Why you should learn from others’ mistakes in China…

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.

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