The following are a collect of stories that I’ve either see, experienced directly or been told by the first had participants in the last three weeks. The point to the stories is this: if you’re not a huge MNC (and sometimes even if you are) doing business in China is very different from the books that you read about doing business in China or the classes on international business that you took in grad school. Business is business, yes, but understanding where you are doing business is important too. This is what business is really like—on the ground here.
New factory? What new factory?
We’ve been working with the same “product” factory for about 5 years. They have a large capacity and great service and overall our relationship with them has been an exceptionally good experience. So you can imagine my concern when our main contact, one of the owners, told me that he was starting a second company. Now, in China guanxi rules Chinese relationships so the old factory ownership didn’t dissolve; the new factory, though a direct competitor, still actually shares much of the same clientele and some of the same ownership. But they are not “partners” or “sister” factories. Odd, to say the least. Anyway we are comfortable with their relationship and I’m still getting the product that I need.
All the rules that aren’t fit to print.
A couple of other items about this restructuring that make it interesting. First, there are a number of “unwritten” rules that affect the new factory. Recycling is not optional. Not just recycling but which company you can use—the local officials are “requiring” new factories to use a recycler that was chosen by them. While there are many legitimate other options and no one recycler is contracted legally with the local government the local officials are still forcing factories to work with one service provider. Further the “sponsored” recycler pays much lower rates per kilo than the other recyclers. So…factories are hiding their total recycling amounts and giving only a small percentage to the “sponsored” recycler. The rest is sold at market rates to other providers in the middle of the night. Getting caught doing this is not just expensive but can result in officials finding “problems” with your registration or taxes or whatever and shutting you down.
Another “requirement is a local manager. All factories must hire a single person that the local officials provide as a manager and pay them a dictated monthly salary. Most factories just pay an annual “salary” to this person and then don’t ever have them come to the factory. Paying money is one thing, but having a “patsy” in house is more trouble than it’s worth (i.e. they could spoil the midnight recycling).
Undocumented fees and “insurance” are also “suggested” by the local officials. Of course, like the mafia, you ignore the suggestions at your own peril. So, may factories just cough it up. Some refuse and are hassled out of business and many with lawyers quietly see their cases lost or dismissed. Or so says our PVC factory owner. Some factories are asked to sign and stamp blank pages of corporate letterhead and just give them to the local officials—I was told a similar story in 2004 by another factory in another part of Guangdong province as well. They sign documents and then don’t ask questions.
Under employment + snow + new labor law = extra long vacations.
The new labor law is a disaster. Coming home from Chinese New Year employees believe that they have the ability leave early or come back late and have little if any repercussions from their employers. The job market is tight in Guangdong—there are more jobs than employees and the perceived power that the new labor law gave employees have combined to create a perfect storm—pardon the New Year pun. Just about every one left for home early because they had to catch a train/bus/plane and then are coming back late because they couldn’t catch a train/bus/plane back on time. Their not scared that they are late coming back; the attitude being “What are you going to do? Fire me?”
The ultimate end game.
The pitch goes something like this: “If you don’t pay the balance in cash immediately (11PM Saturday before Chinese New Year) we won’t release the goods; contracted terms be damned.” If you need product shipped to meet deadlines there is very little that you can do expect pay up. An associate of ours was given just this choice last week. After confirming the final product (and rejecting some for quality problems) the factory dropped this little gem on her as she was walking out the door heading for CNY. Being Chinese herself she worked though all the typical issues she could think of but by midnight was left with no other choice—and that’s precisely why the factory made the demand. She scrambled for the next hour with multiple ATM cards, many of them personal to get the cash and get the loaded-truck out to the port.
What are Chinese lawyers good for?
Have you heard the one about the three lawyers, three real-estate agents and two clients trying to close a home purchase deal in China? They meet once for the “legal” contracts (which were completed with a much lower than market value amount) and then met again for the “personal” contracts with the real market values. This is what lawyers are used for in China. I wish that this was just a joke—I can confirm, that it’s not.
If you didn’t see it, it didn’t happen.
Even after more than a decade working in Asia, last month I forgot that verification is the most important part of production. We made some simple changes to a product that we’d not yet started production on. The changes were cosmetic but required a bit of attention at start up to make sure that they were done correctly. We got caught up in the CNY rush and didn’t check on the changes and, sure enough, they didn’t happen. The factory confirmed that they were done but when we went to do QC we not only found them not completed but no one, outside of the guy on the phone, even knew anything about them. It wasn’t a big deal and didn’t sink the project but the lessen was re-taught clearly—if you don’t see it happen it didn’t happen.
“We didn’t read the contract.”
Yup, they really said that. And not once but twice. When a factory was going to miss a delivery deadline just before CNY we sat down with them and re-read through the contract they signed and chopped. When we pointed out that if they missed the deadline they were going to be either paying for airfreight or taking a huge cut in the final payment. We went round and round with them trying everything to get us to change our position, but we had them sign the contract for a reason and didn’t waiver. It wasn’t easy. It wasn’t fun. But we had the legal documentation that saved our bacon when they claimed ignorance.
This exact same comment was made when we were working out the production problems with another factory. After a really bad day of pre-production QC we (again) pointed out all the spec’s of the project and found that most of the problems were the result of ignorance—the production manager had not discussed the details with the floor engineers. In trying to get us to let them off the hook they said straight out “we didn’t read the contract.” My response? “We read through it with Mr. X (the manager) before you started. Did he give it to you? Did you review it with him?” Of course no was the answer to both questions and they started over.
Other common variations of this are “You’re really going to be that strict?” Or “But nobody can really do that. We just thought you wanted us to try.” Or “But none of our other clients do that.” And, my personal favorite, “The Japanese don’t even ask for that.”
The daily black market.
There are limits on the amount of foreign money that some types of Chinese and foreign businesses can exchange each year. Even banks in China have limits. So we get calls all the time from people that want us to help them change dollars into RMB. We don’t do it, period. But what are businesses to do if they can’t exchange the money they need to do business? They go to the black market. And the black market is HUGE in Shenzhen. Every AM in Louhu you can see people exchanging duffel bags of money. (Just imaging how many bank notes you’d need if you had to do business in cash and the biggest bill you had to use was a $20!!) Yea, the exchange rates are lower that what you’d get a bank but there are a ton of businesses that just don’t have any other choice.
A side note to the “bags of money” comment above: can you think of anything stupider than the Bank of China giving people bags printed with the bank logo to take home their cash? I can’t either. I mean, nothing says “target” like a person walking out of the bank with a full Bank of China plastic bag on their arm.