Silk Road International Blog

This article started a discussion on the China Law Blog LinkedIn group.  Since I participated a bit (and I thought I summed it up nicely, “if I do say so my damn self“) I thought I’d share my comments here.

Interesting article.  Convoluted point.  My ten cents:

1. He’s right that Chinese brands aren’t famous in the West yet. But while ubiquitous elsewhere in the 3rd world, they are not “famous” in other countries either. I do a lot of business in Vietnam and Thailand–Chinese brands of soap, motorcycles, noodles and other household items are everywhere–are they famous/have they built a brand or are they the lowest entry points into the market and so everyone carries them? Ditto Li Ning shoes–famous or cheap options with aging/unfamiliar reps (Shaq–failed at his own shoe line, JKid, Battie).  Maggie Rauch points out that they are not really going global at all, just trying to look like it for the Chinese Market (see #4 below).

2. Taking market share and “building a brand” are not synonymous. If a Chinese brands takes (the bottom?) 5% of Coke’s high-end tea market, I’m willing to bet, they’ll let them have it. When a Chinese brand makes a serious play at their connection with McD’s or the NBA OUTSIDE of China you know that have both branding success and market share (and deep pockets).

3a. The Chinese market is not the same as the West, true. That they don’t understand this is the knock against Western brands that fail going into China.  But like every other article on this topic, the pro-Chinese side here fails to mention that this is also the very same reason that Chinese brands don’t do well in the West.

3b. While HK and each city and class in the mainland are unique and must be understood individually, for some reason we’re supposed to believe that expensive tea and Li Ning and other Chinese brands (that no one has heard of) are getting the entire “West” right all at the same time? And the first time they try it too! LA and Lisbon are the same? Paris and Chicago? Hell, LA and Irvine are not the same.

4. China is culturally (and internetly, yea I just made that word up) isolated. Not because they aren’t connect or don’t ‘get out’ but because they are so big at home that there is often limited motivation to move into the unknown when there are still so many opportunities in the known. Ok, and they have repressive investment, currency, internet, and travel laws too.

5. Read Elite China or Luxury China for details on what the Chinese consumer really want. Wait 25 more years before anyone produces The Chinese version of Good to Great (even the examples of the past ten years like Hai’er have since stumbled) or the coffee table book: Famous Chinese Brands.

6. This NYT article from 5 years ago says the same thing as the BW article–China brands are going big soon. Look out world! Totally different brands mentioned than Shaun’s article–what does that say about the longevity/global position of Chinese Brands?

7a. BW list of 20 Top Chinese Brands–where’s Huawei and Hai’er? I guess since they are not “technically” registered Chinese companies they don’t count?  What does “Top” mean?  Certainly not famous or global.

7b. Of the 20 brands in the BW list less than 1/2 are private–only Moutai and Lenovo in the top 10 are. And if these are the best, then branding efforts are pretty pathetic. (Anecdotal evidence: I’ve lived here for 10 years and speak Chinese and haven’t even heard of some of them IN China, let alone out of China.)  I think that this is really a list of actually profitable state owned companies with a couple of semi-private companies thrown in just for (Wall) street cred.

8. The best book to read about this would be Capitalism with Chinese Characteristics–it points out specifically (written by a mainland Chinese scholar at Harvard) that NONE, not a single one, of the big Chinese success stories would even exist without Hong Kong. Most of the companies are not really Chinese and even when they are, they leave as quickly as possible to protect themselves from the Chinese govt.

Finally, (or maybe this should have been first) if people can’t name the Chinese brands off the top of their heads then how can Chinese companies be meeting any objective definition of “building a brand?!”

Tags: Business, China by David Dayton
2 Comments »

While the Google controversy is truly fascinating, unless it’s directly impacting your ability to do business it really doesn’t matter exactly why Google says they might be leaving China.  For most people it doesn’t even matter if they leave China or not.  (For the rest of us in China, the new uber-slow, ultra-filtered internet is almost worthless, and probably not getting better any time soon—time to move the Shenzhen office to Shangshui.)

One thing that most people should take from the Google mess is this: no matter how big you are, no matter how much money you throw at China, no matter how many other countries you’ve been successful in already, no matter if you hire local or foreign or both, the bottom line is that China is still a different beast. My friend from Wal-Mart and I have sat around and told the same stories about working with factories in China. Exact same problems, just different dollar amounts.  Your size doesn’t matter when dealing with China–no matter who you are.  The pool is just so big here that most foreign companies are nothing here.

China ranks first in the world in exports, first in car sales, third in GDP, first in people, first in internet users and the list goes on and on (and will continue to grow–better get used to it).  But it ranks 140 out of 183 in terms of freedom. Even if you don’t like this particular survey or the rankings (certainly a very hawkish source), the fact is that China is wildly different than what most westerners are used to.  It’s much more like the ASEAN countries—just lots bigger (than all of them put together).

And that’s the real trouble.  If you’re coming from Vietnam to China, or vise versa, you’ve probably got some experience that crosses over very well.  If you’re coming from Perth or Detroit or Liverpool, probably no so much.

The fact that HK, Singapore, Japan, Macao, Taiwan, South Korea, Malaysia and Thailand are ahead of China in the rankings is not all that surprising—they all had a 30 year head start and more international exposure.  But that Cambodia and Lao are also ahead and openly repressive and corrupt Vietnam is about the same says clearly that economic development and engagement do NOT mean more freedom—business or otherwise.

Imagethief, in his discussion on Google last week, highlights the fact that there are specifically predetermined ways companies are expected to work with China.  Though speaking specifically to public communications the analysis is applicable to other areas of work in China as well.

Google has taken the China corporate communications playbook, wrapped it in oily rags, doused it in gasoline and dropped a lit match on it. In China, foreign companies tend to be deferential to the authorities to the point of obsequiousness, in a way that you would almost certainly never encounter in the United States or Europe. Scan any foreign company’s China press releases and count the number of times you see the phrase, “commitment to China”. Demonstrating “alignment with the Chinese government’s agenda” is an accepted tenet of corporate positioning and corporate social responsibility work in China. This is testament to the degree of direct power that the Chinese authorities wield over the fortunes of foreign businesses in China. Even when foreign companies are in dispute with the Chinese government they tend to offer criticism obliquely as long as they have a business stake or operations in the country. Note, for example, the scrupulous diplomacy of Rio Tinto’s communications concerning the detention of its employees last summer, a far more serious situation than anything Google has encountered (although also with far more money at stake).

To me the key part for small business owners here is that there is a play book at all–and the people spending big dollars all know it.  This is something that small companies typically learn the hard way, over years of (painful) involvement on the ground.

Further to that end is an article from the Guardian UK.  The Chinese internet (and country in general), it says, is more like its own intranet than a hub in the global community.  Despite how “small” the world is today, China is still very much an island unto itself.  Like the (legitimate) criticisms aimed at the US for being too culturally insulated (physically isolated), China is the same, only with more people, less overall education, fewer if any emigrants and a more restrictive government.

I’ve been saying this for years—China is unique.  Business is business, I know.  But the context within which business is conducted, personal relationships and communications here are all different from anything most have ever worked with in the West before.

But “different” doesn’t mean threat, although it may be threatening.  In the larger picture, there are generally two theories bantered about by China watchers, the China threat and the engagement philosophy.  James Mann’s book discusses why both have failed and if there is a third path.

Anyone you talk to in China thinks that the rest of the world (especially many politicians the US and the popular media) sees China as a threat.  I agree that this is the most popular approach for many in the US (media)—they need a villain in their myopic, simplistic, sound-bite driven world of ratings.  “China is good” doesn’t have nearly the impact as “Red Hoard” or “Chicoms” does.

But even in the midst of this Google mess, I don’t think that China is an inherent threat.   I do believe that China, for purely short-term domestic political goals thinks that the rest of the world is a threat to China (or at least wants the Chinese populace to think that the rest of the world see China as a threat).  Because the Chinese Government is scared (of the rest of the world or of losing domestic power) it then acts like a threat—a threat because it’s actions are based on an aggressive fearful position that it’s being attacked.

China thinks that the rest of the world acts just like they do—the specifics in the response to Google and the attacks on the Whitehouse, for example, are exactly what is going on here.  China assumes that Govt communication issues/companies in the US are tied to and part of the US national interests and that the corporations actions are directed by the govt—just like they are in China.  Of course they see everyone else acting like they act.  We all do this. (And just because they are paranoid doesn’t mean they aren’t right.)

But like the strict law defense that we’ve heard from China over the years (“Our laws are more strict than those in the US!”  Yea, but you have no enforcement, so the laws are often meaningless.), just because China is honestly acting in their own best interest does not mean that they are not, at the same time and by those very same actions, threatening others.  Just because you’re not an overt threat does not mean that you are not threatening.

For precisely this reason, China is not a global partner or good neighbor.  Could they be?  Yes.  Will they?  I doubt it; only because they’ve determined that it’s not in their best interests to do so.

Side Note: And for those who are offended at this, this blog isn’t about “yea, well the US sucks too!”  I really don’t care what you think about the US.  This is about the question “will China act like the super power that it wants to be” (and claims internally that it already is).  You want to complain about the US?  Go get in line somewhere else.

And I’m convinced that foreigners are trying to use some kind of reverse psychology on China–convince them that by our mass stupidity they really are the best in the world.  These, for example, are defenses of China’s GFW: “We have a very controlling govt in Australia too.”  “I guess that the people of China really do want to decide their own direction with the internet.”  So by this same logic, if we have human rights violations in Australia, then it’s OK to have them in China too?  How about other crimes?  How about just crappy quality?  That OK too?  And which part of “the people of China” do you think are “deciding” anything about “their” internet or anything else for that matter?  Sorry.  I’m finished.

This Google mess bring to light specifically how “business” can very quickly become nationalized and politicized.  Just like Rio Tinto last year.  What is considered “State’s interests” is up to anyone’s guess.  Like so much of the content that is blocked on the Chinese internet or the people that are stopped at the border crossings—it’s random, political, emotional and event (rather than policy) driven.

If you don’t think that this affects you, Mr-I’m-here-doing-business-on-a-tourist-visa, then you just wait for the combination of the tightening economy and this year’s census.

One of the best lines that I’ve ever read about doing business is form Jame McGregor’s One Billion Customers: “Most business people come to China with way too much trust.”

I strongly suggest that you read James Mann’s book, The China Fantasy.  Excerpts from my review:

“But if you wonder why economic change in China hasn’t lead to political change or why no one seems to mind that every US president has taken a hard line on China to get elected but then reversed course in office then you should read James Mann’s The China Fantasy: Why Capitalism will not bring Democracy to China.”

“This is not a rah-rah China book and it’s not a China disaster book either—it’s a middle ground, a third path.  Mann says that it’s far more likely for China to continue to grow economically and remain repressive politically than any other option.  The question is: can businesspeople and politicians and consumers in the west live with that.”

Tags: Business, China by David Dayton
1 Comment »

While working in China is a completely new experience for most foreigners—and a completely foreign experience at that—there are some things that are, well, pretty easy to understand, I think, but that many new-to-China foreigners just don’t seem to get.  I’ve put together a list of issues that have stumped more than one foreign client in the past few years—and I made the list because all of these issues came up within the last month working with clients in the US during the current run-up to Chinese New Year.

1. Order your 2Q products in the 4Q of the previous year NOT in the 1Q, just weeks before you need it.

Everyone knows that nothing gets done in the States the last week of each year.  From about Dec 23^rd to Jan 2^nd you can just count on 50% of every office staff being out on holiday or taking their accumulated sick days or just not working (because everyone else they need to talk with is on vacation).

So why is it hard to understand that China has the same event, just at a different time each year?  Sure CNY is on the lunar calendar so it changes every year.  But it’s still in same quarter, always in January or February, so it’s not that different.  And besides, Easter is lunar; the dates for President’s Day, Mother’s Day, Memorial Day, Father’s Day, Labor Day, Columbus Day and Thanksgiving change every year too, but we don’t forget those.  If your secretary was Jewish, you wouldn’t forget that she’s taking off for Chanukah (every year).  So if your supplier is Chinese, how is CNY a surprise every year?

Remember, all of China (the whole 1.5 billion people-population) goes on vacation for at least 10 days if not more; and all at the same time.  So Chinese factories also place their 2Q orders early too.  January is easily the busiest month of the year for everyone in China—and so if you’re late placing your order, you’re out of luck.

Just assume that if you want anything before April of any given year, you’d better order it before Thanksgiving.  Mark your 2010 calendars now—I’ll wait.

2. Working with China is like working with a contractor–it’s always going to be late and over budget.

If you’ve ever worked with a contractor on any building or remodeling project you know that while the end result can be very satisfying, the process is usually hell.  Delays, over billing, living through a mess in your house (or office); it’s just not pleasant until it’s completely finished.  Working in China is much more like working with a contractor than working with a box store (which is the attitude that I feel like some people come to China with).

China is not Wal-Mart or Home Depot or Target or Costco.  You can’t just walk in and buy 5 or 500,000 pcs in the same amount of time.  If you order 5,000 pcs you’re not going to be able to get 500,000 pcs made in the same amount of time.  Even if the contract says the lead-time is 45 days, that does NOT mean that you’ll have product in your warehouse with in 7 weeks.  If you get a bid on 350,000 pcs you’re not going to buy 70,000 pcs for the same price.  Just because they’ve “done it before” doesn’t mean that your production run will not have issues.  I caution everyone to assume that production will certainly have issues—the question is just how many issues you’re going to have.  You’ll probably have at least 2-3 pull your hair out scream at the wall issues.  Know it going in, and when it happens, you’re ready.  And if it doesn’t, well….it never doesn’t.

China is a contractor not a retailer.  The price and supply of materials is not set even though you’ve got a contract with a fixed price.  The time to create a new product (or even do re-orders) is dependant on many things that are not confirmed when you sign the contract (holidays, raw materials, mistakes, power outages, people problems, mistakes, transportation issues and weather, mistakes).  I honestly don’t think that we’ve ever done an order for any product in the last ten years where at least one things hasn’t changed that affected the final date or price. (And yes, that’s what I get paid to do: eat the new costs and fix the problems for people that are not here themselves.)

This is not an excuse for inefficient labor or poor quality production or mistakes or flat out lies.  But it is a realistic view of working here.  You have to know that just because “you can do it back home” doesn’t mean that you can have it done here—and let’s be honest, you can’t do it back home (for the same price) or you’d be doing it there now and you wouldn’t be here in China in the first place, right?

With the cheaper prices comes more need for management and QC.  Remember when you go factory direct you are cutting out a lot of fat in the pricing but you’re also cutting out a lot of legitimate services too.

3. Just because the rules are the same doesn’t mean that business is the same.  AKA: Driving in the US vs China, part 748.

When driving in the US you assume that everyone is going to follow the rules and you’re bugged at the one guy that doesn’t.  China is the opposite—no one follows the rules and they are all just fine with that.  In fact they usually only get angry at the foreigner that does follow the rules (and is driving different from everyone else).

My experience, both driving and doing business in China, is that for the most part, foreigners are usually pissed off at just about everyone here; simply because no one follows the (assumed) rules.  The real problem though, is with the foreigners whose expectations are based on experiences from driving and doing business in the West.  Those experiences then color our expectations of how things are supposed to work over here.  Processes here are completely different, even if the rules are the technically the same, so we spend an inordinate amount of time being frustrated.

Again, this is not an excuse for illegal dealings or getting cut off by some jerk that doesn’t know where he’s going.  But foreigners need to understand that while the West is mostly black and white with very little gray, China is mostly gray with very little black and white.  And the black and white that there is, at best sporadically enforced, if at all.

Part of the reason that the prices are so good here is precisely because enforcement of the laws is so lax. (There.  I said it.  The secret is out.)  Another part of the reason that you can get done whatever you want here is because if there is money in it someone will figure out a way to get it done.  You can do that (entrepreneurialism) when you don’t have the US nanny state breathing down your neck.

4. Just because it’s your project doesn’t mean that you’re the best one to negotiate the prices or solve the problems (obviously, or you wouldn’t be having problems in the first place).

Sometime you need to play a different role (and that other role is NOT backseat driver either).  When you contract with a factory and something goes so wrong that you need to bring in someone else to fix the problem, you are no longer in charge of the negotiations. Maybe you think that you are. Maybe you’re still paying for all of it.  But the fact that you couldn’t fix it on your own tells everyone involve that you’re no longer the Chief.

Problem is, you’re probably part of the original problem and the factory knows that if they can talk with you then they don’t to deal with the negotiator/problem solver that your hired (who is going to be infinitely more strict and consistent since they probably only get paid in full if the problems are all solved and the product is delivered).

Take for example a project we’re working on with a factory in Zhongshan now.  The client brought us in mid project because he needed help with, in his words, “getting the factory to do what they said.”  But the original client is still answering all the emails from the factory; there really is no place for us as the project manager/problem resolver in the chain of command.

After a few days of negotiations and QC with the factory, the factory emailed the client and complained that we were too strict and they couldn’t do what we were asking (which is only what the client originally contracted for).  So client, scared that he won’t get his order, caves in and changes the standards.  Now he’s paying the factory more for less and he’s paying us to do nothing too—and we’ve told him so.

Sometimes you need to let someone else fix things for you.  It’s not a knock on you personally, it’s just China.  You may be great at managing projects and negotiating contracts back home.  But you’re not in Kansas any more and you need to understand that while you may know product X better than anyone else in China, you probably don’t know China better than someone that’s been working here for 20 years.

5. China is huge.

If you’re a geography major or you’re here already, this is a no brainer.  But if you’ve never been here before, I’m warning you.  It’s bigger than you think.  And more crowded too.

“I’m going to China” is like saying “I’m going to the US.”  Ok…where?  New York? Chicago?  Detroit?  Miami?  Houston?  Denver?  LA?  San Francisco?  China has 10 cities the size of LA or New York or larger.  Chances are, where you’re going or where your factory is located is not convenient to anything else you’ll be doing in China.  Similarly the chance of getting a positive response to the question “Have you ever heard of factory x?” is literally like finding a needle in a haystack.  There are millions of factories in China and the likelihood of finding the exact one is slim to none.  Pick the biggest tradeshow that you’ve ever been to and I’ll bet I can find two in Guandong Province alone that are bigger (both in terms of attendees and exhibitors).

Side Note: May favorite question.  “Oh you’re from the US, do you know Joe in New York?”  And the foreign counterpart: “Oh you work in China, do you know this American guy in X city?” I don’t know how many times I’ve been asked these questions—obviously the geography classes on both sides of the Pacific are lacking somewhat.

For example, we’re managing a shipment for a client now that includes product from 9 different factories in 5 different provinces.  This is more than usual, but not unique.  We figured out that we average 6 factories and 2 provinces per order in 2009.   The client in this case had already “found” 3 suppliers at a show and online.  We never could reach 2 of the 3 factories the client “found” but we found the same (or better and/or cheaper) product at completely different factories.

The point?  You’re not going to fly into the Canton fair and come away with everything that you need for your company in one city let alone one factory—so plan accordingly.  The corollary is that if you’re only looking in one area of the country, your missing out on opportunities elsewhere.

6. Everything is relative.

Just as I was about to post this, I got a reality check.  I was eating lunch and started talking with a lady who was living and doing work in India.  She was in Guangzhou on vacation and couldn’t believe how nice it was.  “No noise, so clean, everyone follows the (traffic) rules, it’s so easy to get around.  You can actually walk on the streets and use the public transportation.”  I was blown away.

Coming from the States to China, I often find the exact same things she complemented as nightmarish.  But coming from India, for her China is an absolute dream vacation!

Pollyanna?  Maybe a bit, but as I look out at the large square in the middle of downtown, blue skies and nicely dressed shoppers, I have to agree.  Somewhat.  The infrastructure here is really pretty good (even compared to the US), it’s just that there is more than a billion more people using it.  The pollution is bad, but it’s bad in LA, Mexico city, Bangkok and India too.

China is what you make of it.  It’s a great opportunity for me.  Frustrating at times, yes.  But on balance a good experience.  Will I spend the rest of my life here?  Not a chance.  But other than maybe, Phuket, I can’t think of anywhere else that I’d like to spend the next 50 years either.

Good Luck!

Tags: Business, China, Culture by David Dayton
2 Comments »

We’ve been working on samples for a large order of clothes for over a year now.  The clothes are cool, new, fun.  But it’s been a very difficult process getting to the end of the road—the start of actual production.

We’ve got the PO signed, the deposit paid and what happens?  Factory tells us: “We don’t think that we can do this order.  We’re really busy now.”  This, of course, was the response to the payment of the deposit.  No indications prior to the placing of the order that there would be anything problems.  We’ve talked EVERY day in the two weeks preceding the actual transfer of funds and every conversation was great.  “Of course we can meet these dates.” “Of course we’ll work with you QC.”  “Of course we’ll meet all the QC standards (you’ll never be as strict as our Japanese clients.)”

So we’ve spent the last week just trying to get them to keep the commitments that they agreed too (signed and chopped) in the contract.  Every single line in the contract was review with them before they signed it.  Every point was agreed to.  Dates were confirmed.  Qtty’s and time frames agreed to.

And then they got the money and EVERY item that was important (material, quality, times, prices) were all no longer committed to.

We have a negotiator/problem solver that we hired just for situations like this.  She worked on the factory for three days before we got back to the point where we were when we made the deposit in the first place.  (Side note–this person does the least amount of actual daily punch-the-clock work in the office, but saves us more money than any other single employee other than maybe QC.)

Here is what she reported to me after the order issues had been resolved.

1. They did it on purpose.  She said that there are times when there are legitimate concerns and changes and times when it is completely a strategy to get more money.  The major difference between real and fake issues include: when you can track changes in material prices, you can see factory capacity already maxed out, or there are differences in the samples and production standards.

2. Fighting about the contract is not nearly as effective as begging.  It’s all about face.  They know they are wrong but allowing them power can often be as effective as offering them money.  The end result of our negotiations is them being in power anyway—they have the deposit, the control the speed for the production line, they monitor the QC, purchase the materials—there is so much that could be sabotaged and be made to look it was just bad luck.  So, giving them the face now and admitting that we’re at their mercy is both pleasing to them and the truth.  We don’t pay any more (yet) and can still go after them legally if we had too.  But at this point they are pretty pleased with themselves and we’re just glad to be back to square one.

3. Thanking them profusely (gifts) is the correct response.  A dinner will cost $100 for the manager that told us “we moved other projects back for you.”  A shirt or wallet (brand name but from Ross or another US discount store) gives tons of face and costs $20.  It fulfills the social obligation we had to the manager for “helping” and it saves us a bundle of money we would have wasted in transferring the order or suing them or fighting and raising the price.  I’ve often said that sometimes the best option is paying more to get what you had already agreed to.  When it’s a small gift or dinner it’s almost not even painful.  Ego is a bit hard to swallow, but that’s about it.

Sometimes you are totally in the right. Sometimes people lie to you.  Sometimes there is nothing you can do about it.  But the end goal, which is often very very hard to remember, is to get the project done (correctly, on time and on budget).  You may not get what you wanted at the originally contracted-for price, but on balance you’re still getting what you want (and it’s still at a savings too!).

Tags: China, Culture by David Dayton
8 Comments »