The more things change…

…the more they stay the same.

Shocker: Official and unofficial numbers for China 2012 economy are not the same!!!  And, hold your breath…..the official numbers not only aren’t accurate they’ve erred on the side of making last year’s downturn less dramatic and the upturn more impressive.  Amazing how it always seems to happen that way for the govt. fighting for social stability.

All irony aside, the numbers show that growth, while slightly better is not at the 7.5-8% levels that just 5 years ago Beijing was claiming MUST be maintained at all costs to keep employment where is needed to be (one of the arguments for not floating the currency).  Growth at 5.5% this next year without significant reforms for the 400 million still not urbanized and poor job prospects for the recent college grads will mean continuing frustrations for the CCP (especially as housing prices start to tick back up again).

New Business Insight: Don’t transfer Western business practices to China directly without some cultural/market specific adaptations.  Do MBA’s learn anything other than numbers in grad school?  Surely they have to take a couple of OB or corporate culture classes, right?  I’m no accountant, I’ll be the first to admit.  But if I needed one, I’d hire one rather than think that I could do it myself.  Why don’t accountants (not picking on accountants specifically, just making a point) hire Chinese consultants before moving to China?

Amazing Thailand: A Buddhist country steeped in centuries of political corruption and a face-conscious culture chooses the middle ground to keep the economy going and wait out the end of the King’s reign.

Creativity–It’s not that they can’t…

…They’ve just never been asked to do it before.

Interesting article in the WSJ about the lack of creativity in Asian graduates.  But I think that the article misses the point.

The conclusion is that Asian grads aren’t creative because they don’t have he soft skills that come from a liberal education.  Ironic that this is the conclusion since the rise of the liberal arts education in the US is blamed for the demise of the US worker, the plight of the ’00 generation, the worthless degrees being offered (at outrageous prices) at most US institutions, the lack of engineers, etc., etc.

Having worked and lived in Taiwan, Thailand and China for almost 20 years, I don’t think that this is the problem at all.  The problem in Asia, like the real the recent problem in the US is the lack of any development of young people and development of practical skills OUTSIDE of formal education.  Specifically, the first job that most Asian grads have ever had is the first job that they get upon graduation from college.  Prior to that time they’ve done NOTHING but study for tests for 20 years.

Here’s a great look at the life of the typical student in Asia.  They are not only forced by their parents NOT to do anything but school work, they don’t have time to do anything else even if their parents would let them.  And most parents won’t let them do anything else–because an education had traditionally been seen as the THE pathway out of poverty not just for the student but for the entire family (two to three generations prior as well as the future children).

The onus isn’t all on the parents, though–they are well intentioned and other factors play into this situation as well.  The economy in most Asian countries is such that many or most of the menial tasks that kids do at home or in a family business in the US are done by (very) low wage laborers in Asia.  Sometimes, kids are not even allowed to have jobs outside the home anyway.  Kids never get to build a tree house, never get to work on a car with their father, never get to have an after school job, never build Ikea furniture (it costs 10Y to have someone off the street do it for you, so why would you?).

The knock on the US education is that while it’s broad and pushes independent thinking, kids spend time in the most stupid of majors.  But kids graduating from college in Asia with their skulls full of more info than American kids could ever imagine don’t know how to use any of that info because they’ve never had the chance to try.  Stupid as basket weaving or X studies may be, the life surrounding the typical US high school and college campus forces most students to at least learn to budget their own time and money and often work at a job too. Internships in Asia are few and far between and not valued anyway.  After school jobs are seen as both socially demeaning as well as a waste of time.

This is why you can hire someone with straight A’s from a great school and they can’t solve practical work issues or won’t do anything that isn’t specified in their job description.  Liberal arts classes might give them some thoughts about diversity but not practical application skills.  My own personal theory is that this is why 20 something Chinese women still love Hello Kitty–they’ve never had the chance to “do their own thing” prior to graduation.  And this doesn’t even address the concept of work-place (and certainly school) pressure keep your head down and to follow the crowd and not promote yourself (at the assumed expense of others).  Work and school in Asia just typically are not safe places to be creative.

I do not believe that the education in Asia is the problem.  Nor do I believe that Asians aren’t creative.  But I know that most of the kids I taught in High School in Taiwan, College in China and the recent graduates we’ve hired in China and Thailand had little to NO practical experience doing anything other than school work up to age 25.  They’d never been allowed to be creative before.  When your entire developmental stage of life is managed by your teacher and mother, you can’t be expected to be a “leader” in the workplace no matter what school and what grades you’ve achieved.

Are you performing The Ferrari Test?

Don’t let the fact that the companies in this article are all large lull you into to thinking you’re too small to get ripped or that you’re too important a client for your factory to pull these kinds of tricks on you:

Despite well-known risks in China, auditors there often are not inquisitive enough or alert to possible fraud, some experts say.

Auditors in China may pore tirelessly over documents and yet “fail to spot the red Ferrari parked on the doorstep and fail to ask who it belongs to, how it was paid for,” said Peter Humphrey, founder of ChinaWhys, a Shanghai-based anti-fraud consultancy that has investigated white-collar crime and fraud at scores of multinational firms in China.

China experts said it is difficult to do business there without encountering demands for gifts or kickbacks.

Transparency International, a corruption watchdog, surveyed business executives who said Chinese firms in 2011 were second only to Russian companies in being most likely to pay bribes abroad.

As always, the key to being successful in any work in China is the Due Diligence done BEFORE the project begins–and don’t fret if this DD takes longer than the production time of your project itself.  It’s time well spent.

If you’re spending more money than you can afford to lose (or can afford to pay double for the same qtty’s) then you need to go to China BEFORE you ever start any work or sign any agreements.  Visit factories/suppliers actual facilities, not just their trade-show booth.  Go to at least 2-3 different cities as well (and I don’t mean three neighboring cities like Dongguan, Songgang and Huizhou either).  Spread your visit out over multiple provinces and cities so that you can really get a feel for the level of development in the surrounding area (likely where all the sub-suppliers will be located).

A trip to multiple cities in China for 7-10 days can cost less than $5K.  Compare that with the cost of being 14-30 days late or the cost of shipping incorrect, poorly produced and/or unacceptable product back home.

There are things on the ground that you can never get from Skype, email, photos and even trade shows–you have to be there to know what it’s really like.  Spend the money now to be assured that you know what you’re dealing with or spend it later on repairs, rejects, late-delivery and other hassles.

Good luck!

How to get off the negotiations carousel.

Great post by Dan over at CLB again today.  Talking about the difficulty in getting your supplier/manufacturer to give you and then stick with a fixed price.  Basically, it’s not going to happen.  But there are things that can be done about it to save both your bottom line and your sanity.

Price changes happen all the time and it’s a source of never ending frustration to just about everyone working in China.  But there are other parts to the issue beyond just changes input costs.

One that Dan mentioned is the reality of changing nature of raw materials.  But other companies in other countries deal with this all the time.  Is China more volatile than anywhere else (Vietnam?  Indonesia?  India?)?  NO.  The real problem with changing prices is not that they change but that there is a serious lack of forecasting by any chinese supplier/manufacturer.  Basically, this practice just does not exist in the Middle Kingdom.

While changes in prices (due to a lack of forecasting) is partial understandable, what’s not acceptable is the fact that prices will NEVER go lower than the contracted price.  If the supplier gets a raw-materials windfall for some reason, there is no sharing of the profit.  Price changes ONLY go in one direction.  I think that this is explained/justified by the ideas that a) Chinese think of business as a relationship and not just a transaction.  The contracts are never the most important part of the negotiations so there is no reason to not go back and negotiate again. b) Unless you’re getting completely ripped off, profit margins are typically so thin in competitive industries that there isn’t any room for raw-mateiral price changes and there is no way that a Chinese factory owner will lose money just because his salesman signed a contract with you. c) They think you can afford it.

Another issue is that it’s not just materials costs, but labor, electricity, taxes, transportation, holidays, water, etc.  can be used to ask for a cost increase.  Any current item in the news can be (and will be) presented as a reason for rising costs that were not considered before.  The list of possible factors for price increases is practically endless, leaving the buyer constantly on the defensive and constantly on the look out for (conscious) product fade.  I know that there are legitimate fluctuations in China that can’t always be accounted for, but I also know that actively taking advantage of the fact that most foreign buyers are ignorant of the Chinese market is a conscious method to getting more money in many many deals.

The only way to beat this is to have a well designed and informed plan BEFORE you get started in CHina.  a) Have good contracts.  Sure they may not save you in the end, but if you’re bases are all covered before you start then you’ve got both ground to stand on and some amount of legal leverage if things go really bad.   b) Try to have more knowledge about your industry (in China) than your supplier; or at least be as well informed as he is.  This means that you have to do homework and you likely have to speak Chinese (or hire someone that you TRUST that can do it for you).  This may also mean that you’re slower to market than you previously expected.  But, in my experience, you can take time up front and learn the road ahead of time or you can use at least as much and likely much more time later down the road in unprofitable re-negotiations, rejects/replacements and missed dates later.   c) You must also have constant on the ground monitoring/testing to assure against quality fade.  If you don’t have a & b (maybe you’re already into production) this can often make up for your lack of preparation–it won’t solve any pricing or contractual problems but it can at least defend against poor quality due to a factory trying to save money when you won’t pay the additional requested costs.

Why do good companies stumble in China?

This is a response to a question by Dan Harris of China Law Blog Fame.

why do some companies seem to just coast into China while others stumble in and never recover?  What more should we be writing about to help those seeking to do business in China or to sell to China?

Dan, you’ve hit the nail on the head once again.  The non-business aspects of business are so much more often the sources of business failure than the numbers/dollars/dates.  I’m constantly amazed at how many foreign clients will say to me about their Chinese counter part, “Yea, they agree with how we do business, but our relationship is worth so much to them that we’re not worried about them doing X.”  And then it happens and they’re shocked that money wasn’t the most important (actually it likely was, they just figured out how to make it without the foreign company).

Like what you’ve read about in New Guinea, China to has different reactions to Westerization/modernization—not the least of which is the rise of (actually continuation of) Chinese Nationalism, that often manifest itself as spats of anti-foreigner racism.  These attitudes are very close to the surface for many Chinese and can be expressed in myriad ways that will affect business but never show up in any due diligence report.  Experiences that we’ve seen over the years include: Chinese not wanting to see foreign companies prosper (relative to Chinese), Chinese managers/owners not willing to work directly with foreigners, openly admitted anger that foreigners marry Chinese women, and a number of other personal issues.  While racism can be the worst case scenario, to say that it’s uncommon is a bit naive, I think.

Less personally offensive, but no-less destructive to business success would be business goals and objectives of local workers, political leaders and/or factory management that conflict with the business goals of the foreigner partner/buyer.  These are often never identified in any business meetings and are only understood after the fact as bits and pieces of previous experiences are revealed by individuals and the larger context is understood in greater detail.

For example, how both groups of workers and factories managers deal with holidays, over-time demands, rejected product, and criticism of work quality are examples of things that happen on almost every project that are almost always at odds with what foreign companies expect.  The ages, education and experience levels are radically different in various parts of China and so expectations for factories in Guangzhou cannot be transferred wholesale to Chongqing or Ningbo—yet many foreign companies are doing just that; “Going to China,” as if it’s just one big homogenous industrial zone.

There are too many example to cite but in the last ten years, my experience has been that “non-business” factors are much more likely to sink projects than are the numbers/dollars/dates (as those are usually contracted out clearly before hand).  As you continue to identify these cultural issues for your business professionals, you’ll save them time and money.  Keep up the good work!