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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I’ve been telling people for years that China doesn’t have enough mid-level managers.  Most factories have the one or two guys that started the company with 10 years of experience and then a bunch of line workers and college grads all with either no education or training and/or only a couple years of practical work experience.

This phenomenon means that there are limited numbers of people that have both actual production-floor experience AND managerial experience (problem solving/scheduling/QC’ing/forecasting).  Most people have not been trained in anything other then specific jobs/processes.  The two guys at the top are running the factory, counting money, managing relationships with govt officials, trying to find employees and being dragged into solving problems (since no one else can).

And now the problem is becoming acute.

In the last couple of years so many people have left the east coast factory cities to work closer to home in the inland provinces that factories are losing what little management they had in the first place.  Entire QC staff (anyone other than complete novices) at multiple factories have just left or not returned after CNY.  There is now such demand for people with experience in the new inland factories (and jobs that are “good enough” closer to home) that not only are the newbies not coming but the guys with experience are leaving too.

This means three things, first, prices are rising quickly to entice workers to come and/or say.  Second, factories are having more problems meeting deadlines (with fewer people).  Third, they are also having a harder time meeting quality standards (with fewer experienced QC).  To compensate for these problems they are becoming defensive about buyer participation—they just don’t have the time/resources that are being demanded by increasingly connected buyers.

More and more factories are telling us that they don’t want to accept 3PQ.  They are using the “3PQC are all corrupt” line to refuse to follow QC reports (doesn’t this mean that someone in their factory is paying the QC?).  We’re being told, “QC will just find as many problems as possible so they can come back.”  Or, “Every QC is corrupt, you just have to offer them something to pass.”

Now I’m not going to try to defend QC because we’ve fired more QC people than all other people in our company.  We know that this is a real issue.  But you can fire QC and/or hire a replacement fairly quickly.  If you’re using 3PQ and you’re wondering about their honesty you can get a second day of testing with a different QC engineer or an entirely new 3PC company in 24 hours.  Much easier than finding a new factory half way into production.

The reality at many small and medium sized factories is that they actually my not even have the people necessary to resolve the concerns that are identified by 3PQ.  Of course they can’t tell you that.  And if you’ve ordered from them before they don’t want to tell you that they can’t even do what they’d done for you in the past.

Another result of the new economy is that more and more guys with some experience in a particular industry are starting up their own “trading companies.”  Often times this means that they “borrow” a few photos of products they recognize from other websites and set up an Alibaba “store.”  There are a few guys that know what they are doing and have valuable experience—these are the guys that should be middle managers but their factory went out of business and they don’t have the guanxi to get an appropriate position in another factory.  But you need to be checking out these guys BEFORE you hire one/use one just like you would a factory (because you may be paying him directly and/or relying on him to assure product quality for you).

So what can you do to compensate for a lack of managers?

First, you’ve got to be very clear about requirements before you start (pay) for anything.  This is not just confirming with a sales person that they understand what you’re talking about and can show you similar products.  Ideally, you should visit (or have someone visit for you) the site and confirm that they really can do what you want (with the equipment and to the standards you want too).  You will never know that they can do what you expect just by talking with a sales guy (that is fresh out of college and was hired for her English skills not her understanding of manufacturing).

You can buy professional audit services to confirm capacity and/or social compliance too.  These services are affordable ($800) and can be scheduled easily online.

Second, once you’re convinced that they can do what you want, you need to be painstakingly clear about the standards and requirements that you’re expecting.  Typically this means that you send them testing standards for your product and request confirmations that they’ve both meet these standards before and have the facilities and personnel to meet them again.

Third, confirm with them that 3^rd party testing and QC services will not only be allowed into the facility but that the factory will agree to follow the reports/results.  This may seem like a no brainer but we’ve had multiple factories that, like I mentioned above, that do not want to live by the standards that are returned by these third parties.  The most common thing we hear is “QC is corrupt.  If we paid them these would have passed.”  We’ll yea, maybe the report would have said “passed” but the product is still sub-standard and it will come out in subsequent tests (off site) or if different QC personnel.

Fourth, pull samples yourself to send to testing facilities.  There is no reason to believe that your factory will not send “golden” samples to be tested.

Fifth, when you have problems, and you will have problems with no managers and inexperienced line workers, you will need to participate in the solutions.  And by participate I mean visit the factory and devise a solution that works for both you AND the factory.  Remember, the factory mostly likely doesn’t want you involved and since you’re asking for things that are going to cost them money, they really don’t want you to be proposing the solutions too.  Here’s what works for us.  1. Let them propose solutions and then accept or tweak to get done what you need.  If they are the ones that are taking responsibility for the problem and offering the solutions there is more onus on them to get it done right. 2. Have someone from your company working with managers/owners of their company that understand Chinese culture and the face that is associated with mistakes/lack of managers/paying for rework/having clients propose solutions. 3.  Don’t wait for the entire thing to be redone.  If you wait, and the solution doesn’t work or is completed incorrectly you’ve now got to fight with them to do it a third time (more money, more time, more loss of face for them) and even if it’s their fault you will likely lose this fight.  So follow up on each step, each milestone in the rework procedures.

Sixth, since you’ve visited the factory already you’ve hopefully developed some sort of rapport with people other than the English speaking sales rep.  You now need to call on those folks to help you out.  Sure their loyalties are to the factory, but having someone that is at least willing to listen to your issues is helpful.  Also, if you have someone on your team that knows how to work relationships in China they now have a contact point to work with.  Don’t underestimate the importance of having someone fluent in Chinese culture working for you.

Seventh, track everything.  This is where your MBA can be very valuable.  As amazing as it may sound, you may know before your factory if you’re going to be missing dates or short on product.  Sure each department may have better numbers than you do and certainly more experience in their own factory, but you’ll be able to extrapolate more quickly, be able to combine data from various departments and project much earlier than they will.  We can almost always tell long before our factories if they’re going to meet qtty’s and deadlines.  We always know if they’re going to have to do an extra run or if they’ll have extras.

This data can only come from being on site.  And this is very helpful not just for rework but for any project where colors or pieces must be consistent (fit, match, testing, etc) across an entire production runs.  Often (way more often then you’d know unless you are here) factories will have a larger number than expected rejects and so need to add additional qtty’s to the order to meet the order totals.  This means that they’re literally doing another run without any of your QC or oversight and adding the product into your existing (already tested) order qtty’s.  As you can imagine there are tons of problems with this happening—quality may not be as good, product is not tested, raw materials are likely not from the same (tested) batches, colors and other features are not the same, chances are larger qtty’s than were needed for your order were made to save money and so (fully functional) extras will be sold by the factory to someone else.

Basically, you’re going to become a defacto manager—but one without any defined position.  People will defer to you because you’re foreign (and they are polite).  You’ll be allowed to watch and comment, but likely not given much information.  You’ll have no seniority but access to the higher ups that no one else has (since you’re a paying customer).  Don’t abuse, but use your foreignness to your advantage.  Don’t step on toes, but definitely go up to the owners/admin people that have the authority to make decisions.  Don’t cut responsible parties out of the loop on the production/QC lines, you need these people on your side (if for no other reason than to give them a slight reason to care about your product).  But step in and offer suggestions/make changes/point out issues and mistakes.

China is risky.  China is changing.  China is a lot of opportunity but it’s also fraught with pitfalls—mostly stemming from a combination of lack of oversight and corruption in the factory and the client both not being in the factory and assuming that “business is business.”  It’s not.  And now there are fewer and fewer managers to help you make a successful transition to the Chinese style of doing business.

Tags: Business, China, Culture by David Dayton
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A couple months ago I ran across a very interesting piece about working with suppliers.  The story was that suppliers are no longer willing to work with buyers that are “difficult.”  Typically the “we don’t make much profit” line is part of the give and take of the pre-order negotiations.  But this time, when the buyer pushed back the sales rep imediately got “very angry” said they should trust them and then ended with “we don’t want to work with you anymore.”

What’s odd is that I bet that we’ve had a similar situation happen to us 5-10 times in the last 6 months.  It’s odd because it’s completely new; we’re still shocked each time it happens. Like the buyer in the story, we push factories for better quality or lower prices (or even just to meet contracted standards) and they instantly give up and offer our mold fees or deposit money back.  Yes, offer to give us our money back, just like that.  We’re not putting inordinate amounts of pressure on them, like in the buyer’s case, we’re just following the typical pre-order dance routine.

Before we get into what I think is happening, I will admit that margins are small now–this is true.  And they are smaller than before so there really is less room to negotiate.  But there have been tight margins in many industries for a while and no one went to Def Con 4 that quickly.  It’s more than economics for both sides.

I think that I’ve been here long enough now to see that China has changed in more ways than just the infrastructure.  The Olympics, the Sichuan earthquake, the Western economic meltdown vis a vie China’s continued growth, increasing inflation (and the accompanying dissatisfaction), the college graduation of the first wave of “little emperors,” millions of new cars, millions of under or un employed college grads and many other social other events have changed the dynamics of the Chinese psyche.

Entry-level employees (newly minted college grads) who typically have the English skills that put them into factory sales offices are not the 30 and 40 somethings that grew up in hard times of the 70’s and 80’s.  These two generations look at foreign customers completely differently.  Foreigners aren’t only “normal” for the younger kids (who probably had foreign teachers in high school and college), they are probably a pain in the ass—stricter standards, more demanding, and all in ESL—much more difficult to work with then domestic clients.  Order frequency and qtty’s from foreign buyers are all less then they were three years ago too.  And as “everyone on both sides of the [pacific]” knows, this is the Chinese century, so foreigners should take their attitude down a notch or two, right?  (Don’t let this, or this or this ruin you red-tinted dream.)

I completely 100% agree that you’ve got to let your supplier make some money.  In fact I’ll go so far to say that if you as a buyer are getting exactly what you want for your expected target price you shouldn’t even care how much your supplier is making, even if it’s 1000%!

But, I don’t agree with the article’s conclusion.  The author said that Chinese suppliers really are not “asking for much” and so foreign buyers shouldn’t worry about paying “a little extra.”

To me, “a little extra” is Pandora’s box—you open the door a little and you’ll never get it shut again.  Especially when the person getting the money is the one making the decision about what both disclosure and the amount of “a little extra” are.

And I don’t think that it’s true either, that suppliers aren’t asking for too much.  In my experience in China, suppliers ARE asking for too much.  And often after contracts have been signed.  Anything over contracted prices is too much in my book.  And suppliers are typically asking foreigners (as opposed to other Chinese buyers) for more of the “too much” as well.   In my opinion, anyone that tells you that Chinese and foreigners get the same price are either a large MNC (volume/leverage) or they don’t speak Chinese and so don’t really know all that’s going on.

This conclusion is dangerously close to the xenophobic argument of “foreigners are rich, so of course they should pay a little more.”  (Or conversely, “Chinese are poor and have been oppressed by the West for 100 years so we and you both deserve this.”)

I’ve been here in China since the days of two official prices at hotels, airports, train stations, supermarkets, etc.  And, while working for a Chinese company (e.g. getting paid Chinese wages) back then and paying Chinese taxes now, I’m of the same opinion: Why should it matter to the price where I’m from or what I look like?  It shouldn’t!  Just because I’m getting the quality I want does NOT mean that I should be willing to pay more for it than what we’ve contracted for or higher than market price.

This argument is based in the fallacy that “it’s fair” for those with relatively more to be (secretly forced to) pay more for the same things that others are getting for less simply because they look or sound different.  But you can’t even read that sentence without realizing that it’s certainly not fair, not to mention that the standards are so subjective that it could never be “fairly” implemented.  Especially when the other party involved in the agreement is the one determining “fair.”  It’s all about one party’s justifying getting a bit more than they agreed to.

The other end of this is that right now most foreign buyers are working in a depressed economy where every “little bit” is more than they may be able to honestly handle.  Many Chinese suppliers don’t realize that while there may indeed be a 100% mark up from COG to wholesale prices, R&D, design, higher costs for labor, professional services, warehouse space, transportation and other things eat that margin up much quicker in the West than in China—which means that a supplier’s clients maybe working on equally thin margins.  I personally know of many companies that are doing the exact same things that Chinese suppliers are doing, namely working on little to no margin to keep the company going and the brand alive in the recession in hopes that it will be profitable a couple of years from now.  (No, I’m not claiming that westerners are poor.  I’m saying that recently the margins on both sides are very low to non-existent.)

The common response by Chinese (and other SEA people I’ve talked with about this) is three fold.  1. Yea, but I don’t do it like that.  2. It doesn’t happen as much as you think, you’re exaggerating.  3.  You’re just bashing the Chinese.  You’re lying to make China look bad.

First, “Yea, but I don’t do it like that” is usually followed by some convoluted version of “yes, but they still get what they want, I just get a little bit more than we agreed.”  I’ve never been clear how these two positions (“they get what they want” and “it’s different than we agreed”) co-exist.  You either follow the agreement or you don’t.  The typical problem is when the supplier can save money and then doesn’t feel that there is any reason to pass those savings along (or even share that there were savings in the first place).

I would agree with the supplier (like I said before) if the contract was for a fixed price/fixed costs/fixed quality and all those could be met without additional issues or even additional disclosure.  But, so often the costs savings come at a price—lower quality—and the question of disclosure if left up to the one benefiting from not disclosing (if the client says “I want to share the savings” the sales guy gets less). Oftentimes the dip in quality isn’t noticeable (but it certainly would be found in testing—if you’re not testing, it’s you, the buyer’s, fault).

The real issue here is the standard “If no one knows, then why is it wrong?”  Just because this is common, and many say, “It’s just the way it’s done here,” this isn’t “Chinese culture.” I don’t care how many people are willing to claim that it is.  It’s wrong and illegal here and in the US and just about everywhere else too.

Suppliers at some point have to be responsible for what they sign up for: contracts with specific standards for quality, prices, everything. So where is that point?  When is the “difference” too big and the “little extra” money that could be made irrelevant?  Obviously, there isn’t a acceptable sliding scale for quality/prices—and it’s never acceptable to the buyer if the supplier is the one make the decision independently.

Second, “It’s really not like that, you’re exaggerating.”  Just like I can’t speak for what it must be like to be a Chinese or an ABC or a woman or any number of things, Chinese people can’t tell me what it’s like to be a foreigner (or a foreign buyer, for that matter) in China better than my own personal experiences over the last 12 years can.  So from my experience let me say this:  I KNOW that this happens almost daily and I’m sure that there are other times when I don’t catch it as well.   I do not think that I can underestimate the degree to which is CONSCIOUSLY happens—and that’s just based on the events that I’ve been able to confirm!

I have had multiple Chinese (and Thai) friends go shopping with me and after a while get embarrassed at how many times it happens and they have to keep sticking up for me. I can’t count the number of times in the last 16 years I’ve had shop or factory owners/workers tell the Thai/Chinese friend next to me that they’ll just charge a bit more since I’m a foreigner.  And when I bust them, since I speak the languages, there is always a laugh (cover up for a loss of face) and the honest retort—“You know, that’s how we do it.  You’re a rich foreigner, just a little bit more won’t hurt you.”

Again, anyone that tells you this doesn’t happen either is naive or ignorant.  And when it becomes personal to those that are naive, all of a sudden they see it more often than they did before.

I’ve had Chinese family members and employees almost get into fights with people over this issue.  It’s uncomfortable the first couple of times, but when they’ve see it for the umpteenth time they get frustrated with it too.  When you’re buying food on the street it’s obnoxious, but when you’re ordering tens of thousands of dollars worth of product from a factory it’s neither ammusing nor acceptable.  My wife has had to stop taking clients and family visitors shopping because she was continually getting in fights with shop owners because it was happening every single time they went out—you take a couple foreigners out shopping and the price goes up.  Automatically.

But it happens other places too—not just shops and factories.  I’ve had people tell me different prices than what is listed on menus, on fare charts or what’s written on signs or not give me a sale price that’s advertised.  When I was making Chinese wages, it would make me angry, but there was nothing I could do (other than beg, which worked sometimes) as this was the legal standard for hotels, buses, trains and airplanes in China.  But now it’s technically illegal.  But changing the law is easier than changing traditions.  Hell, Chinese charge other non-local Chinese higher prices based on their different accents too.

The only place I’ve found that it never happens is in the supermarkets.

Third, “Liar liar pants on fire.” A number of times people have basically gone ballistic on me.  A number of people that comment on this blog, people that overhear foreigners complaining in a pub or people with just a little to much patriotism to let foreigners share real experiences have tried to either shut me up or argue that I was lying about China for some other personal/hegemonic agenda.  Sorry.  No agenda in talking with friends in a pub and no agenda in asking factories to be honest (other than getting my contractual prices and standards).

Admittedly, mine is one of many versions of the reality of doing business here.  There are certainly other opinions.  But to claim that mine is somehow less valid because it’s “foreign” is exactly why there is a problem—bad habbits will continue until they are confronted and discussed and replaced.

Tags: Business, China, Culture by David Dayton
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I had a very interesting lunch last week with some foreign (overseas-Chinese) investors, the manager of one retail location of a int’l coffee chain and one of the lawyers that does some work for the same.  The discussion was centered around opening up a new western franchise food venture in southern China.  I was asked to participate and comment on foreigners managing supply chains and dealing with regular purchase negotiations in China.

The interesting part of the conversation to me was not the coffee shop numbers (although those were staggeringly high for a single coffee shop on a monthly basis), but rather the open and very matter-of-fact discussion of all the “additional expenses” that the lawyer (ironically) and the manager said it cost the coffee shop both to set up and just keep their doors open

Intellectually I know that corruption is everywhere here.  And I’ve seen a lot of corruption first hand too; I even wrote about it in this month’s China Sourcer magazine.   But I seemed to be the only one that was taken back by the amount and the frequency at which corruption affects their coffee business.  Afterwards, the investors focused simply on how the new numbers could be managed and how to deal with the accounting—no one even batted an eye at the stories or points where corruption would affect their potential business.  Just for perspective, the numbers they were talking about to pay for corruption were comparable to their total start-up costs for a 70-80 square meter shop in a mall in downtown Shenzhen (rental contract and deposit with additional “gifts” to the mall owners/management office, build-out, equipment, etc.).  That’s DOUBLE their actual costs for the first year of business!!

Here is a list (made after the meeting was over from what I remember) of the specific issues that were discussed.

1. Govt corruption/cost of bribes.  Inspections were seen to be the most expensive.  Not only do you have to have a series of pre-opening governmental inspections that will not happen without appropriate sized “gifts” (read thousands of USD per square meter) but once the officials do come out you’ll have to “take care” of them while they are there (and whenever they come back too).  These aren’t fees paid to get things done illegally, these are red-envelopes that you give to govt officials or they just won’t do their job.

2. Cost of goods/extras.  Apparently there are specific requirements for patented logos and other items and those cost premium prices—meaning, “a chair that should cost 100Y costs them 800Y.”  Signage was more than 500% more than typical market price as well.

Side Story: At least twice that I can remember, I’ve seen police drive up to street food vendors, take everything they are selling and drive off.  I’ve never been fast enough to get it on film.  Once when I was trying to get a quick pic of the action, my wife physically pushed my camera away and told me very directly to never ever do that  (film police) again.  Another time I was actually buying fruit and the police came and took everything.  I was trying to pull the basket back and was yelling at them and they just let me keep the basket in my hand and took everything else and quickly rode off.  No one else either time ever tried to help or stop what was going on.  Afterward a friend told me there was nothing I could do but get myself in trouble so I’d be wise just to let it go.

3. Lack of consistent quality.  Managing suppliers is probably the hardest part of the job.  The quality is never the same and qtty’s vary from day to day—some days orders don’t even show up!  In addition to cultivating and maintaining great guanxi with your main suppliers you have to have immediate options for back-ups if your small.  Busy holiday weekends, even for big famous brand stores, can be hit or miss on qtty’s.

4. Employee dishonesty/finances.  No way you can trust any employees to track both goods and money.  You have to separate the two and you have to have someone else that you trust completely to do the accounting.  Multiple versions of the accounting records are also needed for various interested parties. (Meaning that along with actual cooking, cooking the books is an additional full time job–see what I did there?  Cooking?)

To my way of thinking there are two different kinds of corruption in China: Institutional and Systemic.

What I mean by Institutional corruption is the kind that’s noted in point one above and in my own experiences with setting up an office.  It’s not paying under to the table to get things done illegally, it’s not cheating on paperwork or hiding taxes with some “official” assistance.  It’s simply “paying/gifting” extra just to get officials to come do their job—if you don’t pay, they will just “forget” their appointment or be “out of town” whenever you try to meet or just flat out tell you no unless they see an envelope.  This is a HUGE problem for most Chinese citizens as well as for anyone trying to start a new business.   Passports, hukous, school placement, registrations of any kind all require stamps from specific govt officials.  And when the enforcers themselves are corrupt, there is absolutely nothing you can do.

To deal with institutional corruption I’ve consciously stayed away from getting entangled in anything do with government regulations and procedures.  Outside of annual company registration work and setting up our office we stay as far away from the govt as possible.

Systemic corruption is the other kind—payments made to factories to get access to restricted IP or to get in-production sooner or to fake testing standards.  It’s the under the table deals with govt officials to get around laws or to avoid the enforcement of penalties.  It’s kickbacks or payments for “guanxi” to pay for past help or payments to ensure the lack of problems in the future.

And even though corruption is endemic both types of corruption are, in my opinion, almost completely avoidable .  It’s not culture, it’s not Chinese and it’s not right.  You don’t have to participate and usually you can actively avoid most of it.  When it’s going on around you, you can do independent testing and QC and avoid much of the problems caused by the second type of corruption as well.

My fear is that as the US economy continues to decline and China continues to rise what’s normal in China will slowly become normal everywhere else too.  China is #78 out of 178 countries ranked on the 2010 Corruption Perception Index.  And, as everyone now knows China is also the world’s second largest economy and world’s second or third largest manufacture (Japan, Germay and the US other top manufacturers).   So their lower status in transparency has an inordinate (negative) affect on world business.  And I fear that that effect is growing.

Two other reports that confirm my fears in round about ways.  One from a Chinese blogger on Weibo via This is China blog:  (actually quoting from a WSJ article):

“When a country is corrupt to the point that a single lightning strike can cause a train crash, the passing of a truck can collapse a bridge, and drinking a few bags of milk powder can cause kidney stones, none of us are exempted,” wrote another Weibo user. “China today is a train traveling through a lightning storm. None of us are spectators; all of us are passengers.”

“Egads!” I thought to myself, “I’m one of those passengers!”

I’ve had this thought myself many times in the last 3 years.  Corruption is not just wrong and a pain in the ass, it’s actually dangerous.  Is living in China worth the risk to my own life and my family members?

And the second from a video clip on The Wall Street Journals Realtime Report.  In an interview about his book and Chinese official statistics Tom Orlik basically says: in a country where the press and the courts are not independent and the govt’s processes for creating/reporting statistics are not transparent you have international investors questioning the veracity of the statistics themselves.  I would add that in a country where entire ministries are massively corrupt and government offices tell people to shut-up or they’ll be arrested how can you trust anything/anyone?!

Related articles on fakes in China here and here and my previous post here.

Tags: Business, China, Culture by David Dayton
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