Silk Road International Blog

All the Tea in China is a 21st century version of Mr. China—and in a handy “how to” format to boot!  Jeremy Haft has taken all his lumps and learning in China and distilled them down to a 200 page “how-to” on getting started in China.  (By the way, if you’ve not read Tim Clissold’s Mr. China, you really should.  Here’s my review.)

Haft’s All the Tea in China is one of the unique books that meet all of my requirements for a great book: it’s entertaining, it’s informative and it’s useful!  I found myself nodding in agreement, laughing out loud and underlining and dog-earing pages like crazy throughout the entire book.

Haft’s descriptions of his lessons learned in China are not just entertaining but enlightening–which is were the rubber hits the road.  What Haft does in All the Tea, that Mr. China did not, is to take the lessons that he learned the hard way and make the usable to others trying to walk the same paths.  Haft provides specific instructions, work flow charts, and lists of processes and documents that are immediately usable for anyone working with China.

The usefulness factor is what makes this book better than just a collection of great stories or a to-do list from the BBB.  Haft goes to lengths to specifically details what he or others should do or should have done to get it done right the first time.  It’s all written quite succinctly too—less than 200 pages and each section is valuable because its applicability.

I don’t know for why its so much fun to commiserate with others who have lost (and gained) so much in China.  But as I identify with both the headaches and solutions that Haft shares here it’s some comfort to know that I’m not crazy—others, like Haft, have really been here too and you can tell by the stories he shares.  It’s also great for the resources that are designed specifically to help new comers to China learn the lessons of the past without having to go through it all themselves.

A quick first read, but a very useful book that you’ll come back to over and over.  I recommend it!

Tags: Book Reviews, Business, China by David Dayton
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Since I’ve been at factories and solving project issues all week, I’ve not had time to write a “real” blog–so here is another of my (usually) tri-weekly news links list.  Enjoy.

1. China on President Elect Obama

First, be careful on Taiwan.   Second, in the short term, problems are expected. Third, a generally wary response from China to new US President Elect Obama.  Why not too excited?  Because the Chinese don’t know him from a hole in the ground.  Really?  Join the club.

So what will the first 100 days visa vis China be like?  And a better link (than last post) to more here.

Believe it or not, the US media thinks that Asia should swoon over Obama even though he’s still only the President Elect.  But he’ll soon be the next two-term President, I’ll bet.  Timing is everything—in 4 years the economy will probably be back up and President Elect Obama will get another 4 years.  It’s better to be luck than good, eh?

Surprise, surprise, surprise!  The same number of people voted this year as in 2004!!  Young neophytes showed up in droves this year and all the pissy old men stayed home.  Historic, indeed–it’s almost always the other way round.

And finally, what does Thailand think of President Elect Obama.

2. The Chinese Economy:

It’s crashing faster than expected.  Some say China growth will only be 8% next year (with extra links)!!  And some say 6%!  Yikes.

Airline and flyer demand slowing in China.  And China stocks keep dropping (and more) as do US stocks.  (Comment from a friend in the know about the US economy: “I just came from a bank regulators meeting in DC….it was beyond depressing.  There is a lot of pain still left to inflict out there in the economy.  The banks have already felt most of it…I suspect there will be more problems but most of the beating has occurred…as it works itself through the economy it is going to be very ugly.”)

And China’s banks are not immune.  And the Yuan will continue to weaken.  The incredible shrinking Euro won’t help China either.

And China is backing out of international investments to focus on the home market–not smart.

So the Govt wants a stimulus package.  I think that Chinese savers need an attitude adjustment, not a stimulus package, to get them to spent.  How about some confidence in domestic management?!   Most think that China will spend it’s way out of the recession, which is MUCH better than the US idea: borrow our way out (we are complete idiots!).

No matter what they do, this recipe won’t help anyone: Chinese (book) cooking!  Mmm, mmm, good.

But the bad economy will only last another 18 months, or so.  Maybe. The most tepid prediction of recovery every.  “expected” “should” “potentially” in 12 months.

But at least oil is dropping!!!

3. Doing Business in China

So what can a china business do to be safe(r)?  Part 1 and Part 2.

At least shipping is lower.   But be careful: Competition is going to heat up.  The US unemployed moving to China?!

Some advice from China: the west needs to change their earth-destroying lifestyles.  But let’s be real about climate change in China.  Remind me.  Where are 16 of the top 20 most polluted cities on the planet?

Good news!  Despite the blood in the streets, China and Taiwan are talking, that’s always good.  10K’s of protestors and riot police are actually good to—at least in Taiwan they can protest! OK, I guess you can protest/riot in China too.  Shenzhen incident last night; I didn’t see, hear or find any local news on this at all.

Tags: Business, China, Culture, Politics, Thailand by David Dayton
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I collect news links to read as I travel back and forth to factories.  Here is my edited list of hightlights from Wednesday and Thursday.  I thought it was especially good reading so I’m sharing.  You’re welcome.

China stocks continue to drop, and while you can’t judge a economy by one day, October is worst month ever.  After a day of election euphoria the US stock market took an historic plunge too. Thursday night update–world stock plunge.  The Auto and other industries are looking at 60%+ profit drops! I hope this is not the “change” that we’ll be getting for the next 4 years.

In the larger context, the Chinese economy is still robust compared to most countries.  But, as many have predicted, it’s getting worse.  I said that you’d need growth below 8.5% to see social.  Others are saying that it’ll have to be worse than that mark but that “worse” is certainly on the way.

Anecdotal evidence about the bad economy: Canton Fair attendance was way down.  You can debate the reasons but it doesn’t change the fact that Southern China is losing jobs, and there is a significant slowdown in Chinese manufacturing too.

Surprisingly, or not, there is a serious political nature to the Chinese economy which some think is not helping things–it’s hard to debate the State sponsored 11% of the last decade, though.  Of course, like everything else, you can (honestly) just blame the US for the mess–we started it and weren’t ready for the results.  Regardless of the fault, China/India are indeed making changes, trying to help their economies.

But of course you can’t blame the US for what’s going concerning product quality in China.  A great (I mean really great) Time article about how you can replace any other scandal with melamine and predict the government’s response.  By the way melamine is going to get even worse before it gets better. And here and here.

No surprise then that Wal-Mart’s opinion of Chinese suppliers’ quality control is not good.

The other major issue in the world is the new President Elect Obama in the US.  Despite the fact that we’re supposed to believe that we’re now all color blind and “this isn’t about” Obama, I’m still a bit skeptical–I mean, this election taught us that as long as someone’s a member of a minority religion or a woman, bigotry is still OK–just as long as were not racist.  I’ll be sure to tell my direct ancestors that were KILLED in the US for their religion that they can now celebrate this “historic” occasion.  Ahem, sorry.  Anyway, here are some of China’s reactions to Obama’s win.  They range from “moderate” to “neutral” to challenging.  I’ll report, you decide.  That sounds fair, eh?

Bloomberg, WJS, Times of India, UK Telegraph and Forbs. And here’s a stab at the Future of US-China relations.  Very similar to the prediction that I made a month ago too.

If you didn’t know already, the China Kool-Aid is just slightly less popular than the Obama Kool-Aid.   3 of 10 of the World’s Next Great Cities are in China.  And another list of China’s Fastest Changing Cities that’s interesting.  Shenzhen, Hong Kong and Guangzhou are 1, 2 and 3–need any more evidence that the PRD is in turmoil?!

And finally, I thought that this Thai political problem would be like all the others, but I was wrong—this time the opposition (it’s the PAD this time) has gotten wise.  Instead of waiting for the military to step in this minority party has figured out that if they cause enough trouble they can force the military’s hand.  Both sides are corrupt and culpable to be sure.  But regardless of blame, Thailand’s democracy is now going backwards.  I hope the military can resist the urge to overthrow an elected democratic government.  But it looks increasingly like another military coup is coming soon.  So much for the holidays in BKK.

Tags: Business, China, Culture, Politics, Thailand by David Dayton
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This book, The Writing On the Wall, by Will Hutton, is just great.  It’s only flaw is that it’s at least 100 pages too long—and there is a specific 100 pages that could be cut out with nothing lost.

Chapters 1-8 are as good as any book I’ve ever read on China.  Even if the pre1980’s history is a bit long winded, it sets up nicely what Hutton attacks in chapters 4-8, namely that China is ill-equipped to have a transparent political or economic system like that of the US.

In my opinion, the best chapters are 4-8.  Chapter 4 on the congruencies of the capitalist and communist systems, chapter 5 on the political difficulties facing the state, chapter 6 on economic frustrations within the current system, Chapter 7 on the necessary political preconditions for a fully functioning capitalist system and Chapter 8 on the social infrastructure that is mandatory to perpetuating the current economic growth; all fantastic.

I repeat, the first half of this book is spot on in terms of describing, in theory exactly what China is like.  The analysis of the systems of cronyism, corruption, weak R&D in the corporate world, a lack of innovation in either the public or private spheres, ineffective leadership and a lack of international presence by China’s domestic companies are not only revealing but useful in understanding much about the larger system within which individual companies must operate.

I reprinted (without permission, but with full source citations—is that OK? What are the online rules for this?) a section on corruption on this blog last month.  It’s exactly what we see in factories on the ground each day and what many recovering from the post -0lympic hangover are now discovering with the milk scandal.

This is China from 30 thousand feet and it’s a fantastic and detailed perspective.  It cuts past all the the “china will rule the world” platitudes and focuses not on if or when but what the internal workings of now are.  And how those specific structures are prepared (or not) for supporting another superpower.  The position of Hutton is that China is decidedly not the “next” hegemonic superpower.  Not because there are others to share power with and not because China claims to not be reaching for this goal.  But because despite the physical infrastructure and fantastic numbers China has serious fatal flaws.

According to Hutton, education that promotes innovation is nonexistent.  A legal system and the social structures (free press, individual freedoms) that will support a credible financial system are either hollow or corrupt and getting worse, not better. The maintenance of political power at all costs rather than the development of a stable and self continuing political system seems to be the task at hand for the CCP.

For some reason, chapters 9-11 (about 100 pages) are really more critique on the US (and almost nothing about the corresponding situations in England, Australia or EU at all).  After reading it all, I’m still struggling to try to understand what the point of these chapters is.  Sure, it’s nice to understand how the US is fundamentally different from China.  And it’s nice to realize that there are some serious current deficits in the US practices that will allow some great opportunities/advantages to China.  But knowing that Enlightenment ideas/institutions are necessary for Western style democracy and capitalism and then assuming that nothing short of replication of these in China will sustain their market economy and political system is a stretch, even for an unashamed flag-waving, American like me.

My doubting of the accuracy of Hutton’s conclusions does nothing to decrease the value of the description of China and it’s current malaise.  Indeed, the willingness to be labeled a China Basher and become a target of scorn and derision for all the Chinese whose feelings will be hurt by this critique is laudable.  This book is detailed and honest look into the depths of China’s successes, failures and future.

Highly recommended.

Tags: Book Reviews, Business, China, Culture, Politics by David Dayton
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This new QC program that Wal-Mart is rolling out is not related to the show, but it is related to the questions on supplier qualifications and product QC.  That a buyer as big as Wal-Mart is drawing a line in the sand is only going to be a good thing.

What can China or the buyers say to this new standard?  No?  No way.  They need this to legitimize their future manufacturing in the light of the last couple of years of bad press.  Sure there are tons of Chinese-made goods that are up to snuff, but that line of response is just going to be ridiculed by the west and MNC’s.  China needs to pick up this gauntlet and answer the call.  There is a great review of the Wal-Mart position of China suppliers right now from Bill Dodson at This Is China! Blog.  This, by the way, is a fantastic blog with a lot of good info about what it’s like to do business on the ground in China (from long boring car trips, to bad food, to negotiations, to actually business—that’s what it’s really like).

I talked with a friend at Wal-Mart last night and he said that some in the Chinese media are already painting this as Wal-Mart forcing new costs onto the Chinese suppliers.  Here’s a hint for the overly defensive nationalist local media–this is the wrong angle to take.  I’ve said it before and I’ll say it again: until Chinese factories value the lives of their Chinese customers as much as they value the lives of foreign customers there will continue to be quality problems, child labor, pollution and other problems with Chinese made goods.  Chinese buyers/customers really need to support the Wal-Mart program and demand it for domestic production too.

But finally, to make this QC program work for Wal-Mart (and others) corruption is going to be addressed even more seriously than in the past.  Let me just say this about Wal-Mart and QC, I know that they take corruption in QC very very seriously.  But there is still much abuse.

We have a supplier that we’ve worked with for more than 4 years.  They also supply Wal-Mart.  They told me, when Wal-Mart came up in a conversation one day (and I told my friend in Wal-Mart’s South China office), that they are getting killed by the tens of thousands of dollars in payments that the Wal-Mart QC people demand.  Not only are their margins already low, they told me, but the corruption is not limited to the inspectors but the department heads are in on the take too.  They demanded regular payments or threatened to reject otherwise acceptable product.  They told our factory that if the they blows the whistle on them the report will stop the order, go through the (corrupt) department heads and basically just hurt the suppliers own margins and times even more.  If something was to happen to the QC inspectors, they claim that they make so much money in illegal payments that they can both take a year off if they are fired and still use the Wal-Mart name/experience to get a new job elsewhere (since no one in China calls previous employers when hiring).

The factory would not tell me the PO number because they didn’t want to have the order canceled.  But they did repeatedly ask me to talk with my friend in Wal-Mart and see if something could be done without hurting the current order or supplier. To Wal-Mart’s credit, my friend tried to get all the info he could from me about the supplier.  For weeks he begged for info so they could do something about it.  Wal-Mart also has a very active and extensive fraud department that regulates stuff like this.  I known a couple of people in Wal-Mart over the years here in China and I can honestly say they are great people—to a man.  But their security and fraud prevention obviously has some shortcomings, but they are vigorous about trying to control illegal activities.

I’m not bashing on Wal-Mart here.  Actually praising them for both taking the QC issues public and directly to those that matter and for investing so much money into the prevention of fraud.  I know they fire a lot of people for graft.  The problem is that this type of corruption is systemic, as the cases of milk and lead paint (and cough syrup, and tires, toothpaste, and eggs, etc., etc., etc.,).  We’re fired more QC people in China the last 6 years than all other types employees from the US, China and Thailand combined.  Honest QC are paid handsomely here.  Honest suppliers are something you never let go of.  Here’s another example, from a large rodent themed entertainment company, I’ll call them Rat Inc. (I don’t know why I’ve never told this story and used the company’s name, I just never have.  Story telling mystique?  Fear of retribution?  Don’t know.  But why change now?!)

A couple of years ago we managed a project for a buyer that was selling into Rat Inc.  They require that all factories are inspected before any products are manufactured with their name or trademarks.  So we called their Shanghai office and said “We’ve got 11 sub suppliers making parts for this kit of kids products.  They are all in Guangdong, when do you want to go see them?”  They told us, directly: “We didn’t hear that you have 11 suppliers, we only want to see one.  We want to see it on this day and we want to be gone by noon.  Pick the best factory, get us the details and have them ready with all the sub suppliers items already there.”

Now I can understand that Rat Inc. wants to be efficient with their inspector’s time.  And I can understand that they trust our good judgment and manufacturing quality.  But policy is policy, right?  And the point of having inspectors in the first place is to inspect, right?!  I guarantee you some of the sub suppliers wouldn’t have passed their standards—and that’s the point.  They knew it too.  But they also knew that the product was, at least with an eyeball test, “good enough” to ship out and there was a very low chance of it coming back, so they just let it slide.

These are the issues that you face manufacturing your own products, anywhere in the world, really, but especially in China.  The rule of thumb is: the more time you spend in the factory watching, testing, checking, the better the quality your end product will be leaving China.

Show Question #1.

Q: I’m about to place my first order with a Chinese supplier but I’m now concerned that the factory may go bankrupt like so may others; I may lose my money and the product I’ve now found.  What should I do?  Also you recommend using a lawyer in China, how I would I find a reputable one?

A: First, pay $150 or so and get a report on your company before you send any money.  It’s easy to do.  Get online and talk with either Verify or Glo Bis.  Both are US companies.  They can get you back ground information and even government tax and registration reports and personnel searches on the owners.  I’m sure there are many other similar services like this available if you looked.

Second, pay another $800 and get your factory audited.  This will confirm for you both what the factory is really doing (capability) and it will give you a “live” update as to the current situation of the factory—are they busy, clean, licensed, still there, etc.  SRI can do an audit for about $650 plus expenses.  Bureau Veritas has similar charges (I think) and also has engineers if you want specific machinery audited (costs more).

Third, ask your factory/supplier for some client recommendations that can vouch for the existence and the quality of your potential supplier.  Try to get someone from you home country (or that at least speaks your language, obviously) and that has ordered in the last few months.

Now, maybe you’re saying: “Hey!  I can’t pay and extra $1000 to just confirm what they already told me!”  My response is:  “What % of your order can be rejected and still allow you to still stay in business?”  Yes, it’s that serious.  Pay $1000 up front.  Pay another $1000 for a few days of QC and you’ll not only be safe, you’ll be set up for your next order and you and your supplier will have standards set for the future.  If you are ordering $20K or more, this should be an acceptable margin.  And the next order you’ll only be paying $1000 for the QC.  The opposite scenario is that you just trust your factory and send tens of thousands of dollars to someone you don’t know, have never visited and works in a very instable and opaque business environment.  If the factory takes $20K and runs (and I’ve never had this happen to me, but I’ve heard stories) the $1000 will seem like small potatoes.  If 20% of your order is junk, or if 100% just “off just a little,” but enough to make it a 2nd in your market, how insignificant is the $1000 pre-check now?!

You learned it when you were a kid and it’s still true now: it’s better to be safe than sorry.

Fourth, get a lawyer and cover your legal bases in China before you send any info/spec’s/designs/art to China.  China is a file first legal system (like Germany, but not like the US which is first to market) so you need to register your designs before you start working in China.  Some lawyers you can use are Harris and Moure in Shanghai/Seattle and Jun Zejun in Shenzhen.  I’ve used both.  Harris and Moure are much better, and much more expensive too.  But I have friends who swear by Jun Zejun.

Show Question #2

Q: If I see that factories/suppliers are “certified” or “Verified” or “Trusted” on the online sourcing sites, what does that really mean?

A: It has a lot of different meanings.  First, on Alibaba, you can buy the Trust Pass or Gold Supplier status icons.  It has nothing to do with quality of the product or legality of the business (though they do claim to do a credit check).  I was offered the option of buying “gold” or other levels when we once considered setting up on Alibaba.  It’s sold to trading companies, middle men, buyer agents, whomever.   Their sales people offered it to us as a way to convince people that we were a manufacturer.

Second, On Global Sources (and no, I’m NOT an employee or contracted worker for GS in any way, shape or form) the “Verified” means that they have visited the factory and confirmed that they have a business license and have a credit check run.  I don’t know how the process works for he other sourcing sites.  Search engines like google, Baidu, Yahoo do NOTHING to certify the listings on their results pages.  ALL these sourcing sites have NO GURANTEE FOR ANY PRODUCT OR PRODUCT QUALITY!  They have simply verified the legal and physical existence of the supplier.  The quality of any item that you buy is completely up to you.

Tags: Business, China by David Dayton
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