Silk Road International Blog

Some weeks are better than others.  Some are just down right awful.  This last week was one of those weeks, where everything goes wrong.

1. A Fight!  A Fight!  One of our factories has been complaining since we paid the deposit that we are too strict with our QC.  We’re not doing anything out of the usual (for us) but the factory is just not doing what they agreed to before we every paid them a deposit.  This isn’t new, we have this argument all the time.  What is new is the fight that our QC manager and the factory got into—actual fisticuffs!  I’ve seen many a screaming match.  I’ve seen gang fights on the streets.  I’ve seen brawls on the bball court and I’ve seen people get chased out of town with machetes or butcher knives.  But I’ve never seen factory professionals in white shirts and slacks go at each other with their bare knuckles.

Luckily, we had a second QC engineer in the factory that got in the middle and broke things up and mediated the immediate situation.  But we still have an active project.

So what to do?

We are always very clear that we support our QC people so that there never is a question as to who defines what acceptable quality is.  Also, we also try to be honest and fair with factories—we need them to do business.  And since we make money on re-orders, it make sense to keep them happy during/after the initial is being produced.  So we have to balance these to things by not sending our manager to this factory again, but also not giving in to any of the lower quality standards that the factory is trying to get away with.  This way both parties save face.  Someone else comes in to negotiate the argument for us and the factory manager gets face.

2. We had an employee take off for maternity leave.  Of course we knew that this was coming and so three months earlier we hired her temporary replacement—thinking that we could keep both once the new-mom returned.  So after a three-month investment into the new lady and only three weeks into the 2-month maternity leave the replacement tells us that she’s leaving too.  “This job is not what I expected it to be.  It’s too hard.”  You didn’t realize that 1 or 2 or even three months ago?

3. After a couple of frustrations, we decided that we need to have a back up for our international shipper.  For the most part, we’ve had a good experience with the old company, but they’ve made some changes in their staffing of their China office that have cause a few problems and made us a bit uncomfortable lately.  So we’ve been shopping around.  Well, of course the old company realizes what’s going on as we try out other companies’ services.  But instead of calling us to see what they can do about the relationship and see how they can keep our business, they go the opposite direction.  They call us, tell us that if we’re going to be using someone else they not only wont give us terms on any new shipments but that ALL shipments currently in transit will be held in the port of entry at $150 a day until all outstanding bills are paid in full.  This amounts to more than 10 container loads worth of shipping bills (current shipments and shipments still under payment terms), so it’s a substantial number.

We’ve had this happen before—twice as a matter of fact.  Because of the rules regarding shipping companies in China, they are usually set up independently or at least relatively autonomously from their foreign “home” offices.  This means that they have independent billing and collections, customer relations rules/norms, service centers, etc.  It also means that when it comes to where you’ll be paying your bill they are basically competitors with their own companies in other countries.  The China office always want you to have a “China” account and pay in China, that way the get more of the money.  Sometimes they make up some story as to why we need to change our billing to China.  Other times they are just flat out honest about their dishonesty—“You pay in China or we won’t show up for package pick up or delivery.”  One large shit-colored company has a rather bad reputation for holding shipments hostage until companies with offices in China change their billing to the China company’s billing system.

Good thing we had a couple of back up 3PL’s ready to go!

4. Different price, different quality, different sizes—same PO.  Yup, that’s what we got when we ordered a small qtty of stock items for a larger project.  They shipped less qtty, larger sizes and at a higher price than what we ordered.  When we called they said, “Sorry we were out of what you ordered.”  We asked if we could send it back and we’d wait until they had what we ordered.  They said that since it had already been shipped to us (from one Chinese city to another) that they wouldn’t take it back.  Of course we argued that we didn’t ask for it (the wrong order) to be sent to us, but that went no where.  Yup, we had to order it again, from someone else.

5. Factory refuses QC visit.  We use Asia Quality Focus for specific engineering-QC needs in locations across China where we don’t have our own employees.  We order man-days and they show up and do a great job.  Sometimes, too good.  Last week we had a factory call us and say that the 1. The independent testing company (not AQF) that rejected the product because it didn’t meet spec’s is wrong and that the pipes are correct.  And 2. The AQF QC engineer was too strict (boy, never heard that before) and was “trying to find problems” rather than “approve the order.”  Never mind the fact that we do not hire QC to either find problems or approve orders—just check orders.  Or that pipes are tested electrically and the process is standardized.  Or that the QC and testing company are not related.  Or that the same QC engineer never goes back to the factory twice.  Or that they get paid salary, not by the day.  Or that the factory agreed to repair/replace/finish everything that was marked as “fail” on the QC report anyway.  The factory says that they won’t do any orders again that require independent testing or 3PQ—that pretty much means they don’t want any more orders from us.

6. Factory says that if we don’t change to better materials, they won’t do the re-order.  Factory is complaining that there are too many rejects because the quality of the materials are poor.  Of course, they sold us the “best” quality materials when we placed the first order and that’s why the costs were higher.

Now, we’d be glad to upgrade as long as new materials pass the same tests as the previous materials.  And as long as the new materials match the same look as the previous product that has already been sold.  But, while tests have been passed, “look” to match previous production runs is NOT the same.  The factory can’t figure out why different colors of the same SKU number are a problem.  Client can’t understand why the factory thinks that this is acceptable.

7. Rejected materials equal retaliation.  A new buyer called us this week with a problem—production is done, but the quality is not acceptable and so the buyer doesn’t want it.  But the factory won’t do anything for them unless they buy it or pay about 2x as much for a re-order.

As much as I rail on factories for not doing what they agree too, this is not the factories fault (well, the poor quality is but finding out about it when the shipment is ready to leave China is NOT)—checking product for the first time only when it’s already done is just not a smart way to buy product from China.

The longer you wait in the production process to do QC the more difficult it will be.  We never advise any clients to just do a single day of QC at the end of the production process—it’s just a waste of money.  At that point, when everything is completed and ready to ship, you really only have two choices—accept or reject.  And if you reject product that is completed it will be sold to re-coup costs, you’ll probably not be able to get any of your deposit back and you won’t be offered a re-order since they don’t trust that you’ll accept it or pay for it.  From their point of view, there is no security in working with you if you’re not going to “partner” with them—which means that you recognize their investment and make one yourself (pay the balance and take the product).  From a safety perspective you just don’t ever want to be in the position of seeing your product for the first time when it’s already completed.

Tags: Business, China, Culture by David Dayton
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Sometimes contracts just don’t work.  Sometimes you not only don’t get what you ordered but you’re left with no viable options for exit or resolution.  Even ”if you can’t do it, just return my money and we’ll call it good” gets you nothing.  This is rarely ever successful.

In China, just because you can identify the problem that does not mean that you have a workable solution.  The reality is if you have guanxi and an MBA-system, as opposed to just having a contract and critical thinking skills, you can get anything you want done.  If you have a contract and critical thinking skills (and a western MBA) you will be able to detail (flowchart, graph and summarize) why you can’t get done what you want.  You’ll even be able to go to court—but that doesn’t mean you’ll get what you want.

One example I know of is Coffee Company X—like many others they tried to come to China and “do things the right way,” e.g. without any personal relationships—straight MBA numbers and efficient processes.  What they found was that they couldn’t get things done without “knowing people” as well as knowing how to do things.  They struggled to get registrations done, get spaces in prime locations and keep stores open.  Then, they consciously shifted their approach and now they are everywhere.  Did their foreign headquarters decide to do this or did managers that wanted to keep their stores open do it on their own?  That, I don’t know.  But I do know that selling coffee isn’t about beans, it’s about relationships and real estate (location, location, location) and you don’t get the prime spots in China without connections.

This last month two suppliers for completely different products confirmed stock qtty’s of goods, delivery times and quality standards.  Within the same work-week we placed orders with each.  Both came back to us and said, “Oh, sorry.  We don’t have the size, the price, or the qty’s that you requested (3 days ago).  But we’ll give you less, worse quality and charge you more. OK?”  This type of “business” begs my favorite un-useable question: “Are you stupid or just dishonest?!”  But of course that doesn’t help.

We did all the usual due diligence on these factories—paid for info, talked with buyers, checked out their physical facilities via a partner company in their areas and confirmed (or so we thought) available qty’s.  But nope, within a day of receiving the deposit, they didn’t have a damn thing.  “Demand” and “Govt rules” and “season” magically changed the entire project in less than 48 hours.

We played the game, called, begged, threatened, screamed, visited the factory, and adjusted expectations but we still were not going to get what we wanted.  So we called a friend with connections and had him get involved.  He wasn’t able to completely solve the problem, but once he was finished with the factory, “meibanfa” (no options) turned into some palatable choices.  Not great choices mind you, but choices, which is more than we had before he called.  We were able to substitute approved options for the same prices and keep the same delivery dates—really probably the best we could have asked for.

So what do we pay for help like this?  Well, we have a person in our company who ONLY does this work for us.  And when we go outside for help we never pay.  Well, we never pay cash and never “pay” immediately either.  Usually the help is “repaid” with favors later, most typically, help with a factory with whom we have some guanxi.

China is both different and risky.  You can ignore the risk and tell yourself that “numbers are numbers” no matter what country you’re in.  Or you can admit that it’s different, scary, uncertainty here and deal with it consciously.  I think that there are three ways to deal with the risk in China.

First, Chinese style—no due diligence or contracts, only Guanxi.  Until deep into 2009 and the collapse of the Western economies we’d never seen Chinese factories do any due diligence on buyers.  Even now, after so many factories have been stuck with product from buyers that have gone out of business before paying for their orders we rarely ever see anyone asking us for any corporate info/security that we’ll actually be paying our bills.  Even with large SOE’s it’s surprisingly still “business as usual” for Chinese in China—work with whom you know or build relationships before you order.

This is about education, but it’s describing the belief of parents of teens in China (e.g. 40+ year olds—the very people you’re doing business with).

here’s what our programme’s parents really believe: ‘I succeeded because of my ability to maintain and manage guanxi, not because of critical thinking skills and creativity. My child will succeed based on his ability to conform to Chinese society and to obey me.  My child will study in the United States to meet other rich and powerful Chinese. That my child crams for the SAT rather than read books and that he lives in a Chinese bubble will prove to me and to Chinese society that he’s a loyal and obedient Chinese, and that will ensure his transition back to China after he’s bored with the bright lights of New York and the blackjack tables of Las Vegas. Why should my child learn English and American cultural values when China is superior to the West?  Creativity and critical thinking skills are Western imports, and ought to be distrusted as dangerous influences.’

Second, Western Style—no Guanxi, only due diligence.  If you’re going to have only one, this is the one that most people choose.  And with this line of advice from CLB, I don’t blame you.

“The point is this. In China, you never know if you are dealing with a legitimate company and a legitimate representative of that company unless and until you investigate on the ground in China. Any foreign company that enters into a contract in China without this knowledge in hand is taking a risk that the Chinese companies themselves will not take.”

But the reality is, tons of DD and a great contract will NOT solve problems for you.  It will not force people to do their jobs and it will not guarantee quality product on time.  You’ve got to know who you’re working with.  You have to know that who you’re working with is used to getting paid to do what you’re asking.  I’m not suggesting that you pay them to do what they’ve contracted with you to do, but you must realize that you’re starting out with negative social credit since the supplier knows that you’re not going to be giving anything extra to them.  So when push comes to shove and you’re more strict than their other clients and they have more rejects than they accounted for you’re I a hole that a contract and numbers will not solve.

Third, the best of both worlds—lots of research and probably as many dinners.  You’re doing business in China because it’s cheaper, right?  So realize that it may cost you some in dinners, trips to the factory and additional time working both the personal relationships and numbers to get what you want.

I do NOT believe that you should “go native” and I do not believe that a western MBA is the key to making things work in China either.  You’ve got to have a lot more patience and willingness to work with your suppliers to get the same level of quality that you’re used to back home.

I guess that a fourth style would be to do nothing and just wire cash to a personal account of someone you met online—but if you’re going to do that, you could get better results (or at least have more fun) by going to Macao, or buying a Russian bride online or responding to the dying lady in Africa somewhere that needs your help, my dear, to get $15m out of her late husband’s account.

Write good contracts, run all the numbers, meet all the people involved and keep close contact with them, pay for a few dinners, spend time understanding the limits and abilities of the factory, hire someone (a trusted Chinese employee) to manage the relationships and negotiate the problems for you.  Use the best, not the worst of both cultures to find success.

Tags: Business, China, Culture by David Dayton
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