Made in China Story: Faulty Tires -- How a Chinese supplier's bad
decision turned into one importer's worst nightmare, and may mean the
end of his business

Made in China: Faulty Tires

How a Chinese supplier's bad decision turned into one importer's worst
nightmare, and may mean the end of his business

by David Welch

Richard Kuskin was sitting in the dingy basement office of his Union
(N.J.) import firm one day in May, 2006, when the phone rang. One of his
distributors in New Mexico was on the line. There had been an accident
involving an ambulance riding on Chinese-made tires sold by Kuskin's
firm, Foreign Tires Sales Inc. The tires had blown out, causing the
driver to lose control. No one was hurt. Still, the incident scared
Kuskin. For several months he'd had a nagging feeling that his Chinese
partner, Hangzhou Zhongce Rubber Co., had cut out a key safety
technology. For Kuskin, the ambulance incident was like a flashing red
warning light.

After hanging up, Kuskin called his engineer, Gary Eiber, and dispatched
him to New Mexico with instructions to inspect the shredded tires. Then
Kuskin called a product liability attorney. Kuskin knew the costs of a
recall could crush his company, which has 13 employees and last year
sold just 700,000 tires. He also knew that getting Hangzhou Zhongce to
pay for some of the recall would be hard. Chinese companies aren't
legally obligated to execute U.S.-ordered recalls, and, says Kuskin, his
supplier was denying there was a problem. "I didn't sleep too good that
night," he recalls.

There were more sleepless nights to come. Over the next few months,
consumer complaints about faulty tires made by Hangzhou Zhongce and sold
by Foreign Tire and several other companies trickled in. There were more
accidents, including a fatal one that has sparked a lawsuit and prompted
the Feds to recall 450,000 tires. The National Highway Traffic Safety
Administration (NHTSA) is now weighing an investigation into whether FTS
moved quickly enough when the first tire defects were reported. NHTSA is
also looking into whether other tire distributors have also sold
potentially faulty tires manufactured by Hangzhou Zhongce.
Hidden Costs

With the very real prospect that his company could go under, Kuskin has
sued his Chinese partner in federal court for fraud, breach of contract,
and recall costs. Hangzhou Zhongce, which declined to comment, has
retained legal counsel and hired a Washington public relations firm. The
Chinese company recently posted a statement on its Web site. It reads in
part: "Until now we have not found the claimed defect as described by
FTS. We believe our tires' quality is good."

The Foreign Tire saga reverberates well beyond the world of cheap
replacement tires. Companies selling everything from toothpaste to toys
to all-terrain vehicles rely on mom-and-pop outfits much like FTS to
import products from China. In most cases, the federal government
expects these firms to monitor and test goods for possibly dangerous
defects. But the reality is that many small importers have limited
resources and testing capabilities, and face only minimal requirements
to perform tests. Kuskin, for his part, acknowledges that though his
company tested tires, until the recent crisis the process was random.
"It's so important for U.S. manufacturers and importers to test and
inspect anything they buy overseas," says Sally Greenberg, a senior
counsel with Consumers Union. "It's not so cheap to source to China when
you have these quality issues."

Kuskin began buying tires from Hangzhou Zhongce in 1990, and has been
riding the Chinese import wave ever since. The number of Chinese tires
imported to the U.S. has grown quickly in recent years, growing fivefold
to 32 million a year, or about 10%% of the market, since 2000. Most are
cheap replacement tires that sell for $100 or less. A company like FTS
typically approves the manufacturer's design and mandates certain
specifications. FTS sells to wholesalers, which in turn supply
retailers. A consumer can find tires made by Hangzhou Zhongce under
brand names like Vesta, Goodride, and Chaoyang at outlets large and small.
Tire Testing

Kuskin seems shell-shocked, and gets defensive when telling his story.
The 59-year-old entrepreneur is quick to say he's had only one other
minor recall in 19 years. And though it didn't help, he expresses pride
in the testing his company does, which he says involves driving tires
for 40,000 miles for 40 days on hot Texas pavement. After that, the
tires are sent to a lab, where they're analyzed for wear and breakdown.
The test costs about $40,000, he says, and is not required by the
Transportation Dept. "When these tires are made right," says Kuskin,
"they're as good as any tire in the world."

But clearly some of them weren't being made to FTS's specifications. The
first sign of trouble came in October, 2005, when FTS spotted a "sharp
increase" in consumer claims. Kuskin says he didn't hear about a single
accident and argues that there were claims on only 0.5%% of the tires.
That may seem small, but one major tiremaker says it considers warranty
claims on more than 0.5%% of one model to be "on the high side," and even
when the number exceeds 0.1%% "it starts drawing attention." Kuskin says
he submitted the data to NHTSA and that it didn't see an issue either.
"I wasn't in tune to the fact that this could be a big problem," he says.

But his engineer, an industry veteran, was suspicious that the tires
weren't being made properly. And after the May, 2006, accident in New
Mexico, Foreign Tire started asking pointed questions of its Chinese
supplier. Eiber wanted to know if Hangzhou Zhongce was using a
0.6-millimeter gum strip―it prevents a tire's steel belts from
separating from the rubber―in every unit. Kuskin says the company told
Foreign Tire that the tires were fine. But when Eiber took apart the
tires from the New Mexico ambulance company, he found no gum strips.
Foreign Tire pressed Hangzhou Zhongce about the missing strips, but says
its executives responded that the tires were not a problem.
Ignored Concerns

It was time for a face-to-face meeting. Kuskin, Eiber, and the FTS's
attorney flew to Hangzhou in September, 2006. Over three days of
meetings, Kuskin says, they talked about problems with the tires, the
possibility of a recall, and asked for documented test results that
would prove the tires were safe. Then Kuskin says he pressed the Chinese
to take responsibility for the recall and replace the defective tires.
They listened, he says, but were noncommital.

The trip did unearth one revelation, Kuskin says. Hangzhou Zhongce told
him that its chief engineer had decided to stop using the gum strips,
which the company has since confirmed. Apparently the man didn't
understand the significance of the technology, Kuskin says. "There is
one engineer responsible for this whole mess," he adds. "That's the guy
I am absolutely furious with."

Over the next few months, Foreign Tire says it sent six e-mails to
Hangzhou Zhongce asking for information on the tires and help with a
recall. On May 30, Kuskin wrote: "Problems do not go away because they
are ignored. We notified you of two quite severe problems. I have heard
nothing or very little on these subjects." Hangzhou Zhongce, says
Kuskin, never directly responded to his questions. Nor, he says, would
it say which tires lacked gum strips so FTS could recall them.

FTS decided to do more testing. It asked a tire distributor in Maine in
early January of this year to find a few Hangzhou Zhongce-produced tires
that were made in 2005. It took the Maine firm six weeks to find the
tires and ship them. Kuskin sent the tires to Texas for another
endurance test. After 20,000 miles, the tires failed. Kuskin got the
test results on May 10.
"Not Acceptable"

A few days earlier, Foreign Tire was sued over a fatal wreck that had
occurred in August, 2006. A van using FTS tires crashed on the
Pennsylvania Turnpike. Two people were killed and another has serious
brain damage. "It wasn't a good day for me," says Kuskin. On June 11,
Foreign Tire alerted NHTSA about all of its findings and the government
ordered a recall. NHTSA sent the importer a letter on June 26 saying the
company's inability to afford the recall, which Kuskin estimates will
cost $90 million, is "not acceptable." For its part, Hangzhou Zhongce
says the tires aren't defective and questions whether a recall is even
necessary. Attorneys for the Chinese firm met with NHTSA on July 11 and
asked for a chance to prove that its tires are safe, says a person
familiar with the meeting. The company also says incorrectly sized tires
may have played a role in the fatal accident.

Meanwhile, the attorney representing the victims of the Pennsylvania
crash is gearing up for a major legal battle. Jeffrey B. Killino, who
works for the law firm Woloshin & Killino in Philadelphia, plans to make
the case that Foreign Tire waited too long to issue a recall. "I'm going
to build a case that they should be criminally indicted," he says. "It
was my case that prompted the recall." Kuskin denies he waited too long
to alert NHTSA and says his tires not only meet government standards but
also that his firm volunteered that the tires failed its own more
stringent tests.

As he ponders his future, Kuskin says he is trying to apply the lessons
he has learned from his experience. "We didn't have a formal schedule"
to test tires, he says, but now the company tests one a month. Kuskin
also plans to write new contracts that would obligate Chinese
manufacturers to help pay for future recalls and ensure that disputes
are settled in Hong Kong, where the legal system is more sophisticated
than China's.

As he takes out ads in newspapers urging consumers to turn in their
recalled tires, Kuskin harbors hopes of making his Chinese partner pay.
He says he has had "reasonable conversations" with the U.S. law firm
recently retained by Hangzhou Zhongce. "We intend to be made whole by
Hangzhou," he says.

Welch is BusinessWeek's Detroit bureau chief. With Lorraine Woellert and
John Carey.