Silk Road International Blog

No matter what the reason, when your factory has officially passed the we’re-losing-money-on-this-project point, expect to see product laying around, no more QC, no managers, and expect no one to answer your calls.

This is what happened to us last month.

We had a project worth hundreds of thousands of dollars and about 10 containers in size.  We had spent more than a year setting up the deal with three suppliers.  By October 1 we had completed work with two of the three suppliers and the other supplier was completing their production and packing.  We were doing QC the entire time, and rejected a frustratingly large amount of product from supplier #3.   They were replacing it as we rejected it, but the larger than expected qtty’s of rejects were starting to delay packaging and were making both us and the factory angry.  They were, to their credit willing to replace things that were their fault, but the costs were mounting and we could tell that any more problems would be met with some serious resistance.

Well, there were more problems. (They seem to come in bunches, don’t they?)  There were some serious fulfillment issues and that turned out to be the final straw.  The factory basically stopped working on the project.  They’d past the we’re-losing-money point long ago and now, to the factory, there didn’t seem to be any value in dumping more money down the same hole.  It didn’t matter that there was a contract.  It didn’t matter that they’d shipped 6 of the 10 containers already.

What to do?

1. We continually reassured them that even though things were late we were indeed still interested in the remaining qtty’s.  This was a major point of emphasis for us–we still needed the other 40% of the order and couldn’t renegotiate with our clients to just not deliver almost 1/2 of the order.  Of course this put us in a bad position with the factory as they figured if we really needed it we’d pay (a lot) more for it–which was simply not true.  So we pressed both for the remaining qtty’s and the terms of the contract, not a strong position in China, really.

2. We then reassured them that we were going to not only pay for what we ordered, but we would pay on time and pay for any additional costs that were due to changes or our mistakes (of course, there weren’t any, but we doing everything we could to be fair and empathetic to get product).  This is a fine line–paying for what you’re responsible for and nothing more can be a tricky proposition.  We try to be fair, we are willing to give a bit extra to get things done right.  And more than once we’ve paid for other people’s problems just to get things done–sometimes it’s the best option.

3. At the point that things ground to a stop, sending project managers into negotiate with other managers wasn’t going to solve anything.  Sometimes it’s more about face than money–and that was the case here.  I went into the factory and met with the owner.  We discussed 1. what the problems were (they knew it was their fault), 2. we’d gladly work with them to get things done right, 3. we’re not going away until this got done.  At the point that the owner had some face time, the managers were more conciliatory.  Both being in their factory every day and having someone other just a QC engineer gave us the physical and social presence that we needed to press our case.

4. To get what we wanted (product done correctly, at the same price, ASAP) we basically gave in on everything that we could that didn’t affect product quality or cost us cash out of pocket.  We waved late-shipping penalties, we extended shipping dates and re-booked containers ourselves, we adjusted container packing/SKU qtty requirements, we brought in our own project managers and QC from other projects and added them to the factory’s daily rotation so that they could still take care of their other clients while working to finish our project.

In our situation we had two positions of strength–the outstanding balance of payments and our physical presence in the factory.

Even though the factory was losing money with every re-do and delay the owner recognized the value of the contracted payments still sitting on the table (worth more than both the value of the product that had been shipped and the value of what was left).  This was our trump card.  While the factory was indeed losing money they were not going to ever lose as much as they stood to lose if we walked away from the final payment.  They didn’t want to spend any more money but they didn’t want to lose any more either.  Them not finishing anything else meant two things: one, they got nothing but the deposit and two, we were going to make the unfulfilled contract even more expensive for them via court.

What made the money real to them though was the fact that we were in the factory each and every day literally waving cash at them to ship portions of the production.  We wanted the product and we kept promising them that we were willing to pay 100% for everything that was correct (even if it was late).  AND, and this is a big and, we were a pain in the butt every day.  They weren’t getting rid of us until we got what we’d been promised.

Other random lessons learned here:

It’s not always a bad thing when your factory tells you that they screwed up and they fire their manager and some QC people.  At that point you know that all that you have the attention of someone that will actually do something for you.  Also, now you have a couple of new people in positions that are publicly sensitive because of what just went down.  As long as the boss hasn’t told them to ignore you, you’re going to get more attention.

Sure the boss is listening, but is it too late?  Since we were here and already in the factory it wasn’t too late.  If we had had to fly from around the world after either receiving crappy product or after realizing after days or weeks of delays that things weren’t coming then, yea, it would have really been too late.  But we knew before it all hit the fan that there were problems. We could both document the issues and we were pressing to fix things even before it all went south.  No possible way we could have done that had we been out of the country.

Managers, the very people that you’re depending on to help you push through difficulties, may be the problem.  Just like back home, different departments in large organizations work on budgets and they allot time to specific projects.  They when they overspend in either time or money, they get in trouble.  Precisely because they are tied to these specific limits they can’t always see the big picture.  Sometime a single project that busts their budget is the worst thing they can imagine and so they freeze up or stop the hemorrhaging in their department.  When this happens, you need to get up a level, get above the managerial trees and recruit a GM or owner to direct these lower lever guys to do what’s best for the factory (as opposed to what’s best for their personal fiefdom).

You need to realize that you’re working in a vacuum over here.  The factory isn’t worried about their reputation.  They aren’t worried about seeing you again.  They aren’t concerned that you will complain to the HKTDC or Alibaba or Global Sources.  They aren’t even worried about getting taken to court.  Appeals to reason or morals will always fall on deaf ears if they’re losing money.  Negotiations based on obligations, contracts or agreements will similarly go nowhere.  You can threaten legal and other actions all you want, but they aren’t scared of that; remember, they’ve had little to no experience with going to court so it means nothing  to them.  And if they have had experience then they know that enforcement of a verdict is next to impossible in China. They are worried about two things and two things only–getting paid for the work that’s already been done and making money on the project, or losing as little as possible.  This is why I always say that paying more to get less than you original wanted is sometimes the best bet.

Tags: Business, China by David Dayton
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This is the second posting from SRI’s current Intern, Eric Luker, from BYU’s Kennedy Center for International Studies.

Quality, quality, quality. Quality equals money, which is most likely why it is the hardest thing to get. Over the last few weeks I have learned that you should never trust a factory’s quality control and you always need to check the product yourself. Here is one experience that helped me come to this conclusion.

Our factory was getting close to the shipping date of a product that was not packaged. The factory that we had contracted with couldn’t finish the packaging and was sending our product to multiple other factories to help with the packaging so we could meet our deadline. A co-worker and I went to one of the new factories to make sure that the packaging went smoothly and that quality was being maintained. We spent the whole day teaching the floor managers about the quality we were looking for, how to check for bad material, and how to package the product so it doesn’t get damaged. We felt confident that things were going smoothly and that we were going to get good product. The factory was going to have more people come and work through the night so we could get the product shipped the next day. Before we left the factory we made sure that the floor manager knew our quality requirements and that she would make sure all the new lines packaging at night knew them as well. When we came back the next morning to check the product we expected to find the quality as we left it but what we found was far from that. The lines at night had not maintained the quality like we taught during the day. We ended up not being able to ship the product. What is even worse was that when the product was moved back to the original factory their quality control personnel checked the product and tried to tell us that it was fine. They said after checking over 10 cases they didn’t find any bad product, we then checked and found bad product in every case. We ended up having the factory go through the product and pick out the bad items. They then had to make more to replace the large amount that was wasted.

I can only imagine how much extra money the project cost the factory because they didn’t maintain quality. It seems counter-productive for factories to cut corners to save a little money when it costs so much more to fix the problems if they are caught but they still do it hoping you won’t find out. The bottom line is trust yourself. If someone tells you it is fine, check it, if you weren’t there check it, even when you were there, check it again to make sure.

Notes from David

Notes from New to China Buyers Seminar at the first phase of the Global Sources China Sourcing Fairs at the Asia World Expo in Hong Kong.  I’ll be speaking again this next week at the Gift and Premiums Show and then again next week at the Garments and Textiles show.

1. Charles Kirmuss of Kirmuss and Associates Consultants says that  buyers need to build relationships with manufactures because you’ve taken away the QC and the professional middleman that was guaranteeing product quality.  If you go factory direct to China you are now responsible for ALL the professional services that were previously taken care of by others (QC, logistics, testing, importing, project management, etc.)

2. In China there are very few managers with more than 10 years of experience.  There are a bunch with less than 10 and then there are a ton of guys just out of college (who have NEVER EVER even had a part time job before).  That’s pretty much it.  If you’ve graduated from a Western University, if you had a part-time job in high school and/or college or fixed your own car (or stereo) you are the new middle manager and you have more experience than most of the people you’ll work with here.  If you went to graduate school and/or have been working for more than 15 years in your profession/industry you will be the undisputed expert in just about every factory you visit over here.

3. Mike Bellamy of Passage Maker said: Choose you lawyer and location carefully.  1. Make your contracts enforceable in China first, and a nearby locality or the main city of production preferably. They only time when you wouldn’t want to do this is when the town is so small or the manufacturer is so large (% of local employment) that you’ll not be guaranteed a fair trail.  In that case make the juristiction the nearest big town/provincial capital.  2. While you may be better/more familiar legal services and a better court system in the US you’re not likely to ever see your Chinese supplier in the US–and that means you’ll never be able to actually take him to court.

Here’s a link to a very good  article about the N0be1 Pr1ze from Cal Poly that references SRI (blocked in China).  What will the Chinese government do when some Chinese person they agree with wins the N0be1 Pr1ze? (Yes, I’m paranoid about getting blocked.)  Will they count past Chinese winners?  Will they let a Chinese ever accept the award?  What if it’s a government official?

On a related note, of course the events of the past week are blocked in China.  Even with the fact that there were issues with busses and marches in SZ on Monday, no one in my office knew anything about them other than there was traffic problems.  Isn’t this is like lying to get something and then realizing that the lie may ultimately prevent you from getting what you wanted after all!

Tags: Business, China, Culture, Politics by David Dayton
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No matter how well you plan, there are almost always problems that arise prior to shipping quality product from China.  It’s debatable whether China itself is inherently problematic or not, but sourcing, managing production and doing quality control from 5000 miles away (more or less) certainly is.

Problems typically crop up from areas that are either under-understood (business culture or the design of a new product, for example) or under-managed (lack of any of your own on-the-ground personnel for production, for example).  These hurdles can be the death of any project regardless if China is involved or not.  But working in China can add additional barriers into the production mix.  A second language, new or relatively unknown suppliers, non-transparent sub suppliers and/or business practices, difficult to manage meeting and travel schedules.  They all can add up to serious delays and/or cost overruns.

So, what to do?

Fortunately, you don’t have to do anything by yourself anymore.  Every problem you’ll ever deal with has been dealt with already by others.  China is not new, unknown or inscrutable.  Chinese history, politics, dating, business culture, you name it, it’s all been detailed and analyzed for you.  All you have to do is to apply the (hard) lessons of others to your own situations.  I know, easier said than done.  So here’s some things that I’ve found to be invaluable.

First, one trusted employee is worth their weight in gold. You’re not going to find this person on the first try (that’s the scary part) but it’s worth it to keep trying to find this person.  This might be a QC or it might be an office manager or it might be a finance person, but it’s going to be someone that can be both involved in multiple projects and understand the “foreign” and Chinese perspective on things.

One of the things that you’ll notice about ALL Chinese companies, no matter the size (remember the arrest of the Guome boss ordeal?), is that there is a relative involved in or managing the finance department.  I’ve said it before and I’ll say it again, Chinese people don’t trust other Chinese people–so why should you?!

Probably the most important person after the one managing the money in your company is the person making the deal.  I’m not talking about you or your lawyers writing the deals, I’m talking about the person that is negotiating how the deals actually get done–on the ground in the factories.  This person, more than anyone else will structure how money is paid/received, how projects are completed and how problems are solved.  They literally have their fingers in every pie in your business.  If you don’t speak Chinese then you’d better be praying every night that you can trust this person.  And even if you do speak Chinese you need to be so confident in this person that you can let them put your company (or at least your company’s cash) on the line each time they go into a meeting–because that’s what they are doing.

The next person that you have to trust is your project managers.  They are the people who make serious decisions about where things are done, about who gets involved in which QC issues, about how everyday problems are managed and what issues you’re notified about and what they can handle themselves.  These people, again, have access to a ton of money even if they don’t pay any bills or have actual access to any accounts.  These are the people (along with QC) that are always (and I promise you it really is ALWAYS) offered the kickbacks for orders (and delays and changes).  These people are organizers and managers, not negotiators or QC.  You pay them just to keep things going, to keep product flowing from all the sub-suppliers, to coordinate all the logistics, testing and other schedules.

I’ve shared it before, but had it confirmed to me again recently with some other people working in China, so I’ll share it again: Your staff is getting offers for kickbacks all the time.  And I really do mean ALL the time.  On every order, one of the questions they are routinely being asked is “How much do you want for this project?”  If they are honest (with you) and rejecting the offers you need them to be cutting the prices accordingly.  Let me repeat that: YOUR STAFF IS GETTING OFFERED CASH BACK FOR EVERY SINGLE COMPONENT OF EVERY SINGLE ORDER IN CHINA (AND SOUTHEAST ASIA).  IF THEY ARE HONEST, THEY ARE REJECTING THE OFFERS AND CUTTING YOUR PRICES.  I don’t care who you are.  I don’t care if you fire people for taking kickbacks.  I don’t care if you think that everyone in your company is as honest as the day is long.  I will bet you any amount of money you want that if you don’t know that this is happening (and you’re not doing something about it) your employees are making money on your orders from the factories–and not even thinking twice about it.  This is how business is done here.  This is one reason why wages for college grads are so low.  This is the honest to God truth.  Believe it or keep losing money.

One more person that you have to trust is your QC.  QC is the position that we’ve hired and fired the most in China.  They will make or break your orders.  They are usually the only one in the factory seeing actual production. They can be the ones getting the most money/extras and they can be the single best on-the-ground resource you have.  If you train these guys well they will be a copy of you.  If you find a good one, pay them well enough to keep them honest and keep them from leaving.  They are totally worth it.  If you find they are getting paid, make the firing very public (factories and other employees should all know all about it).

If you only have a couple of trusted people in your company I would suggest that a majority of these trusted people have to be Chinese–No, not a Chinese speaking foreigner and not a Hong Kongese and not even a Taiwanese.  You need someone local that knows how the the local game is played.  Now I know that there are a ton of smart overseas Chinese and a ton of Chinese speaking foreigners, but you need someone one that can tell you what’s “meant” not just want is said.  I’m not saying don’t hirer the others, I’m just saying that you need at least some of your trusted inner circle to be locals so that you know exactly what is going on.

Second, unlike some other problems there isn’t a language problem that you can’t pay to solve. If you’re still working in ESL then you’re missing MOST of what’s really going one.  Not some, not part, not a bit, MOST of what’s going on is not being relayed to you.  This is a problem that money can solve–hire someone that is fluent in both Chinese and your language.  And then train them to tell you what’s going on–not just what’s being said, but what’s really going on.  There is a big difference in what’s said and what’ happening and you need to know both.  Of course the best way to do this is to learn Chinese yourself–it’ll take you two years, full time, but you can do it.  Or you can hire someone that you can depend on to follow you around 24/7.

Third, time up front saves money later. Do your due diligence on your potential suppliers BEFORE you pay them anything. Know what has to be done to get your product completed before you ever start asking questions to factories about the the process.  Know the market prices for all your components and raw materials.  Know the import taxes and duties in your destination countries on your goods before you ever start any work in China.  Get more than one bid and get more than one factory approved to do production.  Tie QC to payments and make sure that the factory is not only aware of this but in complete agreement from the top down.  Make sure there are no problems with your documents and artwork.

Fourth, even a single day of QC early on can save your project time, money and problems later. To me this is the single most overlooked part of working in China.  Have a 3PQ confirm that what you’re paying for is actually being done.  It can be as painless as just spending $300 to get a day of QC at about 25% of production and then another $300 to have 85% to 90% of the product confirmed again.

Fifth, Westerners typically think of cost, quality and time as the most important factors affecting any project.  Your Chinese supplier is usually thinking cost, cost and face. Quality is such a vague concept that it’s never a priority for your manufacturer–he’ll do exactly what he’s compelled to do and no more.  There are so many levels of quality in China that you’ll get only what you can enforce–why would they do anything more?

My friend Mike Bellamy always says: “All quality problems are really money problems.”  I rephrase it as “There isn’t any quality problem that more of your money won’t solve.”  So in this since, Chinese are thinking about quality, but it’s more about how to afford quality not about the concept of doing things right.

Time is similar.  There is nothing comparable in China to the delivery expectations of the Western box stores.  Everything is flexible since everything in China is always changing and/or under construction.  Hell, there was/is a 60 day traffic jam in Beijing–you think that every one of those orders was cancelled just because it was late?  Of course not.  Chinese don’t work like that.  You have to be understanding and flexible here or you’ll have a heart attack.

If I had to make a guess, I’d say that most foreigners who have problems in China, most of them not knowing it, have problems because they can’t read the signs–not the Chinese language signs, but the cultural ones.  Maintenance of face and status are the only things that I can think of that will trump the desire to make money in China.  There are many reasons for this, but one is the fact that if you have face/status historically you’ve still been able to make more money.  But without that social position, you have nothing.

Americans especially are very direct about business and problems.  We think it’s “honest” and “just how things are done.”  But here it’s insulting (even if it’s true) and often the complete wrong way to get things done.  In the US, where time is money, it’s the best way to get the most done.  We want to know what’s wrong and why without wasting time guessing or beating around the bush.  But when your country and culture is thousands of years old, there is much less urgency to each transaction.  I have many clients come to China and before they get here they tell me they’ve scheduled something like one day each with a number of different suppliers and ask me what they should do to make things go smoothly.  I always say: “Spend more time with each one–the more money you spend on them, the more time you should spend with them.”  Of course, no one ever takes my advice (“We’ve already booked our return tickets.”) and so instead of doing what’s best for millions of dollars of product, they do what’s best for a $1000 plane ticket.

Time spent on relationships will save you money and problems.

Finally, sixth, China is as risky as you make it. Mike Lavine from BV once told me that he was amazed at how many foreigners come to China and think “Well, since China’s such a big risk anyway, we’re just going to throw all our SOP’s out the window and jump in with both feet.”  Whither this is your conscious decision when coming to China or not, don’t let it be your default position.  Don’t let a short trip force you into uninformed decisions.  And just in case you didn’t know this yet, not being here in China when you’ve got production on-going greatly increases your risk.

China IS risky, but the level of risk is in direct proportion to the amount of research and effort you put into your China investment.  Just because you’ve heard that due diligence is hard to do in China (true, it is), that doesn’t mean that you just don’t even try to do it.  Instead, you should take more time and try to do more, not less.  Just because you have your ticket home already, doesn’t mean that you should agree to start production before you see samples.  If you can’t be here, hire someone to do it for you–it’s well worth the money.

You can either learn from history (other’s mistakes) or you can repeat it.  Good luck!

Tags: Business, China, Culture by David Dayton
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First, if you’re not reading The China Sourcer Magazine already, please do–it’s free!  The China Sourcer Magazine is part of the new China Sourcing Information Center.   If you’re sourcing from China, then you’ll want to check it out.  Yea, I’m involved in it, so I’m not unbiased in my recommendation.  But I also know the others involved and I’ve read all the content so far published and I know that it’s a collection of valuable information.  And it’s free!

Second, Dan over at the China Law Blog not only contributed to the first issue of the China Sourcer, he recommended the second too.  Thanks, Dan.

Finally, the China Law Blog group at Linked In has a great discussion about “What is Guanxi?”–something that everyone working in China has to, at some point, deal with.  I deal with this all the time–personally (Chinese family) and professionally–so my answer was too long for the form.  But you, you lucky devil you, get it for free here!  And you don’t even have to sign into Linked In to get it.  Consider these two free offering my apologies for not posting much this summer.

______________

What is Guanxi?

What it is is relatively easy.  I personally think that there are three kinds of Guanxi.  And there is really no problem with guanxi until it’s used in a context where the legality of relationship comes into question.

The first is the natural human relationships between associates, friends and family.  Every culture has this.  Everyone “uses” these kinds of connections—you ask your neighbor to help you with something heavy.  You ask your friend to help you get some tickets and you’ll pay him back later.  You don’t have cash on you so you borrow 100RMB from your co-worker.  These are favors that are not illegal or morally questionable in any culture—it’s friendship.  Chinese are always saying that westerners don’t have renqing or guanxi like they do since we are a more mobile society and are more nuclear-family oriented than they.   My response is that they misunderstand us as much as we misunderstand them.  We all share, help, love and work together.  We just haven’t had 5000 years of “continuous” history to formalize it like they have.

The second kind is relationships that are completely illegal in most legal systems—China, the US, anywhere.  These are legally defined lines and when crossed constitute nepotism, insider trading, under-the-table deals, kickbacks, cash payments to officials, etc.  There is no question that foreigners AND Chinese alike should not be participating in these types of Guanxi.  It blows many clients away to find out that the dinners and gifts and “bonuses” they are paying for are not only illegal in the US but in China too.

The third, then is the middle/gray area between these two.  This is where most people get caught.  There is no line, no definition where these end and where they end.  For example, your client knows a buddy that does printing and he gives the client a special deal and the client then takes him out to dinner to say thanks—legal or not?  Probably not a problem, right?  But what if he gives the deal and the return is dinner, Karaoke, some companionship and a hotel room for a weekend?  What if it’s just straight cash (homie)?  Now, is it still clear what’s legal and what’s not?

Another example.  What if you buy a license for something that would cost thousands of dollars to actually qualify for?  Clearly illegal, right?  But what if your sub-supplier buys materials with fake credentials—and come to find out they always have, you just didn’t know about it, AND the “fake” materials will pass the tests too?  Now, is that an illegal use of connections or not?

Another example, what if you legally do all you are to do go get your license in China to do business.  But one of the offices that you must use “requires” you to give a “gift” of thousands of dollars to the inspector or he will not even come out to your office.  There is no way around this  you’re completely legal, but this guy has to have some cash or you don’t get your license?  What if you can “pull strings” with others you know in the govt and get the cost reduced, but not eliminated?  Of course you have to pay the “others” back too, but it’s cheaper.  Legal or not?

Lastly, what if your factory clearly breaks the law and holds your goods hostage for a “ransom” payment before they ship it?  You know a local policeman and call him in to help.  For his help, you have to pay either a cash payment or host a lavish banquette for him and his friends.  What do you do? Where does Guanxi end and bribery begin? (This is really the money question, as far as I’m concerned.) What is a favor between friends and what an illegal kickback?

All of these are real situations that we’ve seen over the years.  How do you work in a corrupt system and keep your hands clean?  How do you do business in a system that has as one of its founding social principles the use of personal guanxi over adherence to law?  I love guanxi—I got box seats at a soccer game in the States this summer because I knew someone.  My Chinese staff can solve many problems with production because they know how to talk to and how to work within the system using “relationships” to fix problems.  But you have to define your own lines and say: “No mater what, I don’t do X.”  I promise that if you’re here long enough, you’ll be asked to do X—and you better have decided before you get to that day what you’re going to do or guanxi will become a problem for you too.

Tags: Business, China by David Dayton
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