers initiative and held in Beijing in 2004. It attracted some 400 participants from more than 30 countries and is credited with laying the groundwork for China’s food-safety strategy. “The people who are making policy decisions at the highest level and designing the system in China now accept that a single system is required to control the entire food chain,” says Morrissey. “And they know if they can’t create a single agency, they must co-ordinate between them. That’s a huge change.”

China has not yet achieved a unified system, but there are encouraging signs. In late October, its cabinet approved draft legislation that would see government standardization of licence granting, product labelling, recalls and the way inspection results are recorded. Part of the proposed law also calls for “unified, timely, objective and accurate” announcements of food safety-related emergencies, a goal which will be largely reliant on turnaround times at government labs.

To boost capacity and efficiency, Morrissey recommended that Chinese officials seek advice from CFIA, Canada’s food watchdog. However, it doesn’t perform testing itself; instead, it passes lab work along to three companies. One of these contractors, JR Laboratories Inc., based in Burnaby, B.C., was enlisted by CFIA to provide consulting and training for the Chinese labs. (In November, it was acquired by U.S.-based Silliker Inc. and renamed Silliker JR Laboratories ULC.) Since joining the Small Farmers project in 2003, JR Labs has worked with China’s Ministry of Health, Ministry of Agriculture and AQSIQ. “We were able to help them develop standard operating procedures, adapt to new lab technologies and test for chemical contaminants,” says Ray Cheung, division president of Silliker JR Laboratories.

The training focused predominantly on two advanced testing techniques: high-performance liquid chromatography and liquid chromatography–mass spectrometry, allowing for chemical detection into the parts-per-billion range. Such sensitivity is particularly important as China struggles to overcome problems with unsafe chemical residues on food, which last June led the U.S. FDA to begin inspecting (and detaining when necessary) all imports of farm-raised catfish, basa, shrimp, dace and eel after repeatedly detecting carcinogens and antibiotics on the products over an eight-month period.

Though certainly bad for Chinese producers, Cheung is encouraged. “If you know the testing requirements for outside of China that would eliminate some of the financial losses from a shipment getting rejected, that’s very valuable,” he says. In 2004, JR Labs opened a Beijing office to explore opportunities beyond the CFIA contract. Operations are still small, with just five employees, and Cheung won’t reveal how much JR Labs has invested in China, but the company is set to open a full-service testing lab in Beijing later this year. The facility is a joint-venture between JR Labs and Beijing Xinghongke Inspection and Quarantine Sci-Tech Service Center, and has a licence to test food, electronics, textiles and toys for safety, quality and import/export certification. If Cheung has his way, there will be many such ventures to come for JR Labs, which is looking at expanding to other Chinese regions. “This is an area of growth. We can tap into the market to enhance foodsafety in China and help exporters meet other countries’ requirements,” he says. “They’re paying more attention to this safety factor now, and that may contribute to the demand for our services.”

In an effort to prove their actions are producing concrete results, Chinese officials have been quick to spout seemingly impressive figures. In a January briefing, AQSIQ vice-minister Pu Changcheng claimed that over the four-month rectification program, officials inspected 16,000 points of food export, banned 16 categories of illegal production practices, deemed 120,000 lots of food exports safe following quarantine and inspection and destroyed or returned to their country of origin 168 illegally imported shipments of meat, fruit and other materials. Pu also said food production licences had been granted to 98,000 manufacturers and processors.

Still, some 120,000 other smaller producers were only required to sign a letter of quality commitment, and until proper methods are implemented and strictly enforced among frontline producers, the door remains wide open for inferior products to enter China’s supply chain. Given that the country plans to import 37 varieties of processed food and fresh fruit from Thailand during the Olympics this summer, there seems to be some government concession that problems will continue, at least in the short term. (Some Olympians seem to agree, as parts of the teams from at least a dozen countries, including the U.K. and the U.S., will hold training sessions in Japan and South Korea, reportedly because of air pollution and food-safety concerns.)

Morrissey, however, is quick to point out that China overcame another agricultural crisis less than 50 years ago, when it was still struggling with famines. “They produced an absolute miracle,” he says. “In a relatively small amount of fertile land, they’ve been able to feed 1.2 billion people and produce a little extra for export.” With the kind of support producers and the government are receiving from Canadian experts and consultants, Morrissey says there’s no reason why China can’t create another miracle. “If they apply the same intelligence and diligence and hard work to improving the quality of food as they have to improving the quantity of it,” he says, “and I think they will, then they’ll sort out their food-safety issues.”