Silk Road International Blog

It goes without saying that there is more than one version of China.  The view of the English teacher, the foreign expat working for a large MNC, the foreign entrepreneur.  There’s rural China, East Coast China, rich and poor China, white collar vs blue collar, etc.  I’m adding two more to the list—English speaking expat China vs Chinese speaking expat China. (For a great recent discussion on value of speaking Chinese go to the China Law Blog Linked In discussion group on this very topic.)

I recently had the opportunity to talk with about 20 business people from around the Western world about doing business in China.  They ranged from having 2 years to decades of experience in China.  All were successful (professionally as well as financially) and well educated.  About half spoke Chinese.  Despite the similarities, there was a HUGE (ginormous, I tell you) difference in the understanding of Chinese business culture between those that were fluent in and those that could not speak Mandarin Chinese.

Most of these people are associates of mine, so I mean no disrespect to any of them.  Like I’ve said, they are all in successful positions and respected at what they do.  But to say that those who do not speak Chinese live in a VERY sanitized parallel Chinese universe would be not be doing the extreme differences in perception and understanding of Chinese business practices/culture justice.

For example, one guy who’d been here for a couple years already was shocked (completely shocked) to recently find out that his factory was offering nights out, complete with “full service” hostesses to foreign and domestic clients that came to the plant for businesses meetings.

Another guy confidently said in response,“I’ve been here for 3 years and working with China for 10 and I can promise you that because of how we do business never once have I or any of my staff ever even been offered these types of services.  Not once.”   I’m impressed with his conviction and I hope that he’s right, but I’ll bet you any amount of money you want that he’s dead wrong.

Myself and at least three other people in the group (including two ethnic Chinese) looked at each other when he spoke and just shrugged.  What can you say to someone that is so convinced that his version of China is the only and correct version?  In my opinion, to have worked here for more than 24 hours and not know that “evenings” are part of the business culture here is to admit that you’re not seeing/hearing/understanding (by ignorance or by choice) what is going on.  I’m not saying you have to participate—you absolutely do not! But to not even know about it or have the only company in China where it’s never come up?  I find it very hard to believe that that’s even possible.

Now I know the people involved in this discussion are basically honest and strive to be fair and consistent, but to make claims about what happens in a language and within a culture they know little or nothing about is not just ignorant it’s arrogant.  Basically, they are saying, “If you’ll just run your business like I run mine, you’ll never have any corruption/moral problems.”

Not understanding what’s going on amongst your staff and not having corruption issues are NOT the same thing.  If you don’t speak Chinese, there is a huge amount of information that you don’t know you don’t know.  And that can be dangerous.

A couple of years back, a Chinese-speaking foreign-born Head Security Officer in China shared with me two things that I will never forget.  First, he said that almost EVERY level of their business in China was corrupt in more ways than most foreigners can ever even imagine.  Second, he said that it would blow your mind the people that are involved in this corruption.  It’s not the swarthy-looking, shady types hanging out in darkened stoops that are the problem.  It’s not the random companies acting as middlemen that are the real issue.  He said that even the accountants don’t catch most of the problems.  It’s only the language-speaking investigators that are identifying the problems.

His conclusions have been confirmed to me by other security officers and investigative professionals across Asia over and over in years of personal research (for grad school, a book and in personal conversations and business dealings).  Divorce stats for expat postings and just about every book on business culture in Asia would also back this up.

Another example.  One businessman in this conversation mentioned that his company was completely open about their moral standards from the beginning of all negotiations and in every conversation with all suppliers—exactly what should be done.  But they still have a large department dedicated to investigation of corruption.  Having standards, talking about standards and enforcing standards still is not a free pass to projects-without-problems/corruption.  It’s the right direction, but it’s only the start.

The point is this—you’ve got to understand more than just your business and your particular industry.  You need some Chinese language and Chinese cultural understanding to really make money the “right” way in China.   Doing business in China is just as safe and moral or just as risky and amoral as YOU personally make it.  You can do everything possible to keep things above the table or you can take advantage of every back door offer and under the table offered to you.  Most people, I think, try to avoid the obviously illegal but may not have as many issues with the not-sure-if-it’s-legal-or-not type of issues.

Even if you do speak Chinese, there are things that you’ll miss, just because you don’t know what you should be looking for.  I was finishing up at a factory last week in Guangzhou and was about to leave with one of my QC guys.  He asked me if we should wait for a ride from the factory or call a taxi (would have taken about 40 minutes to arrive).  I just shrugged and said, “No, I always just walk out to the main road.”  My QC was shocked.  He told me that he’d never walk though a neighborhood like that (he’s a Guangzhou native).  I just laughed him off, but he later told me that I really need to know that I shouldn’t be walking alone, at night, through that area.  I had no idea.  He was quite adamant that I didn’t know how dangerous it really was.

Because I hadn’t had any problems and I’d never seen any and I’d never been told of any issues I assumed that there weren’t any.  I’ll bet that I have this same conclusion pointed out to me at least once a month in various topics/situations—I don’t know that I didn’t know.  And if I can speak Chinese and am at least aware of the idea and consciously trying to read up/study the issue how much more difficult would it be for those who are “just off the boat” or a bit sheltered in their own expat experience?

On a related note, more than one person every season at trade shows asks us some version of this very question: “I didn’t know that it was illegal in China to do X, now that I’m involved in the deal already, what should I do?”

First, if you’ve not yet paid any money, get out now.  There is no reason to be involved in this kind of deal.  This is not me being on a moral high horse, this is just basic gambler’s logic—if you get caught the cost of the deal will be much higher (time in jail, kicked out of China, fines, legal issues in your home country, etc.) than anything you’ve saved by taking shortcuts.

Second, if you’ve already paid money and are involved in something that you are now questioning the legality of, you need to pay for competent legal advice—that means talking with someone that is both impartial and fluent in Chinese law particulars.  (Here are a couple of trusted options, Harris and Moure and Southern Perspective.

Third, if you’ve already sold your soul, so to speak (and this may be a deal with someone that misrepresented themselves to you and is not your fault), you may not be in a position to completely extricate yourself.  At that point you may have to find the least expensive (not just in monetary terms) way to either wind down the project or complete the deal ASAP.

I know that many people that come to China are in the same boat as a lot of these successful business people that I was talking with, myself included.   We’re doing the best we can, we are aware of issues and do all that we can to limit our own personal liability and the shenanigans in our own specific spheres of influence.   Often times it’s a question of “we’re making enough” and so we fine with not knowing what we don’t know—we’re just too busy to try to find problems.  And really, why open a can of worms by looking for corruptions (which you will certainly find)?!  Unfortunately, the laws for US citizens abroad does NOT consider ignorance of the laws of the US or the country that one is doing business in, a lack of ability to understand the language culture or ignorance of the actions of subordinates adequate defense for illegal activity.

Part of the price of doing business in China is learning about, or at least admitting that what you don’t know you don’t know is probably a larger percentage of the information than what you know you know and even what you know you don’t know combined.

Tags: Business, China, Culture by David Dayton
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Once upon a time in a magical land of history, culture, riches, eunuchs, opportunity, etc., etc.

Story #1. As I was returning from a factory for a US client on Saturday I met another foreign guy that was also returning from a factory visit in Guangzhou.  We started talking on the train back to Shenzhen and he told me that he’d been ripped off by some suppliers last year and so decided to take my advice (he attended the Global Sources China Sourcing presentation last year) and visit the factories himself this time.

While he was here on the ground and in a few factories he learned a number of important things.  First, he found out that his “factory” was really a guy in HK that was charging him about twice as much as he could get it from a real factory source.  Second, he found out that another one of his “exclusive” component manufactures was not only not “exclusive, but not a manufacturer either.  Third, he was able to test and reject an order that otherwise would have cost him tens of thousands of dollars in bad product and shipping (and return) fees.

Moral of the Story? You can pay for QC and information now or you can pay for bad product later—your choice.

Story #2. We have a product that was originally supposed to ship the UK on March 15.  The lack of returning workers from CNY holiday has extended that date to the 10^th of April.  When that date was missed but other product was shipped from the factory for other clients we realized that we were not getting the service that we’d been repeated told we could expect.

We had, in the spirit of cooperation and understanding, given them more time to finish our order since they honestly didn’t have workers to do the job on time.  After the new delivery agreement, like always, we checked up, QC’d, called about worries they would not make the new date and finally when it was clear that they would not finish on time had an argument in the office as to why other product was getting shipped out but ours was not.

After about 5 hours of hemming and hawing, the factory finally told us that they didn’t finish our product because the penalties in the other contracts forced them to ship on time or pay for air-freight.  We pulled out our contract and pointed to the same line in our agreement and they said: “Yes, but you agreed that we could miss that date so we didn’t think this was urgent.”

We hammered out a new agreement, signed it, chopped it and left with a new date and clearer understanding of both “urgent” and “contracts.”  As we left my manager said to me: “You were too nice to them.  They did that on purpose.”

Moral of the Story? Don’t ever break any contracted details yourself or your factory will be more than happy to do it too.

Story #3. I enforced some QC standards and helped teach some QC processes to a factory on Monday for an Australian client.  The factory is very responsive, had decent product and is more than friendly.  But they don’t have great QC and so have a high percentage of rejects on almost every order.    They are always willing to re-do product, but the extra time to do this and the additional days of QC gets expensive for them, is time consuming for us and delays delivery for the client.

The factory’s solution to this problem was to have us come out earlier in the production cycle to inspect.  A great idea if they hadn’t assumed that one visit at 25% was going to be the only visit.  How surprised were they when we showed up again at 85% to do QC again!  As usual, we rejected a large percentage on both of the first two visits and had to come back the third time–the factory paying for visits 2 and 3.  While the product was our first priority, helping the factory improve their processes is an added bonus that helps everyone.

Moral of the Story? If one QC visit is good for identifying problems and giving you a heads up before it’s too late, then multiple visits are that much better. QC at 25% is a great idea and I suggest that it’s of much more value that a single day at 100% completion.  But IP (In Process) QC is not a replacement for final QC.  Ideally you’d have an almost constant presence in the factory.  If you can’t do that the next best thing is to be scheduling QC visits at regular intervals—25%, 60%, 90%, for example.

Bonus, Moral #2: Work with your factories.  Take the time not to just fix the problems with your product but lay out the processes that you’ve used that they’re not getting correct.  Take time teach them, not in a condescending way, but with real detail and honest intent to make them better.  You’ll get better service, better product and better relationships.  The factory will get better/more clients and be in business to service your needs longer (and with less worries).

Tags: Business, China by David Dayton
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Here is the best quote from the shows so far.  In talking with a Chinese industry consultant about the status of sourcing electronics in China, he told us: “I think that many foreigners have some serious problems here.”  This is from a guy whose job it is to promote the electronics industry, not look out for the foreign buyers.

The conversation we were in was about some of the people that are attending “New to China buyers: buying from China” seminars and why buyer’s with experience are attending these presentations as well.

He shared with me the story of a large utility in Eastern Europe buying hundreds of thousands of dollars worth of components from a number of factories in Zhejiang province and ending up getting product that was either useless from the beginning or was broken within just a few months of installation.  This consultant was hired to help them both get some money back and finding better suppliers for future orders.

The results of his research were that the suppliers were actually not factories but had represented themselves as such.  The buyers had not visited the factory sites but only met the suppliers at a tradeshow.  The clients had also not done any QC either.

This guy, who, again was representing the industry suppliers not the buyers, told me that he advised the clients to hire someone locally to both run factory audits before buying and do on-site QC once orders have been placed and before final payments were made.

Word to the wise: if large industries are getting ripped off when buying from China, small buyers that don’t have the ability to enforce contracts or have any physical presence in China are likely going to be taken advantage of as well.

Question. “All the suggestions you’ve made (QC, background checks, testing, etc.) take all the possibility for profit out of the orders from China.”  (I know, it’s not a question.  Work with me.)

Answer:

First, if you’re ordering $10,000 or more and you can’t afford to spend $600-$900 on QC and some background checks then you’re in the wrong industry.  This is less money than the cost of the ticket that you bought to fly to the tradeshow (which, if you asked me is not where you should be spending your money anyway). $1000 could be lost in a customs delay, a very small percentage of crappy product, penalties from a DC for missing a shipping date, small changes in prices of goods, etc.

Second, if your margins are too tight to be able to pay for testing (to meet legal requirements in your home country) then you’re asking to be put out of business (and maybe in prison too).  This isn’t my “suggestion” these are legal requirements!!

Finally, after almost 20 years in Asia, I believe that you’ll have better odds at Macao than you do of getting $10,000+ dollars worth of product without having defects or rejects that are worth less than the costs of QC.  Why take the risk?

China is as risky as you make it.  You can eliminate MOST of your risk for a relatively little amount of money.  Buying from China is much more like buying from ebay than it is buying from Amazon.

Question. What are the very minimum standards that you’d suggest people do to safely buy from China?

Answer:

1. Spend $200-$300 for background research on your suppliers before you send any money.  Confirm who they really are and what they really own/do.

2. Coordinate all your documentation–Contracts, PO’s and QC reports.  Don’t pay for anything without physical 3^rd party verification.  This will save you money!

3. Hire 3PQC to check at least twice during the production cycle.  One check at about 25-30% and another check at 85-90% completed.  Man-day fees are about $250 plus expenses per day.  $600.

4. Hire a 3PL from the very beginning to coordinate logistics for you.  Remember, just because China is cheap, if you don’t know what the importing duties/restrictions are it may not save you any money in the end.  This will save you money!

That’s less than $1000 to confirm that you’ll be delivered exactly what you’ve ordered and paid for.

Question. One more non-question: Met a guy that was exporting from China and importing to South America knock-off (illegal) products—and he was complaining about all the troubles he had getting through customs in South America.  He even went so far to say as to complain that it’s costing him more (in bribes) to get the goods through customs.  Not sure why he was telling me this.  Was I supposed to be impressed?

Answer. Just don’t do it.  Don’t go there.  Don’t even be tempted by it.  The fastest way to lose money is to bank on either some under the table deals or some special personal connections.  Maybe you’ll make a bunch of money.  Maybe you’ll get away with it.  But if you don’t you will lose all your money and maybe even go to jail.  China isn’t nearly as risky as stupid deals are.

Tags: Business, China by David Dayton
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The protests in BKK have put the Thai government and the Thai people in an awkward position.  The protests are no longer about if the government will change.  Rather they are about when will the govt step down, how will it come about, and what will Thailand do afterward.

The reality is that the Red Shirts have won.  Like it or not, they have been in the streets too long and have too many people shutting down too much of the city to be physically moved or cajoled out.  The government has ordered them out, has issued summons for arrest of the leaders and still they fill the streets and shut down multiple shopping malls, hotels and intersections.

The govt looks both weak and indecisive even though they have the law on their side.  They probably have about ½ of the populace on their side and business leaders are putting pressure on them to do something too.  But they have done nothing.

But to be fair, the govt have few if any choices left to them.  They can use force and push out the Red SHirts and then have a full scale riot on their hands—this will garner support from people on the fence and be condemned by all the int’l press and foreign govts.

Or they can negotiate—which just means that the Red Shirts get more and more leverage the longer they can hold out.

The military doesn’t want to step in either.  This is evidenced by the fact that there are NO police or military on the streets at all (police offices near the protests are closed!).  Even though there is a State of Emergency in effect, laws specifically regarding mass assemblies have been breached and there have been more than 40 bomb threats in the last 3 weeks—even injured policemen–there is NO security presence visible at all in the main protest area (Radjaprasong Dist.).

So if the military aren’t going to stop the protests will they force a coup?

They are stuck here too.  If they force a new govt on the people then they’ve simply recreated the same problem they are facing now—a non-elected government that the people do not accept.

This is a crisis of faith in the system, not just a partisan political move at this point.  The Thai people have to choose: if the government is dissolved and a new election occurs, will they accept democracy regardless of whom is elected or will the next government also face mass protests from the opposition?

If it was just the position of the PM in Thailand that was in question this might be just an academic question.  For example, Military kicks out Abhisit and sets up a temporary govt for 2-3 months to set up new elections and then the democratic vote ends the problem.  But it’s much more serious than that.

It is no secret that corruption in Thailand (and China, and Vietnam, etc., etc.) is a historical and cultural problem that affects not just governments but businesses and everyday life of almost everyone living in it’s wake. The Thai courts, the military, the freedom of press, the relationships/influence of business and powerful families are all in question.

So what if the government is replaced but the courts are still controlled by the military?  So what if a new PM is elected democratically if he again has big business ties (as Thaksin did)?  So what if Thailand gets a new government but a large enough percentage of the population decides they’re not going to accept it no matter what (and protest until the choice is, again, force or absolving yet another )?

Regardless of who wins this round Thai’s have some ethical decisions to make about what’s next for the land of smiles.  And these decisions will specifically affect business as well as politics, hopefully for the better.

On a lighter note, the best piece of political commentary I’ve ever heard came from a speech given by a UDD leader yesterday.  In talking about policies that look good on the surface he said (Using the word for transvestite as the personal pronoun) “It may look pretty, but until you see which bathroom it walks into you don’t really know what it is.”

And I bought a great shirt t00.  It says: “Have you gagged-down-like-a-dog enough yet?”  Very vulgar Thai verb for eat that you don’t use for people.

Also, the Red Shirts were the most polite group of protesters I’ve ever seen.  They offered me food, drinks and a place to sit and listen (relative close to the stage).  I must have had polite conversations with 10-15 different people attending the rallies last night–all from BKK (as opposed to the afternoon folk which are mostly bussed in from the provinces and paid around 65B/day)–to a person they were interested in what I understood and hoped that I would support their cause.  But they weren’t pushy about it.

Finally, just by chance I ran into a buddy from grad school who was also watching the protests.  What are the odds?!  Two Americans, that speak Thai, who went to school together, in the midst of a crowed of more than 10,000 people, at night, run into each other!

Tags: Culture, Politics, Thailand by David Dayton
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