Silk Road International Blog

The background on this great idea comes from Wired Magazine.  But more than the great idea, and a Utah company to boot, the look into their issues dealing with China are insightful.  From the article:

Davis has run billion-dollar divisions of global conglomerates with integrated supply chains and the company has produced millions of Orabrushes, but they’ve still faced factory setbacks. The Chinese manufacturer they selected was having trouble molding the critical microbristles and couldn’t properly mold the logo into the handle.

I’m sure that Davis is brilliant at what he does, but even people with a ton of experience still have setbacks in China–it’s part of the reality of working here.  But their solution is even more interesting:

This hiccup spurred the team to evaluate the entire overseas production model.”Producing the product in China, shipping it to the U.S., and then getting it to the retailers is a long cash cycle,” says Davis. “There are also negative rumors in the pet industry about having things manufactured outside the U.S.” Despite manufacturing in Utah costing 5 to 10 percent more in Utah, Davis and his team decided to contract with a local factory.

When timing and  product quality are the major production issues, a higher production cost no longer becomes a barrier to production.  And suddenly China is not as competitive as it was though to be previously.

I have similar discussions with companies just about every week.  Identifying what are the most important current goals and needs sometimes rules out China as a production center even before production can start there.  I would much rather tell a potential client that they need to do their manufacturing in the US, and not use any of my services (read: not pay me anything), and get what they want than have them pay me to get them something that they’ll not be completely happy with.

Things that you need to have researched BEFORE you commit to production in China.

1. Time to market constraints

2. Cash flow timelines

3. Marketing and distribution in your home market

4. Product quality and industry/customer standards and perceptions

5. Mold and product design, production and protection

Just because you have a great idea and have decided that, for whatever reason, China is the place where you have to do your production does not mean that China is the best option once other factors are considered.  Do your homework before committing to any production location simply because you’ve heard or decided that it’s the best value.

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John Hammond: [as they gather around a baby dinosaur hatching from its egg] I’ve been present for the birth of every little creature on this island.
Dr. Ian Malcolm: Surely not the ones that are bred in the wild?
Henry Wu: Actually they can’t breed in the wild. Population control is one of our security precautions. There’s no unauthorized breeding in Jurassic Park.
Dr. Ian Malcolm: How do you know they can’t breed?
Henry Wu: Well, because all the animals in Jurassic Park are female. We’ve engineered them that way.
[they take the baby dinosaur out of its egg. A robot arm picks up the shell out of Grant's hand and puts it back down]
Dr. Ian Malcolm: But again, how do you know they’re all female? Does somebody go out into the park and pull up the dinosaurs’ skirts?
Henry Wu: We control their chromosomes. It’s really not that difficult. All vertebrate embryos are inherently female anyway, they just require an extra hormone given at the right developmental stage to make them male. We simply deny them that.
Dr. Ian Malcolm: John, the kind of control you’re attempting simply is… it’s not possible. If there is one thing the history of evolution has taught us it’s that life will not be contained. Life breaks free, it expands to new territories and crashes through barriers, painfully, maybe even dangerously, but, uh… well, there it is.
John Hammond: [sardonically] There it is.
Henry Wu: You’re implying that a group composed entirely of female animals will… breed?
Dr. Ian Malcolm: No, I’m, I’m simply saying that life, uh… finds a way.

(Thank you, IMDB)

Would you get fake-divorced to save on your taxes?  Apparently hundreds of people in China will.  I’m not saying that this is right or wrong, it’s just one way to play the system.  But I am saying that even after 20 years in Asia, the extend that average people will go to make money still amazes me sometime.

Ultimately this story is either a great example of how creative Chinese can be in overcoming political/financial obstacles thrown up in their pursuit of wealth.  Or, with a bit of context, it’s another example of how that pursuit of wealth has made even the sacred fair game.  Maybe it’s both.  The point being, This Ain’t Kansas Anymore.  While the “game” is the same (make as much money as you can ASAP), the way it is played is not always what you’re used to back home.  If you still dont’ think that everything you see is a show, you just don’t get it.

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…the more they stay the same.

Shocker: Official and unofficial numbers for China 2012 economy are not the same!!!  And, hold your breath…..the official numbers not only aren’t accurate they’ve erred on the side of making last year’s downturn less dramatic and the upturn more impressive.  Amazing how it always seems to happen that way for the govt. fighting for social stability.

All irony aside, the numbers show that growth, while slightly better is not at the 7.5-8% levels that just 5 years ago Beijing was claiming MUST be maintained at all costs to keep employment where is needed to be (one of the arguments for not floating the currency).  Growth at 5.5% this next year without significant reforms for the 400 million still not urbanized and poor job prospects for the recent college grads will mean continuing frustrations for the CCP (especially as housing prices start to tick back up again).

New Business Insight: Don’t transfer Western business practices to China directly without some cultural/market specific adaptations.  Do MBA’s learn anything other than numbers in grad school?  Surely they have to take a couple of OB or corporate culture classes, right?  I’m no accountant, I’ll be the first to admit.  But if I needed one, I’d hire one rather than think that I could do it myself.  Why don’t accountants (not picking on accountants specifically, just making a point) hire Chinese consultants before moving to China?

Amazing Thailand: A Buddhist country steeped in centuries of political corruption and a face-conscious culture chooses the middle ground to keep the economy going and wait out the end of the King’s reign.

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…They’ve just never been asked to do it before.

Interesting article in the WSJ about the lack of creativity in Asian graduates.  But I think that the article misses the point.

The conclusion is that Asian grads aren’t creative because they don’t have he soft skills that come from a liberal education.  Ironic that this is the conclusion since the rise of the liberal arts education in the US is blamed for the demise of the US worker, the plight of the ’00 generation, the worthless degrees being offered (at outrageous prices) at most US institutions, the lack of engineers, etc., etc.

Having worked and lived in Taiwan, Thailand and China for almost 20 years, I don’t think that this is the problem at all.  The problem in Asia, like the real the recent problem in the US is the lack of any development of young people and development of practical skills OUTSIDE of formal education.  Specifically, the first job that most Asian grads have ever had is the first job that they get upon graduation from college.  Prior to that time they’ve done NOTHING but study for tests for 20 years.

Here’s a great look at the life of the typical student in Asia.  They are not only forced by their parents NOT to do anything but school work, they don’t have time to do anything else even if their parents would let them.  And most parents won’t let them do anything else–because an education had traditionally been seen as the THE pathway out of poverty not just for the student but for the entire family (two to three generations prior as well as the future children).

The onus isn’t all on the parents, though–they are well intentioned and other factors play into this situation as well.  The economy in most Asian countries is such that many or most of the menial tasks that kids do at home or in a family business in the US are done by (very) low wage laborers in Asia.  Sometimes, kids are not even allowed to have jobs outside the home anyway.  Kids never get to build a tree house, never get to work on a car with their father, never get to have an after school job, never build Ikea furniture (it costs 10Y to have someone off the street do it for you, so why would you?).

The knock on the US education is that while it’s broad and pushes independent thinking, kids spend time in the most stupid of majors.  But kids graduating from college in Asia with their skulls full of more info than American kids could ever imagine don’t know how to use any of that info because they’ve never had the chance to try.  Stupid as basket weaving or X studies may be, the life surrounding the typical US high school and college campus forces most students to at least learn to budget their own time and money and often work at a job too. Internships in Asia are few and far between and not valued anyway.  After school jobs are seen as both socially demeaning as well as a waste of time.

This is why you can hire someone with straight A’s from a great school and they can’t solve practical work issues or won’t do anything that isn’t specified in their job description.  Liberal arts classes might give them some thoughts about diversity but not practical application skills.  My own personal theory is that this is why 20 something Chinese women still love Hello Kitty–they’ve never had the chance to “do their own thing” prior to graduation.  And this doesn’t even address the concept of work-place (and certainly school) pressure keep your head down and to follow the crowd and not promote yourself (at the assumed expense of others).  Work and school in Asia just typically are not safe places to be creative.

I do not believe that the education in Asia is the problem.  Nor do I believe that Asians aren’t creative.  But I know that most of the kids I taught in High School in Taiwan, College in China and the recent graduates we’ve hired in China and Thailand had little to NO practical experience doing anything other than school work up to age 25.  They’d never been allowed to be creative before.  When your entire developmental stage of life is managed by your teacher and mother, you can’t be expected to be a “leader” in the workplace no matter what school and what grades you’ve achieved.

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Don’t let the fact that the companies in this article are all large lull you into to thinking you’re too small to get ripped or that you’re too important a client for your factory to pull these kinds of tricks on you:

Despite well-known risks in China, auditors there often are not inquisitive enough or alert to possible fraud, some experts say.

Auditors in China may pore tirelessly over documents and yet “fail to spot the red Ferrari parked on the doorstep and fail to ask who it belongs to, how it was paid for,” said Peter Humphrey, founder of ChinaWhys, a Shanghai-based anti-fraud consultancy that has investigated white-collar crime and fraud at scores of multinational firms in China.

China experts said it is difficult to do business there without encountering demands for gifts or kickbacks.

Transparency International, a corruption watchdog, surveyed business executives who said Chinese firms in 2011 were second only to Russian companies in being most likely to pay bribes abroad.

As always, the key to being successful in any work in China is the Due Diligence done BEFORE the project begins–and don’t fret if this DD takes longer than the production time of your project itself.  It’s time well spent.

If you’re spending more money than you can afford to lose (or can afford to pay double for the same qtty’s) then you need to go to China BEFORE you ever start any work or sign any agreements.  Visit factories/suppliers actual facilities, not just their trade-show booth.  Go to at least 2-3 different cities as well (and I don’t mean three neighboring cities like Dongguan, Songgang and Huizhou either).  Spread your visit out over multiple provinces and cities so that you can really get a feel for the level of development in the surrounding area (likely where all the sub-suppliers will be located).

A trip to multiple cities in China for 7-10 days can cost less than $5K.  Compare that with the cost of being 14-30 days late or the cost of shipping incorrect, poorly produced and/or unacceptable product back home.

There are things on the ground that you can never get from Skype, email, photos and even trade shows–you have to be there to know what it’s really like.  Spend the money now to be assured that you know what you’re dealing with or spend it later on repairs, rejects, late-delivery and other hassles.

Good luck!

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