Negotiating With Chinese Factories

As I sit in a factory working with a number of engineers trying to get colors to "sound" just right for a particular client, I have time to consider a number of steps in the process of working with Chinese factories that may be new and difficult to understand for those who are new to China.This can be especially true if you are, like most foreigners, just here for 10 days "checking up" on production and getting some last minute peace of mind that your orders are being done correctly.

On this trip, after spending 6 hours traveling to a factory, the engineers took me out to eat dinner-at 1 AM.We went to a little caf¨¦ with a roadside garden (read: plastic lawn chairs in the street).The dinner group was all male and all drinking, smoking and eating unidentifiable seafood dishes.The only women present in the restaurant were for "hire" by the hour for either karaoke or more personal duets.Rats, chop-sticks, loud voices, dirty plates, spitting on the floor and tons of tissue are standard fare in these types of restaurants.

Now, I have lived in Asia for quite some time, so this isn't new to me.But as I was thinking about my clients whom I was representing at the factory I realized that they would have a tough time on this trip.Not that they aren't capable, it's just a totally different experience; one that can be quite difficult if you aren't used to it or prepared.

So here is a list of six things that can help you make sure your Chinese factory experience is a success story and not a horror story.

 

1. Business is Cultural

First, doing business is a cultural experience in China.Not only are the physical places of business different but the understanding of fundamental business relationships are also different.Here, business is personal.Business relationships can include gifts, favors, dinners, karaoke, cigarettes, night clubs, drinks, friendship and long term commitments.I am constantly reminded by various factory reps that I am not just their client, but their friend as well.(And when they're drunk, I'm family!)Problems with orders, requests, and even small details are personal.The next 5 points all support this single issue-despite the fact that China is changing (and changing fast) business in China is still done, to a large degree, "Chinese Style."

 

2. Results are What Matter Most

Remember your priorities.Production methods may be different from what you are used to but results are what really matter.If your Chinese counterpart has a unique way of getting the same results that you get from your manufacture at home don't try to force them to do it "your way."Quite often there are very good reasons for how they do what they do.

One good example is an experience we had this last year.We produced a painted wood product for a client that sold into Wal-Mart.The client had very specific instructions on how to achieve the look they wanted.Pages and pages of instructions for each shade of color and finish were sent to SRI in China.Ironically, the original design had come from China and the factory already knew how to achieve the desired results.The China factory's method and the US instructions differed greatly.Since the American samples had come from the arid Southwestern US painting instructions in humid Southeastern China were of little or no use.Raw materials and machinery were also different.But in the end the result was exactly what the client wanted.Had we "forced" the factory to do it "our way" we would have ended up with bad product and strained a relationship.

After a brief, 2 hour lunch, I'm back dying colors for the client I'm representing today.Most of the lunch time was spent talking with factory administrators about the last factory rep that handled our account.He only spoke Cantonese and couldn't speak Mandarin or English and I don't speak Cantonese well.The factory was amazed that we got as much done together as we did considering that they didn't understand him much either.The fact of the matter is nothing can replace being on the ground and having a good relationship with the engineers that are actually doing the production. I work with engineers, not sales people so the fact that I couldn't communicate with him had very little influence on production.

 

3. Cooperation

"We would like to have good cooperation."This is a favorite saying of the Chinese.You'll hear it everywhere and read it in most emails.I have been told that it means that they want to be comfortable with you (see number one above) and have a continuing relationship (i.e. let's make lots of money together.Not a bad concept, actually.)The key is applying that concept in a multicultural context as all too often it's repeated when there are factory problems or delays that they want you to accept.

For Westerners cooperation is clearly spelled out.You fulfill your part of the contract and I'll fulfill mine.With an extra dose of patience and customer service thrown in we will both be satisfied by the results.The Chinese would quickly agree with this but add that cooperation is much more than just fulfilling the contract and has much more to do with how you work together than what you accomplish.Everyone wants to make money and everyone wants to be satisfied/satisfy the other party.But the Chinese also add significantly more weight to the intangibles than do Westerners.

Specifically, service is personal in Asia.While we talk about personal attention in the West and a few companies pull it off well, most of the focus is on customer retention and is strictly "business" related.But there is no line between personal and business over here.One factory regularly invites us out on "family" outings with other managers.Another offers dinner and Karaoke every time we come to the factory (they spend over $100,000USD a year on dinner, karaoke and "extras" for clients).Another knows that I like to eat chocolate and gives me chocolate at traditional gift giving occasions throughout the year instead of the typical Chinese foods.Multiple factories gave me a gift when my baby was born.All our suppliers gave us (rather large, I thought) gifts when we moved to a new office location.I returned the favors with baby gifts, drinks and gifts from the US for the engineers and factory reps.Small items?Sure.But they are the personal elements of good cooperation.

There is more to cooperation than gifts.Prior to leaving on this factory trip I had been in Hong Kong for a couple of days.I had not personally been in contact with this factory for about a week.They knew that I wanted to come and help them dye colors but we hadn't confirmed a time yet.When they came to our office to show me samples I told them that I wanted to go the next day-they immediately arranged a car, a driver and a hotel and took me that very afternoon.When I mentioned that I was uncomfortable with him dropping his plans and taking a 3 day trip on a moment's notice, he told me that it was his responsibility.That "as a manager and as my friend he should do all that he can to cooperate with [me]."

And often the level of service is suffocating-always (I mean always, even walking one to the bathroom) having someone by your side, constantly having your drink refilled, constantly having a third person involved in every conversation or if you have a translator a fourth person, even having "friends" of the same gender hold your hand.

While a bunch of little gifts may sound nice-they are not given without expectations of return.Cooperation is a two way street.The flip side to customer service by the factory is your willingness to work with and understand them.When there are problems with orders, money or time frames, you are expected to be flexible with them.This is often a hard thing for Westerners to understand.We come from a culture where business is "done by the book", follows the "letter of the law", and has the "bottom line" as the primary interest.One of my most memorable experiences was a time when I told a factory no, they couldn't have more time as I needed to meet a shipping deadline and they responded, very candidly "but we gave you moon cakes."

But there is a logic behind the gift other than just manipulation. China is a culture of powerful individuals and a weak legal system.That means that contracts are a starting point for projects, not the last word.Individual relationships are the security against fraud and the assurance of fulfilled agreements.

Often the two methods of "cooperation" collide and frustration on both sides ensues.But getting frustrated at a factory manager because he isn't doing what you agreed to in the contract usually doesn't help.Demanding product or fines from the factory usually doesn't work either.Going to court is almost never the answer either-unless you are willing to wait for years, fight an uphill battle against a pro-Chinese biased court system and spend a lot of money.

Talking through production issues, listening to production issues, explaining US deadlines and what it will cost you to deliver late will usually light enough of a fire to get things worked out.Sometimes it takes a little more money or time because they under bid your project or have run into some unforeseen difficulties.Sometimes they need help in understanding your priorities and can, with some careful juggling, get you what you need on time, though it may require two shipments.You can be the hard guy, and you'll probably get your order done on time.But I can almost guarantee you that there will be issues and you'll never be able to work with the factory again.Measure your responses and realize that cooperation on a production problem now means that you still have the option to demand performance later, if you need it.

Another example.SRI did a project this year that was held up because of a comment that I made to a factory regarding quality.As production was nearing completion I mentioned that if our product didn't match specifications they would have to do it again and that I wouldn't pay for bad product.That comment was taken to the assistant manager and suddenly they were requesting (demanding actually) that we pay the entire balance of the order in cash before they would release the product.After two days of accountants and managers discussing options and then our office manager arguing with the assistant manager and getting no where, I personally called the owner of the factory and explained the situation to him.I listened to his issues and found out the real reasons for the money demands (cash flow issues).I reminded him that we had always paid on time and that I had always been honest with him.He agreed and immediately called the factory, chewed out the manager and released our product.What comes around, goes around.

Sometimes even the most conciliatory partners have a melt down.Sometimes you just have to get angry and force some issues at the expense of others.Last February we planned out an argument with a factory that had been stalling for weeks and was pushing us to accept product that we had already rejected. My assistant and I mapped out a Chinese version of good cop bad cop (black face/white face in Chinese) and decided what we were and were not willing to accept.I yelled (all in English) and pointed out all of the reasons why there was no way we were going to accept the current product.My polite and apologetic assistant worked as the go between (good cop) and buffer with the factory's QC manager.We empathized with the factory at their loss of time but reminded them that had already agreed to the QC standards and since we were reselling this in the US we would be losing much more money than they.We threatened to pull the project and cut our loses now.In the end the factory agreed to re-produce what was incorrect and we extended the production deadlines, paid for additional QC hours to accommodate the new production run and also paid a percentage of the remaining balance to help them with project expenses to give them confidence that we would pay for the now late product.Even with a little emotion, cooperation was the key to getting a mutually beneficial result.

This is a good result.Sometimes it's even worse.Last October we were printing with one of the largest print factories in China-A $250,000USD order.This factory prints for Sony, Toshiba, Nintendo, Honda and does millions of dollars in printing each year.They have thousands of employees at two different sites.We placed our order and within days Disney placed a book order with them too.We were instantly pushed down the food chain and things stopped getting done one time.We spent days talking, arranging schedules to accommodate the new 800lbs gorilla in the production line.We provided our own QC and even hired some of our own labor.Not nothing got us to our delivery dates on time.Finally, after days of cooperation, arguments, and negotiations we had to have a showdown and demand results.It got ugly.We literally had two 12-hour arguments that ended up with us shipping about 10% of the product, walking away from a 30% deposit and leaving the factory with 90% ofan order that was, at this point, printed but basically unusable product.They stalled and dared us to walk away from so much money-but we'd already prepared a second factory.So while we lost some of the cash deposit we were able to successfully move the production and get the product done somewhere else.

Moral of the story?You must have a back up plan.No one thinks that it will happen to them, but it can, even if you've been here for a long time (we'd been working with this print factory for more than 3 years).If you are locked into a single factory they have the leverage to push you around-even if you owe them money.

 

4. Act the Part

This example leads us to the fourth suggestion when working with Chinese factories:Act the part.In China performing your role is very important.Every relationship has, in the Chinese mind, a clear role and position.Each actor should play his part or the relationship is thrown out of balance, leaving the permanence of the relationship and the individual roles unclear. In Chinese every single family member and everyone in each office/company has a title based on position (relative age, administrative seniority, etc.). For example, while English has one word for "cousin" Chinese has eight.Chinese separates cousins by sex, marital linage and relative age to the speaker.In Chinese you don't just have a cousin; you have a female, maternal, older cousin or a male, paternal, younger cousin, for example.Another example is seating in cars.The Chinese will always offer the front seat in a car to the guest or highest ranking person in the group-exactly opposite of the West.I don't know how many times I've seen the look of confusion on the face of a factory driver or rep as I climb into the back seat.

These are simple examples to be sure but they illuminate verbal and physical dimensions of roles that are part of Chinese culture.To be effective and to allow your Chinese counterpart to feel comfortable (i.e. to "cooperate" well) you must both understand each other's role within the context of business.The importance of roles in Chinese culture really cannot be understated.

This isn't a wholly Chinese concept.Even in the West business interactions are sometimes described as a (role) play or stage performance.Each actor knows their part from years of subconscious cultural and formal education.The stage rules are set by tradition and culture and refined and defined by strict legal and professional systems.

In China, however, there is no strict legal system to limit the tradition.To comprehend the power and influence of Chinese culture you need to understand that this international role-play is thousands of years old.Dr. Sun Yat-sen, the founder of modern China, said of Chinese international relations prior to 1911 "China had a very high opinion of its own achievements and had nothing but disdain for other countries.This became a habit and was considered altogether natural."In Ross Terrill's book The New Chinese Empire, and what it means for America, Jim Haogland of the Washington Post is quoted as saying, regarding Bill Clinton's 1998 trip to China "His [Clinton's] China trip is being scripted around a set of fictions.Clinton joins the Chinese in manipulating himself for their purposes, which he mistakes as identical to his own."

Indeed, may foreigners, businessmen, travelers and politicians alike assume that China's goals are identical to their own.The reality is quite different.While development may provide for similar short term financial goals, even monetary goals are different.China's ultimate goal of development and modernization, Terrill claims, is to "supplant the US as the leading force in Asia" and the world.

So what is the role that individual foreigners play in this environment of real politic?Your role is that of honored and privileged guest.You are the guest, the buyer, the one with the money and the ability to accept or reject product and place more orders.You will be respected for the troubles you have endured to get here.You will be appreciated greatly if you have learned some Chinese.You will find lasting personal and professional relationships if you are willing and able to work within the Chinese system.

At the same time you are considered lucky to be allowed to work with the historically superior and increasingly globally important Chinese (empire).But you will not be told this directly.Most, if not all, of your Chinese counterparts may tell you that the current PRC is not superior to America or Britain anymore. They may even say that "America is better." If you have good relations they may also point out that they used to be superior-that they were cheated by Japan and the West; that they are still limited by the US's hegemonic aspirations; that if push came to shove over Taiwan China could and would beat the US in a war; that the West needs China more than China needs the West; and on and on.

In short, the West is regarded with suspicion and jealously admired for its technology, independence and power. You, by default, as a Westerner who is rich enough and independent/free enough to travel to China for business (and or pleasure) are an extension of that opinion.

As you can see, there can be a diametrically opposed opinion of the West held at the same time by the same individuals.It needs to be said that almost all Chinese can spout off the government standard line (most of the above) but whether they believe it or not is another story.But believed or not, that is part of the context into which you arrive for business in China.Your role in this context can often be equally convoluted.But there is a place for you nonetheless.Your place can be seen more clearly as we identify the role of your Chinese counterparts.

The traditional but simplistic description of the Chinese role is this: your Chinese counterpart is the low cost and increasingly high-tech supplier.But, perhaps, a more accurate and up-to-date description could be: your Chinese counterpart is a recently rich, well educated, international businessman that is part of a larger historical context of cultural superiority and explosive modern economic growth.The West, in general, has yet to acknowledge this.

More recently, the economic growth in China is also seen to support this theory of cultural superiority.Professionals in East Coast urban centers of China are averaging more than $12,000 in annual per capita income.Higher education (college degrees) in these large cities has increased in the last ten years from 1% of the population to almost 5%.Financial and (Chinese speaking) human capital coming from the more developed and Westernized Hong Kong, Malaysia, Taiwan and Singapore are increasingly common.In fact, chances are your factory has foreign roots.

It's all a stage on which you and others play your roles.Like a synchronized dance, movements together are beautiful and wrong steps are ugly and obvious.

But does all this anthropology really matter in business?Can't we just talk numbers?Can't we all just get along?The answer is both yes and no.No, you don't need to understand culture to bargain with a calculator and calendar.If that's all you want, dates and dollars, then you should be fine-but you've also wasted a trip to China if that's your MO.You can get dates and numbers with a fax or email.

On the other hand, yes, culture does matter if you come to China to see production, to do QA, to establish long term relationships.Working with someone that is difficult to communicate with intrinsically means that you'll soon be looking for other options.Missing subtle clues or misunderstanding details is not just inconvenient, it can be very costly.At the very least be aware of the fact that cultures are very different, even in business.

 

5. The Devil is in the Details

Regardless of where you live and with whom you work, an ounce of prevention is always worth a pound of cure-especially if you have to fly 7000 miles to make an emergency house call.So fifth, follow up on all details diligently.This should go without saying, but the truth is, many of our clients come to us because they didn't have enough hands on follow up with their projects and they need us to step in and solve problems.Again, ensuring correct production mid-stream rather than at the end of production will save time and money.Voice, fax and email may give you a little piece of mind, but photos, samples and ultimately some eyes on the ground are much safer.If you can't be there yourself, hire someone to be there for you.Or, count up how much money you can afford to lose in late, bad or even MIA product and then pray that you don't face these problems.

If you are going to manage production from across the ocean make a detailed QC list of each piece, part, color, package, requirement and regularly request comprehensive reports, samples and photos.When you actually go visit the factory take time (days if necessary) to QA everything completely.If you are especially concerned about the quality of a certain part/piece schedule your trip to coincide with the production of that item and watch the entire process.Don't take their word for it-see if for yourself.Establish a standard, sign off on the standard (literally sign your name to an approved sample) and then make sure that production matches.Sound's obvious, right?But it's surprising how many people don't use the their approved standard later on in QC.

From near or far immediately voice concerns about anything that you are worried about or even question or don't understand.Many times a QC question will be answered with "it won't be like that in production" or "there are just a few like this."If that answer is not good enough for you, and it should not be, stop the run. Then personally QC enough product to make sure that it is just a minor issue.The more diligently you require feedback or QC yourself the more likely the factory will understand and meet your expectations.Set the bar high from the beginning.

 

6. Contracts

Lastly, a word about contracts.You've heard all the horror stories about breach of contract and stolen IP.Well, it's all true, and worse!We've heard first-hand stories of not just IP being stolen but entire factories being "acquired" by unscrupulous Chinese partners who knew that their Western JV partner could do nothing about it.If you have issues with your Chinese supplier/partner you certainly can go to court but that probably will not help much.First, who will represent you in China?If you go court, how do you win a verdict in a system that openly favors domestic development over international law?And in the unlikely chance that you do win how do you enforce the verdict or collect a settlement (which are usually grossly undervalued anyway)?Bottom line: You don't want to go to court.

But you should work under the assumption that your contract is binding and will hold up in court.To do this, be involved in all the legal registration process that you can do yourself (or your lawyer can do for you).Take all the legal precautions for your Chinese supplier/partner as you would take with a Western supplier/partner.If your Chinese supplier/partner has an overseas office or parent company make the contract with them to give you more legal leverage in case there are difficulties.Letting your Chinese supplier/partner do the legal work or originate the contract will leave you at a significant disadvantage if push comes to shove (e.g. Dannone vs. Wahaha).

Have the Project Manager set a precedent by using the contract as the "answer key" to all questions.This strategy assumes that your contract has all the details and questions written in.If the factory knows that your answers are going to be "by the book" they will be less likely to try to get you to agree to something less than you contracted out for.On the other hand, if you wing it and personally approve samples or accept product that doesn't meet the contract standards be prepared for the factory to lower standards on everything.Either way, on really important issues you may have to fight just to get what you wanted in the first place-so be prepared.

Many Chinese factories may not understand or even care about the legal importance of the contract in the West and certainly will not understand the "legalese" in which it is written (English).Remember, Chinese society is built on relationships and history, not a legal system.And, since business is personal, the contract is often seen as a formality not as a road map that must be followed.Be prepared to give and take.Hold to your standards but be flexible on issues that are less important.

Be prepared when you go to China for a fantastic cultural experience.Arm yourself with a little info and with flexible expectations (not flexible standards but flexible expectations) and chances are you'll find success.Good luck, and don't forget the Imodium.


David Dayton the owner of Silk Road International and currently lives full-time in Shenzhen China.He speaks English, Thai and Mandarin and has worked in Asia for more than 15 years.You can contact him at david@silkroadintl.net or at www.silkroadintl.net.

Return to List of Articles