Silk Road International Blog

I was told in once in a sales course that if you can name the game you don’t have to play it.  It’s just as true in China as it is in the US, although the Chinese version I was told this week “Doing business in China you always play the games or they will eat your weakness” seams a bit more vicious.  Here’s how we played the game with a factory this last week.

First, we’re working on a rather large project that involves more than 10 different suppliers and testing for countries on three different continents.  So of course we had contracts (in Chinese) and NDA’s and had spent a few months getting both preliminary testing and correct samples from everyone.  And of course, prices, timelines, quality standards, et al were all approved and agreed to.  We had worked with suppliers to confirm with their sub suppliers that they’d have enough materials in advance too.

But now that the order is placed, the molds are “more difficult” than they expected and the price is going up—about 200%.  Funny thing is, we were told that after our meeting to confirm the spec’s of the CAD drawings the molds had already been started!

Of course both the facts that we were told something that was not happening and that the price is changing was completely (expected) unacceptable.  So we said no—but how we said no was the key to the game.

We said no and reminded them, politely that we had a contract.  They said that if we didn’t pay they would have to return our money.  So we said, “Fine, we’ll pay you 1000RMB for your time and you give us the rest of the money back.”  Then we stopped talking to them. Within a day they had returned with a much lower price increase and a newfound willingness to complete the project.

About two weeks later, after we had confirmed that the molds were started (we went to see them this time), they called us again.  Again, they wanted more money.  This time the problem was that our products “were not typical” and so the molds were more expensive than previously estimated.  We told them, again, that we had gone over the CAD details and that the contract stated that the mold price was fixed.  They said that we could keep the same contract and just increase the payment per piece to cover the additional mold costs.  Of course we said no.  And they responded with the “if you don’t pay we won’t work with you any more” ultimatum.  We said we were sorry they felt like that and we would compensate them a few thousand RMB for their time and efforts and they could return the product deposit and the balance of the mold costs to us and we’d find someone else.  Then we stopped talking to them and waited.

They called us back a couple days later, said they had a new engineer and some better “skills” and would continue the project for us.

This happened again too, and we resolved it the same way.

This is a very simplified version of what happened.  In real time, there were behind the scenes arguments about what we should do, if they were lying or telling the truth, what other options we had, etc.  And we’ve had this scenario happen to us over and over again over the last 10 years in Asia.

While negotiations are often different in their specifics negotiations like these are often quite similar in general and there are a number of lessons that can apply across the spectrum.

1. Sometimes the request for money is true—and that’s both why you call the bluff and have a back up prepared at the same time.  If you call the bluff and you don’t have a back up, you’re in a worse position then you were with them asking for money as you now have no credible supplier.

For example we molded a new PP product for a client this last year and found that the specifics of the design required a skill set that was not common at many of the factories that typically built this kind of product.  When our chosen supplier called to tell us that the prices would be going up, we expected it—we negotiated the amount but kept them as our primary supplier and paid them to keep the project going.

2. There are times when it is indeed worth it to pay the new costs and keep the same supplier.  This is different than #1—sometimes the request for money is not based on a true increase in costs, but you want/need/like the supplier (or don’t have any other options) and so making a payment is valuable to you.

3. Delays often mean that either they are stealing your money, they can’t do it and won’t tell you or they have price issues they are trying to outsource themselves without telling you.  In the first case above, they couldn’t do what they had contracted for and were trying to not let that cat out of the bag.

4. When the offer to pay more comes, and it will, you can offer to cancel the project and send bank info then wait.  If they are bluffing they price will come down, you can then make a counter offer, wait and repeat.  If the price drops you know it was a ruse to get money.

If he returns your money, he’s telling the truth, they can’t do it.

5. If you pay each time they ask, they will keep asking until you are so far down the line that you can’t back out and you’ll get screwed (a la hostage payments to release goods).

6. Nominate only one person to talk with the factory.  Tell the rest of your staff to NOT talk with them.  Anyone that is not the point can only take calls and say thank you and then goodbye.  Why?  Because, even if staff says something as simple as “I’ll talk with so and so about this,” that means that there is room to negotiate.  Be strict and tell them to respond when asked about The Point person, “We can’t find so and so. Sorry.”

7. Always talk direct with the factory and the boss that can make decisions—remember, they’re playing the same game you are.

8. On the bright side, the request for money is not always a bad thing. Tie some additional quality standards or dates to any new payments to make.  If you didn’t have before, now you can get a legally enforceable Chinese contract signed, for example.

And, if the money shows up you know three things.  1. What the cost of good should be within a small %.  2. What the mold costs really are.  3. The factory is honest—so if you can’t find anyone else you can go back to him and pay more and get it done right.

9. The exact same words do NOT mean the same thing to you as they do to your Chinese counterparts, so be careful and consult with some trusted bilingual staff.  For example, one time the factory told me, “If I have time, I’ll return your money.”  My staff was really offended while I thought it meant that they get to it as soon as they could.  Our Chinese negotiator knew though that this meant that the factory boss was fighting with himself—do it or don’t do it?  Turns out he later came back and negotiated to keep the project going.

10. If you let your supplier “win” the first time they ask for money you will never know if you can trust them or if they will do it again or what your real costs/prices are.

11. No matter what, you can’t make your Chinese counterpart lose face in public (unless you calculate it very carefully).   Once he’s lost face, he’s lost all desire to help you out, maintain civility or even complete the current project.

12. Your Chinese supplier has to retain hope that there is more business coming or there is no reason to keep the current deal going.  If they think that this order is dead they will fight for all they can get now.  You play the game too—Tell them if they want the order next time and you’ll give them 2% more. “Next time I’ll let you make more profit.”  You need to act as if you’re trying to help them as much as you possibly can.

13. Never tell them, before you place the order that you’re going to place the order.  You cut the prices and lead them along, get them to cut the price and then place the order.  If you tell them “I’ll place the PO tomorrow” you know the factory will raise the price tonight.

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

I’ll be the first one to admit that I just don’t get face.  My wife would certainly confirm that as well.  After I graduated and for my first few years working in Asia, I thought I knew what was up.  But as the years have passed and I’ve learned what the Chinese words I’m saying actually mean to Chinese people, I realize more and more that I have a long way to go before I’m fluent in Chinese Culture.

I’ve heard some people simplify dealing with face into “just be polite and you’ll be fine.”  This is certainly part of it, but has nothing to do with things that you can’t say in Chinese that are perfectly acceptable to say in America.  And how do you politely and professional discuss lies, broken contracts, sub-standard samples, non-disclosed changes in production and unapproved production locations (sub suppliers)? Even if you can manage to speak like Pollyanna you’re going to be nailing someone’s keister to the wall, canceling contracts, changing ship dates (enforcing late penalties) or rejecting thousands of dollars worth of product all in a second language or through a translator.

Face is not just being polite, it’s more than that.  It’s complicated.

We’ve had two factories in the last year try to change out approved product with cheaper un-approved product after we’ve had testing completed.  In both cases the tested product was clearly marked in sealed boxes, wrapped in shrink-wrap, labeled (in Chinese and English) and set aside.  Yet somehow the factory “mistakenly” used part of our product for someone else and then “replaced” what they used with substandard, un-approved inferior product.

When asked about it, there is always an excuse.  And we of course, since we live in the PC 21^st century, we listen to all BS politely.  But even if we could agree that it was an honest mistake, how do we not get notified about a problem this large after 6 months of stringent testing?  How do the sealed boxes get “re-sealed” with our special tape?  How does our signature over the seals get copied?  How does product get replaced just coincidentally the day/night that we pass the tests?

One of the tricks to working in a very face-conscious culture is to let others know that you know their lying without actually saying as much.  You have to show that you know more than they realized without publicly pointing fingers.  Even when you’re in the right, you have to give them a way out and you have to keep your cool.  It’s a VERY tall order.  Sometimes too tall for me to deal with.

I’m reminded of Jim Gaffigan’s comedy routine when he laments that ethnically he’s “nothing.”  He claims that if you’re a Latino and you get mad it’ll be said that you have a “Latin Temper.”  But if you’re white and you get mad then you’re just a “jerk.”  The same is true here.  If you’re Chinese and you say “Chinese people lie” it means you understand your own culture and you’re being street smart.  If you’re a foreigner saying it, you’re a racist bastard (trust me here; personal experience).  If you’re Chinese and you’re angry and threatening to foreigners in China it’s because you’ve been offended and oppressed for 1000 years.  If you’re foreign and you’re angry it’s because you have no culture/class and you’re making yourself and others lose face.

Over the years I’ve gone ballistic more than once when I’ve been straight-out lied too.  Sometimes we plan the fights, sometimes I can keep it cool and sometimes it’s like a 2×4 to the side of the head—out of the blue and almost deadly.

Sometimes people get fired, relationships are damaged beyond repair and all the previous work is lost (worst case scenario).  Most of the time, there is a big fight, a show, a reconciliation and then things move on.

Yet with all these pot-holes in the cultural landscape, what amazes me is that sometimes after what I consider a fight, a single phone call can “solve” it all.  For example, we had a supplier that decided that since we tested his product, we had no choice but to order from him despite the contracts (written by a Chinese lawyer in Chinese) he’d already signed. Other than one cultural unacceptable outburst in which I had a few choice words for him, I calmly laid out all reasons why he couldn’t raise the price (contracts in China and the US, personal agreements).  He responded that he had “invested” a lot of time into the sample process and needed to recoup his costs.  I then outlined the mistakes and problems in the sample process that he was responsible for.  Of course, being the boss, he had no clue what had actually gone on in the trenches during the 6 months of samples—he’s only been shown the bills and been told that we were locked in due to the testing we’d done.  But instead of helping, my phone calls and emails that pointed out all the details about his employee’s mistakes made him lose face.  We went from “best friends” to “we will never do business” with “foreigners like you” in two emails.  But one call and it was back to “we are businessmen, that’s how we talk” and “we’ll just work on the future not the past.”

While everyone is polite now, and we still have the same price as agreed, my professional issues with the processes were never addressed.  Of course, a factory employee has probably been dressed-down, but how do I know that anything has been taken care of?!  And worse case scenario, what if the anger has just been transferred to the employee who will now sabotage things later?  This is where having a savvy and trusted Chinese employee is invaluable.

When dealing with heated and potentially face-losing situations and their aftermath, just remember,  just because you’re paranoid, doesn’t mean they aren’t out to get you.  Sure, fear is irrational but it’s usually based on some actual previous experiences—in my case 10+ years of these kinds of experiences.

Face is public, but retaliation is private and discrete.  Problem solving “western-style” is completely unacceptable in Asia—confrontations, “open” discussions about the merits of various plans, brainstorming, finger pointing for problems and praising individuals for success, email trails with names and dates, etc.  In short, personal accountability in a collective face-conscious society is not something you should expect to encounter.  (I know, I’m a racist bastard for saying this.  Oh, well.)  But hey, now you know and so you can prepare for it.

Tags: Business, China, Culture by David Dayton
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We’ve been involved in the sample and testing processes for 4 different clients and about 18 different SKU’s of product for the last year and a half.  Why has it taken so long to get the testing done? you might ask.  And I’d be glad to tell you, if you did ask, that CPSIA is a huge pain in the butt.  A complete racket from every angle.

First the rules are a complete burden to US businesses.  Well, a burden to everyone except for testing companies, that is.  We have one client that has closed down specifically because of the onerous requirements of CPSIA on their small start up company.  We’ve had at least three others (that I know of) that have changed design and/or target markets and/or components so as get out from under the CPSIA regulations.  The regulations are real nightmare.

Second, the actual testing process is a complete scam too.  You can only use a testing company from a US govt approved list—and of course, those on the list charge more for their certification than companies who are not on the list.  In addition to that, some large box stores also “strongly suggest” that if you want to place product in their stores you have to use a specific testing company.  Why the hell should it make any difference?!  That’s like forcing everyone that sells to you to deliver their goods in Ford trucks even though Chevy, Audi, Toyota, Buick, VW, Honda and BMW (wow, can you tell I live in China?) all have legit truck options too.

Three clients switched testing companies after products failed their first round of tests.  ALL three had the exact same products pass the tests after they switched to a different testing company!!  (And they all switched in and out of the same two testing companies!)  We pulled and sent all the SAME samples for ALL three clients and mailed them ourselves to the two different testing companies so I can personally testify that NOTHING changed in the samples between tests.  But the results were different—radically different.

When testing, the responsibility is on whomever requested the tests to make sure that everything is done correctly—and really, how in the world can you know if it was done correctly or not?!  Unfortunately, the reality is that if there are problems in the methodology, you’ll never be told about it.  We have one client with a personal connection to one of the testing companies US sales office and they were able to get some inside info and some help.  The other two?  Paid for everything twice (or three times).

FYI: If there are problems with the testing methodology you can get the tests redone for free (at least that’s the policy of the two companies that we’ve been working with).  The problem is, unless you get them to admit themselves that there is a mistake/problem, you’ll never know that maybe you could have either passed the tests or you could have your stuff retested again for free.  This is significant when testing for a single item can cost thousands of dollars.

Third, despite what our suppliers told us before we started samples and testing, CPSIA standards and the strictness of the processes that must be followed are not fully understood here in China.  The fact that we’d be testing both before and during each and every production run was seen as unnecessary.  The fact that we would still test production when suppliers already had other clients that they were sure had already passed testing was again not understood.

One Taiwanese/Chinese supplier, who has been exporting to the US in this industry for more than 25 years, was advertising “CPSIA CERTIFIED” at a trade show in the US this year and last.  But when called, not only did his factory/staff not know what CPSIA standards were, they had NEVER testing anything.  He had sold one item to a customer in the past who had told him that he had passed CPSIA tests, and apparently that was enough for him.  Despite the fact that this supplier has hundreds of different products made from different materials and with different processes, he was selling his “certification” as a done deal based on the hearsay from one clinet.  He did have some testing doc’s from the EU, but no CPSIA.  Over 50% of the product that we tested from this supplier failed tests (at two different testing companies).

When called on this fact, his answer was this:

“There are more than 300 colors and patterns available in XX. No one would send all to test CPSIA one by one. You may find tens [suppliers] in China, who can show you 300 certificates of XX? Who will prepare 300 kinds of XX material any time to be tested by CPSIA?”

Stupid me!  Why should I think that if he advertised as being “certified” that he actually was?!  Obviously, no one in their right mind would ever spend that kind of money!  Duh?!

Without exception, the fact that we are actually testing our own products when suppliers could either buy fake certificates of completed tests (ANY test you want: LHAMA, RohS, CPSIA, ASTM, etc., 1,500RMB) or just change the dates on older tests (“It’s all the same materials.”) was completely not understood either.  In fact, the idea that we would be testing and were tying payments to test results made more than one factory very nervous.  We had one back out completely and two others expressed concerns along the lines of, “But we’re not sure if we can control all the materials.  What do we do if they don’t pass the tests?”  Which is precisely the point—you need to “control all the materials.”

For us the processes usually goes something like this.  Contract out with the supplier for the testing sample process—these means that we pay for what is often free, but we get agreements (in Chinese) that we can enforce later when we have to make sure that production matches 100%.  Pull our own samples, send to independent third party testing company, sign new contracts and initiate PO’s with suppliers and then pull, test and repeat.

While suppliers might not understand the necessity of strictly following the testing standards they know how to work the process. Where it gets really frustrating for us is either just before the PO’s are placed or just after testing of actual production samples is completed.  We sign agreements before we start because we know what’s coming—suppliers realize after we’ve spent $10k or more and taken 6 months to test (and re-test) that they now have the upper hand.  Since they are now “legit” they figure that can raise the price as much as they want (and request copies of our testing results) to release any goods.

Usually the new price requests result in a pretty big argument since we’ve already completed contracts in the US months before and contracts in China to ensure against this very thing with the suppliers too. This type of problem is difficult, but usually resolvable; even though getting past these changes and into actual production can sometimes cost a lot (time, money, face, emotion).

What’s not resolvable is when a factory decides that they need to save money (aka: make more profit of this one order) and change either some of the raw materials or change part of the already approved production processes.  If either of these things happens when doing both pre-production and in-line testing the supplier is going to get caught almost every time–but it still happens, often.  Of course, now the entire production run will be rejected.  And if you didn’t have a fight on your hands before, you most likely will now.

If you can get correct production and pass the tests, the question, if you’re not in the factory 24/7, still is: “Am I getting the product that I tested?”  If you can ship to a secure 3^rd party storage facility without paying the balance before the testing is completed, I encourage you to negotiate that—but we’ve never been able to do that.  Usually we seal and sign all boxes to make try to minimize the chances of “replacements” being shipped to us after testing has been completed.

After having gone through this process over the last 18 months with 4 different clients in completely different industries, I would be completely shocked if all the product in the US that is “CPSIA Certified” really is, in fact, certified.  There are just too many tantalizing options for individuals in the process to cut corners and take a huge one-off profit; there are too many people that just don’t understand how important testing standards are; and there are just too many people involved that will NOT be held accountable if, in 5 years, some component is found to not comply with the standards.

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

It’s be more than 20 years now since my first work experience in Asia, 15 years this month since I first came to China.  So much is different, so much is so new, so much is much more developed.  Buildings are new, technology has not just made it here, but taken over.  Cars, shopping, manufacturing, education and income levels—it’s almost a different planet than the China of 1995.  Almost.

Whenever my Utopian vision of what Asia is pops up (yes, I still have dreams of Shangri-La) it’s usually quickly beaten down a few times with the baseball bat of reality.  Here are a few of the most recent bruisers.

1. Conversation at a factory: “You know how fake LV is much cheaper than real LV?  It’s like that.  It looks the same.  The quality isn’t too bad.  But it’s much much less expensive.”

This is the analysis from a factory manager (800 people, 11 years in business in Shenzhen, over 80% of their volume goes to the US/EU).  He also confided in me that they can buy any testing certification their customers need for about $150 per item—ANY ONE HE NEEDS!  That’s RoHS, LHAMA, ASTM, CPSIA 2008, TRA.  You name it, it’s for sale.

Wasn’t China supposed to have significantly improved enforcement of things like this?  I usually agree with Dan, but I’m not seeing ANYTHING different today than 10 years ago.  Maybe we disagree on the definition of IP, but it’s not getting a lot better down here in the trenches.

2. Comments from a conversation with a group of about 10 men, all working for large (VERY LARGE) multinationals:

“Let’s just say that my company will never build another plant in China.”

“I can’t tell you what’s next, but “next” for us isn’t China.”

“We have too much here already for how risky it still is.”

3. Conversation with a newspaper reporter about China vs. Vietnam.  He asked me about the increasing preference for doing projects in VN.  Me: “Sure Vietnam has cheaper labor.  But the supply chain and infrastructure are so much less developed.  Unless I can get the components, packaging and fulfillment all done in the same city there, it’s still faster, more convenient and about the same price to do things in Guangdong.”  And even though I love Pho, I have to have more than coffee and bread shops to break up a week long trip there.

4. Conversation with a QC manager working in Zhejiang.  “I hate working in Zhejiang.  It’s 10 years behind factories in Guangdong.  No one understands that contracted quality standards really do need to be met.  It’s a nightmare.”  I guess it’s all relative, huh?

5. Conversation with a local in a bar after the US beat Algeria in the World Cup last week: “How come the US can get to the elimination round but China can’t even get in?!  We have 1.3 billion people, a national program for football and it’s our favorite sport.  America is only 300 years old and American’s don’t even like football.”  I had this conversation in 2006, 2002, 1998, and 1990 in Asia.  Remember when students were jumping out of dorm windows in 1996 as China tried and failed to qualify for the 1998 world cup (they lost to Korea and complained about the population then too).

Quick side note on China a soccer performance:

My theory is that collectivist cultures deny the development of most of the great individuals that they would otherwise have and that are necessary to win.  China’s Olympic medal haul in so many individual sports may seem to contradict this, but if you look at what they won it does not.  They only won in sports that they specifically targeted because there was no great Western presence.  They picked unpopular sports that the West didn’t care about so they could win the gold medal count.  So my theory still holds— they themselves know that they could not create the greatest athletes in the most popular sports.

6. In our church group of about 150 foreigners here in SZ, 4 families (total of 20 people) are moving out within the month.  Either business is not as good, opportunities are better elsewhere or factors of health/safety/education have prompted them all to move to other countries.  8 years ago there were less than 20 people, in 2007 there were about 200. Now it’s down to a buck 25.  Not sure why I included this one.  I thought it was interesting.

7. Money: I was passed counterfeit money twice in the last week; once in a taxi and once at restaurant.  I can’t believe that I didn’t check either time—I’m obviously not getting any smarter either.

8. My phone didn’t work with the new software upgrades this last week.  I took it to the “Official Apple Retail Store” in our local “International” shopping mall where I bought it.  They charged me 100RMB, spent about 15 minutes with it plugged into a “jailbreak” program (yes, it said “jailbreak” in English and Chinese right on the overhead screen in the shop in the middle of the mall) and now it works fine.  Of course, Apple won’t register it and they tell me it came from Australia.

9.  Of ten new projects/orders started in the last two weeks 7 of them had price/component issues because what was spec’d out in signed contracts and approved in samples and what was “meant” by the factory for production were two different things.  No, none of the 7 changes made any of the orders cheaper.  But thanks for asking.

10. We have an English teacher in our apartment complex whose English is so, um, accented that none of my kids can understand her (or my wife when the teacher speaks English).  I can usually figure out what’s being said only because I speak Chinese and so have learned the art of simultaneous language deconstruction (“If I say that sentence word-for-word in Chinese, what does it mean?”).  15 years ago, a high school English teacher asked me the same mis-spoken question over and over again while translating a much more interesting conversation back to her friends.

11.  After my last triathlon in Bali (50 minutes faster and 4kg lighter than the first one last year, thank you very much), I had my wife bring my bike back into China while I was updating some paperwork in HK—she was stopped at the border for 2 hours (and was furious with me).  I’ve crossed the China/HK border with the same bike, in the same box (and unboxed too) more than 15 times—never stopped once.  I’d love to be able to say that the US border is different/better.  But it’s not.  It’s worse.  My father in law said the most accurate thing I’ve heard to date about the US bureaucracy, “At least with the Chinese government, if you pay some one you get what you paid for!”  I can think of very few things I hate more in life than having to deal with the US govt (IRS, TSA, Immigration, Embassies, etc.).

12. This is what’s officially happening in China: labor laws are impacting workers and wages, RMB valuation is change prices, labor shortages are stretching out lead times and raising costs, inflation and raw materials prices are rising, factories have still not recovered from the lowest points of 2009 so fixed costs are still higher per order, new international express mail rules are making it much more difficult to send samples out of China.  You’d think that China would be running pell mell from the Obama method: tax, spend and make it hard to do business.  Nope.

Finally, GE boss Immelt on the current situation in China:

Mr Immelt acknowledged the importance of the Chinese market, which contributed $5.3bn to the group’s revenues last year, but declared GE was encountering its toughest business conditions there in 25 years.

The more things change, the more they stay the same.

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

Part I is here.

6.   You will never know when you’ve gone “too far.”

Once, back in ’95 in Chongqing, people were gathering on the street and huddling around me yelling advice at me crowding around me and staring at me while I was trying to take care of my crying 1 year-old son.  I asked them to stop and leave.  (OK, I screamed in Chinese at 100+ mobbing Chinese strangers, telling them to get the hell out of my face and leave me the *&^%$ alone—of course this just added another 100 Chinese strangers to the scrum.)   Other than more of the same, the response from one of the people nearby was this:  “This is China!”  I will never forget that.  You won’t change China. You can either learn how to work within it or constantly fight against it.  I find that it’s usually some of both.

When you make small cultural mistakes like not using the public chopsticks or bowing (Chinese don’t bow) or slapping a female co-worker on the shoulder or a million other little things you’ll be completely forgiven.  It’ll just be chalked up to “stupid foreigner.”  But when you make demands on a broken contract or hold people accountable in public for personal mistakes or force specific processes to get things done you will be punished for it.  I promise.

You many never know what the retaliation will be, but it will happen.  I’ve found out that problems on one project were related to arguments we’ve had over previous projects. Again, Asians do NOT compartmentalize their lives like Westerners do.  And so usually there is no reason for your supplier not to retaliate.  There is no guilt since no one knows if they will ever see you again or if there will actually ever be re-orders.  Right now, in the heat of the moment, it’s all about recovering physical, social (and probably personal) loses.  And don’t ever underestimate the need for a restoration of face.

The most difficult thing about Chinese culture for many foreigners here is the reality that you don’t know when you’ve crossed the line and offended someone that will not forgive you.  Maybe it’s because there is not a defined line for every person/situation.  Maybe it’s because I’m a foreigner and I just can’t tell you where that line is.  My rule is this: separate the argument from the people.  Again, Chinese DO NOT do this.  But you’ll want to keep your cool and avoid as much personal animosity as possible.  To do this you’ve got to consciously talk about things rather than people decisions, comments or anything that can be considered personal.  This will be hard, because when you’re talking about money, personal responsibility, deadlines and names on contracts I promise that it will get very personal very quickly.

7. “We just don’t really work like that.”

The reality of contracts (even the good Chinese ones) is that no one but you has ever read them.  When contracts are broken in China (and court is not an option) your going to just hear “well, we don’t really work like that in China” or something similar.  Your own Chinese staff will of course and help you, because it’s their job to do so, but will also think “my boss doesn’t get it, Chinese just don’t work that way.”  The fact that you don’t know “how to do business in China” is your fault.  Unless you can enforce something in court, no blame (social, financial or otherwise) will be laid at feet of the supplier for breaking the deal.  “Everyone else gets it but you!”  Sure they’ll sign the contracts.  Sure they’ll tell you they do it all the time.  Sure they’ll sign the non-comp.  But I promise you that no one but you will ever look at the contract again unless you force them too in a meeting to review standards/penalties.

If a factory screws up you’ll have to fight tooth and nail to get them to pay for replacements (rather than just “fix” the problem pieces).  If a supplier misses their delivery dates you’ll have to pitch a small tantrum to get them to understand that they are responsible, like the contract clearly says, to pay for the resulting airfreight costs.  You will learn to hate (hate hate hate, I tell you!) the words “chabuduo,” meaning “just about” or “almost” as in “Well, it’s almost right” or “Isn’t this good enough?”  (I always responded to “chabuduo” quality statements with an offer to pay off “almost” or “just about” the full invoice amount.  No one has ever accepted my offer.)

Contracts are only as good as the people signing them.  And if your supplier doesn’t really understand how important the document is and has never had legal experience with any contract, he’s not going to value it at all.  China is just not a “contract” culture; there no cell phone contracts here, apartment lease agreements are a very new thing here, most people buy houses and cars with cash.  The reality is that they don’t have the legal experience that we just grew up with in the West.

8. Hierarchy—use it or be abused by it.

Sure there are bosses and underlings in the West.  Sure there are complex corporate structures all over the world.  China also has it’s own structure and it usually very slender and very vertical with a wide base.  The thing about China’s typical corporate culture is that it’s very limiting.  There are tons of titles in Chinese companies but typically very few people that actually have the power to make decisions and enforce or take responsibility for the results.

Maybe you have worked out a great solution to a problem with your sales rep, but if the manager doesn’t agree, you’re dead.  Ditto working directly with line workers without getting an “OK” from management first.

The opposite side of the coin is that if you know who to talk with you only have to convince one person that you’ve got a solution.  They have the authority to get everyone else on board.

For example, we had a factory that was NOT doing QC on incoming components.  Every one agreed that we needed it, but for some unknown reason, it wasn’t happening.  No matter who we talked with, we couldn’t get past this.  Then, over lunch outside of the factory, one engineer told us that because the components came from a factory that was owned by a relative of the owner of this factory they would lose face if they QC’d incoming components (and rejected some—which is what really needed to happen).   So we drafted a letter from our US office saying that we had to QC on all incoming components ourselves and let the boss present it to the other factory on our behalf.  We do QC there now too.  Problem solved—but only because we had inside info and used the hierarchy.

And other example, we worked with a manager and a couple of engineers to solve a problem for almost two weeks without getting anywhere.   The project was wrong and late and they would neither take responsibility for the mistakes nor correct the processes to stop future bad product from being made.  Finally we realized that we were going to have to kill some personal relationships to get things done.  We went over the manager’s head by cornering the owner and telling how much money in past/current and potential business this issue was going to cost him.  We pointed out exactly what we wanted that was not being done and what we were going to do if things didn’t get better immediately (a law suit).  The manager got fired (not our intention), the difficult engineers got moved off the project, the replacement materials were bought by the factory and the product was redone, correctly, in record time.  While this  is an excellent example of using hierarchy to get things done quickly, this also worked specifically because we’d done hundreds of thousands of dollars worth of business with this factory and were also negotiating another larger order at the time of this project.  I’m not under any delusions that we could have pulled this off if we were not a significant client for this supplier.  But small or large, cornering the boss, and getting his ear for just 5 minutes can save you days of pointless negotiations.

9.  If you’re not here, it doesn’t matter what you want or what you say.

Factories themselves tell us this ALL THE TIME!  The client places an order, doesn’t hire any 3PQ and the factory is just left to produce product on their own.  Sure, most of the time they don’t produce complete crap, but who is deciding what’s crap and what’s not?  Yup, the very people who stand to make the most money from doing as little QC as possible.

I’m really tired of foreign clients who counter this reality with “but there is so much potential future business, I can’t believe they’d do this to me!”  Learn this now: there is no such thing as potential when you’re manufacturing in China.  There is no future, only now.  No one feeds their family on potential.  Just think about how may hundreds of clients tell your supplier the exact same thing every week?  Day in and day out, they’re hearing this from everyone of their potential and current buyers trying to cut prices.  Your project is not special (unless your current order is BIG for them).  They don’t know you, they don’t trust you, and sometimes they don’t even have a clue what your product or your market is.  No matter what you say, you are not getting good product if it costs your factory more and you’re not here to enforce your agreements/standards.

So, what to do?  Be here 100% of the time or hire someone to be here for you.  You can physically take control of the manufacturing process by passing or rejecting every single item that rolls down the line.  If you can’t do 100% QC, hire 3PQ for day visits and give them standards that are so high (matching the contract, of course, but letter-of-the-law exacting and demanding) that you know a high percentage of product will be rejected.  Once you’ve got independent QC saying the product sucks—you have leverage!

Again, these are tricks that are ALREADY BEING USED AGAINST YOU now, I’m just telling you how to level the playing field.  If you don’t think that factories are buying testing results to pass EU and US quality standards, you’re just not thinking.  If you don’t believe that entire QC departments are corrupt then you’ve never talked with any Internal Security Officers for large MNC’s based here in China.  Have you ever heard of Quality Fade?  Uh huh, much of it is very intentional.  If you don’t believe anecdotal stories then believe this: the 3PQ industry is still growing, even in a recessionary economy.

10. Know your role to be truly effective.

You have a role to play in China business (in Western Business too) and Chinese history and culture are the authors of your script.  Your role is explicitly understood by the Chinese.  But unless you’re an expert in “China” you’re not going to know what your expected role is.

This is historically true—the Brits coming in the 1600’s didn’t get it.  Bill Clinton didn’t get it.  Bush didn’t get it.  Dannone didn’t get it.  Obama, Geitner and Hillary don’t get it.  Google doesn’t get it (they thought they knew and then were forced to reconsider).  Hundreds of other businesses didn’t get it and have since left China.  There is a VERY good reason why there are entire industries that have grow up around helping foreign companies adapt to the business environment in China.

The protestant work ethic means nothing here.  You are not respected because you yourself work in your own factory back home.  If anything you’re looked down on for being a boss that is still getting his hands dirty (“Must not be very successful if you still have to do it all yourself.”).   You are a foreign buyer, you’re expected to have money.  You’re a guest, you’re expected to be well educated, polite, understanding, generous and above the everyday issues.

Because you are the guest (the owner/manager of your own company even) you need to use your title and talk with someone that is your “equal” or at least a final decision maker.  We typically don’t like to throw titles around in the more socially egalitarian West.  But here in China, titles are basically the only thing that make you different from the billion other people on the streets. If they are going to fit you into a specific role, and they will, then you yourself need to define what that role is as much as possible.  And it should go without saying that it’s ever so much better to play the Boss role than the Worker role.

11. Bridges can only be burned once.

Make each and every negotiation/argument count.  Hopefully you can get what you need without getting anyone fired or destroying relationships.  But the reality is that sometimes your product ($) is more important than the “relationship” that you have with the factory.  If it’s the choice of getting the product correct and being “friends” with someone you may never work with again, there isn’t really much debate about which choice you should make.

Here’s an extreme example.  We had a project that was worth about a quarter of a million dollars with a single factory and the production we were getting was complete crap.  The factory was doing everything they could do to fix bad product.  But in the end it was still bad product.  This was a huge and successful supplier too; more than 1000 employees and only foreign clientele.  Nothing we could do could get them to change processes.  We had paid a 30% deposit and had other projects going on at the same time too.  It finally came down to an end game where if we didn’t get what we had to have to accept the product we were going to cancel the order (and go to court).  They wouldn’t give in and neither would we.  At the same time we finished and took delivery on two other projects that were almost the same total as the deposit we paid for the problem project.  We took these two completed orders didn’t pay and left.  We never worked with them again.  The crappy product was unusable as it was customized and only a part of a larger kit that we had kept from them.  We never saw the bad product or the supplier again (we were told later that it was sold to be recycled and two managers were fired).  We had a Chinese contract that we made sure the owner knew about.  Before we left we paid for additional labor, engineers, molds to the factory and also late fees to the client.  They took responsibility for nothing always, instead, offering only to “re-do” product for later delivery.  This was unacceptable, of course.  We eventually did it correctly with another supplier.  But we also “fired” me so that we could get them to understand the seriousness of the issues we lost an employee (QC) over the issues and were scared for months that they’d come after us (physical retribution).  It cost us 10’s of thousands of dollars in time, fees, airfreight and additional expenses.  Up to that point they’d been one of our best suppliers (for 3 years), of course we could never work with them again.

We were told by a manager involved, who eventually moved to a new factory (and is now one of our regular suppliers again), that they purposefully decided not to change processes to force us to accept poor quality product to meet our shipping deadlines.  It was a calculated gamble that they lost.  They made the decision having been in the situation before—they knew what we were up against and bet that shipping deadlines for a box store, just like with their other clients, would trump quality details.  What they didn’t know was that we had, by design, cultivated other back-up supplier options “just in case.”  We rarely use our back ups, but this time having one literally saved our company.

12.  Relationships are not the most important thing.

I’ve been here too long, I just don’t buy the standard line “in China relationships are most important.”  When it comes to small orders from unknown foreign buyers they just aren’t.  If you’re not a large percentage of the factory’s total business then your personal relationship is worth next to nothing.  To be precise, your relationship is worth only as much as you’re able to pay in cash right now.

I think that foreign buyers get inordinately worried about relationships when they have small orders.   If you’re not even your salesman’s biggest client, why do you think that you’re a priority to your factory?  You’re not.  They don’t care who you are and they don’t care about your “potential “ either.  Once you re-order 3 to 4 times and/or your volume is something that they actually have to plan for you’ll matter.  But until then, you are nothing but a deposit number.

This should be freeing, in a way. Don’t worry about the conflict of pressing for quality over personal relationships.  Don’t worry about being a bit harsh, you’re not working with a long-term friend.  While a close professional relationship may develop, it will be one that’s based on quality and the fact that you’re setting standards and expecting them to be meet every time (not on “friendship” or nights out or the guy who introduced you).

It’s all about context and China is not Kansas.

Remember, I’m not advocating spitting on anyone’s culture.  Hopefully these attempts at explaining some culture will not be abused or taken out of context.  The point is this: you’re being played if you don’t know what’s going on.  Learn the culture, do the right thing and protect yourself.  You’ll earn friends, respect, get good product and maybe even fall in love with China (or a Chinese).  I did.

Good luck!

Part I is here.

Tags: Business, China, Culture by David Dayton
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