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Ancient Chinese Secret: Don’t Lie (to foreigners), it’s just not worth it.

The pearl of wisdom in the title came from my Chinese neighbor in a conversation he and his wife had with my wife about a week ago.  A Chinese man of about 65 years of age, he is a multi millionaire who made his money importing machinery from the US and UE into China over the last 20 years.  He said, when asked about his experience, that the single most important lesson that he learned in international business was this: “don’t lie to foreigners.  Even if the news is bad, don’t lie or cover it up.  That just causes more problems.”

Before I get a ton of email/comments from Chinese calling me racist, I want to repeat: I didn’t say this and I wasn’t there for this conversation.  This was said by a Chinese man to two other Chinese women who were talking about importing some food stuffs into China and relayed to me later.  What I will say is this, anyone that has worked in China for any amount of time knows of the regional distrust and stereotypes that are rampant amongst the Chinese themselves. This is not meant to be racist, but rather an insight into business in China provided by Chinese people about Chinese people.

Anyway…It takes SRI, on average, about 6 months to really get our suppliers to believe this concept too.  We work with suppliers over and over and over and usually about order 3 they finally admit to us something like this: “You know, we didn’t believe you at first, because we don’t ever tell our Chinese customers about problems, but now we know you really do want to know about problems and help resolve them.  Now we know that we can call you at 4AM and it’s OK to give you bad news.”  You don’t know how great it is to hear that I can expect middle-of-the-night calls.  It doesn’t mean that there are not going to be problems, but it means that we now get advanced warning and have the opportunity to change things in-line rather than try to re-work or reject so much bad product.  It’s about this time, 6 months in or order #3, that we start getting terms and the relationship moves beyond just the order details.

What I also think is very interesting is what my neighbor didn’t say.  He didn’t say “don’t lie period,” but rather “don’t lie to foreigners.”  He distinguished very clearly one of the major differences in doing business in the West and the East.  Again, I’m going to play prevent defense here because I know what’s coming.  Don’t get all bent out of shape and start screaming “racist pig” at me.  I’m not saying that all Chinese are liars.  I am saying that Chinese themselves say that there is a very identifiable ethical difference in doing business with Chinese and doing business with Westerners.

Transparency, win-win, partnering to solve problems, honesty is a virtue—these are all very western concepts of doing business and do not have similar historical or cultural precedents in China.  In fact I’ve had Chinese tell me that when they were young their parents told them to never be honest to anyone except them, their parents.  Telling the truth has been historically dangerous in China.  Recently, with intense competition, its seen as being economically dangerous too.

I was reminded this week about this again as I talked with a factory about an upcoming client visit.  The supplier has a great factory and quality products but has not been able to meet our material requirements.  Their solution?  Have the client come to their factory for the tour and then ship in correct samples from somewhere else.  Sounds like the best of both worlds, right?  Wrong.

For many suppliers in China, this is a great solution to an otherwise lost opportunity.  The supplier, of course, keeps the business, or at least a portion of it.  And the buyer does get a quality product, but there is really no way to control QC in this type of situation.  And finally for me, this solution openly lies to someone that is flying half way around the world to figure out if they trust me enough to give me money.  The bottom line is not that quality will be delivered, because there is no way to control it, but that there are just too many unknowns in the mix and too many “stories” that have to be kept straight—there is just no way that this will run out well when there are real problems.

Maybe Donald Trump would agree with the Chinese that business is business, and in a sense it is.  But bait and switch, like the factory example above, is going too far, and it’s not just illegal in the West but unethical too.

There are a number of reasons they there is such a deep ethical difference between Chinese suppliers and western buyers.

First, in China, despite what you’ve been told about how “socially-minded” and “group-oriented” and “relationship conscious” Chinese are, in business the order comes before any thoughts of personal relationship.  Yes, Chinese want to get to know with whom they are working.  Yes, they will probably want to take you to lunch and maybe out to drinks and Karaoke too.  But don’t confuse being polite with building “guanxi.”  Chinese want to know who you are to determine if they are going to get paid, first and foremost.  Sure, if the relationship develops into something else that is great, but the point of business for anyone, Chinese or otherwise, is to get paid.  Everything else is gravy.

Second, even after simple business introductions and finding out who you are personally, most Chinese suppliers don’t know you from Adam, or Zhang or Sven or Pedro.  They don’t know if you’re going to pay on time.  They don’t’ know if your as big as you say you are.  They don’t know if they can trust you any more than you know if you can trust them.  Chinese suppliers do NOT run D&B reports or credit checks on potential clients.  They may have their secretary run a google search on your company, but outside of that they are taking you at your word—and they’ve been burned by “honest” westerners many, many times.  What westerners forget is that the West has, in general, been pretty nasty to Chinese for hundreds of years.  Chinese are still taught this in school; they haven’t forgotten—even if we were never taught about it at all.

Third, there is so much competition in China, particularly in the Pearl River Delta, that they don’t necessarily believe that one order will mean multiple reorders.  With the current economic world wide wipeout (the new www) it’s only going to get more intense too.  So Chinese suppliers are interested in getting you to sign agreements and pay deposits and are generally willing to promise the moon and figure out how to get it to you later.  That’s not considered dishonest, at least no one talks about it like that, it’s just considered business.

Think about it like this: half million foreigners come to tradeshows in Guangdong and Hong Kong twice every year.  They each talk with hundreds of suppliers at shows and visit, let’s guess, a few factories each.  That’s millions of factory visits each year and less then half of those visits and maybe 10% of those supplier conversations are actually going to turn into business.  That’s a pretty low ROI for factories.  Add to that the fact that labor and material costs are going up; inflation is rising; the RMB has gained 20% in the last 3 years; prices have remained steady or even dropped and now the two biggest China buyers (US and EU) are dead in the water, so to speak.  It’s pretty bleak.

The bottom line is that there is just no economic logic to betting on re-orders from unknown sources.  And so the business-savvy Chinese work only on the currently opportunity until there is proof of more (e.g. subsequent PO’s).  This means they do all they can to get the most out of the first order, even if it’s things that you think are dishonest or unethical—this is where social relativism comes back to bite the westerners who embrace it at home.

Fourth, there is a very volatile history for economic opportunity in China in the recent past.  Political changes aside, the rise and fall of stock markets, the fanatical growth of SEZ’s and the corresponding income disparity, combined with the Chinese propensity to take care of themselves first means that Chinese suppliers have their own interests in mind first and foremost.  No one in China knows what’s around the corner 3, 6 or 12 months from now and the resultant attitude is “get it now while the getting is good” or “if you snooze you lose.”  It’s expedient in a system that has always provided too little security and too little opportunity.

Fifth, there is a growing sense of desperation in China.  I’ve written before how people tell us that “it was better three years ago.”  The money just isn’t in the orders today that was there in 2000.  The collapse of the Chinese stock market last year and the recent scandals have really sucker punched people that were riding high on the 0lympics and the space mission.  Now, growth at 9% or less reminds people of the economies of the late 80’s and early 90’s.  Many people that could afford to buy houses in the early ‘00’s cannot now afford their mortgage payments.  (Sound familiar?)  And unfortunately, the news for all of us just keeps getting worse.

Finally, there is a completely different sense of what is right and what is wrong.  Western culture is guilt based (my family seems to excel at this) while China is shame based.  What this means is that in the west there is a moral sense of wrong that is (supposed) to keep westerners in line even without the legal details or the public humiliation.    The legal structure is there go keep “good men honest.”  It’s the Spirit of the Law idea.  But Chinese see getting caught and the resultant public humiliation as the definition of what is wrong (or at least what’s very stupid).  If you don’t get caught it’s just not wrong.

The fact that there are many grey areas in the current Chinese legal system, political and business cultures and a serious lack of education about and experience with a rule of law culture means that this is perpetuated through the infrastructure of the system.

Business is just not the same here as it is back home. In the west every single transaction is based on trust and lawsuits are there to resolve the exceptions.  Yes there are (many) exceptions to the rule and many criminals in the system.  But they are still exceptions in a system that is still overwhelmingly based on trust.   There is no trust and no system in China.  You do what’s best for you right now, whatever that maybe.  And that’s the smartest way to do it.  Honestly.

I’m not trying to justify any of the unethical decisions that I can detail here, but there is logic to the decision making process here.  The good news is that where there is logic there are opportunities communicate and to resolve concerns, build trust, establish strong, fair and secure relationships—but you have to know going in that the playing field is not level and is not the same as it is “back home.”

Just a couple of notes for the Chinese whose feathers I may have ruffled with this post—I admit that I have only ever been stiffed for payment by US clients (as much as ¼ million USD in a single deal!)—never by a Chinese factory.  But I don’t have Chinese clients either.  Also I have never had a US client lie to me about the source of a sample, or withhold delivery in violation of contracted terms, or retain molds despite payment because they knew I couldn’t physically pull them from the factory, or substitute sub standard paint for approved, or claim that we hadn’t paid until I personally produced bank records to the contrary, or move my product to a third party sub-supplier after I’d already audited another factory location, or physically hold my QC personnel hostage until I make early payments, or been told one thing in English only to have the exact opposite be told to my staff in Chinese…you get the point.

Also, I completely understand that the standard of ethical business should go both ways.  It absolutely should.  I advise new buyers on a (way too) frequent basis that they never should be doing business in China in anyway that is illegal.  No bribes, no back-door payments, no deals that are not contractualized, no use of special relationships.  It seems to me that many foreigners are willing to “acclimate” themselves to the less than stringent legal environment in China way too quickly.  There is no justification for cheating people just because its being done by others.

Further, if you do get these “black” relationships involved in your supply chain and lose your “special relationship” or the uncle’s friend’s cousin of your partner’s wife’s nephew doesn’t deliver then you have no recourse and your supply chain is going to have a serious hole in it; one that you may not recover from, not to mention your home government may now have legal issues with you too.

There should be two take-aways from this.  First, precisely because there is a different standard here there is an opportunity to do more than just a business transaction here.  Train and invest in your suppliers and lift them up to the level that you and their other international clientele really expect.  A good example of what can happen when honesty/transparency becomes important: Last week China announced that it’s exported food will now comply to international standards.  It’s unfortunate that it took a scandal to get here, but this is step in the right direction (now if we could get them to get their domestic food to the same levels).

Second, you must do your due diligence in China.  Don’t use the lower standards to justify questionable practices on your end.  My friend Mike said it best:  Many foreigners come here with the idea that China is risky and so they abandon all standards and safeguards and jump into bad deals and dangerous situations just because “hey, it’s risky” here.  The opposite should be true—if there is really more risk here, the there should be more DD, more QC, more factory visits, not less.