Silk Road International Blog

I spent the week at factory in Jiangsu province. The owner, now retired, used to be a teacher before he opened his own factory some 25 years ago. One of the final motivations to move from education to business was that, in the early 80’s he as making the equivalent of approximately USD$8 a month (yes, eight dollars a month) working as a teacher—I was making almost that much an hour at a part time job in high school in the 80’s!

He switched to business and never looked back. His factory now employs not only his immediate family, his second son runs the business now, but hundreds of local workers as well. They are expanding to a custom building complex that will house twice as many employees and triple production floor capacity. They have 5 to 10 production lines, less than 10 major products, a few hundred employees (less than 500), good local connections for logistics and supplies. They are honest, sincere and friend first, business partners second.

But working with them isn’t always easy. This is the “reality” of their situation (and many that are similarly sized/experienced).

1. They are good a few things that they do regularly. This factory, or example, has two products that they do over and over and have 20 years of international experience with. They are simple products that can be altered minimally with no change to the quality of the product. The product is sold both to the domestic and international market so they have a consistent and growing market for the same thing every month. In the last 5 years they’ve added another line of (simple) products for one of their two main clients that are doing very well.

2. They are growing quickly as both the domestic and international markets expand. The boom of the Chinese economy has stretched into the smaller, mid level cities and these factories are growing as the economy looks for more resources and advantages for both the local markets and the competitive export market. Most of their growth is coming from two to three sources—two large clients, one domestic and one international trading company in Shanghai, that reorder the same things each month and have started to try them out on a couple of new items as well. The other source of new clients is tradeshows—that’s how I found them in 2003. The tradeshow clients are typically smaller inconsistent orders and in total make up less than 30% of their business.

3. They most likely have a couple of large clients that they do the same product for over and over again—this keeps them in business and gives them some tradeshow cred. These two big clients are on all their literature and all over their tradeshow booth. This is at least 70% of their business and if either of these two clients leave, for any reason, they are going to be in big trouble.

4. They probably don’t have very good or standardized QC processes. Indeed, because they have typically been servicing either the domestic market or only a couple of international clients with the same product/service they may not have any QC department at all. They have grown up with their two largest clients and know exactly what they want and expect. Each employee has the process down to memory and they have done the same thing every day—without QC. This is good if you are buying the same thing from them, but changes mean a new process and there is no established order for checking new products/processes. This is our biggest issue with them—fortunately we have our own QC and can leave a man in the factory for the length of the production cycle.

5. They are growing so quickly that, while intentions are good, they are falling short in quality because of the in ability of the “family business” model to keep up with the new international level business they are attracting. They are going after bigger fish, and with the names they throw out and length of time they have been in business they appear bigger and more capable than they really are. This is NOT an attempt on their part to be dishonest. They are very very good people with whom we’ve had great experience, but do not know what they don’t know. Since they produce for X international brand they assume that everyone is the same and they’ve got that mastered—so what else is there?!

6. The international standards/testing requirements are not even on their radar. We test all of our products with third party testing companies and introduced this process to them. They don’t understand the standards they have to meet, but don’t realize that annual testing, re-testing for minor changes and/or testing for new products (even with similar/same components) is still necessary.

So how do you work successfully with a factory like this? There are a number of things that help.

First, you realize that working with them has specific advantages not the least of which is probably price. We can make products with these folks for 1/3 of the price it would cost to do the same item in Guangdong Province. That’s huge and it makes up for the extra travel and QC expenses that we incur. Second, it’s a partnership, a process not just a quick one-off. We have invested significant time in transferring out QC experience to them and they respond by giving us service that we couldn’t get anywhere else. Third, there is significantly more time involved in the development of new items/products and we know this going in. Because we plan extra time, we have the ability to work throw what would, at a larger factory, be non-issues. Fourth, component parts must be controlled more than you’d expect. While this factory has the connections to get the suppliers/support they need for raw materials they don’t necessarily have the standards that we expect. We do a lot of QC on incoming materials and go out and do other things on our own too (printing, for example we do on our own and ship into them).

The time and effort that we expend in working with them is exhausting and sometimes very frustrating. But the quality product we get for the low price we pay is the point of the relationship. We have great dinners together too.

Tags: Business by David Dayton
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I always learn new things on business trips, and this trip to Shanghai has been no different.

First, after a day at a tradeshow I love to break the bank and fork over the big money and have a $10 two-hour foot massage. But this time I got more than the foot massage, I got an education. The 24-year-old girl that massaged my feet was a recent college graduate. She had a degree in Computer Science and had very very good English—good enough that for the entire two hours we could talk about everything: politics, economics, Shanghai pop culture and why she was rubbing feet instead of working elsewhere. Why? She explained that she can get 3x the money every month doing massages (even with no “special” services for customers) than she could working for a computer company, doing retail sales or even selling real-estate; all of which she’s done in the two years since graduation. The glut of (sometimes unqualified) college graduates and the uncontrolled migration into Shanghai have, predictably, made a buyers market for college graduates here. The going monthly rate in Shanghai is somewhere around $250 for someone with a college degree, decent English and some specialized skills (accounting, computers, etc.)

This should be a warning for America! How long do you think that 1-2 million college grads each year are going to be satisfied rubbing feet? Even with good money my bet is not for long. Due to this glut, there is a huge opportunity for entrepreneurialism in China’s immediate future. This has been one of the biggest critiques of China “they just aren’t creative or independent thinkers.” And I agree. But as an American I also believe that necessity is the mother of invention. There just aren’t going to be millions and millions of satisfied college educated graduates every year, year on year. Is not going to happen. You’re been warned.

Second, the Shanghai Global Sources Show that I was just speaking at had a very different demographic than the Hong Kong Shows I spoke at in Oct. The majority of buyers here were Chinese. Many overseas Chinese to be sure, but I’ll bet 20 to 1 Chinese to foreign buyers. I don’t know the show stats, but I’ll guess that the Hong Kong show is more like 3 or 4 to 1. Significant, I think, in that it says the domestic market is growing out of the Shanghai area while the international market is still being feed mostly out of the South. The export stats would bear with out—the Shanghai/Ningbo area move about 28.8 million (TEU) containers while the Guangzhou/Shenzhen/Hong Kong area moves about 48.3 million (TEU) containers annually (numbers from Schenker Int’l).

Singapore, Hong Kong, Shanghai, Shenzhen, Pusan and Kaoxiong (Taiwan) are the top 6 ports in the world, in terns of TEU exported per year. Do you speak Chinese yet? Maybe you should learn.

Third, you think that it’s risky to do business in China? Maybe so. But how much riskier are you making it yourself? If you are coming here on your own, that’s fine. But that shouldn’t mean that you just jump in with your eyes closed. Do some DD (yes, either Due Diligence or David Dayton, I hear I’m great!) and check up on the factories that you’re working with. Yes there are problems here, but there are problems everywhere. So just because the system is dangerous you don’t stop doing DD altogether. You should be taking MORE precautions, not less. For example, if a hospital in (any region of the world) was known to be unsanitary, but you were sick and had to go there anyway, would you just say “what the hell, I’ll take my chances” or would you take your own syringes? Is there even a question as to what you’d do? Of course not. So why, would you consider not taking precautions when coming to China?!?!

Fourth, A few thoughts about Shanghai. There is very little bling in Shanghai. It is a much more sophisticated city than Shenzhen. The average car on the street can’t compete with Shenzhen’s Bentleys, Audis, BMW’s, and Porsches and maybe the size of the city (twice the size of SZ) just water’s the money down. But I think the MWM, (as Diligence China calls them) are much more flashy with their cash in SZ than in SH. It’s more of a subdued wealth here; it’s not “new money.”

I found the city to be much more “international” than Shenzhen. There were more Western BBQ restaurants in Shanghai than all foreign restaurants in the Shenzhen together. Many more foreigners in all parts of the city than I typically see in Shenzhen; much more like Hong Kong (except for at the trade show).

But the subway was a mess. Packed to overflowing from 4pm till closing. No electronic location signs. you know, the little red LED’s that tell you where you are. So if you can’t hear the PA system, which no one can from 4pm till close, you’d better have a clear view out the window to know where you are. And it closes at 11PM–what’s up with that?!

Finally, Had a great dinner with Steve Dickinson of CLB fame two days ago. He first came to China in 1974—nine-teen-seventy-four!! That’s almost longer than I’ve been alive! Steve has serious history, serious war stories and amazing experience and endless knowledge. He quoted Chinese poetry, Chinese law and dropped the names of judges, foreign companies and threw out more than one Chinese book that I ‘should read” in our time together. Our business-over-drinks meeting turned into a 7-hour (4pm till 11pm) rip-roaring ride through the history of Modern China and the inner workings of business and law in China. I asked him when he’s writing “the book” on China. He responded “which one?” Just amazing. If you’ve not talked with the CLB guys, you need to. They know China. Thanks, Steve!

Oh, yea, the Shanghai weather and pollution are really really awful!

Tags: Business by David Dayton
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I drive my own car here. Some people think I’m nuts. I find it quite convenient, if not a bit stressful.

If you don’t drive yourself, you may be oblivious to the traffic around. But chances are you probably sit in back and complain about the traffic and the “drivers” on the road. If you do drive you probably complain about the traffic and the other “drivers” on the road. But take comfort, it’s not just your bad attitude. The roads in China really are the most dangerous in the world (ask WHO). So be careful and keep complaining, if it makes you feel better.

If you are still complaining, and I’ll admit I am, here are some observations that will at least make you think before you flip off the next guy that cuts you off.

The most important thing I’ve learned while driving here is that the biggest car in the collision always wins everytime. No, just kidding. What I’ve learned is that it’s not really all their fault. Really, they can’t help it. The Chinese are not bad drivers; it’s the system that sucks.

Don’t believe me? Let me give you a few examples.

First, remember when you got your first driver’s license? After a semester long course in 10th grade and 10-15 hours of mandatory driving in a car you got it. So for starters, your education was formally much longer than these folks here. They buy a book, take a test and that may be it. They may drive in a car, with a hired coach, but only for just as long as the coach thinks they need it. If they act competent in 2 hours or 10, that’s all the training they get.

And just because they have some time in the car that doesn’t mean they received quality training. For example, my wife, while practicing driving, was told in no uncertain terms: “There is no such thing as a blind spot! Don’t ever look further back than your mirrors. Looking over your shoulder is illegal.” That pretty much explains 80% of the accidents you see here, doesn’t it?! But who’s fault is that?!

Second, you rode home in a car from the hospital the day you were born. And probably rode in a car, on average, every day of your life from birth on. There are probably no American’s under the age of 80 that can say they remember the first time they drove, let alone rode in, their first car. Most, if not all, Chinese people can tell you when the first car in their village showed up. When the first time they rode in a private car (not a taxi) was. And certainly when the first time they drove was. They’re all newbies when it comes to cars.

And not just new to driving—new to cars!!

You probably cleaned dad’s car as a kid. You my have had older brothers or friends or neighbors that were car nuts. You knew your way in and around cars before you were 10. But, here? You’ve seen him, that guy with the shocked look on his face as you slam on your brakes and blast your horn to avoid hitting him I the middle of the intersection. Or, how about the college graduate who can’t figure out how to get out of the back of a van (true story)? Or the lady driving her own car who has no clue what any gears other than R and D are for or that her car has wipers (another true story)!

There is no car culture here. Being from the West, you know to look both ways before you cross the street; you know how to open a car door; you know that the bigger the car the more time it takes to stop; you know cars can’t see people in dark clothes running across the 5 lane freeway in the middle of the night; you know that there are sidewalks for a very good reason. You know that you can defrost your windshield without opening your window in the middle of winter. You know that your car uses both oil and gas and that they are not the same thing and you probably know how to change or pump both too. Because of that knowledge you are unique over here.

Third, In the US the most expensive insurance class of drivers are teenagers. Why? Lack of experience and tons of social pressure. Ditto China. No one in China has been driving for more than 10 years. (And if they’ve been driving that long they’ve been driving in the army.) Most people on the road have had their license for only the last 2-5 years. And, they have enormous social pressures (face) to keep up now that they have a car. That makes them all relative teenagers behind the wheel. Inexperience and testosterone are a bad combination no matter what the culture you’re in.

Although I was driving tractors on my father’s farm before, I’ve been driving with a license since I was 16. That means that I’ve been driving for more than 20 years. In 5 years in Shenzhen, and I ask every taxi I get in, I have never meet anyone who has been driving longer than me and only a couple of people that have been driving for 10 plus years.

Fourth, while the surface of the roads themselves are pretty nice, the organization is really really bad. The guy backing up on the freeway to get back to his exit? Not his fault. Signs are posted at or even after exits, not before. The guy drifting into your lane without looking? Not his fault. Roads often change from 4 lanes to 3 with no notice and for no reason. The guy making a U-turn from the right lane. Ok, that’s his fault. But you get the picture. It’s really not all their fault that driving here is such a nightmare.

Fifth, you know how many people drink and you know they’re all driving now too, right? Drunk driving is really no big deal, socially, here. Even in college in the US, frat parties usually have a designated driver. Bai-jiu business meetings and all night karaoke parties here do not. How rude to have someone miss all the fun! You probably remember campaigns by MADD, or wrecked cars outside of high school gates before graduation to remind students not to drink and drive—none of that is done here because no teenagers drive! You don’t get any of the (drinking &) driving cultural lessons until you are much older, if at all, here in China.

Sixth, I think that the “unless I get caught it’s not wrong” mentality really affects driving quality, among other things. Add to that the concept of “don’t offend anyone as they may be a resource in the future” and you have millions of drivers who don’t follow the rules and don’t call out anyone else—i.e. there is no community policing of driving laws in China. You screw up on the freeway in America and everyone for 4 lanes will honk and yell obscene things at you. Heck, some people will even follow you home just to yell at you. Here? Everyone does it, so why get angry? What’s the point, they may not even know what they did wrong.

Seventh, police enforcement is specific and sporadic. Let me explain. Police and cameras enforce specific laws at specific times in specific places. Just for example, let’s say that on Monday police in Shenzhen are going to stop all white private cars and check for registration papers. Or on Tuesday they are going to stop all mid-sized trucks and check emissions. Camera’s only check for speed red light violations and they are in fixed spots, so drivers know they only have to obey the laws in those few areas with (working) policemen and cameras. If you know that the chances are slim to none that you’ll get caught anywhere else then breaking the rules is never even a question. You just do whatever you want. Why wouldn’t you?

Other factors: Complete-coverage insurance at very low rates means that trucks and buses hit people and honestly don’t care. Fines for breaking laws, if you do actually get busted, are so low it’s ridiculous. In Shenzhen, with the highest income levels in the country, its only RMB500 for running a red light and RMB200 for speeding in the city. Compare that with $279 for the lowest traffic violation fee in CA.

One side note, if you do get a ticket you can’t pay it by mail or credit card. In fact you can’t even find out what it costs by mail or by phone or even on line (but you can look on line to see if you have a ticket—and you can check on anyone else too, if you know their license plate number! Talk about voyeuristic fun!). You have to return to the city where you were given the ticket and get it physically printed out at the “Traffic Control Department” and then pay it in cash at another department! Really. Of course since this is suck a ridiculous system a quasi-legal service economy has grow up to fill the gap. You can hire an “agent” to go and print out and pay the tickets for you. They charge you per ticket depending on how far away you are from the ticket location. They claim to service every city in the country. Who says the Chinese aren’t creative!?

See, not such a crazy idea after all, is it? Drivers here are uniquely equipped to drive in this very Chinese system. And, like most things in China, us few participating foreigners aren’t going to change the system no matter how many fingers fly and no matter how many times we lay on the horn. Complain if you want, but it’s not changing—not with 1 million new cars on the road each week!

Beep Beep. Have fun!

Tags: Culture by David Dayton
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Merry Christmas!

SRI has a couple of gifts for all of our loyal readers!

First, SRI makes a fantastic calendar every year from photos that we’ve taken in China and Southeast Asia over the past year of our personal and business travels. If you’d like a copy, you can request one by email and we’ll mail it out to you. It’s free if you’ve got an address in China but international shipping is on your own dime if you’re not in China, says Scrooge. I’ll be in Shanghai passing out free calendars at the Global Sources Expo on the 13th (New Buyers Seminar) and standing on a street corner passing them out in exchange for dinner on the 14th! Email me with your address at david at silkroadintl dot net if you want one.

Second, we’ve taken the photos from the past three years of calendars and built a screen saver. It’s about 7MB and free to download from our home page or the column on the left (“Free SRI Photo Screen Saver”—yea, that link). Click here for an instant download. It works great with Windows, but we’ve had some problems with Mac. I too have a Mac, so I understand the frustration. But, hey! It’s free, so whatcha gonna do?! When it gets fixed I’ll let the Mac users know.

Now for a couple of business related issues.

David will be speaking at the New Buyers Seminar at the Global Sources trade show in Shanghai this Thursday. The event is in the Shanghai Pudong New International Exhibition Center and starts at 1pm.

Due to (positive) peer pressure from Dan at China Law Blog, we are updating the blog this month–yes, consider it another Christmas present to you from us. Look for the changes in the next couple of weeks!

Merry Christmas to all and to all a good night! Ho Ho Ho.

DD

Tags: Business by David Dayton
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1. Factory owner and millionaire, 35 years old, tells me that the road out in front of his factory he built with his own hands when he was in high-school. The local govt required all households to provide unpaid labor for specific lengths of the new road. His father was a teacher and away at school and his mother was over 40 and the only one home. So he had to miss much of one year of high school to fill the State-mandated labor quota. These are the type of people that you’re dealing with in China—you need to know that they can wait you out. They are not intimidated by your pressure. They know they can dump your product in the local markets if you back out. You need to understand that you’re probably not nearly as important to these many factories as you think you are.

2. My friend Peter Zapf in Singapore alerted me to this amazing phenomenon in China and since I was traveling this week I made sure I took notice. Yup, he’s right—except for Beijing, all airports built in China in the last 15 years are exactly the same. Some just have more gates than others. One large room divided by check-in and security counters, (cold) metal and glass, blue, silver/grey and white are the only acceptable colors, rounded-girders or stretched “mountain-tops” roof design. The same crappy shops with over-priced luggage and the choice of Haggendas, noodles, Dove chocolate, Pepsi, local dried fruits/meats and knock-off electronics. 90% of the travelers are Chinese men in dark suits, 8 % are foreign men in jeans and polo shirts, the other 2% are young women, almost no kids. All airport customer service employees are women, departures on the top floor, arrivals on the bottom.

3. Unless specifically contracted otherwise “good enough” is the going rate for production standards in China. Doesn’t matter what your making. If good enough isn’t, you’d better make sure you spec out exactly what is acceptable.

4. Everywhere I go Chinese people are thrilled that that Hillary Clinton may be the next President of the US. Kind of tells you something about the foreign policies of Bill Clinton, that he is so popular here but not known for his great international legacy in the US. Of course China donated (illegally) tons of money to Bill Clinton, so that may explain some of the local admiration. Also, many Chinese openly admit they don’t want a black man to be the US President, are sacred of John McCain (understandable), have never heard of a Mormon and think that Guliani is going to continue war with other countries. Any other choices?

5. Factory Sales Manager: “Why is your government still trying to make us change the value of our RMB?” Me: “Actually, it’s the Europeans this month. Our economy crashed—we like your cheap stuff now.”

6. Why do people hate road construction in China? You’d think they’d be happy with all their new cars and all. But, again, they know what we don’t. Repaving the roads means that someone in the government signed and is paying out on a contract. Ditto for roadside trees, sidewalks, parks, and just about any “non-essential” public works project. The process for awarding and fulfilling contracts is less than transparent in China, and the locals know it.

7. Speaking of construction, every single construction project in the entire country of China is expected to be finished by August 8th. Now, I’m no construction foreman, but even small manufacturing projects go over time. Heck, most things run over. So how is every huge public works project going to be done all at the same time next year? Answer: They’re not. No way. I’m going on record right now saying that there are going to be issues with the logistics around the country next summer before, during and after the Olympics with all the accompanying tourists. Just in one city in Jiangsu, by Taihu Lake, this last week I saw the cannel being dredged, new bridges and roads just being started, massive public and government buildings starting to rise and new power and utility lines going in—all to be finished “in time for the Olympics.”

8. Fantastic article by David Brooks in the New York Times. This is certainly what it’s like for, 1% of China. But before you think that everything is social clubs and meritocracy, remember the factory owner I mentioned above and realize his ilk represent 10 to 20 times the total number of people this article talks about. And, at best, these two groups of people are out numbered 4 to 1 by the rest of the Chinese population. Whenever someone asks me “what is China like?” I always respond: “Which China?”

9. Last, if you can read this, you’ve got better access than I do. For some reason, Top Way blocks my access to this blog and I have to update from other ISP’s. So much for prosperity mentality.

Tags: Business by David Dayton
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