Silk Road International Blog

One might think that business is business no matter where you are. That might be true to an extent, but culture and monetary circumstances have a big impact on how business is done. I’ve been in China now for three weeks working with factories on quality control and also trying to find suppliers for new projects. Much of what I have experienced is not what I expected. My expectations however were set in place by my western education and by some previous experience in China.

I am currently studying mechanical engineering and have learned about many processes used in manufacturing.  I have also been to China to study about globalization and its effects. During my study I was able to visit various factories in Shanghai and other large cities. These factories were very well maintained and manufactured products like laptops and automobiles. This experience, combined with my education on the latest manufacturing processes, gave me a false expectation of the factories that I am currently working with. During the interview process for my current position I was told that I would be working on small projects, but I failed to realize the large difference in manufacturing conditions.

During my first quality control visit to a factory here in Shenzhen I expected to see a fair amount of automation. While there were machines that performed what a person couldn’t, I was surprised to see the amount of labor required for the product. The machines’ accuracies were highly influenced by the operator’s ability to position the next product in the correct position. The operators did just that very well most of the time, but often the materials they worked with weren’t perfect which caused inaccuracies. This made my assignment to do quality control harder because there always seemed to be things that were wrong and often it was not because of the current step, but rather an earlier one.

My expectations received another shock when I went to a factory that had no machinery. This factory was used for the beginning steps of the packaging process. The product they were working on required that several hundred pieces of an item be put in a bag. It would have taken too long to count each item since tens of thousands of these bags had to be done. So they weighed the bags using simple digital scales to see if each had the right amount. This was a smart way to speed the process up but it did once again cause some inaccuracies in the packaging. I quickly realized that I would not be working with the type of factories that I had learned about in my classes and that I needed to change my way thinking.

Understanding the process that is being used by a factory and the limitations that are imposed by that process has been extremely important while doing quality control. As I continue to better understand these processes I am able to focus on the parts of the product that are more likely to have problems. This also plays a large part when trying to get the factory to fix problems. Often factories will say that they can’t get 100% accuracy because of their limitations but by understanding those limitations you can work with the factory to solve the problems.

While finding suppliers for new projects I ran into some interesting things that have made me reflect on modern Chinese culture. The first thing that I noticed was the ability of my contacts to use English. I used emails and instant messaging to make my contacts and communicate. It seemed that everyone had English that I could easily understand, sometimes I actually had to look up terms they used. China is really trying to grasp English and many factories have hired employees that make them accessible to foreign business. I was even given an option between Chinese and English when I called my cell phone’s service provider. Still my time in factories is always spent speaking Chinese.

While English might be used to do business with foreigners, Chinese culture is still present. The Chinese cultural idea of guanxi or relationships has a significant impact in Chinese business. I got a glimpse of this while instant messaging a factory. In my initial search I had missed the fact that this factory had a minimum order quantity, or MOQ, that was a bit larger than what we were looking for. When I made the comment to him that our order wouldn’t be large enough to fill his MOQ he told me not to worry about it because it was our first time working together and he wanted to be friends. I took this as him trying to build guanxi with our company by going out of his way to see if he could help us fulfill our needs. Some other factories also wanted to know a little about me personally which must be the same thing. I don’t know how business is generally done in the US but the friendly attitudes of the factories made me feel more at ease while working with them.

Overall, China has been a great place to work. It gets frustrating when I can’t understand what people are saying due to any number of reasons but those instances get less frequent as I try to study things I’ve heard.  China is not the easiest place to just jump in and do business but it is possible, you just have to work at it.

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Eric Luker is currently working for SRI and finishing his degree in Mechanical Engineering at Brigham Young University.  He is fluent in Chinese and has worked and studied in both Taiwan and Mainland China.

Tags: Business, China by David Dayton
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I was told in once in a sales course that if you can name the game you don’t have to play it.  It’s just as true in China as it is in the US, although the Chinese version I was told this week “Doing business in China you always play the games or they will eat your weakness” seams a bit more vicious.  Here’s how we played the game with a factory this last week.

First, we’re working on a rather large project that involves more than 10 different suppliers and testing for countries on three different continents.  So of course we had contracts (in Chinese) and NDA’s and had spent a few months getting both preliminary testing and correct samples from everyone.  And of course, prices, timelines, quality standards, et al were all approved and agreed to.  We had worked with suppliers to confirm with their sub suppliers that they’d have enough materials in advance too.

But now that the order is placed, the molds are “more difficult” than they expected and the price is going up—about 200%.  Funny thing is, we were told that after our meeting to confirm the spec’s of the CAD drawings the molds had already been started!

Of course both the facts that we were told something that was not happening and that the price is changing was completely (expected) unacceptable.  So we said no—but how we said no was the key to the game.

We said no and reminded them, politely that we had a contract.  They said that if we didn’t pay they would have to return our money.  So we said, “Fine, we’ll pay you 1000RMB for your time and you give us the rest of the money back.”  Then we stopped talking to them. Within a day they had returned with a much lower price increase and a newfound willingness to complete the project.

About two weeks later, after we had confirmed that the molds were started (we went to see them this time), they called us again.  Again, they wanted more money.  This time the problem was that our products “were not typical” and so the molds were more expensive than previously estimated.  We told them, again, that we had gone over the CAD details and that the contract stated that the mold price was fixed.  They said that we could keep the same contract and just increase the payment per piece to cover the additional mold costs.  Of course we said no.  And they responded with the “if you don’t pay we won’t work with you any more” ultimatum.  We said we were sorry they felt like that and we would compensate them a few thousand RMB for their time and efforts and they could return the product deposit and the balance of the mold costs to us and we’d find someone else.  Then we stopped talking to them and waited.

They called us back a couple days later, said they had a new engineer and some better “skills” and would continue the project for us.

This happened again too, and we resolved it the same way.

This is a very simplified version of what happened.  In real time, there were behind the scenes arguments about what we should do, if they were lying or telling the truth, what other options we had, etc.  And we’ve had this scenario happen to us over and over again over the last 10 years in Asia.

While negotiations are often different in their specifics negotiations like these are often quite similar in general and there are a number of lessons that can apply across the spectrum.

1. Sometimes the request for money is true—and that’s both why you call the bluff and have a back up prepared at the same time.  If you call the bluff and you don’t have a back up, you’re in a worse position then you were with them asking for money as you now have no credible supplier.

For example we molded a new PP product for a client this last year and found that the specifics of the design required a skill set that was not common at many of the factories that typically built this kind of product.  When our chosen supplier called to tell us that the prices would be going up, we expected it—we negotiated the amount but kept them as our primary supplier and paid them to keep the project going.

2. There are times when it is indeed worth it to pay the new costs and keep the same supplier.  This is different than #1—sometimes the request for money is not based on a true increase in costs, but you want/need/like the supplier (or don’t have any other options) and so making a payment is valuable to you.

3. Delays often mean that either they are stealing your money, they can’t do it and won’t tell you or they have price issues they are trying to outsource themselves without telling you.  In the first case above, they couldn’t do what they had contracted for and were trying to not let that cat out of the bag.

4. When the offer to pay more comes, and it will, you can offer to cancel the project and send bank info then wait.  If they are bluffing they price will come down, you can then make a counter offer, wait and repeat.  If the price drops you know it was a ruse to get money.

If he returns your money, he’s telling the truth, they can’t do it.

5. If you pay each time they ask, they will keep asking until you are so far down the line that you can’t back out and you’ll get screwed (a la hostage payments to release goods).

6. Nominate only one person to talk with the factory.  Tell the rest of your staff to NOT talk with them.  Anyone that is not the point can only take calls and say thank you and then goodbye.  Why?  Because, even if staff says something as simple as “I’ll talk with so and so about this,” that means that there is room to negotiate.  Be strict and tell them to respond when asked about The Point person, “We can’t find so and so. Sorry.”

7. Always talk direct with the factory and the boss that can make decisions—remember, they’re playing the same game you are.

8. On the bright side, the request for money is not always a bad thing. Tie some additional quality standards or dates to any new payments to make.  If you didn’t have before, now you can get a legally enforceable Chinese contract signed, for example.

And, if the money shows up you know three things.  1. What the cost of good should be within a small %.  2. What the mold costs really are.  3. The factory is honest—so if you can’t find anyone else you can go back to him and pay more and get it done right.

9. The exact same words do NOT mean the same thing to you as they do to your Chinese counterparts, so be careful and consult with some trusted bilingual staff.  For example, one time the factory told me, “If I have time, I’ll return your money.”  My staff was really offended while I thought it meant that they get to it as soon as they could.  Our Chinese negotiator knew though that this meant that the factory boss was fighting with himself—do it or don’t do it?  Turns out he later came back and negotiated to keep the project going.

10. If you let your supplier “win” the first time they ask for money you will never know if you can trust them or if they will do it again or what your real costs/prices are.

11. No matter what, you can’t make your Chinese counterpart lose face in public (unless you calculate it very carefully).   Once he’s lost face, he’s lost all desire to help you out, maintain civility or even complete the current project.

12. Your Chinese supplier has to retain hope that there is more business coming or there is no reason to keep the current deal going.  If they think that this order is dead they will fight for all they can get now.  You play the game too—Tell them if they want the order next time and you’ll give them 2% more. “Next time I’ll let you make more profit.”  You need to act as if you’re trying to help them as much as you possibly can.

13. Never tell them, before you place the order that you’re going to place the order.  You cut the prices and lead them along, get them to cut the price and then place the order.  If you tell them “I’ll place the PO tomorrow” you know the factory will raise the price tonight.

Tags: Business, China, Culture by David Dayton
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