Silk Road International Blog

A couple of really good articles that indirectly have some significance for business in China.

First, of course, if you didn’t know, gas prices in China just went up 18%; but they are still relatively lower than the EU or the US because of remaining government subsidies.  While the domestic consumer market is not expected to revolt, the impact to prices for everything manufactured here is going to go up.  In addition, if you’re working inland and you have to truck in either materials from other provinces or you have to truck product out to a sea port your through-port costs just went up.  By the way, the fact that 18% increase in gas prices is not expected to cause massive revolts nation wide gives you an idea of how “non-Chinese” the big East-coast cities are—meaning you see photos of Beijing, Shanghai, Guangzhou, Shenzhen, and Hong Kong, but these really aren’t the “reality” for most Chinese.

Second, why being polite is more than just an 0lympic trend.  This article explains very clearly the business environment that most Chinese are familiar with—close personal, inter-provincial relationships.  Historically there has been very little movement between provinces (hence the hundreds of regional dialects).  What this had bred in addition to language variations is both a mistrust for other (Chinese people from other provinces) and an real inability to communicate with strangers on personal level.

If you’ve worked in a factory for any length of time at all you probably noticed the province and regional cliques among the workers.  These are not just for convenience in communicating or because they like the same foods.  But there is a tangible mistrust for “others” that these groups guard against.  When things go bad, when bad news is shown on TV, when someone tells of getting ripped off, one of the first things that happens is people are “stereo-typed” by where the perpetrator was from.  “All Funan people are just like so and so,” or “All Hong Kong people are such and such.”  It can get down right nasty and racist (can you be racist within your own ethnic group?).  Certainly this is not unique to China, but since most foreigners don’t speak Chinese and have a hard time telling the difference between the various Asian ethnicities it blurs the degree to which this happens.  This happens all over Asia (and everywhere else too, I know)—every province in China looks down on some other one, none of the other Chinese like people from Shanghai, Taiwanese in the North look down on their Southern “country” cousins, Thai’s look down on the Lao, Cambodian and their own Esean (northeastern) neighbors.

Quick comedic sidebar.  This is the one and only episode of King of the Hill I’ve ever seen.  My brother showed it to me once after I told him about one of my trips to Laos.

Quotes from “Westie Side Story.” Written by Jonathan Aibel & Greg Berger, Directed by Brian Sheesley.

BILL: They look Japanese.
DALE: Nope. I think they’re Chinese.
BILL: How can you tell?
DALE: Japanese guys usually have glasses and a suit and a tie, and stuff like that.

BOOMHAUER: Yeah, man, them Chinese, man, you can’t understand a dang-ol’ word they say, man, just try, dang ol’ whole upside-down and whatnot.

HANK: So, are you Chinese or Japanese?
KAHN: I live in California last twenty years, but first come from Laos.
HANK: Huh?
KAHN: Laos. We Laotian.
BILL: The ocean? What ocean?
KAHN: We are Laotian. From Laos, stupid! It’s a landlocked country in Southeast Asia. It’s between Vietnam and Thailand, okay? Population 4.7 million.

HANK: So, are you Chinese or Japanese?

OK, so what does this little anthropological foray have to do with business? Specifically, it means that if you are working in Jiangsu and you have someone from Jiangsu you’ll get more attention and probably better pricing.  If you are working in Guangzhou and your project manager speaks Cantonese you’ll get much more of what’s going on that if you rely solely on Mandarin.  If you are foreigner working with (any) Chinese the affect is magnified.  So does this mean that you need to hire a person for each province where you are working?  Yea, it probably does.  And why not?  If you are going hundreds of thousands of dollars of business in Guangzhou but your office is a mandarin only office in Shanghai you might want to rethink you positioning.  Ditto for a Shenzhen based Cantonese speaking office doing work in Ningbo and Jiangsu.  If you are moving into China’s second and third tier cities you’d better really study your positioning before you move.

I double-checked this article’s theory with my resident Chinese expert (my Chinese wife) and she agreed and volunteered a few of my Chinese cultural missteps as examples (so helpful).  She says that when we first got married that I said “please” and “thank you” so much to my in-laws that they thought I didn’t like them!!   In Chinese society, the more polite you are to people the larger the relative social distance.  She says they understand now that I’m being police because I do like them, not the opposite.  She also pointed out that I am way too polite to line workers and office employees.  I try to always proceed a request for work with a “please” and end all emails and most conversations with a “thanks.”  Managers/Owners just don’t talk like that to people on lower economic/professional/educational/social levels.  It not only is contextually not appreciated by the thanked parties, it can also be misinterpreted to mean more than was intended.

Finally, I was sent a map of Chinese development that I really liked.  I don’t agree with all the analysis and there are some cities that are now expanding the edge of the “west coast” of the Isle of China (reclaimed land?), but it’s a very visual way to express the relative development of China.

Tags: Business, China, Culture by david
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For whatever reason(s), we just went back to my wife’s family’s village for the first time this past week. We drove from SZ to Jingdezhen in Jiangxi, about a 12 hour trip each way. Along the way up and back I gained a new appreciation for driving in China. We drove up the off ramps since the truckers completely blocked the on ramp of every service station. We waited in gas lines (truckers waited for hours!), we saw fights in gas lines (and almost got in our ourselves). We saw at least 6 MAJOR accidents on the way and a couple of dead (or at least really bloody) bodies. The fact that freight ever even gets to port in this country is a miracle!

My wife had always told me her village was small, but I didn’t realize that “small” meant it was less than 100 people and no roads. It was the only village for about 10-15km’s in any direction; surround by mountains and tea fields. There was running water, electricity and satellite TV though.

They killed the fatted pig (literally), we passed out tins of cookies, smokes, drinks and red envelopes and took tons (500+) pictures over the two days. We hiked through the freshly planted rice paddies to the tombs of ancestors. We drove from the family village to the next valley where the village had a street and a restaurant. We fed 45 relatives from 4 generations a huge lunch. The little cousins got into a fight over a toy in the (open) kitchen of the neighbor next door to the restaurant and most of the other people on the street stood outside the door and watched the meal.

Over the course of two days my brother in law had to call a friend in the municipal government to get the police to let him go for driving our car (foreign plates, local driver), we had friends call the mayor of the largest area town and request permission for me and another brother in law (HK citizen) to go into some Chinese-only national park-like tourist areas. We had family call officials to get us lower prices for museums and other attractions and had a huge dinner courtesy of a local judge (friend of the family). Quite a weekend.

Now let me put that this little family adventure into context for you.

My wife not only built part of her village home with her parents when she was ten years old, but she has since lived in Shenzhen and worked for multiple MNC’s for almost 20 years now. She is not alone in this life changing move from village to high-rise living. Most middle class urban immigrants come from similar backgrounds.

The point is this: your average urban Chinese person older than 25 has probably had a similar life experience. These “average” urban Chinese are the middle and upper level managers of most to all of the companies that you’ll be working with in China. This generation has a deeply ingrained set of beliefs and ties. Here’s some of the concepts held by the people we met that were either told to me directly or presented themselves clearly in the course of the week’s events.

1. No one will take care of them but themselves. Working 24/7 for twenty years is not just justifiable but necessary.
2. Every opportunity is a one time shot that needs to be taken advantage of fully before it gets away (or is taken by someone else). This precludes creation of new long term guanxi (with foreign clients) which is supposed to be the hallmark of Chinese business culture.
3. Strong, binding relationships with family and a few close friends are the only lasting “valuables” that you can count on maintaining throughout your life.
4. Uncategorically, property and cash are the most important things you can have for your own future and for your children. EVERYTHING in business is done within this mental framework of stockpiling these assets for the future.
5. The economy was better a few years ago than it is today—more evidence in support of banking on items 1, 2 and 3.
6. Despite all the recent nationalist rhetoric, a “faith,” in or commitment to the current government is not nearly as strong as the desire to “just make life better” economically—an almost palpable practical-ism that precludes ideology in China.
7. The further you get out of the big cities the more personal connections matter in getting things done.

Do these beliefs affect negotiations and business? The real question should be how do they not. They affect everything.

First, when negotiating in China, the prevailing concept is probably “scarcity” rather than “abundance.” This means that when you negotiate, your Chinese partner is almost certainly NOT looking for win win. Don’t misread that as “your Chinese partner is looking to have you lose,” he’s just not equally concerned with your profit margin as he is his. Even in this age of factories being busier than they can handle, most don’t believe that this will continue forever—and the slowdown this last year confirms that. (The move by many factories to inland provinces and other SEA countries further confirms it.)

So to make the deal more palatable, it needs to be structured to benefit them in the short term and you later on, if at all possible. You can see this style of negotiation in lots of deals in Asia—the Olympics and North Korea being the biggest examples I can think of.

Secondly, you have to realize that if there are problems (and my experience says there ALWAYS will be) the “customer first” theory will NOT be practiced. You are not going to get anything banking on it’s “the right thing to do” or because it’s “good in the long run.” Again, don’t misread this as “you’ll get screwed by your supplier” as many people claim. It’s more a matter of immediate self-preservation in a very insecure system—and by nature, you look after yourself as your supplier looks after himself.

Third, never pay bribes, never take kickbacks and fire anyone who works for you that does. Draw a very clear line in the sand and make firings for this offense as public as possible. At the same time, never be afraid to pay more than you agreed to just to get what you want. The difference is the legality of the payments. Cash is king and if you have the cash you can run the show. For example, incentives (publicly and legally) paid to key engineers, managers and other individuals can make a big difference in the level of attention to detail that you’ll experience. Buying drinks for line workers in a factory without AC is another way to win point and get better results too.

Fourth, be very very careful about what you say about politics. Just because some Chinese (very rarely) criticize their own country in public doesn’t mean you can—even in personal, private company. Misplaced comments spoken in what you think is agreeable company can reinforce taught stereotypes and make partners less willing to cooperate and more intransigent on sensitive issues or requests for help. In the current environment, it’s just not smart to talk about politics or the 0lympics (unless you’re positively thrilled about each). The rule I was given by my first Chinese employer, a university in Chongqing, was: say nothing about Religion, T!bet, T!ananmen or Ta!wan. Some things have certainly changed, but it’s always better to be safe than sorry.

On a related note—it never hurts to know the right people. This isn’t an endorsement for pulling personal strings to get access to opportunities that otherwise would not be available to you. But it is an absolute acquiescence to the reality of the power of well placed political individuals in a relatively weak legal system.

Finally, let me say that I’m not trying to insinuate that Chinese are all about money and themselves. But I am trying to convey the notion that background experiences color the perceptions and positions of the Chinese partners that you work with. Understanding and emphasizing with that background will always be an asset in negotiation and working with your Chinese partners.

Tags: Business, China, Culture by david
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One visa for all countries in ASEAN—great idea! The fact that you’ve got Thailand,Malaysia and Vietnam all fighting over the same pool of potential business clients and ton of tourists going to both Cambodia and Thailand (and to a lesser degree Vietnam) this is a great deal for Thailand—as the largest regional city/airport Bangkok becomes more and more the de-facto hub for all SEA travel. With the new road connections from China, this would boost travel and investment into Lao too, no doubt. Now if ASEAN could just do something about Burma…

A very interesting perspective on Thai culture and the lack of any real political progress in the last decades. Even more interesting now that there are signs of yet another coup in the works this week (more here). If you could clean up the sex trade and straighten out the government processes in Thailand, it might just be heaven on earth. Dare to dream…

Wow!! Let me get this right…thousands of factories close in China in the previous two financial quarters and Thailand, as the regional investment hub for SEA, has 5.7-6% per quarter growth! Well, fancy that. If you’ve ever done business in Thailand you know a couple of things. First, it’s a great place to go on vacation. Second, Mandarin and Cantonese are just as useful as Thai when talking with most factory management. And third, investment, ownership and raw materials are, in large part, all coming from China.

2008 Global Competitiveness Rankings. China and the rest of SEA are just eating up the European countries and Singapore may just knock the US out of it’s 15-year top spot next time around. Brief article here. Methodology and details here. The world it is a changin’.

And finally a not-directly-related-to-SEA piece of news; more on the impacts of the quake to Chinese and global finance here.

Tags: Business, Culture, Thailand by david
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In the last two weeks we’ve worked with two factories and talked with a number of other people about the reality of the new export responsibility enforcement in China. (New since the lead-paint problems of last year.) Yet, recently (since about Chinese New Year) the enforcement seems to have been ratcheted up another notch.

Example 1, we’ve been looking to export some electric bikes to the US for a client. But, unlike just about any other time in the last 10 years, some factories can export them and others really cannot; not right now at least. Very simply put, without an export license factories are not registered to export from China—rarely has that ever been a limitation on actual exports, though. But since China is trying to make sure that everything that leaves the country is traceable back to the site of production, it’s now limiting exports to factories with licenses (or good connections, more on that later). The market for electric bikes in China is huge and the bikes from a number of domestic factories are both good quality and available in foreign markets.

The problem is that enforcement of the rules are at best sporadic but getting stricter. So factories that were indeed (with out a license, through a 3rd party) exporting before have recently taken orders from foreign clients but the products are stuck in the factory and can’t leave the country for the foreseeable future. One of the bike factories is exporting like crazy—orders have gone up because they have a license. Another is telling us their warehouse is full of orders that they can’t get out of the country.

Example 2, dust, powders, fine particulates are currently restricted for export. Some can’t be air freighted, some can with visas and some, well some are just the luck of the draw it seems. We do a lot of craft glitters and flocks for export and have been hit with a weird series of regulations this year (not last year). Glitter cannot be exported by air in bulk qtty’s. “Bulk qtty’s” could be as small as qtty’s of 5grms per unit. This law seems to be cut in stone. Glitter by sea, no problem. Flock, in similarly small qtty’s is OK for both air and sea. An associate of mine says that his coffee exports are being similarly affected by this but that sufficient testing and paperwork solves most of his problems.

Example 3, some types of products are restricted but only in specific qtty’s or packaging. Ribbon, for example can be exported without a visa if it’s in pieces smaller than 20mm and clearly marked with the word “SAMPLE” on the packaging. Different materials don’t matter. If it’s classified as ribbon, it’s either going to require a visa or must be chopped up and labeled. We learned this the hard way. We were told by UPS in China that larger samples were no problem in small qtty’s. So we shipped a carton of samples to the US and indeed had no problems. But one month later, a second carton was held up and cost us hundreds of dollars to get out of US customs.

The lesson is–don’t trust your Chinese freight forwarder on US requirements and vise versa.
So what to do? The easy answer is you should do the same things now that you we’re doing before—following the laws. If you were using factories that didn’t have export licenses before, now may be difficult for you. I feel your pain, but can’t sympathize much. Domestic factories are cheaper for a reason—and now with exports controlled more tightly foreign buyers are finding out what that reason is. We buy a lot of materials from domestic factories and ship to domestic locations for final assembly, manufacturing—making sure that all our final factories can export.

More helpful advice is to check out customs in both the export and import countries. Talk with freight forwarders on both sides too–My experience is that freight forwarders don’t talk to their own offices on the other side of the ocean as much as you’d like to think. You make the calls and you’ll be safer–and have confirmed answers. Also, confirm BEFORE you order that your factory can really export on their own. A quick and relatively painless (few hundred USD) company report from and company like Verify can confirm independently that you’re working with someone that can ship your products regardless of the enforcement status in Chinese Customs.

So how long will this enforcement of the rules continue?

At least until the end of this 0lympic year, for sure. Hopefully longer. While the cynic may say that once the 0lympic hoards are gone so will be the enforcers, but I hope that’s not true. It’s in every-one’s best interest to make sure that the goods leaving China quality tested products. And that if there are problems, solutions can indeed be found and implemented and individuals and factories can be held responsible.

Tags: Business by david
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We’ve had requests for assistance work from 3 different companies in the last two weeks. All three have projects that were started independently and have since been canceled, rejected, or are held up for various reasons. All three are at least 6 months late and at least ten thousand dollars over budget.

So let me reiterate a couple of rules that should be engraved on the forehead of every international purchase manager. These are not jokes, although you may laugh if you’ve seen this before (or you may cry if you’re stuck in the middle of it now). And my experience is that if these rules are not followed the results are anything but funny. These rules could just as easily be applied to manufacturing that you’re doing anywhere, not just China. But since China is what we’re talking about, China is the example here (so save your “stop picking on China” feedback).

1. If you’re not here, you’re not getting what you ordered.

1a. The corollary to this is: “Any money saved from not coming to China (multiple times) will be lost in missed delivery dates and/or labor paid to repair product.”

2. If you don’t speak Chinese you’re not getting what you asked for.

3. If you don’t personally and physically confirm that samples match production you’re not getting what you asked for.

4. In the midst of problems, if you get angry and try to threaten the factory using your final payment as leverage, you’re not getting what you asked for.

5. If you don’t pull production samples yourself and have them tested by an independent third party you’re not getting what you asked for.

6. If you’re sending IP to various factories to get bids and/or samples and you’ve requested that, after a difficult and unfruitful sample process and no orders, the factory give back all the IP and never look at it again (especially if there is tooling involved) you’re not getting what you asked for.

7. If you don’t have perfect samples of every single part and a perfectly completed pre-production sample neither does your factory (i.e. you won’t be getting what you asked for).

8. Beware of the request for cooperation. “Cooperation” in Chinese means that you happily pay more for lower quality product delivered later than what you’ve contracted for—obviously, you’re not getting what you asked for.

9. If the answer to any question other than “Can I have a Coke instead of tea?” is “No, Problem. Of course we can do that.” you are not going to get what you ask for.

9a. The corollary to this is: “Any factory that, when offered money/orders, tells you “No, we can’t do that.” is a good factory and you should keep them on file for future projects.”

10. Nobody cares about your product as much as you do, but if your supplier sees you regularly, knows how much you care and also cares about you/likes you, you just might get what you are asking for.

11. There will be problems. Plan for them in your delivery schedules and budgets.

Tags: Business by david
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