China, the global financial mess and what it means for SME's

So, what’s really up with China and the Global Economy?Are they immune, hurting like everyone else, headed for collapse or what?  Options include:1.    They are fine and will see few if any affects from the world’s economic slow down.2.    They are not only fine but should help the rest of the world out.3.    They may have some problems, but they’ll manage.4.    They are going to be hurting just like the rest of us, just for different reasons. 5.    They are already hurting, we’re just not seeing it.At least they aren’t at war with their neighbors, themselves and their own army.  So much for my dream of retiring in peaceful, quiet, Thailand.So what’s the answer? What’s the situation in China?  I think that they will weather the storm but be hurt by the surrounding slowdown, no shocker there.  But, it’s also going to be worse than official figures will ever let on and it's going to be difficult for SME's throughout.First, they have the capital to survive and the security in the banking markets that the US didn’t have to carry them through tough times.   The banks are relatively stronger than the US, but only because a highly capitalized and motivated govt will not allow them to fail. (For more on this read: The coming collapse of China.)Second, they have the ability and willingness to sink billions into public works which not only employ people and infuse cash it builds the infrastructure for future growth (it also lines the pockets of government officials which also helps the high-end economy).But there will be serious bumps.There are 10’s of thousands of factories in the toy and furniture industries alone that have gone out of business in Southern China in the last year alone.  This has nothing to do with the economy, but rather higher taxes and the lead paint scandal respectively.  When you combine the closure of these thousands with the thousands more that are shuttering as the economy drops to a two-decade low of 8.5% growth and you have a serious situation on your hands.The really interesting part is that we’ll never know exactly what the numbers in China mean because we’ll probably never know the exact numbers.  Why?  Because once the growth rather starts to reach the “politically sensitive” point, about 8.5%, the interests of the State will kick in to keep bad news out of general public consumption.This is similar to the temperature in Chongqing.  When I was working at a university as a teacher in the summer of ’95 the temperature in Chongqing was sweltering.  The law was that if the gauge got over 40 degrees school and government offices closed down until it cooled down.  So we were stuck at an official 39.5 degrees for more than two weeks before, in an incredible atmospheric inversion in mid August, the official daily temp jumped to 44 degrees every day for the next week and a half and school mercifully closed.  Of course everyone’s personal thermometer had already been at 44 degrees for the last month.Back to 2008 not much is different.  The fact that China took an 0lympic ego break from bad news for the first three quarters of this year does not mean that there weren’t problems; it’s just that no one was able to talk about them publicly.  Now, milk, Skype, mudslides, they are all coming roaring back into the public spotlight.  I dare you to run the same public confidence polls (Pew) that were run earlier this year again now.  Instead of 83% of Chinese being proud of their country, I’d be willing to bet you get half that number now.  If you think that this is the last problem we’ll hear about, that manufactures have learned their lessons, think again.  I’ve said before that with the economic squeeze on, there will be more, not less, likelihood of problems with inferior (cheaper) materials being used in production.To understand the levels of, um...complexity involved in doing business in China, read this article about the lack of any legal action against Sanlun (the tainted milk supplier).What do SME's do?The big guys are going to be more secure in their developed supply chains and supplier relationships. The domestic markets are also going to be getting some federal help.  So what about the impact on small to medium sized foreign buyers coming to China?  That’s where the pinch will be felt.  Smaller buyers are going to be fighting through the remnants of the closing down and the gone but still not closed and the suppliers that are still in business.  This group of active suppliers will continue to shrink.  The good news is that as large buyers buy less, there maybe room at larger suppliers for smaller orders.You’re going to need to really do more due diligence in vetting suppliers than before.  Testing of samples and QC are also going to be even more important too.Starting out in China for the first time, or even having been in China for years and starting a project with a new supplier, the reality is you can’t trust what’s in your product without doing independent testing.  This isn’t Sun Tze and it ain’t brain surgery either.  It’s just common sense.  If the people who are making your product are not invested in your relationship or the quality of the products then they will never be independently accountable for the results.The current global crisis means that suppliers in China (and everywhere), no matter how insulated from the banking mess, are sill being negatively affected.  Orders from overseas are down and domestic demand, the mythical panacea for any of the ills of “capitalism” in “socialist” China, has yet to take up the slack.  What this means is that more than ever before your suppliers is being squeezed to get as much profit as possible from each piece that comes off the line.  As I’ve been warned by many many Chinese friends, there are not yet deeply ingrained ethical standards in China as you may be used to doing business elsewhere.  This means that when business is tight, and you’re not here watching the line, there is a great chance you will not be getting exactly what you are contracting for.Even in, or maybe especially in, overly/closely regulated industries people that are willing to do the (western) “right” thing when push comes to shove with local officials are hard to find.  There is no recognized financial incentive to be transparent in China—so don’t expect it.  Ever.  The unfortunate reality of amoral capitalism is that profit is the ultimate end goal.  That can be good if there is a long-term mentality that weighs the costs and balances of the current order’s profit potential with the long term client relationship.  But in China, whose history is long but experience with capitalism is short, the attitude is often very short term.To help create participation and responsibility in the processes work with your suppliers to build systems and infrastructure for the future that ensure people understand quality standards and are rewarded for achieving quality rather than achieving savings goals.Random thoughts on recent related news articles that maybe of interest/help to you:Continued news cover ups.  The question that I asked a few weeks ago, “is corruption endemic?” is only half of the question.  The full question should have been: “is corruption and the subsequent cover up endemic in China?”More than the actual milk scandal, the cover up is what hurts China’s soft power and reputation.  This James Fallows article says the same thing.  Everyone has problems, but China kills itself because it just doesn’t manage the fall out from the problems well.Call me crazy, but I always thought that to ruin one's reputation you had to have a good reputation in the first place!!  When was China’s track record on product quality good?  Isn’t this the country that went from socialized mass production of crap to capitalized mass production of crap?  I, and thousands of others like me, indeed entire industries (3PQ), are in business because of how consistently bad quality control in China has been, is now and will continue to be.My friend Mike was telling me about how factories get all their R&D for free from foreigners at shows and I commented that that’s the real economic miracle of China—FDI combined with free R&D would make anyone competitive!  So, where does the US still lead the world?  Even China knows that it’s in R&D.  Which makes Mike’s story about stealing at trade shows that much scarier.Finally, be wary of anyone that claims that moving to Vietnam or Guiyang or Timbuktu will be better for your business simply because "labor is so cheap" or “there is so much potential” there.   Good article on Vietnam here.   If you can fit these production centers into your larger supply chain, that’s great.  We do, and there are real values out there if you already have a developed supply chain.  But don’t count on them replacing the Pearl or Yangzi river delta’s as your major supply centers just yet.