Silk Road International Blog

Beyond doing things correctly (correct materials, correct standards, correct processing, correct completed product) when working with suppliers I really only have three other expectations.  1. We’re going to be very strict about QC and testing.  2. I need to have a schedule–I know things change, but I need to manage other venders and clients’ expectations and so a schedule is paramount.  3. Good or bad, I just want to know the truth.  I want to know what the problem is and what can and can’t be done now (and what can or cannot be done with more time and/or money).

As we set up projects I try to be very clear with factories about these things too.  I know that my staff warn new suppliers that we’ll be strict about these things too (to which the suppliers ALWAYS respond, “Don’t worry.  Our clients are Japanese so our standards are already very high.”).  But even with suppliers that we’ve work with before, we tend to have the same issues over and over again–little or no transparency, missed dates (usually its us telling them they are going to miss their dates and then them coming back later and confirming what we already figured out), and complaints about us being “too strict.”

Story #1. Printing.

I’ve spent the last three days printing with a factory that has worked with us for years now.  They know how we work.  They know that we’ll come out at any time to fix things.  They know we won’t take bad product.  They know we pay our bills (that’s why they’ve worked with us for so long).  We even have the magical pixi-dust (guanxi) with these guys.   But today, when we get to a print that is very obviously different than all the other 12 SKU’s we’ve printed in the last 36 hours the manager’s response to the question “Why?” is a slap in the face.  “Well it must have sat too long—this sample is bad. You can’ use it for a print standard.”  I’m not sure what to say to him.  I start with asking him about all the 15 other samples that we’ve used for the last 3 days.  And then I move to the print proofs from the supplier themselves that match the sample;  Not good either, eh?  How did we get all the production of the other SKU’s to match and have the same colors?

His answer is obviously complete BS—he doesn’t know what the problem really is.  But why do that to me now?  What could be possibly be gained by lying about the real problem (or the fact that you don’t know what the real problem is)?  He knows I’m not going to accept it.  Is he just looking to make conversation?  Am I not supposed to answer (call him on the BS)?  Is this some Chinese secrete code that I’ve not figured out yet (possible)?  Of course I point out how none of those things are the problem.  And so he says, “This one is RGB and the other’s are not.”  OK, now that may be true.  Let’s check.  Last order, same file–no problems.  A call upstairs to the computer/film lab confirms that nope, its not RGB.  I don’t say anything, but everyone on the floor knows the manager just got busted.

So I try it again, this time I ask the engineer instead of the manager.  “Why?”  His answer is: “The pixels are not the same. It must be that you changed your file.”  Again, how can we be using the EXACT same files as last time—and all the colors for all previous 11 SKU’s still match perfectly except for this one?  Of course, it can’t be the fault of the supplier–they didn’t change anything, they maybe don’t have the skills to repeat what was done before (it is a new engineer).  Not only did we not change the file ourselves (we won’t change clients’ artwork) we don’t have anyone in our office that knows how!

I don’t accept it and they take off the screens, wash the machine and start over on the next one.  They’re pissed that they are “wasting time” because it was “close enough for the Japanese.”  By the way, who the hell are these amazing Japanese with incredibly high standards and yet horrible QC?  And what about my time they’re wasting right now!?

But who really cares about details or right or wrong, when you have a schedule to keep to?   They want to finish this ASAP.

The desire/push to get finished quickly is certainly understandable.  They’ve already had 2 film issues in the 15 previous print runs that we’ve done this week and they don’t want another one on the second to last run.  While we’ll quickly switch screens and do the last remaining run, this mistake will most likely mean they’ll have to stop the machine and wait for the problem to be resolved (can’t switch out inks for other client projects without losing even more time switching back again).  They really just want me to approve it and move on.  They want to get this project off the machine as quickly as possible so that they can make money on other clients’ work without having to fix anything or do this again.

But just because it’s understandable doesn’t mean it’s acceptable.  I don’t accept sub-par production just to move things along.  If I did, I’d be no different than the hundreds of other project managers/trading companies trying to make money off of the uncertainty and unprofessionalism of China.  The difference is, I’d have to pay my client back for rejected product while no factory west of Taiwan would ever even consider doing that.

Turns out that the lady upstairs that was making the files for the print screens also “adjusted” the files (which she wasn’t supposed to do).  She changed one of the blue colors to make it match the other items that she was putting on the same screen.  Didn’t tell anyone.  Didn’t check with the order to see which pieces were supposed to match.  She was just trying to get everything “close enough” so that it would be faster.   No one else has a clue about this—she just changed one shade of blue on this one file—she told us as much as we worked back up the line to get this problem resolved.

Story #2.  Samples.

We’ve been making iPhone cases for a number of clients for a few years now.  We’re sampling a few new ones right now for a new client—the samples are not coming out well.  We go to see them before they are sent and every time we’re rejecting them—6 rounds of rejects.  For the first few, every time one problem was fixed there was another new problem.  Then the old previously fixed problems start coming back on new samples.

After two rounds of bad samples I was on the phone with the manager asking, “Why are we’re having problems with samples?”  His response is: “We’re really busy right now.  And your order isn’t our biggest one.”  Not sure what that means… you’ll take my money but you don’t want my business?  It’s not like I twisted his arm to do this.  OK, I tell give me my money back and I’ll take my business elsewhere.  Of course, that option is quickly refused and he tells me that they are busy but they’ll get it right for me this time.

After the 4^th sample I call again—“What’s going on?”  He says, “We’re just too busy but we’ll get it right this time, I promise.”

A month later and finally sample #7 is correct.   Apparently the factory was “so busy” that doing it half-assed 6 times and once correctly saved them more time than doing it right once.  Wow, that’s really busy.  Of course we already took the project to someone else, after sample 4.  (Yes, the last three samples were us trying to get what we’d been promised (6 times) and what we’d already paid for.  But it wasn’t just done completely for spite, we now have a confirmed backup.)

Turns out, the person that manages their sample department for them was on maternity leave.  Manager didn’t know what we wanted and was basically stalling for time until she came back.  Congratulations!  She’s back.  Too bad we’re paying someone else.

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Why is “I don’t know” so damn near impossible for Chinese people to say?  It certainly has to be easier than making up a lie and then trying to remember it for the next time you meet, right?  Or maybe lying is easier precisely because you don’t have to remember it for next time because no other Chinese person will call you on it in public.

He’s my belief window about working in China: You will not lose face if you tell me you don’t know.  In fact, if you tell me you don’t know but that you’ll find out for me I’ll probably be more impressed with you (not less).  You will not lose my business if you tell me you don’t know.  In fact, if I know that I can trust you to actively solve problems I’ll give you more business, not less.

Saying I don’t know doesn’t make you look less professional or stupid or unprepared or anything negative whatsoever.  Everyone is hit by surprises sometimes and everyone has things they are not sure about.  I know that in China there is lots of dishonesty–meaning there are tons of situations that you could never know about before hand (like the changes the film lady made to the blue color or the order details that the lady on maternity leave usually deals with).  Not knowing about these things is completely understandable.  Lying to me about what you don’t know is not.

What makes you look stupid and foolish is lying about little things.  What makes me want to take my business elsewhere is you trying to pass off less-than-I-paid-for quality just so that you can hurry up and do something else.

If I know that there will be delays I can manage expectations.  If I know what’s really wrong I can help with solutions.  If I’m told the truth, chances are I’ll be much more forgiving and understanding.  But flimsy stories that I can see through immediately make me ask more questions.  Delays and cover-ups immediately make me look for other options.  Lies (from “friends“) are insulting and just piss me off.

Guanxi too often seams to mean that Chinese suppliers think they can can lie to me and I won’t call them out in public.  Guanxi too often seams to mean that a supplier can screw up and they still think that I’ll share the costs of their mistakes AND I’ll pay for the late delivery penalties on my own.  Guanxi too often seams to mean that suppliers think I will share in their quality/product lies to the end client (as if there is some value in that for me too).   To this date, I’ve yet to see guanxi used to fix problems and have someone other than me pay for the expenses of it.  I’m sure that guanxi has been used to “save my face” on multiple occasions.  But I’d much rather be rich and embarrassed than paying for someone else’s mistakes while everyone stands around and smiles at each other.

My advice?  ”Never lie to Foreigners.  It’s just not worth it.“

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

Update 30/07/11: Another reader sent me this link: daily news article in Chinese and English with highlighted terms for study.

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One of the points I make in my presentations at various shows around Asia (Buying From China, What New Buyers Need to Know) is that regular China buyers should learn Chinese.  This suggestion is usually met with laughs, rolled eyes and versions of “Yea, right!”

But after they stop laughing I ask them, “Why not?”  Over the years I have really only heard three answers, 1. I don’t have time, 2. I don’t want to, 3. I don’t think that I can/I’m not good at language learning.  Basically they are all the same: I don’t think that it’s important enough to really try to learn and/or I don’t want to put the time and effort into learning Chinese at this point.

Fair enough.  It’s not for everyone.  I understand.  But for those who come to China often or who are working with Chinese suppliers regularly (or who are married to a Chinese!!), it should be a priority, if for no other reason than to save your money and your sanity.  (Do you really need any other reasons?!)

In 1998 when the Thai economy collapsed I lost my job as a English-to-Thai translator in BKK.  I realized then that I wanted to stay in Asia and the best way to do that was to learn Chinese.  So I moved to a very small town in Taiwan and worked as a curriculum director (glorified teaching position) and an English teacher at a local high school while I spent as much time as I could studying Chinese on my own.

With a full time job, a family, and some other responsibilities within 2 years I was still able to get to the point where I could use Chinese for business negotiations, factory visits, to understand much of the TV news and peck-out simple letters in Chinese characters.  I focused on speaking and character recognition and have really never practiced any writing at all (Who needs it?!  With computers, text and Skype I rarely hand-write anything even in English any more.).

You can do it too.  Back then I had a couple of books, some flash cards, a friend or two in the same boat and a dictionary.  Sure I lived in Taiwan, but I also worked in an exclusively English environment and went home to a completely English environment as well.

Side Note: Let me say here also, my Chinese isn’t great–upper intermediate.  That’s what living and working here (but not studying will get you).  After studying the basics on my own in Taiwan, I have just learned the rest of what I know as I work/live each day here in China.  I have a pretty good ear for tones and a decent accent; it helped to learn Thai first for sure.  But since I never really went through a formal course/manual my vocab is broad but not deep and I so I still can’t fully read a newspaper—but I can read QC forms, spec sheets and email; I can send messages in and emails in Chinese too.  I can do negotiations and problem solving in factories exclusively in Chinese.  I can understand movies and TV in Chinese.  But I can’t do contract work and book reading is difficult. I can drive in Chinese too–watch out!

Here’s a great example of how anyone, anywhere can do it:   (And if this one app doesn’t convince you that you want to learn Chinese then there’s really no hope for you.)

I found that there are two keys to language learning.  One is to have a thick skin—you’re going to get laughed at, your going to get frustrated, you’re going to get served the wrong food.  So what?!  You have to learn that “I don’t understand” and “what did you say?” are some of the most useful phases you’ll ever learn.  Second, the real trick to learning a language is to force yourself to do something new every day.  A stack of cards, listen to the news, order a bowl of noodles, talk about a sporting event, read an article, tell directions.  Something, anything at least once a day.  10-15 minutes of something that is honestly difficult for you.

There is real value in learning Chinese, not just esoteric value to additional knowledge.  This article points out that one of the things that all of these VERY different but successful American entrepreneurs in China have in common is that they all speak Chinese and understand Chinese culture.   With that said, let me make this plug for anthropology and history studies (Yes, I’m waving the flag for all of us who defied logic, received social science degrees and found a way to actually make money).  I can’t think of a better degree/background for understanding the Chinese language than Chinese History/Anthropology.  The culture has SOOOOOOOOooooooooooo much to do with the language (and vise versa).  Being able to speak Chinese doesn’t make you fluent by any measure.  More so than in English, the high-context nature of Chinese requires to understand the culture to understand the words.

So not only is it possible for just about anyone at any age, it can be fun, you can save money, you could meet a nice Chinese girl/guy and there are other advantages too:

Learning Chinese will save you time in communications.

Learning Chinese will save you money in hiring translators.

Learning Chinese will save you time and money on projects as you’ll be able to be involved directly in negotiations and problem solving.

Learning Chinese will increase your value to your employer (or your own business).  I can’t tell you how valuable knowing the language has been for my business–more important than any other one thing I’ve done besides physically being here.

I’m sure there are tons more reasons too.

Plus with all the new tech available, learning Chinese shouldn’t cost you much money—as a matter of fact, everything that I had to learn Chinese you can probably access online for free (except the environment, but you can probably manufacture that now too).  There are sites like Pop-Up Chinese (very cool online personal services), CSLPOD, Melnyks Chinese (great help and easy to use lessons) and this great online dictionary.  And I love the articles and comments from the guys over at Beijing Sounds (check out their “Most Commented” posts).  There are hundreds of free (and for pay) iPod/iPhone/iPad apps too.  You can watch Chinese movies (with or without subtitles) and you can listen to Chinese news (NHK world radio has a free 15 minutes of by-natives-for-natives news twice a day in multiple languages–iTunes) and Chinese music anywhere in the world.

Of course the counter to that would be what people have always told me at the trade shows, “I just don’t have time.” And they may be right.  Learning Chinese will take time—a lot of time.  If we’re being perfectly honest it will be more like a second job if you’re really committed.  Plan on at least a couple of quality hours a day for 3 years to get to a lower-intermediate level.

And if you’re tone deaf don’t even waste your time—learn Spanish and work in South America.  Hola, Senorita!

But except for the few hombres that really can’t, just about anyone can learn Chinese.  And there tons of other reasons why you should learn Chinese that are not related to your specific business too—Chances are, with somewhere between 1.2 and 1.5 billion Chinese you’re going to have Chinese neighbors at some point. You’re probably going to soon, if you don’t already have Chinese co-workers/friends/social acquaintances.  If you travel you’ll probably have to push your way though a Chinese tour group sooner than later.  And if you’re reading this, you’re probably either dealing now with or will be dealing with China soon.

加油!

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

UPDATE 20.07.2011:  Same conclusion, much larger scale.

Is China becoming a country where rioting is the best way to get anything done?

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One of the things that I’ve learned (through painful experience) while working in China over the years is that Chinese and Westerners (Americans at least) don’t argue for the same reasons or in the same ways.

Americans tend to argue to resolve specific points (words, dates, statistics, etc.).  Ideally those individual points will be acknowledged and eventually the argument will reach a “logical” conclusion—each side’s specific points have been resolved to some mutual agreeable level.  I guess you can say that you “win” an argument by getting as many of your specific concerns resolved to your satisfaction as possible (without giving up too many to the other side).  This interpretation doesn’t preclude win/win either—you still want to get as many of your personal issues resolved as you possibly can, you’re just going about it by allowing the other side the same goal in the hope that it’ll actually get both of you a better resolution in the end.

But in 12 years in China, I can honestly say that I’ve only had this progressing-to-a-logical-conclusion type of argument a couple of times (and no, I’ve NEVER had a win/win type factory relationship—even when we’ve consciously tried to structure it—there just isn’t enough mutual trust on either side).  It seems to me that both the point of and the process of arguing is completely different in China.

If you’ve ever argued with individual Chinese about non-business related issues (car accidents, personal issues, politics) they are almost never about specifics (unless it’s historical dates of when “the West” abused China).  I think that the point of arguing for Chinese is to get a reaction.  After decades (centuries?) of dealing with layers of frustratingly inert bureaucracy that typically don’t want to do or be responsible for anything this is the best course of action; just getting someone to acknowledge your issue is half of the fight.  Because of the lack of attention, a specific resolution is not the point, rather just getting some action taken is the best that can be hoped for.

Arguing with a factory that has your money and your product is similar—you may have no leverage whatsoever, you’re just hoping that by making a big enough stink, you’ll get something (anything!) done—we see this all the time with employees who think they’ve been wronged by an employer.

The way that many Chinese women (and children) argue is also similar—they throw a loud emotional fit, and often throw things too.  In a male dominated culture that tends to devalues both honesty and commitment, women are asked to hold up ½ the sky but certainly don’t get half the benefits/accolades.

Another example.  Trying to argue points in the law about the responsibility of a traffic accident, for example, is near futile.  Neither the other party involved nor the police know the law and neither want to point fingers if they can avoid the loss of face, piles of paperwork and still reach some level of resolution (a lowest common denominator usually) that gets both parties out of the middle of the road as quickly as possible.  And besides, why argue who’s right and who’s wrong if you have more friends (standing in threatening poses) and a language advantage over your foreign antagonist?!

Certainly for westerners this not the ideal climate for business to be conducted in: sweeping emotional generalities and a loose adherence to details.  And while I realize that not everyone is dealing with a behemoth state-run bureaucracy all the time, tradition dies hard.

Side Note: I was once negotiating the final benefits in the end of a contract with my employer in Taiwan.  I wanted to talk about specific dates and compensation.  But before we even started to talk about the specifics, in Chinese and right in front of me (they didn’t know I had been studying Chinese) the boss asked his assistant if they had any dirt on me–when was my visa due, did I drink, sleep around, have anything illegal that they could exploit in these discussions.  When I answered their questions they both lost face and I got all that I wanted (more than I expected) and the discussions ended almost immediately.  I’m not saying that all Chinese are like this.  But this is an example of what I’m talking about.  Their first response was to look not at the details but what leverage they had outside of the details–they wanted to use emotional power/shame to resolve the entire discussion in one fell swoop rather than look at each specific date/amount and run the numbers.

We’ve also had the complete opposite experience in China where we’ve argued with manufactures about specific measurements and they’ve decided that we were just being jerks.  Their ploy then was if we’re going to check this one item then they have to have us check everything.  This of course will cost them some more money but it make us late too.  (The assumption being that being late will be more expensive to us so we won’t take the deal and they can get out of the discussion on specifics.)  We almost always agree to these tactics knowing that within a day or so it will be so onerous in terms of man hours and customer relations and costs that eventually a higher-up will hear about it and call it quits.

Yet despite the fact that the specific business environments have changed, the same traditions that inform arguing with bureaucracy manifest themselves in project management with private companies (no one reads your contract but you, no problems are ever shared, no QC, nothing is fixed/done right unless you pitch a fit).  So it’s not a stretch to see a strong cultural influence crossing over into business negotiations.

Specifically, these are some cultural issues that we’ve repeatedly seen in discussions with private factories—some small or large—all seem to have many of the same habits.

1. Chinese talk about problems in circular, non-direct inferences.  This means that when you say “I’ve never heard anything about this problem before,” it’s not exactly true.  And while you’re saying this, your Chinese supplier is thinking, “We told you about it a couple of times, you just never followed up so we didn’t think it was a big deal to you.”  Honestly, they probably did mention it.  Chances are they dropped a comment about something similar that happened to another client/project and you just didn’t get that they were ALSO talking about your project.  The combination of ESL or CSL and hints/innuendos means that there is a great deal of information that most westerners are just not even aware that they are missing.  If you were Chinese you’d get it and the fact that you’re not picking up on their hints is either never even a consideration to your Chinese supplier or they know you don’t get it and they’re too embarrassed (because of the of or the individuals involved in the problem or because of your lack of understanding) to bring it up directly.  Which leads to point number #2.

2. Never underestimate how much information is being kept from you to save YOUR own face.  And assume that at least that much info is also being kept from you to save someone else’s face.  Face isn’t just being polite and it’s more important than anyone from a non-face-saving culture can imagine.  Just know that there are very strong reasons for hiding mistakes and these reasons will trump personal and business relationships as well as money.  When you realize this, your arguments with factories may not make any more sense, but you can at least consciously try to figure out what the other motivations are.

3.  The corollary to this is that there isn’t ever any one to blame.  Either the materials were bad/wrong, or the weather affected the production, or “we’ve never done it like this” or whatever else can be used to not have any one person take the fall.  If push comes to shove, a sub-supplier is usually the first one hung for problems (regardless of if he had anything to do with it) followed next by a low level line individual.  As the specifics go unresolved and the argument drags on the finger pointing will climb up the factory hierarchy.

4.  Because there is no one to blame, no one has to be responsible.  The truth is, most employes are not paid enough to care as much as Westerners are used to have “customer service” people care.  And in addition to the lack of assigned responsibility, most employes are not supposed to deal with problems.  Job descriptions are VERY VERY narrowly defined.  The authority to resolve concerns is limited to a very select few (since it usually includes financial commitments).  Further, most employes are not used to resolving concerns or problem solving anything!  They never learned these skill sets in school and are definitely not hired to do this job now.

5. Unlike the West that has 250+ years of legal culture to ingrain the idea that specifics and details mater, China has less than 20 years of this “culture” and almost no personal level experience with the law.  Most Chinese business people have never worked with a lawyer for any reason and even fewer have any experience with contractual agreements of any kind.  Only a few people in any given factory will ever work with and sign contracts with foreigners and certainly there are even far fewer contracts signed with Chinese clients.  Chances are the only “legal” activity anyone in China has ever had was the signing of a mortgage.

6. Instead of the legal, laws-are-more-important-than-people environment of the West, China for the last 100 years has been a radically changing uncertain environment dominated by competing armies, political parties and political movements.  Not to mention the fact that there wasn’t even a functioning legal system until sometime in the last decade.  You don’t rely on the law if that law changes (180 degrees in some cases) regularly.  You work with people you know (and can hunt down when things go south).

7. There is no trust.  You can’t resolve concerns and fix issues if you think that your counter part is actively trying to rip you off.  Everything becomes either a fight or a conscious exercise in doing as little as physically possible to appease the other person without actually doing anything.  If you’re convinced that the other party is lying to you even before you start negotiations, the chances of a healthy relationship and a mutually beneficial outcome are slim to none.  We usually get to a “trusting” relationship with factories during order 3 or so.

8. A massive and overwhelmed bureaucracy.  In China most people can’t even honestly hope to get what they really want, but maybe if they put up enough of a fuss, if they annoy enough people for long enough, you might get some one to do something.  Like a single child with 6 adults caring for him, if he makes enough racket chances are one of the adults (ironically) is going to give in.  Or, equally effective, if you pay a single well-place individual enough you’ll get (some of) what you’re asking for.  Either way, you have to make your case un-ignorable.  Not right, not technically exact, not morally overwhelming, not sympathetically compelling.  Just not ignorable.

9. Lack of individual rights.  It really goes without saying that individuals don’t matter.  The all too common “there are too many people in China” sentiment, I think, affects the attitudes of everyone here.  The reality is that there are literally so many people waiting in line just behind you that no one really has time or desire to treat anyone well.  Ditto for factories with thousands of customers from all over the world trying to order.  If there is a problem and you’re throwing a fit and threatening contractual penalties, it’s just much easier for them to wait to have you leave than deal with you.  If you’re already threatening to make it a legal issue then ignoring you is better than talking with you and acknowledging your concerns (only to have those acknowledgements used to apply legal penalties later).

10.  China is both an immature and fast-growing market.  This is true for factories as well as retail.  The general attitude in China, except for a few exceptions (Starbucks, some hotels and a limited number of first rate suppliers), is: “So what if you never come back and order again?!  That’s just one less person with problems that I’ll have to deal with!”  And neither the retailers nor the factory owners believe they can operate in China the way their counter parts operate in more mature markets (with many times fewer potential and actual customers)—they all claim they would lose money here because of the unsophisticated clientele.  I agree.

All of these factors contribute to the response that you’re given when you try to argue about contractual specifics.  The reality is that you have to win the cultural, emotional and relationship battles with someone in authority first.  Once you’ve won the support from the top then you can start talking about the details with the people actually working on your project.

Tags: Business, China, Culture by David Dayton
1 Comment »

12 July 2011 UPDATE: Very interesting post by Steve at CLB on Foreigner on Foreigner Fraud in China.  I’ve never had any clients come to us with this specific type of case, but I agree with Steve that it’s surprising that business people from well developed business economies are still falling for tricks like this.  It seems that when people come to China, and the potential is so big they lose all sense of caution.  It’s like when (that much!!) money becomes the most important, all of a sudden it no longer matters how you make the money as long as you do.  So all Due Diligence and caution goes out the window.  The best advise I ever heard on working in China was from my friend Mike, formerly with BV who said: “Because China IS risky, you need to take MORE precautions, not less.”

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Really, it’s either read the news and learn what not to do and what to be aware of, or learn the same lessons yourself–the expensive way.  By the way, here’s a free way to learn a lot–the latest issue of CSIC’s The China Sourcer magazine.

Almost daily, I read the China new and blogs (what’s not blocked, that is) and then save news articles that I think I can use myself or share with others.  I’m always intending to comment on this collection of articles and tie them into blog pieces too.  But I never get to it, usually opting to write a long expose about an (horrible) experience with a factory while I’m still caught up in the emotion of the debacle.  But there are so many pieces on the same topic recently that wanted to at least put them together in a quasi-list format.  The final push to posting this was this piece by Dan Harris at CLB about a piece by David Wolf at Silicon Hutong—both bloggers that I read regularly and whose opinions I respect.

I need to say that I often feel guilty, like I only point out bad news about China.  But I’m really not a panda hugger (don’t think that China will rule the world) and my job is really just finding and fixing or trying to avoid problems in a very opaque business environment.  True, I do choose to live here, so there are certainly redeeming factors about China.  But what I love about China has nothing to do with business (or govt, or education, or traffic, or food quality, or crowds, or medical care, oh never mind).

Corruption happens in China (yes, and everywhere else too).  We know that no one is surprised about this; it’s not a revelation, right?  But despite the obvious, many buyers every week talk with me about how they started a project (read: paid money and/or shared IP and tech) and then were completely shocked when they were later screwed by their supplier who they “felt so good about.”

So, because some people obviously need another reminder, “in a word,” this is the theme of the following links: Speaking about China Enzio Von Pfeil, CEO of the Economic Time Bond Fund told CNBC on Thursday.”…unresolved problems such as endemic corruption and the lack of rule of law were heightening concerns over rising prices, bringing things to a head.”

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In another piece, Dan Harris recounts some comments he made in an interview about the legal implications of the recent Alibab/Yahoo!/Alipay situation.  But what is generally applicable from his specific analysis is in the last couple of Q&A’s that he provides:

Is this sort of thing unprecedented? Not at all. My tiny law firm has been involved in probably a dozen similar matters. The only difference here is that we are dealing with extremely well-known companies. This sort of thing goes on all the time with small and mid-sized companies and nearly every time it is due to a fault in the initial structure of the business. The Chinese company took advantage of the legal ignorance of the foreign company and set things up so that it would eventually be able to shut the foreign company out, purely legally. Is this what happened to Yahoo? I do not know.

Will this lead to a decline in foreign investment into China? To a large extent it will depend on how it is finally resolved. But probably not.

Are we going to hear more stories like this in the future? Yes.

Foreign company ignorance, pushing too far and making Chinese counterparts lose face, and then realizing that you’ve messed up but don’t have another option so you’re forced to keep working with China (maybe even with the same supplier).

Yep, this is pretty much what I see every week in China.  At least ½ of my clientele is working with me because of some version of this same story.  Now, it’s not always the client’s fault.  Indeed, many of the problems are a result of blatant dishonesty on the part of a supplier.  But the cause of the problem, like in the Alibaba/Yahoo! story is not the point—you are ALWAYS going to have problems managing a project in a developing country from 10,000 miles away.  The point is how you react to it.

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And really, how could you expect anything different?  Corruption in China (like debt in the West) is inspired/instigated/accepted from the top-down.

Washington times.

Wall Street Journal.

East Asia Forum.

It’s a never ending battle between whose understanding will be the correct interpretation of what’s really going on.  And while that might be fun for policy wonks, it’s not fun when the argument is between you and your supplier.   If possession is 9/10’s of the law, chances are you’re going to lose unless you’ve prepared BEOFRE you start.   So what to do?

1.  You need to believe (and then act on those beliefs) that Chinese understanding of business is fundamentally different that what is understood “back home,” wherever that may be.  No, the numbers, spreadsheet, computers and office buildings may not be different, and no maybe even many of the technical processes of production may not be different.  But how the processes are both understood and undertaken, what the expectations in business are, what the baggage of each country and individual going in is, what the external legal/political/social/historical/cultural influences are will be COMPLETELY different.  See this interview with Tom Doctoroff for some recent reinforcement of this concept.

2.  You’d better have someone in China working for you (insert shameless plug for SRI here)—QC, Inspections, testing, audits, project management—as much as you think you can afford (and probably more than that, to be safe).  Indeed, you should have someone working for you before you start working.

3. From my experience, regardless of what level of manufacturing you’re working in in China, the rules (or lack there of) and culture are the same.  Don’t make the mistake of thinking that due diligence isn’t necessary because you’ve heard that “the higher end of Chinese manufacturing is so much different/better than the mid-level suppliers.”  If that’s your logic, you might want to read this:

Some observers say Foxconn has come under greater scrutiny than other manufacturers because of its high-profile link with Apple, but its working practices are no worse than the vast majority of factories in China’s manufacturing heartlands.

“They pay workers on time and for overtime according to the regulations, and that’s why workers always queue to work there,” Geoffrey Crothall, a spokesman of China Labour Bulletin told Bloomberg Businessweek last year.

So for all the deaths and supposed labor violations, it’s one of the best options over here—what does that say about the rest of the manufacturing industry in China?  Nothing good.

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In addition to corruption affecting government and business, it’s basically being taught in schools too.

Talking about alternatives to Chinese schools’ testing system, the Gaokao.  FP said:

That’s what a lot of people tend to forget: that given the complete lack of trust in each other and in institutions, given the stifling poverty that most Chinese find themselves in, and given China’s endemic corruption and inequality, the gaokao, for better or worse, is the fairest and most humane way to distribute China’s [scarce] education resources.

That sentiment is fairly widespread. In a country where corruption and suspicion are endemic, many believe that everything has a price, even favorable teacher recommendations and grade-point averages. The test, for all its brutality, does produce a clean numerical score — and those scores can be ranked. As a recent graduate of Beijing Language and Culture University, a midtier school, told me: “If there was no gaokao, there would only be guanxi.”

So to recap:  “Endemic” corruption in education, accounting, manufacturing, politics, investing and legal issues and Chinese think that this is probably the best they can do, given the circumstances.  And please remember, it’s not me (a foreigner) saying this, the Chinese themselves talk about the lack of trust they have for other Chinese.

Tags: Business, China, Culture by David Dayton
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We work with a client whose buyer chronically asks for us to lower their costs.  Every order, every item, every time, multiple requests.  It’s their MO.  It’s like they were taught in MBA school that “if you don’t try to cut the price, you never now what you can save.”  And while I agree with the logic, pushing it so often, as they have, means that their costs are actually rising.  Specifically:

1. Factories quote higher original prices.  It is actually expected that you will cut prices to a certain degree, but once you are a “known quality” any additional cuts will cost you somewhere else.
2. Factories pursue conscious quality fade to save money. If you’re intent on cutting the prices up front (especially on first orders) you’ll get bitten in the end, guaranteed.
3. Even if you do cut the cost, to be safe from quality fade you have compensate on your own too.  Meaning, other costs go up, namely any 3^rd party testing, QC or management company involved to deal with issues 1 & 2).
4. Replacements/failures rise when standards are high but costs of materials are not raised accordingly.
5. Inflation and rising RMB are two additional factors that change the costs before ever even getting to the factory.  If you wont’ allow your factory to compensate for these real increases in the PO your quality will take the hit to cover the costs.
6. Overly-strict QC standards.  I know, I can’t believe I’m saying this either.  But if you push too hard on the first order, re-orders prices will go up accordingly.  More time, more re-do/repairs, more labor, more rejects all cost the factory money on the first order and they’ll “learn” what you really cost them before they let you place a second order.  Stick to your QC guns, but don’t be punitive.

I realize that there is very fine line to be drawn here between getting charged too much, getting lower quality, maintaining your standards and allowing for the real changes in prices and expenses.

I also understand that many of these issues will exist when working with suppliers regardless of if you’ve pushed too hard on price points or not.

So, what to do?

First, learn your market.  Know the prices of labor and materials, inflation rates, the status of currency rates.  If you know as much or more than your supplier you’ll never get taken advantage on prices.

Second, schedule and enforce purchase and production dates.  If you know what market rates and prices are, and you know what your schedule is supposed to be you can enforce the purchase of materials and the amount of time that is (supposedly) spent on your product according to the dates/qtty’s you were given in your contract.

Third, accept real increases.  Since you know the market, you can agree with legitimate increases.  This not only avoids fights but also builds trust—your supplier knows they can come to you with hones issues and you’ll be accepting/understanding about them.

Fourth, QC and test your guts out.  Even though you know the prices of the goods your getting and you’re on-top of all that’s going on in the market, that doesn’t mean that you’ll not get ripped off via (intentional) quality fade.  There is nothing else that protects your investment like regular QC and product testing.

Tags: Business, China, Culture by David Dayton
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