DIARY - Today in Washington - March 29
1000/1400: The National Association of Realtors issues Pending Home Sales for February.
When Turkish firm Arcelik learned its fridge-freezers may cause fires, it did not tell customers for years. Did Europe's system encourage the delays?
By Tom Bergin
LONDON, Oct 21 In June, when a fire ripped through a concrete tower block in Bermondsey, a low-income neighbourhood in south-east London, residents initially blamed it on a lightning strike. "It was only later we heard the truth on the television," said Kathy Pullady, who lives across a chipped tile-covered landing from the 17th-floor flat where the blaze took hold.
The London Fire Brigade had in fact been investigating the probable cause of the fire for years. In July it publicly pointed to a faulty fridge-freezer made by Turkish company Arcelik, Europe's third-largest appliance manufacturer. The fire brigade says timers in certain models of Arcelik fridges have caused at least 20 fires in the UK since 2006. One man has been killed and at least 15 people injured.
Since 2005, the European Commission has recorded fire safety warnings for 37 fridge-freezer models. Sixteen of those models were made by Arcelik under the Beko brand, 18 by Swedish-based Dometic (including some fridge-freezer-oven combinations used in mobile homes), and three by South Korea-based Samsung.
Fire chiefs told Reuters they took the unusual step of issuing a public statement about the Arcelik appliances because the company itself had failed to publicise the danger. Consumer groups also charge the company -- along with British regulators -- with dragging its feet when it came to warning customers.
Arcelik (pronounced Arch-e-lick) agrees design flaws in certain fridge-freezers are to blame for the fires. A company spokeswoman told Reuters in an email it believes "there have been 29 incidents which can be attributed to an issue with the defrost timer since 2006." But the company says it acted as quickly as possible to tackle the issue. Regulators have declined to comment.
The issue highlights how an increasingly globalised supply chain can expose consumers to weaker safety regimes than they may be used to. The European Union's database of unsafe products has seen a sharp rise in product warnings since 2003, and the vast majority is on products made in emerging markets. Against this backdrop, Britain's fragmented regulatory regime can slow public notification of life-threatening defects. And companies whose products injure or even kill face much milder sanctions in Europe than in the United States.
"The regulatory and safety standards in the U.S. and the EU have developed over a long period of time," said Luke Upchurch of lobby group Consumers International. "A lot of the products are coming from jurisdictions where there aren't tight controls ... It's still very difficult to monitor that on an international basis."
Up to half a million of the Arcelik appliances have been sold in the United Kingdom and another 9,000 in other countries. Following the Fire Brigade's July announcement the company started a media blitz inviting owners of affected models to have modifications made.
"They could have acted faster ... there are a lot of questions unanswered in this," says Alice Judd, senior researcher at the UK's Consumer Association.
LOW PRICES, LARGE MARGINS
Arcelik is listed on the Istanbul stock exchange and majority-owned by Koc Holding, an $8 billion-group controlled by the Koc family, Turkey's richest. The company, which is expanding around the globe and has huge ambitions in China, sells its products under a number of brands including Beko, Arcelik and Leisure. For the most part it targets the economy end of the market.
Low prices don't mean low profits. Arcelik reported revenues of 3.5 billion euros ($4.8 billion) last year and an operating margin of 9.2 percent. That's well above the 5.1 percent achieved by Sweden's Electrolux, the number one appliance-maker in Europe, and the 5.5 percent reported by Whirlpool of the United States, the global number one by sales.
Arcelik operates factories in Turkey, Romania, China and Russia and says it exports to 115 countries across the world. According to Ragip Balcioglu, the company's UK country manager, Beko refrigerators are already the biggest sellers in the UK, accounting for one in three of all sold. Beko's UK website says British Prime Minister David Cameron is among its customers.
In the United States Arcelik's range includes sleek, expensive cookers and fridges sold under the Blomberg brand, which it describes as a "German quality brand" despite the fact the appliances are not made in Germany. Arcelik acquired Blomberg in 2002 and the brand hasn't issued a safety warning about its fridges since 1994, when it flagged a potential fire risk from overheating in certain models.
YOUR WARNING'S IN THE MAIL
The London Fire Brigade dealt with its first Beko fridge incident in 2007. By June 2010, the brigade says it had identified the defrost timers as the probable ignition source and notified Arcelik.
The company says incidents involving the timers dated back to 2006, but the information it received from fire authorities did not clearly identify the source of the fires. It says that between 2007 and the middle of last year it worked closely with the fire service to pinpoint the problem. The brigade would not discuss details because of a police investigation into a 2010 fire.
The June 2010 notice from the fire service -- Arcelik says it did not receive the letter until the middle of July -- confirmed that timer units on certain models manufactured between 2000 and 2006 were prone to condensation, according to Andrew Mullen, Director of Service at Arcelik's UK unit. Condensation can cause a short-circuit, which may ignite plastic components and other highly flammable insulation inside the appliance.
Mullen said the company then spent months trying unsuccessfully to recreate an accidental fire: "As soon as we received this letter... we intensely tried to simulate the problem."
Then last November, a Beko fridge erupted in flames in the west London house of the Benjamin-Muthiah family. Santosh Benjamin-Muthiah, 36, died and his wife Jennifer narrowly escaped with their two daughters aged three years and three months. Ian Webber, secretary of Wealdstone Baptist Church where the family worshipped, said that nine months on they were still too distraught to speak to the media. Burnt furniture and bedding were piled in a dumpster outside their home in August as repair work continued inside.
After Santosh's death, Arcelik abandoned its attempt to replicate the fires and started to design a fix that would stop condensation getting into the timers, Balcioglu told Reuters in an August interview at the company's UK head office in Hertfordshire, just north of greater London.
At this point Arcelik also planned a campaign to alert owners. But it decided against taking out advertisements in newspapers or issuing a press release, common practice in such situations and measures it had taken in the past. The company said it wanted to contact people by mail rather than rely on people seeing a notice in a newspaper.
It began gathering addresses, but did not post its first letters until mid-April 2011. A spokeswoman for the fire service said that between February and April 2011, there were nine fires in London involving the Beko fridge freezers under scrutiny.
BY THE GUIDELINES?
Approached for further comment shortly before Reuters published this story, an Arcelik spokesman said the company had always intended to launch a media effort, later in the campaign. Arcelik said its decision to run a postal campaign was not aimed at minimising damage to the Beko brand.
"It wasn't a concern ... ultimately we were driven by what has been suggested by the EU safety guidelines," the youthful, Rolex-wearing Balcioglu told Reuters in a large showroom full of glistening Beko appliances.
Waving a copy of a document titled 'Product Safety in Europe: A Guide to corrective action including recalls', Mullen said the European Union deems direct contact the best way to alert consumers to a defect.
The document, produced jointly by the EU and industry trade bodies, is as close to a rulebook on such matters as Europe has. While it says "personal" contact is the most effective way of informing people at risk, it also warns that relying on a mail shot alone leaves a risk some customers will not be contacted. The guide also advises in several places that companies should use the media to alert customers.
Mullen said one reason the company did not launch a media campaign was because it wanted to concentrate resources on direct contact. But with 480,000 affected fridges sold, the 10 call-centre staff and team of engineers Beko hired to handle the modifications could only handle so much at once. Letters were sent out at a rate of 10,000 a week; Balcioglu said this was to ensure the team was not swamped. By the time of the Bermondsey fire, only a third of owners had been contacted, he added. The company did not have the address of the family in the Bermondsey flat.
A staggered approach is at odds with EU guidance to act as quickly as possible.
That guidance also states that companies should highlight "details of the safety risk". Arcelik's initial letter mentioned only a risk that the "timer may fail and overheat". Arcelik said it worded its message that way because it still believed a faulty unit was more likely to emit smoke than catch fire. But Hertfordshire Trading Standards, which regulates Arcelik's British distribution unit, subsequently forced the company to amend the warning to include mention of "a potential fire hazard".
After the publicity surrounding the Bermondsey fire, Arcelik increased the resources committed to its corrective action, boosting modifications from 3,000 a week to 24,000.
Arcelik's approach to notifying regulators also seems to have been at odds with EU guidelines. The EU General Product Safety Directive says companies should inform the "competent authority" as soon as they become aware that a product may be unsafe.
But Arcelik said it notified Hertfordshire Trading Standards in January 2011 -- seven months after the London Fire Brigade's warning to the company, and two months after it had started on a design fix.
It took the company even longer to inform regulators in other places. Ireland's National Consumer Agency (NCA) said it first heard of the problem in March 2011, when it received a tip-off from a retailer. It sought a meeting with Arcelik which took place in May; immediately afterwards, the NCA issued a consumer warning.
The Consumer Association's Judd said the gaps between the various stages of the corrective action, given the nature of the warning, were unsatisfactory.
SLIPPING THROUGH THE CRACKS
Hertfordshire Trading Standards' response also appears to have been wanting (see ). Consumer advocates say this highlights flaws in the UK's decentralised approach to monitoring product safety, in which units of local governments oversee companies based in their region.
Most other EU countries have dedicated product safety bodies, noted Christine Heemskerk, product safety lead officer at the Trading Standards Institute. Safety experts and consumer lobby groups say the British set-up can lead to an uneven application of the rules and allows companies to call the shots when it comes to corrective action.
"Agencies that are set up to deal with a specific consumer issue tend to be better functioning," said Consumers International's Upchurch. "Agencies that are broader and cover a wider range of areas can sometimes let things slip through the cracks."
After Arcelik informed Hertfordshire Trading Standards, the regulator was bound by the UK's General Product Safety Regulations to "immediately" notify the government so it could file a notice with Rapex, a European body charged with logging EU product safety problems. But the Department of Business, Innovation and Skills said Hertfordshire Trading Standards informed it only on July 15, after the publicity around the Bermondsey fire. The department filed a Rapex notice within days, the EU database confirms. Hertfordshire Trading Standards declined comment.
NOT THE UNITED STATES
Shortly after the Bermondsey fire made headlines, Arcelik -- which has said Beko's annual revenue in Britain is above 300 million pounds ($470 million) -- told investment analysts it did not expect serious financial repercussions from the accidents. Arcelik's UK subsidiary has declined to comment on the cost of settling any cases involving its fridges and cookers.
Its optimism may be partly based on the fact that courts in Britain and elsewhere in Europe do not generally award punitive damages or compensation for pain or emotional loss. Arcelik may have to compensate victims only for fire damage to their properties and medical bills, according to Paul Verrico, a lawyer with London-based Eversheds and an adviser on product safety issues. Even the death of a family's main earner like Benjamin-Muthiah is unlikely to bring a big payout.
"You're not normally looking at more than a couple of hundred grand in total," Verrico said. Deaths of children, since they have no dependents, warrant only minor compensation -- about enough to pay for a modest funeral, he added.
A company which fails to notify the regulator in a timely fashion about a product risk can be fined, but only up to 5,000 pounds.
By comparison, failure to promptly notify the authorities in the United States can lead to fines of many hundreds of thousands of dollars, while companies that fail to warn consumers about known defects have seen potentially ruinous awards for punitive or exemplary damages.
A Los Angeles court in 1999 awarded a record $4.9 billion product safety payout in relation to defects in the fuel system on a General Motors vehicle; the payout was later reduced to $1.2 billion.
Simon Smith, a personal injury lawyer with London-based Goodmans Law, said the UK legal regime, which is similar to that in other European countries, is stacked against victims.
"The law is a bit harsh in that respect ... it expects us to be fairly stoic about things," he said.
Arcelik could still face serious criminal repercussions, though.
In July, after learning of the fire brigade's June 2010 warning to the company, the coroner investigating the death of Benjamin-Muthiah called in the police.
While Arcelik might not face large fines, Ashley Mott, solicitor at London-based law firm DLA Piper, says if a UK business, or its officers, are suspected of having failed in their duty of care they can be charged with the criminal offence of corporate manslaughter.
Arcelik's Balcioglu said the company had been helping police, but believes it did its best to protect consumers.
"Being open and honest, we really had all the right reasons and the best intentions with safety in mind ... without consumers in mind and safety in mind, I don't believe there is a future for any company," he said.
1000/1400: The National Association of Realtors issues Pending Home Sales for February.
BUENOS AIRES, March 28 Argentina's economic activity rose 1.1 percent in January compared with the same month a year earlier, but fell 0.5 percent compared with December, government statistics agency Indec said on Tuesday.