How business is (often) done in China.

All of these experiences happened to me this last month.First, If you don’t make it, fake it.  This is different from the same old “China just copies everything.”  Well, sort of different.We are working for a client that is buying deli products in China for the US market.  They want a PET box or baked chicken.  We found 8 different suppliers, visited factories, received samples, got bids and finally placed a PO with one of them.  One of the factories we visited had just the box we wanted.  But when we placed an order we were immediately told (after the deposit was paid) that “the mold” is broken.  Of course we wanted to confirm as the production times for a new mold (or repairs) would significantly impact our delivery dates.  We went to the factory; they couldn’t show us the mold.  They said it was being repaired off site—we asked to go there too (as we had been previously told it was “next door” to the factory).  Guess what?  The only mold that has anything to do with our chicken box order is now, for the first time, being made from scratch.  The box samples, of which they had quite a few, were actually from somewhere else.  Can they make it?  Yes.  But they haven’t before and now the production will take twice as long as the original bid.

If you’re only seeing samples in the show room, and only one piece at that, you should be wondering about the real source.  You need to see more than just one sample—things like molds, plans, rejects, packaging, etc. will confirm that the factory really does make this product.  Just a couple of samples in the show room can mean that they’ve never actually made it.

Second, If it’s not yours to sell, just don’t tell any one when you do.We’ve been working with a factory to buy some of their overstock and items from canceled orders. With the economic downturn, that’s turned into multiple containers of goods.  The supplier had told us they have a (Chinese) contract that states they can sell unfinished product from orders if the orders are canceled.  We’ve asked for it repeatedly but it’s never been delivered.  In the meantime we picked a number of items and have had them repackaged.  The problem came when we told them that it was shipping back to the US.  All of a sudden they won’t sell it to us any more.  5 containers of canceled-order product have been sold to other Hong Kong trading companies already—you don’t think any of that will end up in the US?  One manager told me (out of earshot of the owner) that the original US customer is putting pressure on them to not sell product to the US market that will complete with the stuff they are still selling.Third, If it’s not legal, find a work around.There are many products that have quotas or dumping restrictions when entering the US from China.  One in particular that we’re trying to buy now has quite a strict import requirement—qtty’s, materials, number of buyers and Country of Origin (COO) are all strictly regulated by US customs.  So the answer to this is not to meet standards or reduce production qttys, but to find a work around.  In many cases it’s a shipping solution to a manufacturing problem.  Freight forwarding companies will actively help clients search for a “solution” to the COO problem by creatively shipping containers to various world ports, unloading and reloading them and then issuing new documents prior to shipping them to the US.Fourth, If you have connections you can do whatever you want.  Sometimes money works too. I can’t personal share details here, but if you read the news you can find more than enough corroborating stories.  Check out CLB if the stories in your Google search don’t satisfy you.   In a word, corruption is rampant over here.  People that are making deals, doing QC or making payments to factories or government officials here know that what’s done on the factory floor is only half the story.  Foreigners that don’t speak Chinese that work in offices with English speaking staff often don’t see it. They’re insulated from the realities of China business because of all the “filters” that come between them and actual transactions.  News about the arrests of everyone from factory bosses to big city mayors are really just the tip of the iceberg.  Talk to the security officials for any MNC or managers of QC teams or purchasing managers or entrepreneurs.  Every exposé-type book from some one that works here confirms this—Beijing Jeep, Made in China, Made Poorly in China, Mr. China, Managing the Dragon, Will the Boat Sink the Water, The Coming Collapse of China, and to a lesser extent All the Tea in China, Inside Chinese Business, China Business Etiquette.  (Sorry, I'm not going to link to each of these, but you can read my book reviews for each one if you click on the Book Reviews link on the right.)Fifth, Grey, not Red should be the color of China. In China, work is done in the gray areas of the law.  Meaning, if it’s not being policed for today, it’s probably considered OK.  This does not mean that everything is illegal, but it does mean that if you don’t outline the specific legal standards that must be followed, they will not be followed voluntarily.  The legal system is specifically designed like this--if it's not specifically illegal then it's OK until someone gets busted and the laws are updated or enforced differently.There are a lot of reasons given (by Chinese themselves) for this.  1. Lack of education.  2. Size of the population of China. 3. Competition.  4. Everyone else does it.  5. Misunderstanding of international expectations.  5. Survival.  Whatever the practice, someone can justify it.  I remember one night in Bangkok, the owner of a restaurant told me, “You can get absolutely anything you want in Bangkok at any time of the day or night.  It’s just a question of money.”   It was true twenty years ago in Thailand and it’s still true today in China (and in Thailand today too).Sixth, Contracts/standards/product will be changed—it’s up to you to catch it.  The corollary is this:  While contracts are indeed more enforceable than ever in China—is it worth it? More often than not, after we’ve negotiated any contract with suppliers with all of our (very high) QC standards written in (and payments tied to said standards), the factory comes back to us and says, “We didn’t expect that you’d really be this strict.  This is going to cost us more than we expected.”  Their solution to this problem is then always one of two options.  One, get us to pay for it—which we won’t do.  Or two, cut costs by adjusting the quality and hoping that we don’t notice—which we won’t accept.  Even if a supplier has a sweetheart of a deal they will cut costs by careful, conscious incremental quality fade techniques.This last week we were trying to complete a shipment of wire baskets and found that ½ the order was not painted the correct color.  The excuse/reason?  “Your prices are so low and your QC so strict that we can’t afford to paint this ½ of the order.”Factories assume a number of things when working with foreigners. One, you’ll probably not have on-site QC.  Second, your delivery deadlines will trump your need for getting everything exactly correct. Third, there are a number of things that you’ll not catch that can be done to save costs once the samples have been approved.  The onus is on you to both establish standards and (continually) confirm that they are being followed.The enforcement corollary is a real problem for small companies like mine.  We typically don’t place orders to a single factory for an entire product.  But rather buy and QC all the components ourselves and then send them to a fulfillment center.  So instead of a $100,000 PO to one place, we have 5 or 6 $10K+ PO’s.  Legal fees, at best, are still going to be a couple thousand dollars and results weeks to months out in China.  That much time and money can represent 20% to 50% or more of the PO value and really isn’t worth it.  The factories know this and so have the upper hand in stalling and holding out.  Sure you can sue, but with smaller PO’s it’s just not worth it.  Which leaves you working out the problems with the factory.  And, with the legal options of the table you are often, as I’ve said before, left being happy getting what you originally wanted at an inflated price.Seventh, Not speaking Chinese (but understanding it) is often better than speaking yourself. I’ve found that if I shut my mouth and listen and speak English to an assistant/QC I can get a LOT more information than I would if I was doing the negotiations directly—of course, I understand Mandarin, Thai and some Cantonese, which are the three primary language in which we do business.  Chinese are the masters at word games—the language is chock full of twists, turns, idioms and double and triple meanings.  That’s what you get when you have a limited number of spoken sounds and written characters.You have to know that that’s the game that’s being played.  When you know, you can avoid some of the problems.  Ways to avoid misscommunications.  1. Get two pieces of everything signed by you and the factory rep.  Get an agreement (Signed and chopped) that YOUR signed sample that is kept in your office is the standard if there are disputes.  2. Confirm everything by saying it back and then recording it. 3. Make sure that your translator is paid for by you and not just the Chinglish speaking sales person at the factory.  4. Make sure that some one from your office is taking the official copy of meeting notes (in Chinese).  Do not leave this to the supplier.  You want to control the words that are used and agreed to.Finally, the people involved in the negotiations will make or break your deal.There are at least 5 people that I would suggest that you have involved in your China operations in general and in negotiations specifically.  1. The standard setter and enforcer--this is usually the foreigner, for us.  2. The translator if you don't speak Chinese.  3. The negotiator--just because the 25 year-old college grad in your office can speak fluent English does NOT mean that she's a negotiator.  4. The details/record keeper.  This person, for us, is the project manager.  5. The QC.If you are not here on the ground for the entire time and/or don't speak Chinese you have to have an incredible amount of trust in each one of these people.  Anyone of them can negotiate a great deal for themselves at your expense and you'll never know it.  They can also save you so many headaches and so much money if they are indeed committed to you.  Get good people.  Treat them well.  Trust them and you'll get so much better deals and solutions.Good luck.