Silk Road International Blog

First, It’s no surprise that Human rights and the environment are taking a backseat to economics.

This is point of the 3rd world’s whole argument with any US/EU sponsored HR and Green legislation—“we’re decades behind you in terms of economics, we need to feed people first and then deal with the fall out (like you got to do).”  Yes, I understand the response that the ordered priorities maybe somewhat backward if we expect to have any future at all on God’s green earth.  But the point is, when push comes to shove IMMEDIATE economic needs are always going to win out—whether it’s global climate legislation or arguing about the additional levels of quality of any given widget.  Find where the money is and you’ll fix your problem much faster.

For example… our current problem with colors in factory A.  We specifically asked that our supplier make molds and print screens in a certain order.  This order, we felt, would help to control color issues.  The factory didn’t do it, said that our process would actually make the product color look worse.  So they did it their way, despite our protests.  We finally agreed (not other choice) but only if they guaranteed the color quality.  To no ones’ surprise the colors are horrible.  The one sample that they made using our order/process was accepted and now the factory is looking at either a large percentage of rejected final product (using their process) or paying for new molds/screens now.  Of course, it’s not really an argument about color at all—it’s an argument about the cost of the molds and screens.  Ironically, if they’d done it the way we asked in the first place and if the colors didn’t work, we would have had to pay for the new molds/screens and not them.  But now, they are stuck—they can pay now, pay later or lose the order and return the deposit.  We knew this would be the problem months ago and so when they refused to follow our processes we had them sign an additional agreement that they’d pay for the new molds/screens if their way doesn’t work.  (What will really happen is they will refuse to do it right and refuse to return the deposit and we’ll end up paying for their mistakes since the order is too small to take to court.  And they know it.)

I’m not usually one for mandating processes as long as correct outcomes can be achieved.  But sometimes, you know from experience when things are going to go badly down the line.  Sometimes you can see that someone’s face (us questioning the factory’s technical capabilities and suggesting different processes) is going to have financial impacts later on.

Side Note: “Very Difficult” vs. “Impossible.”  One of the distinctions I’ve learned to make in negotiations in China is the difference in what people can’t do and what they don’t’ want to do.  If the can’t do something, because they don’t have the machines or technical ablity or time or materials then there really is only one thing you can do: (“go through their pockets and look for lose change.”) make either spec or supplier change.  But the other issue is basic desire—whether for financial reasons or any other issues (and I would argue that there really aren’t any other issues) it’s just more effort then they want to spend—you have to convince or force them to see things your way.  This can be tough if you’re on a timeline and have already paid a deposit—in this type of situate they know they have an upper hand.  So they wait you out, not doing it correctly for a while until it becomes either too late ($) or too frustrating and you give in.  Regardless of what you think the end result will be, the question “is is difficult or is it impossible?” is, I think, a very valid and useful question.

Second, Gary Locke—Chinese American, former governor of Washington and now Secretary of Commerce.  (You can follow the money here too.)  First appointee was a faithful Democrat who got caught with his hands in the state-contract pie—this was a promised return on a campaign favor gone bad.  Second appointee was a conservative with budget and business experience but couldn’t get past the political conflicts with the Obama Whitehouse (surprise, surprise)—this was an attempt to get someone who knew what to do into the right position with as little political fallout as possible.

So now, we get to Mr. Locke.  Locke is known for his support of Chinese-US trade at a time when it seems to be the most important economic relationship on the planet; Chimerica, as some are calling it.  Necessity is the mother of invention, or invitation in this case.  The word in Seattle is this (from a friend there):

“Nice guy.  Squeaky clean.  Honest and very earnest.   The only bad thing anyone ever says about him is that he is a lightweight.  I think he would make a very good Sec. of Commerce.  Doesn’t really know China all that well.  Doesn’t speak a word of Chinese and hadn’t gone there until he was Governor.  Doesn’t really know foreign policy that well either, but overall should be good for US-China relations.”

I guess we’ll see what we get.  I hope that he was appointed because he knows what he’s doing and not because he looks the part.

25/Feb UPDATE: Here is another article on Locke from Seattle.

27/Feb UPDATE: And another look at Locke, here.

Third, when will China see the bottom of the recession?

When Chinese learn to spend money like drunken Americans!

Sure China has a big market.  Sure China has lots of savings per capita.  Sure China has limited debt and a government committed to say in power (e.g. keep the prosperity coming).  But even with all that cash and all those people the economic stimulus package in China will do little if the Chinese people don’t spend any money.  Like the banks not lending cash in the US, the Chinese consumers are not going to spend in an environment of fear.  They’ve had far too many bad experience; too many political wind changes to think that they can/should just keep spending as the seatbelt lights are flashing.  Of course, around the time international orders start to return and the environment gets a little more stable, the Chinese will start spending again—because it’s safe again.  But for now, just know that the Chinese domestic market isn’t going to save anyone.

And, finally: Congratulations!!!

To all those who voted for Obama because they thought that Bush made the US look stupid—welcome to the hot seat!  There is no way that the US looks any less stupid now than we did before.  And I’m not even talking about the most recent poll numbers, just the contents of the non-stimulus package.

This week, leaders of at least 4 communist nations either directly or indirectly warned the US not to move toward the socialist and protectionist economic positions that were created in the non-stimulus bill.  That’s right—THE RUSSIANS AND CHINESE AND OTHER MILITARY DICTATORS ARE WARNING THE US NOT TO MAKE THE SAME MARKET KILLING MISTAKES THEY MADE.   How rich is that?!  Here’s the highlights.

1. Pres. Putin said the US “should take a lesson from the pages of Russian history and not exercise excessive intervention and economic activity in blind faith in the omnipotence of the government.”

“In the 20th century, the Soviet Union made the state’s role absolute,’ Putin said during a speech at the opening ceremony of the World Economic Forum in Davos, Switzerland. ‘In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly. I am sure nobody wants to see it repeated.”

2. A Chinese Commerce Ministry Spokesman said: “China was deeply concerned about the decision by some countries to include clauses in their stimulus packages that prioritized the purchase of products from their own markets.”

3. The Leaders of ASEAN (Cambodia, Myanmar, Vietnam, Lao, Indonesia, Malaysia, Singapore, Philippines, Thailand, Brunei) and some Asian Finance Ministers (and China, Japan, Korea) pledged Sunday to uphold free trade and investment in the midst of the global economic slowdown.  That’s right Communist, Socialist and Military Dictatorships just voted to uphold free market principles while the US plunges headlong into the recognized failures of socialism.

Have you tried to have a conversation with Chinese people about the US economy lately?  Tried to defend either how congress (Frank and Dodd) forced banks to make bad loans or the pork in the non-stimulus package (that no Democrat who voted for actually read) to Chinese factory owners?  How about the bailout cash for auto companies and $29/hr.+ benefits-union-workers that haven’t turned a profit in decades or newly legislated programs/spending that will soon make the US dollar and the treasure bills the Chinese are buying completely worthless?  Want to discuss inflation and unrepayable debt to Chinese investors?

Contrary to campaign promises, stupidity has been served up on a silver platter this last month—and if you want to argue, check the markets’ reactions to anything (and everything) Obama has said as President.  Yup, all down all the time, until the sun goes out.  Neither Obama or the Treasury Secretary get any bump when they speak–why?  Because the markets/investors don’t believe them and/or know the plans wont work.

All this Hope may just kill us.  But hey…that would be a Change, wouldn’t it?!  At least I still get an $80K tax break for living here every year….shhh, don’t tell Obama.
_________
By the way, comments should work now.

Tags: Business, China, Culture, Politics by David Dayton
6 Comments »

This is a post by my friend Matt Kowalak, on a topic that just about everyone exporting from China has questions about–What is a Third Party Supplier/Service Provider actually responsible for?

This a question that comes up in many of the New Buyer Seminars that I teach for Global Sources.  The contracts and disclaimers from sourcing agents, 3PQA or Testing Labs are so explicit in what they exclude that you can question if you’re actually paying for anything at all.  I’ll let Matt explain what options you may have.

____________________

Third Party Contracts

Third party contracts cover a side variety of topics that concern people doing business in China. These types of contracts involve;
•    Contracts of carriage, a contract where you (A) have a shipping company (B) deliver goods to a client (C).
•    Some types of insurance contracts where you (A) purchase insurance from a company (B) payable to another company (C).
•    Third party inspection contracts where you (A) hire a company to inspect goods (B) from a supplier (C).

What are the obligations of a third party? These contracts are specifically different from contracts in which a task is delegated (subcontracting). These types of contracts are those in which a third party is added to a contract to perform a responsibility or a part of a contract. Under Chinese Law, you are still responsible to uphold your obligation.

So, who is to blame when things go wrong? What happens when a shipping company refuses to deliver goods to your client? When an insurance company refuses to pay a claim? When a line of products that were inspected results in a massive recall? In situations where the third party refuses an obligation or performs their obligation in an unsatisfactory manner, what course of action can you take?

Unlike the Common Law system in Hong Kong, in which consideration, compensation, must be made before a contractual promise becomes legally binding. In the Chinese legal system, even an orally made promise can be legally binding, as long as the three conditions for making a legally enforceable contract are met. Those three conditions are,

1. The person must have capacity (mentally sound and of age)
2. The person must have intention (no duress or forced conditions)
3. The promise must be legal (no refunds for your illegal drug mules)
As long as these conditions are met, any promise that you make can be considered legally binding.

So what are the implications for third party contracts? If the intention of the two parties is to place a legal, contractual obligation on a third party and this intention is accepted by all three parties, then the wronged party has a legal claim against the third party. This means that you have a claim against your insurance company for not paying, against the inspection company for failing to inspect properly and against the shipping company for failing to deliver the goods as agreed to.

The next time you are finalizing a deal make sure that your intentions are clearly expressed. What are each of the parties’ individually responsible for? What are their obligations? What are the remedies in case anyone should fail to perform in a satisfactory manner? It is better for you to decide ahead of time about the solution to a problem rather than rely on a judge here to take a guess.

Performance of Contract

What are your contractual obligations? How do you know your obligations and what they mean? When you sign your name on the dotted line, it is very important to know what you expect of the other party, but it is also very important to know what your obligations are as well.

Besides writing about the specifics of your product, when putting a contract together it is important to remember to note the specific time that something is supposed to happen, the place in which it should happen and the specific price. If you fail to make sure that this is clearly expressed in your contract, Chinese contract law states that you must use the state or industry standard or the market price.

So if a supplier ever tries to intentionally keep the exact specifics of a contract fuzzy in the slightest, beware. These “industry standards” become terms of your contract and you may be held liable for failing to uphold them. And they will probably not be the standards that you expect them to be!

Negotiating in Good Faith

Good Faith, this may seem like alien concept to anyone who has spent a long time in China. Many experienced businessmen go into every negotiation expecting the other party to promise you the moon, stars and the sun packaged just the way you want. Those of us who have been here for a while tend to distrust anything that we can’t see, touch or any promise that “the check’s in the mail”. Believe it or not, when negotiating in China, both parties have a legal responsibility to do so “in good faith”.

Good faith is a bit of a bailout clause in Chinese Contract Law. If anything is ever unclear in a contract in China, Article 60 of China’s Contract Law the principle of good faith provides for implied terms, including “giving notice, providing assistance and maintaining confidentiality in accordance with the nature and purpose of the contract”

Again, the point here is that you must be sure that these terms are expressed clearly in the contract, so that these implied terms, which are probably about as clear as mud, do not become obligations that you need to fulfill. For the most part, Chinese courts have decided that expressed terms will usually trump implied terms.
_________________
Matt Kowalak has worked in manufacturing related positions in Shenzhen for the last 5 years.  He studied Chinese at Shenzhen University and is currently an LLM student at The Chinese University of Hong Kong. For further business questions or consulting you can reach Matt at sasinopaths@gmail.com.

Tags: Business, China by David Dayton
1 Comment »

This is a conversation that I had with a friend who is considering getting involved in importing into China.  Since I get some variation of this question a few times each month, here’s my response.  (Original email first.)

Hey David,

I am really interested in importing some stuff to China, I have a solid contact in South America that can help me to import several items.  I think that it is a good opportunity but so far all of my experience in doing business in China has focused only on exporting from China.

From what I have read, importing *** into China is something that is very difficult to do; there is a high import tax, clearing customs is a pain and there can be huge delays, I also heard that the son of the President of ABC, a large American owned importer, was detained for customs violations.

That being said, the potential for growth with items in China has to be better than trying to sell anything to Europe or America.  *** seems like an easier bet, and there seem to be quite a few people interested in purchasing imported *** here in China.

What kind of advice can you offer about how to get started?

Teaming up with an importer seems to be the only way to get started, I think that we would have to sell to them and just avoid doing any distribution at all.  I have several friends that are buyers  but I think that we have to work with an importer, even if I have a supplier and willing buyers.

What would my next step be moving forward?  How should I approach an importer?

My thoughts:

First, importing opportunities.  I’ve mentioned this a couple of times in the past few years on my blog: I think that this is a very viable option for the future and a great opportunity for any company that is willing to do the initial DD and then stay the course.  China can’t support itself and it doesn’t want to and so there will be fewer and few restrictions on bringing things into the country as the economy expands.  It’s only going to get better for importers.  Right now for importers is like the 90’s were for exporters—a bonanza if you’re hooked up the right way.  More on that in a minute.

Why it’s good.

Despite the recent downturn, which will not last forever, Chinese have now and will have in the future more and more disposable income.  This is the most obvious reason that people capitalize on when they think of importing into China—and they have been thinking this for 200 years.  There is money, Chinese save 30% or more of their incomes.

There are markets for mainstream Western products that are not developed yet in China.  And there is a real lack of extensive distribution of imported goods across the entire country.

Not only do Chinese have money (and will spend more as the economy recovers) they want the quality that comes from foreign brands.  Name brands in the US or EU are, in general, popular either because they have better design and/or quality than domestic goods (even if they were manufactured here).  In general, Chinese goods lack both of these characteristics.  Quality is what people with money want—from clothes to furniture to cars to food.  And, they’ll pay more for it.  Long history of successful products/business in the West gives bands instant credibility in China.

On the other side of the coin. The milk scandal really brought down the Olympic nationalism a couple notches.  People openly admit now that they trust foreign brands more than domestic ones.  It really hurt Chinese pride and subsequent buying habits (for those with enough money to choose).  And these are the people you most likely want to target.  You couldn’t buy better press for foreign goods than the milk scandal and the fact that the Beijing govt has now let the FDA set up an office in Beijing.

For my money, the growing economy and the milk scandal are probably about 6’s when compared to the need for face.  I don’t say this as a a knock on Chinese, but if you read “Elite China” by Pierre Xiao Lu (and I strongly recommend that you do BEFORE you import anything), you’ll see that the numbers agree.  Once Chinese have money, they want to spend it on items that give them visible face (conspicuous consumption).  Yea, and they want quality too…but face is first and quality is often an assumed given with foreign name brands.  If we’re talking about imported items there are a few things that can happen.  One, no one will know what it is, but it’s imported so it has some face value to it just because it’s foreign.  Of course there are significant marketing barriers to overcome with this (the marketing it is a whole other issue).  Or second, it’s a recognized foreign brand and you have a prepared market.

Choice is becoming more and more an option for all of China and not just the rich on the east coast cities.  Chinese are more and more internet and marketing savvy and realize more and more that they have choice.  Choice means feature shopping and not just buying whatever is available.  More foreign brands can now compete here precisely because Chinese shoppers are looking for options to meet their specific needs. And since face is such an issue choice doesn’t lower prices as much here (yet) as it would in the US.  Until China produces consistent quality products to rival western goods, imports will be able to stay ahead of the price curve (as least relative to their domestic competitors).

Now for the bad news. Why importing is really really scary.

First, distribution.  Many foreigners think of China as one big country like the US.  It’s not.  It’s much more like Europe—a federation of different countries (provinces), each with their own standards, boarders (tariffs), laws (taxes), and requirements.  Not to mention that China is HUGE both in terms of population and geography.  Finally they don’t’ have the free flow of goods like the US or the domestic infrastructure to make commerce as cheap/efficient as the US.  Negotiating China is a nightmare, as importers have found for the last two centuries.  Just because you’re successful in SZ doesn’t mean that GZ or SH or BJ or CD will even want the same items even if you can get them there.  North China and South are different countries, culturally.   Eastern and Western China are different countries economically.  The first and second tier cities are years ahead of the rest of the country in levels of education.

Distribution to regional chain stores and/or ones own retail outlets then is vastly more complex than getting goods from a couple of factories out of China and into a DC in the US.  DO NOT UNDERESTIMATE THE NEED FOR A (VERY EXPENSIVE) PARTNER IN DOMESTIC DISTRIBUTION.  These guys know their value, they know the law and they quite frequently take advantage of foreign partners.  Danona Wahaha is example #1.

One of the horror stories that I hear from folks at some of the larger chains that have regional and national distribution is that a lack of good quality trucking across provinces kills margins, destroys product and adds significant costs to even the simplest products.  Stuff shows up damaged, rotten (perishable goods) or regularly missing a significant percentage. Insurance is impossible to collect and losses are then just part of the equation.

Add into this the high fees and salaries (bribes and pay offs) that many importers are paying not only to domestic partners but to customs and provincial boarder officials and the price of going from Shanghai to Ningbo can double.  We have issues like this regularly as we ship components from one part of the country to another for fulfillment.  I personally know people who have been jailed for driving specific goods across provincial lines—not even dangerous/illegal stuff either.

Finally, if you do manage to get things in and you do start making money the very next issues you’ll have to deal with are first, paying protection money to either the police or local gangs to keep your retail front “safe.”  And second, if there is money to be made, you’ll be knocked off.  Congratulations!

Recommendations.

•    Read Xiao Lu’s book—no matter what you’re importing.  (My review)
•    Find a trust-worthy partner.  Take the time (months) to do DD on this one.  This one person, more than anything else you do, could sink/steal/make your business.
•    Pick one region or one domestic distributor to start out with.  China’s big, don’t get greedy.
•    Build some serious guanxi with the port and regional officials that you’re going to be using.
•    Plan on staying in the market for at leat two CNY holidays to see if you can really make it—remember, 40% of all annual luxury sales happen over this vacation.

Good luck! Let me know what you think and what happens.

Tags: Business, China by David Dayton
5 Comments »

I know that I was complaining that Obama was predicting world destruction and had no hope the other day.  And I don’t want to add to the doom and gloom crowd.  But that doesn’t mean that people should be seeing silver linings where there really aren’t any either.

According to some, I won’t mention any names, since the CBD’s of most of China’s large east coast cities are still humming along with traffic, full coffee shops and English classes the economy is not really so bad after all.  US news rags are actually saying “China got it right.”  Individual parrots are saying “My English classes are cram full—so it can’t be that bad.”  Or “Downtown _______ is still full of people, traffic, etc.; I don’t see any down turn!”

I think that this overly-optimistic reading of the tea leaves is both short-sighted and naïve.

I’ll be honest, if I was only doing business in the Shenzhen CBD—only teaching English or going to Starbucks or even working in a large office building I’d probably agree—”Hey, it doesn’t look that bad at street level.  I mean, lay-offs here are minimal and I still see about the same number of people eating lunch every day.” I’ve even commented before that over CNY and even before, the shopping malls are indeed relatively full of shoppers.  But it’s quite a leap to conclude that because Starbucks is still in business the entire Chinese economy is still moving right along.

Here’s my two cents.

First some context.  I’ve been in at least 15 different factories in the last 45 days, my QC in another 20+.  Different industries, different cities, different target markets.  Regardless of the factory location or industry, we’re all seeing and being told the same thing—no one is running anywhere near 50% capacity.  Even the smart factories that spent last year buying up closing competitors’ equipment are hurting for orders.  Electronics are dead.  Toys and furniture are going or already gone.  Garments and textiles have slowed down significantly.

Factory managers and sales people that are still around are openly worried they won’t be able to pay for the cars or apartments or their kids’ schools that they committed to back in ’07 or early ’08.

Every factory rep, to a man, has told me the same thing this year, basically: “well, it’s not good, but I’m still here.”  (You know it’s bad when face-conscious Chinese are telling you they’re having a hard time.)  Now this isn’t empirical and it’s not even real numbers, but it is the real situation for more varied types of industries than is a quick survey of shopping malls. (for numbers see this post by The Financial Times or this commentary by China Economics Blog.

Side note: The FT article above makes a small but very important point that I think that almost EVERYONE is missing in the discussions on China—it’s just not that big, relatively speaking.  (At least not yet.)  The US economy is HUGE—so huge that with all the trillions of dollars of loss in the last year it’s still the largest economy in the world and more than double number 2—and, no number 2 is NOT China (it’s Japan).  China’s economy, with 1.3 billion people, is roughly the size of Germany’s who has just over 80 million people!  The amount of poverty in China is both a drag and a hook—its 200 million people living on USD$1 a day or less means that it’s still a very poor country.  But the annual growth numbers and the (now 300 million strong) middle and upper classes have been inspiring the dreams of entrepreneurs for more than a century.  What China really has is an economic paradox that both sides of the “China will save the world” debate use to support their positions.  For example: State planned capitalism; A combination of huge cash reserves and corrupt banks; Massive industrial potential and thousands of bankrupt state enterprises; millions of people saving 30% of their income and tight limits on the flow of investment cash out of the country.  A society that likes conspicuous consumption but hates spending money. Tons of labor but very low levels of education for most people once you get past management.  Cheap labor but rising costs of living.

So just in case you still believe that it’s not so bad here, let me tell you.  It is. (Rude email preempt:  No, I do not get any joy in this—I live here.  My in-laws and friends are here.  My employees and their families are all here.)  Anyway, here’s the reasons for my take:

The cities are not a most accurate judge for the economy for a number of reasons.  For one, the lack of funds keeps people home, in this case Chinese people didn’t go home for CNY en masse like they usually do.  They save the money and spend it locally instead.  So cities look like there is little change—that would explain the slight % bump in retail sales in Jan too.

Besides, CNY always skews things.  This one holiday can be 40% of some retail shops annual income.

The return of CNY also marks the new enrollment period for many night schools.  People are either not making as much and/or not working as many hour as they were last year so English or accounting classes are way to fill up evening hours and get a leg up.  Remember Chinese people save money—they typically have cash on hand they can use for this type of thing.

The fact that there are still 10 million people or more in every big city says nothing about the economy.  These people still have homes, kids in school, commitments, (lower) paying jobs, etc., just like they did 6 and 12 months ago.  The migrant workers (that you didn’t see on the streets anyway) are the ones that have gone home and stayed home.  Not the middle class apartment owners.

Cars are not the economy.  Yes there was a flurry of new car sales in January.  There is every CNY.  And, remember housing sales going up in LA last quarter of last year?  Yup, just like everywhere else, Chinese people know a good deal when they see one.  That doesn’t mean the economy is improving, as the CA govt will attest to.  Chinese people have cash savings, the Chinese car market is significantly over supplied due to last year’s downturn, there are multiple government and industry incentives to buy now, and there is almost completely free credit available to people with assets.  (Can you see this leading to a repeat of ’98? Me too.)  Finally, I’m willing to bet that because of CNY January’s numbers will be an anomaly (never underestimate the power of face).

Stats are lies.  Remember, China ranks next to Myanmar and North Korea in terms of transparency.  As I’ve said before here, the social implications of the presented (as opposed to actual) numbers are at least as important as the actual numbers themselves.  This is historically true in China specifically and in socialist countries in general.  The numbers are worse than reported, guaranteed.

Side Note: A stats example.  The recent stat that Guangdong province actually had a net gain in new business registrations over the last year (+38K businesses) doesn’t explain why there are lay-offs to the tune of tens of millions of more workers than the govt expected over the same period.  What’s the answer?  No, it’s not a robust economy.  I’m guessing it’s an increase in companies set up tax shelters (fake companies), unemployed individuals setting up their own trading companies and factories changing their company registrations/names to avoid debt payments and collections.

Out in the countryside it’s not any better either.  There are a lot of workers (tens of millions) that went home and are still home—they don’t have any place to go back to.  There’s no work—and they are going to start protesting if they don’t have anything in in the next 6 months.  12 months ago factories in Guangdong province couldn’t pay people enough to stay and work.  Now, there are lines for every single job.  There are groups of (laid off) workers waiting at the gates of most industrial parks.  There are fights to be first in line when a factory posts a new “help wanted” posters.  Workers that had their pick of jobs and options last year are taking just about whatever they can find now.

Internationally China is the tail, not the dog.  The domestic economy has not become the world’s savior as had been hopped.  China is still export dependent and export markets rebound AFTER the other import economies recover, not before.  That means that there must be a significant and sustained up-swing in international orders before the Chinese economy shows signs of recovery.

Further, as I’ve said before, China’s domestic economy is NOT big enough to suck up the exports or the jobs supporting the exports that are now disappeared.  China is also no longer importing consumer goods or parts for export from other Asian neighbors either.  As demand in the final export markets drop so does the trade with China it’s neighbors—worsening the situation rather than helping anyone.  And the conclusion of some is that China is going to get worse before it gets better.

There may indeed be pockets of growth, of good fortune and of positive economic news, but China in general and Guangdong in particular are not those places.  I don’t want to be a wet blanket, but I’d rather be surprised with better than expected options/numbers than be crushed by unexpected bad news.

Tags: Business, China by David Dayton
1 Comment »

I’m always amazed at the question: “So what’s it like in China?”  It’s like asking: “So what’s it like in the US?”  Would that be LA or Chicago or Miami or Podunk Utah where I grew up?  The question is usually phrased something like this:  “I saw this documentary about China…is it really like that?”  Or “My friend went there once and said it was ________.  Is that true?”  My parents came over to visit in ’07 and they were honestly relieved that I didn’t live in a quanza hut.  I live in SZ—12 million people, most money and education in China, no buildings over 30 years old, more BMW’s and Benz’s than bikes.

Not to be outdone, I got some great questions from the Chinese during this latest trip home for Chinese New Year: “Do you know Joe?  He’s from New York.  He taught me English.”  Or my new favorite: “Really?!  Black people are Americans too?!”  And, of course: “What’s the weather like in the US?”

In case you didn’t know, China is big.  Huge in fact.  Bigger than the US in terms of total geographic size (and population too, of course).  Because it’s so big there is no way that you can answer the question “What’s it like in China?” without asking a question back:

Which one?

Finally, I’m reading a book that gets this too.  Actually, there are lots of people that get this, but for some reason, none of them are writing books (or speaking English, apparently).  But Jasper Becker is on the proverbial ball.  His book, ironically named “The Chinese,” is about just this very concept—there are many many Chinas.  Just like there are many different versions of the USA.  You can read my review of Jasper’s book next week when I finish it—but for now, know that I’m quite enjoying reading about the various different China’s from Jasper’s perspective.  Another book that specifically gets this concept but sets it out in a generational perspective is Elite China by Pierre Xiao Lu (my review).

I too define my Chinas more by the people that are there than the physical places.  I could, I guess, say there is urban, semi-rural, very rural and tourist China.  But that’s more a description of buildings (or a lack there of) than of China as a social place or even an experience.  I will say that there are some great places to go in China too—only one city, Beijing, would ever make my list of great places, though.  Other spots I’ve enjoyed include: Huangshan, Huangguashu falls, Guilin river, Juizaigou National Park, and of course the obligatory Terra Cotta Warriors and Great Wall.  But for the money, I’d rather eat in Bangkok, or take photos at Ankor Wat in Cambodia or sleep on any beach in Southern Thailand.  But don’t tell my wife I said that.

Anyway, back to “What’s China like?” today.   “My China” at least.

I am living in or at least involved in at least five very different Chinas.   The upper-class urban elite China.  The Chinese/foreign mixed subculture.  The white-collar professional China.  Factory China.  And finally recently migrated but still very connected to the countryside China.

Urban Elite China.

The Urban upper-class China is materially similar to any other large city’s movers and shakers.  Not that I’m a mover and shaker, I’m connect here by association only, but my (foreign) income standards certainly put me in the upper levels of wage earners here (but not in the US).  To be honest there is a TON of money here—or at least a ton of conspicuous consumption.  Either way, there are a lot (meaning 10’s of thousands) of people spending hundreds of thousands of dollars more than I am every year in Shenzhen.

For example, we have in our parking garage more BMW’s, Benzes, Jag’s and Lexis’s (Lexi?) than Hondas or Toyotas.  We have multiple neighbors and friends that own multiple apartments here and in other cities—apartments in Shenzhen’s CBD still go for $400K for a 120m2 apartment.   And Chinese people don’t typically get a mortgage or a car loan—they pay cash for houses, cars and jewelry.  These folks made money as factory owners, landowners who sold out at the right time or got out of the stock market at the right time.  A lot of these people are second-generation money in China—many have either overseas experience/visas or at least have kids now studying or immediate relatives overseas. These aren’t the buy-one-name-brand-luxury-bag/watch-a-year type of folk.  These are the Tai Tai’s that have each bag of the LV line each season. These folks would be upper middle to upper class people in the US.  They are making at least $40K a year–bottom end.  Maybe 4x that along with other investments.  It’s estimated that there are about 100 million of these folk in China.

Side Note: Foreigners, for all the complaining that we do about living in China, are absolutely given differential treatment.  Most of the time. We are treated better than others, we are given automatic face/social status probably higher than deserved, we are forgiven for most social faux pas, we are assumed to be well educated/knowledgeable, and are basically pampered and taken care—service that usually only the rich get.

Expat China.

Which brings me to the second China that I live in—the China of expats and of mixed racial marriages.  You could argue that these are two different Chinas in and of themselves, and you’d probably be right.  But for here (this is another long post), we’ll just lump them together.

The expat world is not really China.  I know, that totally contradicts what I said above about generalizations concerning China, but it’s such a shallow and limited section of the pie that it’s really more like living in a suburb of Chinatown in LA than China.  Yea, most expats interact with Chinese each day.  But the Chinese that we are interacting with are of only three types: service providers (maids, nannies, drivers, waitresses), Chuppies (Young Chinese Urban Professionals) that speak more English than most expats speak Chinese, and finally, maybe some relatives if they have a Chinese spouse. This is the life of private schools, multiple household servants, gated communities and imported western culture/shopping/dinning.  And all of this life is in English.

At work each day I deal with Chinese—professional, college educated or at least managerial level Chinese. But my social life is almost exclusively foreigners.  I can’t talk college hoops, bands/movies from the 80’s, (American) football, or even religion with most Chinese.  Politics gets old and contentious too quickly.  I spend a lot of time with my in-laws and my wife’s friends, but I don’t socialize with them.  There is a reason why there are Chinatowns (Little Saigon, etc) in Western cities and why expats tend to congregate in the same areas here too.

I would guess that less than half of expats here, with or without a Chinese spouse, speak Chinese.  I don’t care how rich non-speakers say there experience is, they can’t fully know what’s going on without speaking Chinese well (better than me).  For context, think of it like this: How much of American culture would you miss if you were not fluent in English?  Why is speaking Chinese any different?  It’s not.  If you don’t speak Chinese you don’t know how much you don’t know.  Period.

I do almost all of my factory business in Chinese. Probably 1/2 of my office work in Chinese.  I can watch movies in Chinese.  I can read some parts of a daily paper.  I can follow the stories on the TV news (not that I want to, but I can).  My Chinese good, not great (because I don’t read well).  But it’s to the point where I now know that there is so much that I’m missing that I didn’t realize before.  The Charlie Brown adage is true: The more you know the more you know you don’t know.

Interestingly, if you want to go shopping or go to cultural events, I’d call the wives of my expat friends before I’d ask any of the Chinese I work with.  These ladies know what’s up (what else are they going to do?!).  Best places to shop for art, furniture, western food, best places to take your kids.  Concerts, libraries, free stuff.  The wives in the foreign community know TONS more than their Chinese-speaking businessmen husbands and more than most local Chinese too.

White Collar Professional China.

The third China that I live in is the White Collar Urban Professional China.  Because I speak Chinese I interact with professional sales people, managers, accountants, lawyers, and other service folks pretty regularly.  These people are VERY well educated.  Very competent.  Very bright.  Very motivated (by money).  They are increasingly skilled in jobs that were once exclusive to expats.  They drive their own (nice) cars and own their own homes (outright or with 5-8 year mortgages) and make it a point to have iPhones, Starbucks mugs on their desks, LV bags, Omega watches, etc.  They make ½ of what their counterparts in the US make, but they save more, live better and have no debt.  These are the young professionals that work for multinational companies.  They are the ones traveling abroad.  Their kids will be the next generation of overseas-Chinese students.

This is the China that you find in the CBD of Shanghai, Shenzhen and Beijing.  They are very similar to their counterparts in Hong Kong, Bangkok, and Taipei.  They work long hours for financial incentives.  They change jobs easily.  Their loyalty, as it should be, is to themselves and their immediate families.  They are not selfish as much as they are calculated.  They are wise in a system that rewards only those who plan, yes even scheme, for the future.

Increasingly this Chuppy China is becoming “China” that the world sees through the class/race-envy press of the West.  Classic example of media fear mongering: The world is flat.  What’s the point of the book?  American better get it in gear (I agree) or you’ll lose your job to Chindia (don’t agree).  Think about the logic here—there are more well educated Chinese than ever before, the playing field is not level, so of course, if you’ve not lost your job yet you soon will.  I think that a gargantuan leap of logic which completely ignores billions of other factors that keep people, jobs, companies and money in the US.

For example, the 300 million Chinese living on less than $1 a day didn’t get mentioned in the book.  Neither did the fact that while much can be outsourced to China, this group of professionals is not taking pieces of a sum-zero pie as much as they are creating a larger pie.  Of course the current US stimulus bill shows that we Americans are collectively stupid enough to kill ourselves without China’s help.  So Friedman may be right by default.

Anyway, back to the Chuppies.  These folks are smart, opportunistic, nationalistic, and not afraid of the West or foreigners.  They are certainly a very valuable asset to any business here—if not the most valuable.  But don’t count on any of them sticking their necks out for radical ideas or to save someone that is not directly tied to their social mobility.  This country may be socialists.  The culture may be collectivist.  But there is no “team” in China.  But there is an “I”.

This is the Chinese that many foreigners deal with.  It starts in Hong Kong at a show or even in the airport and continues through the 4-5 Star hotel, the chauffeured drives to factories and the elaborate dinners with factory owners/managers.  If you’re here on an expat package this is the China that you’re interacting with on a regular basis.  Import stores, international brands, large(r) homes, inflated social importance and stature and young professionals that either aspire to or are actively participating in the same lifestyle.

Factory China.

The fourth China that I’m part of is the factory workers.  Not floor workers, whom I don’t interact with much, but engineers, managers, QC people and some admin folk at various factories.  These guys (mostly guys) are older than the Chuppies by 10 years or more.  They are less educated but have TONS of bitter life experiences.  I know factory owners that built their own buildings.  I know a manager that walked from his home province as a teenager to Guangzhou to find work.  I know more than one manager that is the first person in his family to own a car or to take any classes post junior high.  These are the guys with the best (most interesting/horrific) stories of the past 30 years in China.  They have money but are not well educate and don’t live in the cities.  They are, I guess, the salt of the earth kind of guys.

When you are bargaining with a factory—these are the guys that are making the decisions on the price of your project.  When push comes to shove and you need something fixed, these are the managers that you’ve got to deal with.  Their China is a mix of unbelievable opportunities and caution due to years of hard times.  They typically buy domestic name brands, have multiple generations living together close to or in the factory where they work.  They expect their kids will become the next generation of Chuppies and drive them unmercifully to perform in school.

This is a China that, I think, impacts more of what gets sent to the West than any other version.  They literally control the production of everything in China—whether for domestic consumption or export.  This China, the autocratic managers, the late night drinking binges, the hard-nosed negotiators, the nationalistic-manager, the father of two kids in the best schools he can afford, the facilitator of gifts to government connections, this is the China that no one talks about but really should, I think.  But this China isn’t flashy like the second-generation money in the cities or the Chuppies in the glass office buildings.  They aren’t the pitifully poor in the National Geographic photos. Nor are they the uniformed line workers whose photos make all the Western news rags.

The Rural to Urban Transition China.

Finally, the China that is fluctuating between the city and the fields.  I get access to the rural half of this equation via my family connections.  It’s a world that I never imagined really existed outside of the pages of magazines until I spent time there.  This China is what you thought about when you were told “eat your veggies there are starving kids in China.”  Well, those kids are grown up, working in Shenzhen or Shanghai and going back home each holiday to dark houses with no plumbing in small villages across China.  Once you’re back into the ancestral homes you realize that there aren’t just different Chinas but completely different planets.

The rural half of this China is what keeps domestic China going.  Similar to the middle aged managers that left the countryside two decades ago for the factory cities of the East coast, the little villages and towns all across China feed the nation.  They are also the bodies in the factories that labor to manufacture everything.  Really, everything.

When these young people graduate from high school or a local college and leave their village homes and head into the cities for work they usually start at the bottom, in the jobs that we barely recognize—line workers, shop workers.  With luck and hard work they can move up into the Chuppy group or the Factory Manager group within 10 years.

I’m probably going to get a bunch of hate email saying I’m overly generalizing and/or being racist.  But this is really what my answer is to people that ask: “So, what’s China really like?”  It’s not an easy answer.  If I’ve spent the last week in factories it’s a much different answer than if I’ve been in Shenzhen in the office for a week or on a vacation to an historical hot-spot or even on a family trip back home to Jiangxi.

Everyone that works here has a similar set of answers, if they really think about it.  If you asked me this same question while I was teaching at a University in Sichuan in ’95 or at a cram school in Taiwan in ’99 my answers would be completely different—still not a single answer, but the groups, the Chinas, would be totally different than what I see today.  Ditto for my answers from my missionary or grad school periods in Thailand.  I really believe that what you think of China is significantly colored by who you interact with more than where you physically live.  If you live in a hole, and I did in Sichuan for a year, it can be livable, even good if you have some people that you love to be with.  If you work with professionals and have a couple of maids and chauffour it’s not the same China as 10th generation dirt farmers.  But it’s all still China.

Tags: China, Culture by David Dayton
2 Comments »