Silk Road International Blog

I meet with one of the speech writers for Secretary of Defense Rumsfeld on Saturday.  We had a nice lunch and good discussion about China.

One of the things that we both shared in common was the idea that China, at least militarily, is not really a threat.  Yet.  He had a couple of specific insights into this reasoning that I’d not heard before.

First, The Pentagon had received reports about the new China stealth fighter from the Russians that it was a deconstruct of a number of things, but mostly old (1980’s) US stealth tech and Russian jet engine technology and a number of other planes all cobbled together.  Sure, they have a new stealth fighter, but it’s already twenty years out of date, it uses Russian jet engines and it’s not even theirs (all reversed or stolen or purchased tech).

Second, a lot of people are scared of China’s new “naval power.”  But many people in DC think, if they want to build an aircraft carrier, let ‘em!  It costs 2-4 billion dollars to build one and then tens of billions more to build the flotilla that it takes to cover it when out at sea.  And those are just the start up costs.  For one boat!  Then they have to staff it, maintain it and build planes for it.  Not only that, but they are borrowing old tech for this too.

Third, they still can’t project power past the ring of islands to their east (Japan–Taiwan–Philippines–Indonesia), the mountains to the southwest or the deserts to the northeast.  And who is going to invite a Chinese aircraft carrier and the accompanying destroyer fleet into port for a visit outside of a few African nations?

Fourth, for some reason they still can’t build their own jet engines.  The US learned this when a deal with Russia to buy some new engines went south prior to China unveiling their new stealth fighter.

But there were two thing that he said that the US and others still needed to be vary wary about.

First, Chinese nationalism is like the most virulent nationalism you’ve ever personally experienced, on steroids.  Very few other countries on the planet are infecting their people with such a rabid degree of nationalism as is China.  I’ve seen the text books myself and they teach children that nothing (no one) is more important than the Chinese nation.  This is a power that sometimes leaks out in small doses (tightly controlled pressure releases), for example when the Japanese embassy is attacked or the US embassy is stoned by protesters or when you hear Chinese commenting that all minorities should be either kicked out or locked up (or worse).  It’s expressed by the government in statements like “the Chinese have been oppressed” or other countries want to “keep China down.”  The govt actively supports and promotes this for it’s own purposes.  Labels like “banana” (Yellow/Chinese on the outside, white/Western on the inside) and “friend of China” are more benign examples.  But sometimes the govt can’t control how far the people go with their nationalism.  Ethnic clashes, for example.  The anger and shame spewed at Liu the hurdler when he pulled up lame in the Olympics, is another example.  Or things like “get the F out of here” yelled at me and other foreigners in China.  If you’ve never actually personally lived through a “anti foreigner” moment, then this sounds just like the political trash that’s broadcast everyday on US TV.  But I can attest that I’ve never feared for my life, never had any one of my family threatened or been publicly hated because of my nationality in any other country (and I’ve lived in 5 other countries besides China).  But I have felt this in China.

1 billion angry Chinese people is very scary.  Think about the power of an entire nation that has never been taught any other value other than the superiority of the Chinese State.

Second, while the cold war may have ended in 1989,  2.0 is here now. Now it’s the theft of info and the threat of non-military war.  IP theft is not just something that happens in rogue factories, it’s an active policy initiative for both the government gaining new tech and a way for industry, e.g. China, to catch up with the Western powers that have oppressed them for so long.  Sure, courts are getting better at legislating against Chinese companies–they have to to continue to be a safe haven for FDI–but there is very little enforcement of these court decisions.  So, yes, you can sign a contract, take a violator to court and win, but then chances are you’ll get nothing out of it.  Few if any companies that are not forced to do so under penalty of death (e.g. Foxxcon) are taking IP seriously.  Theft is considered patriotic.

The most recent government example that my friend shared with me was the last trip that Rumsfeld took to China in Jan.  Since Rumsfeld is in the Chain of Command for the US he is required to have both instant “hotline” access to the Whitehouse and the Pentagon and also he travels with basically a “cone of silence” so that he can communicate 100% securely wherever he is.  And of course he has scores of support and media people that travel with him.  Well, when the entourage arrived in Beijing they were denied the ability to unload ANY of their secure communication equipment.  Not only that, but ALL work or personal phones, cameras and recording devices for ALL the support personal had to be handed over to the Chinese military and all people were issued “new” blackberries to use while they were in China.  The US govt, when it goes to China, just assumes that EVERYTHING that is said and EVERYWHERE ANYONE goes is monitored.

Of course this isn’t new.  I was told that this was true about my activities in Chongqing 15 years ago while I was teaching at a university–one student in each class was assigned to spend time with us and monitor our conversations and activities.  Our apartment was bugged and our travel was controlled.  This what I know for a fact–they told us this while we were there.  My then brother-in-law who studied Chinese for the DoD confirmed this and much more about the surveillance of foreigners in China.

Now I was just a teacher at a lower level university.  If you have a product that is valuable/unique or if you have a significant amount of money to invest, if you teach, if you have a popular blog or are famous in the least, you can bet that you’re being monitored in China–to what degree, I have no idea, but you can be assured that it will happen.  But I know that my small company has had our blog shut down, we have had people follow us (after we were published in the NYT for opposing the SZ City govt over the subway), and I’ve been stopped and asked for ID when driving my car out of the city.  This is all in addition to the “normal” controls on $ exchange per passport, entry control, house registration, internet censorship and TV news black outs.

The point isn’t to scare anyone away from doing business in China.  Rather I believe that if you know what’s going on around you you have a better chance of being successful no matter what you’re doing.  In China you need to know that even though “they are not really communist any more” they were all educated in a very nationalist, very distrusting society.  They were taught to both be polite and to hide their true agendas.  They were taught that foreigners are evil, liars, cheaters and just want to take advantage of China and keep it down.  You’re not trusted and often you’re not liked or even welcome (yes, even if they take you out to dinner).  The bad western economy and banking collapse has just exacerbated these feelings.  The playing field is not level.  Subsidies are being made to just about every factory to export as much as possible, and those subsidies are worth more than your IP agreement.  There is no incentive to tell you the truth–and they’ve told me this directly too (most recently in public at the recent Global Sourcing conference), so do don’t expect to be treated honestly.

Don’t get me wrong, I’m not bashing individual Chinese people, I’m just saying the system is not “fair.”  Your “potential” business means nothing to your supplier (and that’s a generous assessment).  Over the past 8 years, far too many westerners have come to me saying they can’t believe that the factory was so nice, and their English was so good, and they signed all the contracts but they still got knocked off!  Deal with it.  You’re not going to change it.  Expect this and move faster or get totally taken advantage of.

My biggest fear of China is not the military, but that as they expand their economic power the world will more and more do business in the “Chinese way.”  That’s the China threat that I’m most worried about.

Tags: Business, China, Culture by David Dayton
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“You know you don’t want the answers, so why do you keep asking the questions?”  That was the question that I was asked last week.  These are some of the questions that I was asking:

1. Why did you sign the contract if you didn’t agree with it or even read it?
2. Why did you give me a bid for this price/time if you knew you couldn’t do it?
3. Why did you tell me you could do it before you confirmed that you could?
4. Why did you take my deposit if you can’t do the project?
5. Why did you demand CAD drawings if you knew you weren’t going to be able to use them?
6. Why did you give us QC standards if you can’t/won’t even meet them yourself?
7. Why did you tell me you had all the raw materials purchased already if you didn’t?
8. Why did you sign one contract with me and another different one with the factory?
9. Why did you use one process/material/factory for the sample and another for the production?
10. Why did you tell me that I could come do QC and that you were finished with X% of production when you’re not even close to that %?
11. If you can’t match the sample quality in production, why did you make a sample like that?

The list could go on and on and on and on.  But the answer is always turns out to be the same: “I wanted to catch the opportunity.”  And that’s what business is all about is scarcity-driven China: Did you catch the opportunity when it flew past or did you let it go and miss your (one and only?) shot?

The good news is that the is slowly changing–and not just with a couple of big suppliers, but across the board.

Last month while speaking for the Global Sources supplier meeting I head some very promising new comments from the suppliers themselves.   Basically the suggestions centered around the following: The “lowest price” is no longer in China–suppliers here MUST differentiate themselves some other way or go out of business.  Chinese suppliers have 10-20 years head start on India, Vietnam, Indonesia, Cambodia, some places in South American and Africa–what are they doing with that experience?  Some factories that were led out as success stories share these ideas with the audiance:

1. Be honest about prices, problems, delays, etc.
2. Add value (especially if you’re a trading company).
3. Be transparent in procurement, processes and problem solving.
4. Improve service quality, be “professional.”
5. Make the buyer feel “safe”/improve the buying processes.
6. Acknowledge and accept the “info age” and it’s implications.

There were over 700 suppliers present.  This is either a good sign that there is a desire for education that was not present before; GS averaged about 300 at previous show.  Or this means that the economy is still so bad that suppliers are grasping at straws.  I’d like to think that it’s more of the former, but it’s probably some of both.

For my part, I tried to stress that the opportunities to keep clients rested in the ability to improve the buying experience, not just lower the price.  There were indeed a lot of suppliers that were taking careful notes and asking questions (of me and the other successful Chinese suppliers on the panel).  Most of the suppliers wanted to know specifics about how to improve or how to deal with specific situations.  There was a lot of discussion around the idea that China has to build on the successes of the past and evolve into a more info and services oriented model of doing business.

But there were still a number of suppliers that just out-right didn’t believe that being honest would help them retain clients.  More than a few even came up to me afterwards and in completely unbelieving and almost mocking tones asked if I was serious when I said that being honest about problems would help them retain customers.  They argued that if they let clients know that there were problems they would lose trust, get mad and leave for another supplier.  My contention is this: after 10+ years of working in Asia I’ve learned a couple of things.

1. There will be problems.  Every time.  So don’t lie to me and say they’re won’t be or there aren’t any.  There will be issues.  You know it and I know it.  I want the 3 AM phone call–really, I do.  I want to drive out and talk through it with you–really, I do.  I do NOT want you to change something just to meet a date.  I do not want to find out there was a problem that will delay delivery just 12 hours before the container shows up–I want to know days or weeks in advance so that I can manage expectations.  So the best thing to do is…
2. Let me be involved in the process.  Tell me what’s really going on.  Not only will I be glad to help fix it, I’ll honestly be happy that you let me know.  Remember, It’s my money, my project (and my ass if it goes wrong). I want to be involved in the process, for multiple reasons.  I care about the quality more.  I know what can and can’t be sacrificed.  I’m responsible for any and all changes.  I know what I want and it’s my call on what is and is not acceptable.

I’m not going to leave just because the price goes up.  In fact, I almost never do if I can get the quality and other aspects of my order correct.  But no matter how many factories have realized that this is indeed the expected way to conduct international business (with foreigners or even other Chinese) there are the hold outs that are not really interested in meeting expectations.  And with them you really only have one option–don’t start doing business with them in the first place.

Tags: Business, China, Culture by David Dayton
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At the request of the Office of the President, I work with a local university in Utah as they implement a new Chinese program.  As part of that, I had the opportunity to listen to and then chat with Tim Stratford for a few minutes this week as he spoke at the UVU China Initiative luncheon.  His topic was: Building Trust in US-China Economic Relations.

While he spoke at a very high level and in generalities, there were a couple of specific themes that apply to individuals doing business in China.

1. “Trust is the most elusive thing in US Chinese relations.” Part of me was pleased when he said this.  I thought, “See, it’s not just me.”  But then I realized that this is a systemic problem and is not going to get better any time soon.

In answering a question about people doing business there, he furthered the point by noting that “trust is lacking at ALL levels” of the US China economic relationship.  And that people doing business in China need to be very cautious.

Part of the problem is completely differing agendas.  While we (US/China) can agree on many high level ideals, getting to “yes” is another ball game completely.  And it’s not just that the US doesn’t trust China.  The mistrust goes both ways.

My thought here was this, it’s been my experience that a lack of trust comes from two different places.  First, history of being scammed or taken advantage of.  Second, from being untrustworthy; people naturally assume that others do business just like they do, until they are shown otherwise.  Both China and the US are learning that business is NOT done the same way in each country.  While both are out to make money, how they get to “profit” in very different ways.

2. “It’s often hard to distinguish between a lack of capacity vs lack of commitment.” In almost every business venture I’ve ever been involved with in China, not a truer statement could be said.  Add in the golden sample and you often can’t know that there will be problems until is much much later into the production process.  So often an “ability” problem is actually an attitude issue (or vis versa).  Sometimes you’ll never know.

Some of the best ways to determine which type of problem you’re dealing with is to eliminate one of the variables and see what the result is.  If you can isolate a specific technical problem, and then throw more money/time/options at that one piece to see what can be accomplished.  Admittedly, this can be an expensive/time consuming rout to take.  But if you’re demanding results and not getting anything other than empty promises, you may have to help you supplier realize a way out (and get yourself some satisfaction).  Never throw “incentives” at a problem unless you can control both the proposed solutions and the results.

Another option, if you’re an engineer is to get into the production processes yourself. Check the tooling on your own, follow one item from raw material to fulfillment and see where the issues are–then isolate the problem steps in production and make the necessary changes.  Of course, this requires that you’re actually in China.

3. The other party’s leverage is perceived to be limited by both sides, (but the US/foreign side is usually wrong). Even if your qtty’s are “big” for you, they are probably not that big for the factory.  Even if you’re paying cash (30/70) the factory can probably cover their butts by selling your product to others if you don’t pay for it.  If you are not more than 30% of your factory’s orders/capacity then you do NOT have the leverage to dictate to them changes or even enforce contractual demands.

4. China is willing to do anything that it can be convinced is in it’s own best interests. Ditto every other country, and of course ditto just about every factory I’ve ever worked with.  IP, you may say, is in their best interests to protect, right?  Nope, not yet.  They can make more money than they will lose (be forced to pay) by selling your designs.  And, furthermore, they know that even if you take them to court, you’ll have a hard time enforcing anything.  But wait, isn’t in their best interest to treat their customers well, so they’ll come back?  No, not really.  They don’t know you from Adam.  They don’t believe all your talk of “potential” and they probably have no idea who you are or what your market is.  So no, they don’t know how much money they are leaving on the table by going after as much as they can get on one order.

5. China is willing to opt out of the world’s current rules and make their own (they have both the ego and increasingly the power to do so too).

Ever thought to yourself, “China just works on a different model than the rest of the world.  Well, you’re right.  They do.  One of the characteristics that Tim pointed out was the guiding principle of Deng Xiaoping to not show your cards too early.  This is, in hie view either a show of modesty or more cynically a way to hid things.  I think that it’s both.  Chinese are for the most part honestly very modest.  But that doesn’t mean that they are in deed hiding things from you.  And in manufacturing or in negotiations, ignorance isn’t just expensive, it will kill you.  Test, QC, monitor, be there or you do not know what’s really going on.

On a related note, from Julian Assange (yes, the WikiLeaks founder):

“The “technological enemy” of WikiLeaks is not the US – but China, according to Assange.

“China is the worst offender,” when it comes to censorship, says the controversial whistleblower. “China has aggressive and sophisticated interception technology that places itself between every reader inside China and every information source outside China. We’ve been fighting a running battle to make sure we can get information through, and there are now all sorts of ways Chinese readers can get on to our site.”

6. Develop a whole new way of communicating with the Chinese. This was the most practical of all his presentation.  He noted that from the beginning of his time in BEijing working with US/Chinese trade commission he was very specific in his method of communications with his Chinese counterparts.

He said that when they had a potentially difficult discussion, after outlining the situation he would then give them potential options for resolution and discussion.  Of course the Chinese were neither very happy about either the difficult situation or limited number of options, but the information was invaluable.  Then, with each option he detailed the consequences for each of the these options and the potential reactions from the US. This was almost too much–predetermined reactions and limited options.  But after a history of being correct in the options and reactions, the Chinese knew what to expect and could plan accordingly–and that was the key to a successful relationship.

So how do you duplicate that?  You follow the same plan.  Maybe you’ll have to allow for more input into the scope of the options that are available for problem resolution, but the forecasting (which Chinese factories, in my experience do not do well) will be very much appreciated, even if the results are not pleasing.

Finally, here are some questions that I had, that I didn’t get answered.  Maybe you know the answers.  How do you discuss competence issues with a power that distrusts (US/China) and a power that is extremely face conscious/insecure (China/US)?

I was particularly interested in the fact that he said in working with the WTO they were able to compartmentalize issues and contain the fall out on both sides.  I have found this, in China, to be very difficult.  Compartmentalizing in a holistic society is next to impossible.  How can you really compartmentalize econ issues not make them political?  Or in the case of production, how can you compartmentalize quality/production mistakes and not make them personal/financial?

One point that I’ve used effectively many many times is the 3rd party scapegoat.  He mentioned that both the US and China use the WTO as the whipping boy for media spin often.  This is a GREAT way to save yourself forma fight and give you factory a way out–offer up someone else to take the fall.  Very effective.  I wanted to know more about how this worked at the country level–I guess just the same as it does at the production line level.

Lastly, “Are you a Friend of China?”  I hate this question almost as much as I hate the question “Do you have free time?”  Because of the baggage and the implications and expectations of these questions, there is really no good answer.  If you answer, “Yes, I am a Friend of China” you are then expected to act the part.  Meaning, you are supposed to do what’s best for China (or the Chinese you are dealing with at the moment) usually at the detriment of your home country or your current personal business interests.  Tim answered this in two parts, “Yes, I am a friend of China, but I am also a representative of the US government and I’m required to look for for their interests first.”  What do you say?

Tags: Business, China, Culture by David Dayton
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Skype is now technically illegal in China.  Read here for more details.  But that, like just about everything else from religion to prostitution that is also technically illegal in China, doesn’t mean that it’s not still available.

The two lines from the article that can be applies to many things in China are these.

1. “The likeliest motivation for banning Skype and other cheap-as-free-internet-calling services that are not owned by the government is that it is trickier to monitor phone calls if you don’t actually own the service.”  This, and of course, if you don’t own it it’s that much harder to make money from it as well.
2. “Of course, with the Internet, making the law is one thing, and enforcing it is another.”  This is quintessential China–the “best laws in the world” and absolutely no enforcement whatsoever.  It’s always been like this–kill the rooster to scare the chickens.  The goal is just to scare “most people” into staying in line.

Business in China is often the same.  Possession is nine tenths of the law, meaning: only if you’ve bought the means of production (anything and everything from the art to the molds to the actual factory) you will have a much better chance of getting what you want.  And even then it can be a struggle.  This one thing is for sure, without that ownership very clearly “yours” you can be assured that someone else will be controlling it and making a profit from it.

In China there is a severe lack of respect for the individual and subsequently the individual ownership of the methods of production.  I don’t know if it comes from the collective society, the overlay of government socialism, the scarcity of opportunity or just a lack of understanding of (western) individual rights.  Regardless, if you “partner” with your factory to develop molds, or if you have your factory design a product for you they will often feel (or at least act like) they have at least some ownership of the product.  That means that if they’ve spent time or money on “your” product and they are not satisfied with the ROI (and let’s be honest, who ever is?!), you will see “your” product elsewhere.

The second point hits directly to the heart of production in China–if you’re not there monitoring or, at the very least, doing spot checks via 3PQ you cannot with any good faith be assured that you’re going to be getting what you ordered.

You can have the most detailed and finely finessed PQM ever made, but if you’re not there to make sure that each step is followed, it won’t be followed.  You have to devise step by step incentives to make sure that the important processes are followed.

SIDE NOTE: “We won’t pay if it’s not correct” is not really an incentive.  It’s actually the opposite, it’s a disincentive–motivation to cut as many corners as possible.  If from the beginning you’re threatening to not pay, what incentive does the factory have to invest in everything you’ve requested?  They would rather hedge their bets and put in the cheapest possible components out of the fear that you’ll not pay (they’ll then sell the product to another client or into the local Chinese market).

So… assuming that you’re not in China to do it all yourself, what do you do?

Scheduled third party testing gives you significant presence in the factory but only if you’re testing both before you start production and during production.  Leave either of these two testing times out and you’re in for a serious fight.  If you only test samples before production you’ve not only wasted your money but you’ll never know if the factory has meet those standards in Production.  If you only test during production and you have previously approved, but non-tested samples to start production you’d better pray things pass.  If they don’t the factory will tell you that they meet the approved standards and it’s your fault for not testing the samples before approving the start of production (which is true).

Third party management can be a huge value if you’re out of the country and expecting things to be done correctly.  Not only do you have the value of fluent English, but someone that is responsible for the quality of the product outside of the factory but inside China!

The key to 3PQ, testing or an outside manager is to tie the PO payments to the reports/results from these 3P agents.  For example, QC is of little value if the factory will get paid regardless of the info in the QC reports.  Similarly, if the factory can “work with you” directly and can ignore the requirements of the project managers you’re going to get exactly what you can see over Skype and not what you’re paying your management company to do for you (i.e. you’re not going to get what you ordered).

Tags: Business, China, Culture by David Dayton
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