Silk Road International Blog

Sometimes doing business in China is like getting in a taxi.  The guy pulls up to the curb and you get it.  It’s a working vehicle, probably not too old, middle aged guy driving, license on the dashboard, working meter, lights, gauges, etc.  Everything you’d expect.  You tell the guy (or show him) the address and he takes off.  Most of the time you get where your going and were only scared half to death once or twice—no actual physical or financial harm to your person.   But sometimes you realize that he’s not going the right way.  When you know more than your driver, you can expect there to be problems.  Your questioning of his methods is usually meet with one of a couple standard answers. “Oh, you meant that hotel.”  Or. “I just know the area, I figured you’d know the building.”  Or, “I don’t know, I thought you were going to tell me.” Or, “This is a short cut.” Or “That road’s closed.” Or, in the worst cases, “If you don’t think I’m going the right way you can get out and walk.”  Either way, you know these answers mean a round-about trip to raise the price, fake money back as change or the guy running over your foot as he drives away grumbling at your poor attitude.

It’s amazing how many of the same things happen when you’re doing business.

Example #1. “How should I know where the Vietnam embassy is!? It’s such a small country, nobody cares about it.” (Quote from a HK taxi driver last month.)  Yea, but it’s the most important place in HK for me at that moment, so please, either call someone else or use the damn GPS and find it.

I’m still surprised at how difficult it can be to get factories to make it easy for us to buy from them.  More often than not we’re told something like, the catalogue isn’t up to date, the products offered are not available for sample only purchase, or they only want to do business with foreigners and don’t want to talk to another Chinese (my staff).

I have to say, I think that the quality it of service in HK is really on the slide.  I had to speak Cantonese to this guy to get him to help me find where I’m going (and I don’t speak Cantonese).  Before you say I’m just complaining, remember that HK is still officially a bi-lingual country (Cantonese and English) and everyone in school for the last 100 years has had education in both languages as well as Mandarin for anyone under 20.  So how do I get stuck with the one guy that doesn’t know where I’m going AND can’t speak anything but Cantonese?  Just lucky, I guess.

I think that you can get much more done in HK in Mandarin than in English nowadays.  This is both good and bad.  First it’s fine for me since I can speak Mandarin (yes, I’m the most important reason to me—you’re first on your own blog too, admit it).  Second, it should be good for Hong Kongers (Hong Kongese) since most of their economy is now coming from Mandarin speakers—especially service industry folk like taxi drivers.  But according to my wife (a Mainlander with HK ID) and other mainlanders, people in HK are increasingly rude and condescending to the “new money” from the mainland.  She has a much worse experience in HK than I do even though she speaks Cantonese.  Of course, it’s all relative.  Despite getting lost on the way to the Vietnam embassy (which is quite small and hard to find, I’ll admit) I typically have a much harder time in Mainland than I do in HK—HK is usually where I go when I need a break from China.

2. One more from a HK taxi driver today, “I’m driving the car.  You can’t expect me to know the address too.”  My wife’s response: “How the hell do you know where you’re driving to if you don’t recognize the building name or the street address?!”

This is why I wrote the post today—seeing my wife get angry with the taxi driver made me realize that I have the same conversation over and over with factories, like I mentioned above.  You start a project and then when the money is paid all of a sudden, you can’t tell where they’re going with it—or worse yet, they don’t know where their going and you’ve got to find the way for them.  Of course, if this wasn’t the case, I wouldn’t have a job over here.  So part of me just sighs and goes back to work.

Probably the worst example of this is this line from a factory we worked with last year on some clothing.  “I don’t know what the Chinese government’s standards are, I’m just a manufacturer.  You’ll have to ask them for that.”  Now I’m not talking about standards for import to other countries–just exporting from China.  There are specific standards for clothing that must be met for export from China and specific licenses that must be had to actually export finished goods.  Good grief.

3. “Let me tell you, dishonest is part of their business.”  When you have a couple of people in your office that you can really trust, you often get more information that you really want confirmed.  Thinking that someone is being dishonest still gives you the out, “I don’t think they’re doing that on purpose.”  But then when it’s confirmed, you’re left with the fact that you’re working with a crook and you’d better play your cards accordingly.  Scary.

Today we got a piece of email about some art at a factory.  Now that the order is placed, the deposit is paid and the project is on the clock we are, for the first time being told that artwork needs additional screens/films—at a few hundred dollars per SKU (multiple SKU’s).  Could this be true—could they really need more screens?  Sure.  But did they have art before?  Yes.  Did they bid out the project/art before? Yes.  Did they confirm the files we sent them already?  Yes.  So to me the timing is more than suspect—it’s flat out dishonest.

I know that every process has procedures that need to be followed.  I know that every factory has rules that need to be obeyed.  I know that sometimes people do make honest mistakes.  I don’t have any issues with any of that that.  What I do have issues with is when the factory doesn’t tell us the rules or procedures upfront and it costs me money later.  Or if there are specific rules that are broken by the factory themselves (to get our business) and then we’re asked to pay for it later (like what is happening now).  Or if they don’t own up to mistakes and claim that “this just is what it is—more cost for you!”

We had another client hire us just this week for a similar problem.  The client found and started working with a factory in the summer.  In September, the factory confirmed (in writing) that production could be finished and shipped by Halloween to meet the expected Holiday sales.  We’re now involved because molds won’t even be finished until Dec 7th!  Production won’t even be finished this year.  Getting a deposit is often the ONLY goal of many suppliers–History has taught factories that once a buyer is hooked there is almost nothing that they won’t put up with to get their product without losing the initial monies.

We placed an order with a factory in Vietnam last month only to find out that instead of QC visit this week they are moving to a new location.  They offered our money back, but also told us straight out that if they told us last month they were moving this month, they figured they wouldn’t get the order or the future business–so they didn’t tell us.  We took our money back and placed the order with another factory.  Since they were our preferred vendor option, if they’d told us there would be a delay in the firs order, we actually would have been fine with it.  Now they get nothing.

Finally, I find the news, like taxi rides, to be oddly related to doing business in China—OK, you’re right, I’m either working too hard at analogies or just working too hard.  But if you’re reading this you’re not working at all.  So cut me some slack.

Reading the news to understand business in China.

Obama’s trip to China wass “highly scripted.”  Wow!  You don’t say?!  No one could have possible seen this coming.  According to the WSJ there are a couple of “reasons” for this.  Face and the fact that the US has more debt than clout are, surprise surprise, still important in China.  It’s important for you too.  If you give your factory face and if you pay in cash you can, more likely than not get whatever you want.

Tags: Business, China, Culture by David Dayton
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I spent one day this last week translating some new product negotiations for a client that is here visiting a factory that I’ve previously visited as 3PQ.  The boss and sales manager picked us up and we spent 2-3 hours in the factory talking about project specifics before heading out for the obligatory long lunch.  Both the client and I commented that we were pleased and surprised to actually get the business done and out of the way prior to the lunch.

As we headed out the door to the restaurant the boss said to me, “you’ve been here two or three times, before we just did business together, but now that we’re going to lunch, now we’re friends!”  My response was that I wasn’t really a client before as I was just doing QC for someone else.   The boss didn’t buy this for a minute and he told me that I’ve been here enough that I should have given him face earlier than today.  This, and a couple of other comments to me, confirmed again to me some of the conceptual differences in how business is done over here.

Quick side note: When we go out on QC visits we have a very strict rule that no other party outside of SRI can pay for food, transportation, lodging, time, salary or anything else; nor can our QC take ANYTHING, even a Coke, from anyone while on the visit.  When I go out, which I do at times when were busy or if I’m working for special clients, I follow the same rules—and factories never ever understand.  “But you’re the boss?!  You don’t have to follow the rules.” is usually the response I get.  Some are quite insistent that I “give them face” and let them take me out to eat or at least sit in their office and have a few drinks with them.  Most people eventually understand, but I know I’ve offended more than a couple of people by steadfastly refusing to go out with them.  So be it.  This exercise in and of itself gives insight into the culture of personal relationships and moral relativity that is China today.

First, going to lunch was the Chinese equivalent of a background check. Prior to just a few years ago, it was basically impossible for a Chinese company to run a background check on a foreign buyer.  There are a number of reasons for this, none of which are “they were not available.” Most buyers in China are just that—professional buyers not companies/people going direct.  Getting a background check on a trading company that has an office in HK wouldn’t tell the factory much—and the trading company may have personal connections with the factory in the first place (hence the orders!).  The increased use of and popularity of online sourcing sites and trade shows in China and the surrounding regions are quickly changing that.  Secondly, even if the buyer was going direct, the factory wouldn’t necessarily be wrong to take a cash order from a foreign client with bad credit.  Remember, prior to 2005, the US dollar was really all that anyone over here wanted—and 30% down 70% to ship was safe for the factory.  If the buyer agreed to that and was paying in USD there really was no reason to not accept the order.  Third, many if not most factories didn’t start off with the necessary export licenses 10 to 20 years ago when they first opened their doors (I’m speaking of factories in Guangdong province and SEZ’s as they were really the only one doing export prior to 2000).  So their only customers were locals and trading companies.  And for domestic orders there was no financial information available (except for tax records) anyway.

Second, contracts were not nearly as important as the ability to talk directly to the clients. No matter how you paid, the supplier took security in knowing where you were, not what paperwork you had.  Problems are still today resolved by personal negotiations, not via contract arbitration.  There is no Chinese precedent for calling lawyers into the mix for contract squabbles.  Lawyers, until as recently as 5-10 years ago, were VERY limited in what they could actually do and the law surrounding commercial disputes was equally limited.   Factories still want to know where buyers are physically located within China—offices, homes, and where people came from, etc.  The security comes from “I know where you live” more than I have your name on a piece of paper.  Besides, as I said before, Chinese is not a detail language and there will be, of necessity, future discussions about the exact meaning of much of the contract’s details.

Notice that both of these statements are in past tense. Chinese companies today both know how to manipulate contracts and do background checks just like anyone else in the West.  Not every supplier is this up-to-date, and a PO for stock items is sometimes enough.  But I suggest that for anything customized or any order over a few thousand dollars you have to have a contract and you probably should have lawyers with China experience write it for you.  And though many suppliers are not as savvy in the English legalese as your lawyers will be, the modern Chinese law both requires Chinese contracts (unless stated otherwise in Chinese) and is much much more detailed and improved in consistency of interpretation than what it was even 5 years ago.  Do both the culturally expected thing and do the safe legal thing–do more because China is risky, not less.

While the business environment today is much different than that of even 5 or 10 years ago the social habits of doing business have not changed much in the last 30 years.  While you may be able to visit your factory or company in a 50 story building in the CBD of a major city, don’t be fooled by the physical trappings of western business.  This is still China.  You don’ have to pay any one off or go get totally drunk to cement the relationship.  But you should both go out to lunch and sign a contract.  You should make an attempt to both become friends and do business together.  Really, not a bad combination if you play the game right.

Remember that in this game, the playing field is not level.  You are not both coming to the table as even partners in some grand expression of mutual opportunity and equality.  For example, the factory has the ability to control almost 100% of what you will see, test, sample and receive.  You need to spend as much time as possible checking (and double and triple checking) everything you can to confirm that you’re indeed getting what you’ve ordered.  This is not to say that Chinese are dishonest, and going there is the surest way to make sure your supplier loses face and you’ll not get what you want.  But I am saying that most Chinese suppliers will very conscientiously do absolutely everything that they possibly can to save money on each and every order.  If that means that they replace a specific component with a “similar” piece that you either didn’t specify or didn’t test (but didn’t specifically decline), then so be it.  It is incumbent upon you to make sure that you’re getting what you want.

This is true for everyone, the most famous example is Bill Clinton’s joke of a visit last decade in which he was shown everything that he expected to see—they gave him the face he expected to receive.  And buyers get the same treatment.  Factories know exactly what you expect and what’s been disappointing to previous clients and what other clients (and auditors) have previously approved.   They want you to be happy.  Happy visitors means more orders (problems can be solved later, over lunch, when we’re friends).

Regardless of where or with whom you work with in China, “face,” however you define it is still very important.  Even if it’s just meeting together to break bread (fry rice?), you need to sit down with your Chinese counterparts and give them some face time.  Don’t beat them up over mistakes (and even flat out deceptions) in public.  Publicly support their efforts to improve/grow.  Basically play nice and realize that you probably don’t know all the rules of the game, even if you’re currently “winning.”  Face is still a big deal here and if you recognize that, it’ll help you more than you know.

Tags: Business, China, Culture by David Dayton
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Sometimes the details that really kill you are not in the printed text but in the white spaces–what’s not said.  Here are four examples of how careful reading gives a completely different story than what was originally reported.

1. Retail sales are NOT good in China. Unless, of course, you count food, services, gas and auto loans sales—which China does count and much of the rest of the world does NOT.

***Quick Monday Morning update.  The iPhone isn’t selling well (subscription required). Really?  No kidding?  Well let’s think about this for about 2 seconds.  1. It’s relatively old (I bought mine in China more than a year ago). Chinese are just as up-to-date as the West in terms of brands/fashion, maybe more so so why buy now?  2. It’s expensive and retail sales are not good in China (no money for new toys here either).  3. Bonuses are paid in Feb–people will (maybe) have extra cash in 4+ months, not in October.

If you want to know if this will be successful in China, wait for the next post CNY software or hardware update and then look at the numbers again.

2. The Chinese market is HUGE. Unless, of course, none of the people that you’re marketing to spend any money.

“Statistics show that there are more than 300 million basketball fans in China, surpassing the entire U.S. population…”

“Despite its promise, the income earned from the China market is estimated to be less than $50 million, far less than the $3.5 billion earned domestically in the United States.”

Haven’t seen many of those “China will lead the world out of recession” articles in the last 6 months.  Hmmm….

3. High context vs low context. I was reminded of this last week in a heated negotiation over some details that were included in a Chinese contract (translate originally from English).  The sticking point wasn’t what was said but about who was responsible for understanding the meaning of specific professional terms in the contract.

Chinese is a high context language–meaning you need to understand what’s going on culturally and “behind the curtain” to get the full picture.  If that wasn’t hard enough in a language as, well, as foreign as Chinese is to most Western European language-speakers the burden of learning and (correctly) applying all this context is up to the LISTENER not the speaker.  In English, a low context language (specific words that don’t need as much context), it is the responsibility of the SPEAKER to make sure that his message is clear and appropriate to the audience.  Not so in China.

This is specifically why contracts in English are the final word (literally) and in China they are just a starting point for further negotiations.  There is no way that a Chinese document can detail all the spec’s of any given items within a significantly larger context being understood in different ways by both parties.  Add to this the fact that Chinese does not add new characters to it’s language nearly as fast (hundreds a year, mostly unofficially) as English does (officially hundreds of thousands each year) and you understand why detailed contracts are as foreign to Chinese business as Chinese characters are to most Americans.

In our case the factory claimed they didn’t understand our use of the wording–we said they shouldn’t have signed a contract they didn’t understand.  They didn’t disagree but they didn’t admit any fault either.  Fortunately for us, there were two sections in dispute and the other one was significantly more expensive for the factory–so we were able to make a trade and get the problems fixed for basically what we had originally agreed to.  Like I’ve said numerous times before, sometimes the best solution is being happy to pay more for what you originally contracted for.

4. Know where you’re going before you start the trip. This is an older (Sept) piece that I never posted, but the question came up a couple times in the Global Sources show last week so I’ve resurrected it (don’t kill me, it’s helpful if not exactly topical).

I’ve written before about concept of China’s interstate commerce laws making the country more like a loose confederate of countries rather than a united country.  Here’s is a new take from the WSJ.

This is important for foreigners coming to understand before they get here for two reasons.  First, if you’re into general manufacturing or sourcing or in need of multiple products than your location will be different than if you’re doing finance or logistics or investment.  If you’re setting up an office, you need to know where you want to be in relation to your suppliers or distributors.  If you’re planning on marketing within China you must know where your market and DC’s are before you’ll know where you want to be.

Second, if you are doing research into living conditions of Chinese cities I’m convinced that maybe the single worst thing you can do is read about those cities online.  Foreigner posts and government sponsored info will typically give you only the highlights and lowlights–not what you’ll have to deal with on a daily basis.  You really need to see these places for yourself.  I suggest that you stay for a week and “try it on, if you can.  Oh yea, and your spouse better be included in that discussion or you’ll be looking at a divorce lawyer faster than you can say “Chongqing, what a dump!” (This was the lead line for the Lonely Planet’s chapter on Chongqing when I first moved there in 1995.)

I got two or three emails a month from people asking me where they should locate and my response is always the same: “Where are your main suppliers/partners/DC’s?  That’s where you should locate.”  One guy from London was doing significant business with a supplier in Chongqing and wanting to know what I thought about him relocating to Beijing, Shanghai or Chengdu as he didn’t think that Chonqing was a good place for his family.

Now having lived in Chongqing before I agree that Chongqing may indeed not be good for you or for your family.  But it’s not like Beijing or Shanghai or Chengdu are any cleaner or safer.  And being in a city that is not convenient for your business interests means that you’re going to be on the road a lot—which isn’t good for the family either.  My personal experience is that being gone on business all the time is worse for the family than a couple years of pollution and inconvenience.

My basic recommendation, no matter if you’re coming here for a month or a year or a decade, is to do some research before you get here but actually visit the potential cities to determine where the best place for you should be.  When I moved to China the second time I went to Guangzhou, Shuzhou, Shanghai, Ningbo, Hong Kong, Bangkok and Shenzhen to visit suppliers and to check out possible relocation options.  We determined that, based on the location of a majority of our factories, transportation options, living conditions and costs, that Shenzhen was the best bet for us (for our company) and then made things work for the family.  7 years later this is still true–we do 70% of our business in Guangdong province, about 20% in other provinces and 10% in Southeast Asia.

Tags: Business, China, Culture by David Dayton
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