Silk Road International Blog

I don’t agree with what Sharon Stone said (here’s some apology news). But a lot of Chinese actually do–it’s not just PC for a Westerner to point it out. She is not the only one saying it publicly either. I would dare say that more Chinese people are themselves talking about it than foreigners are even thinking it.

Take, for example, my wife’s niece. She is a 22 year old college student in Guangzhou. At a family dinner last weekend she said: “this is supposed to be China’s lucky year (08) and the government said that it’s supposed to be a really good for China because the 0lympics are coming. But it’s been the worst year that I can remember.” I asked her if that was her opinion or if she heard if somewhere else. “Oh, most of the people in Guangzhou are talking about it.”

So, that got me thinking are other people saying that too? Sure enough, just mention how this supposed to be a lucky year to just about any Chinese and you’ll certainly get “yea, right” type of response—try it. I’ve talked with neighbors, employees and restaurant and factory workers and all have basically the same response.

The most detailed response was from a taxi driver who said that his life is worse now than it was a couple years back. He said that inflation and the number of private cars and the subway have really cut into his business. He said “the big money times” are over. I asked my (Chinese) wife about his comments when I got home that night and she immediately agreed. Someone else did a blog about a paint supplier with the same opinion a few weeks ago—but I don’t remember who or where—sorry for not citing you to whomever beat me to the punch on this topic.

While I don’t believe that it’s the end by any means, here’s a quick list of what’s happened so far this year.

1. Snow storms strand millions
2. Train wreck kills 70
3. Foot and mouth disease kills children
4. T!bet Riots
5. Torch fiasco. It was so bad they won’t do it again!
6. Sichuan quake—90K dead or missing, 7000+ collapsed schools, umpteen millions if buildings collapsed, 5 million homeless.
7. And now more dam(n) problems
8. Torrential rains
9. Inflation in China at 8.5%.
10. Post-quake political intrigue. The PR honeymoon is officially over.
11. Food shortages

Remember that China is a very superstitious society—there is tons of weight given to lucky numbers, fortune tellers and fengshuai—my children were named by Chinese fortune tellers (who cost a small fortune!) and my office is organized according to fengshuai and in a building with “good fengshuai.” The Shenzhen government building was designed according to fengshuai principles (good for the government, the people in the buildings directly across from the pointy roof are mad as hell that they get all the bad whatever that shoots out from the corners—their property values dropped!). Historically natural disasters were seen as a sign that a particular dynast was over—don’t discount the impact of this concept in the interpretation of the current cycle of “bad” events.

Tags: Culture by David Dayton
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In the last two weeks we’ve worked with two factories and talked with a number of other people about the reality of the new export responsibility enforcement in China. (New since the lead-paint problems of last year.) Yet, recently (since about Chinese New Year) the enforcement seems to have been ratcheted up another notch.

Example 1, we’ve been looking to export some electric bikes to the US for a client. But, unlike just about any other time in the last 10 years, some factories can export them and others really cannot; not right now at least. Very simply put, without an export license factories are not registered to export from China—rarely has that ever been a limitation on actual exports, though. But since China is trying to make sure that everything that leaves the country is traceable back to the site of production, it’s now limiting exports to factories with licenses (or good connections, more on that later). The market for electric bikes in China is huge and the bikes from a number of domestic factories are both good quality and available in foreign markets.

The problem is that enforcement of the rules are at best sporadic but getting stricter. So factories that were indeed (with out a license, through a 3rd party) exporting before have recently taken orders from foreign clients but the products are stuck in the factory and can’t leave the country for the foreseeable future. One of the bike factories is exporting like crazy—orders have gone up because they have a license. Another is telling us their warehouse is full of orders that they can’t get out of the country.

Example 2, dust, powders, fine particulates are currently restricted for export. Some can’t be air freighted, some can with visas and some, well some are just the luck of the draw it seems. We do a lot of craft glitters and flocks for export and have been hit with a weird series of regulations this year (not last year). Glitter cannot be exported by air in bulk qtty’s. “Bulk qtty’s” could be as small as qtty’s of 5grms per unit. This law seems to be cut in stone. Glitter by sea, no problem. Flock, in similarly small qtty’s is OK for both air and sea. An associate of mine says that his coffee exports are being similarly affected by this but that sufficient testing and paperwork solves most of his problems.

Example 3, some types of products are restricted but only in specific qtty’s or packaging. Ribbon, for example can be exported without a visa if it’s in pieces smaller than 20mm and clearly marked with the word “SAMPLE” on the packaging. Different materials don’t matter. If it’s classified as ribbon, it’s either going to require a visa or must be chopped up and labeled. We learned this the hard way. We were told by UPS in China that larger samples were no problem in small qtty’s. So we shipped a carton of samples to the US and indeed had no problems. But one month later, a second carton was held up and cost us hundreds of dollars to get out of US customs.

The lesson is–don’t trust your Chinese freight forwarder on US requirements and vise versa.
So what to do? The easy answer is you should do the same things now that you we’re doing before—following the laws. If you were using factories that didn’t have export licenses before, now may be difficult for you. I feel your pain, but can’t sympathize much. Domestic factories are cheaper for a reason—and now with exports controlled more tightly foreign buyers are finding out what that reason is. We buy a lot of materials from domestic factories and ship to domestic locations for final assembly, manufacturing—making sure that all our final factories can export.

More helpful advice is to check out customs in both the export and import countries. Talk with freight forwarders on both sides too–My experience is that freight forwarders don’t talk to their own offices on the other side of the ocean as much as you’d like to think. You make the calls and you’ll be safer–and have confirmed answers. Also, confirm BEFORE you order that your factory can really export on their own. A quick and relatively painless (few hundred USD) company report from and company like Verify can confirm independently that you’re working with someone that can ship your products regardless of the enforcement status in Chinese Customs.

So how long will this enforcement of the rules continue?

At least until the end of this 0lympic year, for sure. Hopefully longer. While the cynic may say that once the 0lympic hoards are gone so will be the enforcers, but I hope that’s not true. It’s in every-one’s best interest to make sure that the goods leaving China quality tested products. And that if there are problems, solutions can indeed be found and implemented and individuals and factories can be held responsible.

Tags: Business by David Dayton
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We’ve had requests for assistance work from 3 different companies in the last two weeks. All three have projects that were started independently and have since been canceled, rejected, or are held up for various reasons. All three are at least 6 months late and at least ten thousand dollars over budget.

So let me reiterate a couple of rules that should be engraved on the forehead of every international purchase manager. These are not jokes, although you may laugh if you’ve seen this before (or you may cry if you’re stuck in the middle of it now). And my experience is that if these rules are not followed the results are anything but funny. These rules could just as easily be applied to manufacturing that you’re doing anywhere, not just China. But since China is what we’re talking about, China is the example here (so save your “stop picking on China” feedback).

1. If you’re not here, you’re not getting what you ordered.

1a. The corollary to this is: “Any money saved from not coming to China (multiple times) will be lost in missed delivery dates and/or labor paid to repair product.”

2. If you don’t speak Chinese you’re not getting what you asked for.

3. If you don’t personally and physically confirm that samples match production you’re not getting what you asked for.

4. In the midst of problems, if you get angry and try to threaten the factory using your final payment as leverage, you’re not getting what you asked for.

5. If you don’t pull production samples yourself and have them tested by an independent third party you’re not getting what you asked for.

6. If you’re sending IP to various factories to get bids and/or samples and you’ve requested that, after a difficult and unfruitful sample process and no orders, the factory give back all the IP and never look at it again (especially if there is tooling involved) you’re not getting what you asked for.

7. If you don’t have perfect samples of every single part and a perfectly completed pre-production sample neither does your factory (i.e. you won’t be getting what you asked for).

8. Beware of the request for cooperation. “Cooperation” in Chinese means that you happily pay more for lower quality product delivered later than what you’ve contracted for—obviously, you’re not getting what you asked for.

9. If the answer to any question other than “Can I have a Coke instead of tea?” is “No, Problem. Of course we can do that.” you are not going to get what you ask for.

9a. The corollary to this is: “Any factory that, when offered money/orders, tells you “No, we can’t do that.” is a good factory and you should keep them on file for future projects.”

10. Nobody cares about your product as much as you do, but if your supplier sees you regularly, knows how much you care and also cares about you/likes you, you just might get what you are asking for.

11. There will be problems. Plan for them in your delivery schedules and budgets.

Tags: Business by David Dayton
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I’ll admit, I’m biased. I would much rather live in Thailand than just about anywhere else on the planet. And news today of Thailand’s world #47 ranking in medical technology. And Thailand costs (better than Korea, Japan, Malaysia, and China) supports my desire. Article here.

The only concern I have is if an ambulance was needed, could it get through the traffic?!

On a more serious note, I’ve had three different companies come to me in the last two months asking for help with manufacturing “anywhere but China.” Their words, not mine. Two of the clients are in the toy industry and another in home decor.

Their reasoning? First, the lead paint scares last year are not yet forgotten in the Toy industry. This means that regardless of the quality available, high end Toys can’t have the “made in China” label. Second, the costs of labor in China are rising so rapidly that re-orders are priced to high to keep up with a hot selling toy. Third, marking, marketing, marketing. Fair or not, there are enough consumer groups targeting “made in China” that it’s too sensitive to risk right now–particularly if children’s items are involved.

I moved the majority of production that we do from Thailand to China in 2003 because China had both better prices better/more options. Particularly in Guangdong province. Since then, I’ve seen the prices rise and many factory options (and laborers) move to other provinces within China and many back to SEA (mostly to Cambodia and Vietnam). What is interesting to me is that China is still the source for much of the raw materials that are used in SEA factories. And, unless labor is the major cost contributor to a project the Pearl River Delta still has many advantages over Western China and SEA.

So, for the present and foreseeable future, I’m still going to be living in Shenzhen and working, mostly, in China. But for vacations and plastic surgery I’m definitely going to Thailand!

Tags: Business, China, Culture, Thailand by David Dayton
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China Economic Review notes that labor prices are going to rise due to so many workers from Sichuan going to home.  Richard, at All Roads Lead to China, had some immediate post earthquake thoughts on economic impacts too.  China Herald noted two weeks ago, before the earthquake, that prices were already set to rise 12%.

Workers with ties to Sichuan are certainly going to be interested in going back home, now that there will be jobs there, there will be no reason for them to stay in the East.  The reconstruction work on schools and public buildings alone will take years to complete.  Then there are the roads, utilities and other public infrastructure that must be repaired.  Prior to any of that is the massive clean up effort that has to take place.  Since Sichuan is the most populous province in China, this will mean millions of people and jobs.  here’s hoping that the governments in Sichuan give priority to local workers to help them rebuild their lives and families.

Food prices, already at uncomfortable highs for many, will continue to rise as the earthquake strains both domestic food resources and the central inflation controls.  The 5 million homeless will need to be taken care of for months to come.  How many more don’t have jobs (there may be an answer for some of these) and more than 250,000 are injured (i.e. homeless, jobless and unable to work).  The shift in resource allocation is going to last through the end of the year, at least.

On the 14th, John Ng, from Hong Kong wrote that Toyota and other manufactures in Sichuan had suspended operations and that market reaction to the quake was mixed.

The BBC updated this by saying that Toyota was back in business this week and the cost of construction materials are already rising, by as much as 10%.  The article also points out that the quake is costing companies close to 10 billion dollars.  The China Post doubled the cost estimate.

So what does this mean for the SME who’s using a factory in Dongguan?

For manufactures in Guangdong this amounts to a perfect storm of price increases.  When coupled with the effects of the mature industrial base already here and the addition of China’s new labor law you can see why options to move elsewhere are so attractive.

The quake will directly impact production costs form most of China’s east coast provinces that rely on cheap labor from other provinces.  I’ve said before that unless you can pull complimentary suppliers with you moving to a second tier or third tier city in China is difficult.  But the bottom line is moving without a fully developed supply chain can cost more than you ultimately save–it could also be the ticket to better margins; it will depend on what you manufacture, where you are now and how much of that production process you can honestly duplicate elsewhere.

Tags: Business, China, Culture, Politics by David Dayton
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