Working in China: Where to go, what to expect, and how to do it.

First, Whither Shanghai? As I've been saying for years now--Shanghai, smanghai.  Who really needs 18 million people all in one place and all those overpriced-buildings and traffic jams?!  It's not like the mag-lev is really helping out your daily commute, is it?  Now, I'm sure Shanghai is great for some, but it's not for everyone--just like China is not for everyone.  Just like with each of your suppliers, you need to pick your city to base your operations and even the country that you're going to be based in very very carefully.  Research, not hearsay should be the rule of thumb.Here's an interesting take on what's "really" going on in Shanghai.  By the way, the book that they review, I reviewed last year.  And it was already not "new" then.  But at least they got around to it.  The point though, is really this:  just because Shanghai has got the expo doesn't make it the best option for everyone.And if you've not read "Capitalism with Chinese Characteristics" you need too.  I now think that it's the BEST BOOK I'VE READ ON CHINA. PERIOD.Second, General State of Chinese Manufacturing. The demographics of manufacturing in China and East Asia are changing.  And not just changing in slow, cyclical patterns, but rather in large lurching jolts (that most recently coordinated with Chinese New Year).  Here is a copy of an exchange that I had with a colleague from Singapore last month.  His question:

I am trying to get my facts straight about the current state of China's manufacturing sector. What are the implications of minimum wage increases? Are companies going to start looking to build manufacturing facilities outside of China where there may be lower labor costs? Are there any general trends to be looking at?I was wondering if you could write back with your understanding of what is happening in China's manufacturing space, and where you see things headed.

My Response: Wow, that’s a big question.  Let me see what I can do for you.  I don’t have any actual stats.  But I can give you some anecdotal evidence and personal experiences that points to some shifts in Chinese manufacturing.1. VN and other cheap labor countries are definitely having some effect. Some, not a lot across all industries, but definitely some effect in some specific industries.  The interesting thing is that a lot of the factories in VN that we use are Chinese owned (Taiwan and HK) mostly that have moved from China specifically to VN for the cheaper labor rates.  This will certainly continue in SEA as the govt’s there invest more in infrastructure.  China’s logistics (infrastructure and supplier density) are still so much better than anywhere (but Singapore and BKK) that even with higher labor rates most people can still get what they want here.2. Tariffs. We’ve worked on 5 projects (2 in VN, 1 in BKK, 1 in India, 1 in Malaysia) where we were there specifically because of the US tariff and duty laws (rather than anything that had been done by China or other specific countries.  I don’t know how exactly this type of thing will continue but it will continue and I know that it has affected a number of industries in China (furniture, plastics, clothing) already.3. Domestic stimulus and other In-land projects (5-year plans). One of the surprising things that we’re seeing right now (as opposed to before CNY) is that labor is NOT coming back to Southern China and inland factories and cities within China are starting to show up in our sourcing results.  We have had 5 projects in last 3 months that have been delayed specifically because hundreds of people didn’t come back to work in various factories (wood, plastics, clothing, metal—across all industries).  I see two things here.  One is that govt jobs (construction, mostly) is taking up much of the migratory labor.  And with better infrastructure inland factories are moving to take advantage of the cheaper land and (now larger) available labor pool.  This means that costs will rise in Guangdong and all along the East Coast; this trend will most likely continue.4. Internal competition in general is changing. We’re seeing much more development of markets, infrastructure and general standard of living inland than what we saw even 5 years ago.  The recent growth (off of the East Coast) has been noticeable.  This will, I think, make manufacturing in general in China more like Zhejiang (lots of smaller, family owned, limited int’l experience factories) than Guangdong for the next decade.  It will increase cultural differences/conflicts with foreign buyers, increase secondary costs of doing business in China even though primary COG may go down, and will increase total production times and extend supply chains into new locations.5. Specific industries. As I mentioned before, it’s hard to generalize to such a big questions.  So, in a bit more detail (without having much more detail!!) there are specific industries that are big in certain locations specifically because of either foreign tariffs or govt incentives.  Much of the furniture industry has all but moved out of China in the last 5 years.  Plastics and clothing are in the same boat.  Tech is located in SZ with pockets in Sichuan, Xi’an and Beijing.  Factories that rely on large (cheap) labor forces and are not demanding for quality or tech (bags, mold injecting) will be leaving GD if they haven’t already.Finally, the unwritten rules for working in China (yes, and other developing countries too; China-apologists can just keep their knickers on.)My List of Rules for Working in China.

1. The number of factory visits you make before and during production directly equals the quality of the product you’ll actually export.
2. No one cares about your product as much as you do—don’t expect them to.
3. You will never guilt a Chinese factory into “doing the right thing” if it costs them money.
4. If you don’t do QC you might as well take your money to Macao (or Vegas or Monaco).  You’ll get about the same odds and have a much better time losing your money.
5. Never pay any money without doing some (a lot) due diligence first.
6. Always pull your own samples for QC and testing.
7. Technology is great, but fax, phone and email are not enough to manage production from overseas.  You can’t do QC via video conference either.
8. If you (personally) didn’t record it and can’t reproduce it then it never happened.
9. What you see online and what really exists can be two completely different things.
10. Quality issues are really money issues.  Every time.  Without exception.
11. You can have any two, but not three, of the following: high quality product, low prices, quick production turnaround times.
12. K.I.S.S. your communications over and over again..  Keep It Simple, Stupid.  Remember while English may be your second or third language, it’s definitely your supplier’s second or third language too.  So be VERY clear in everything you say.
13. Register your product/brand, Research your potential suppliers, Visit production sites, contract-out all specs and details, QC every order multiple times, and Confirm everything over and over again.  Do these things for every supplier, every product, every time.
14. The more customization your product requires the more problems you’ll have and time you’ll need to get it done right.
15. Sometimes paying more to get only what you originally contracted for is the best option.
16. The more time you have to ship your product the lower the cost will be.
17. Payment terms (Net 30, for example) and INCO terms (FOB, DDP) are not the same thing.  Learn the terms before you buy.
18. Unless you’re using prison labor, you should always be able to go into the factory and do your own QC.  And even if you are using prison labor, you can still hire local Chinese QC to go in and represent you.
19. Factory MNC or ISO certification means nothing.  At best, it’s a double-edged sword.  Yes, it can give you an idea of the capabilities of the factory.  But do not assume though, that because they’ve met this standard once for an audit that they meet these standards every time.  Yes, certification means that they’ve been, to some degree, tutored and managed (at least once) by an international team.  But each MNC’s standards are very different.  And an “audit” my have been a 30 minute visit designed specifically to check off a box on a corporate checklist rather than to actually critique a supplier’s capabilities.
20. Under-promise and over-deliver has not made it to China yet.  So the samples you get are always going to be better than production—expect this or learn to live with disappointment.
21. Much of what you cut out when you go direct has value—you must make up that value on your own.  QC is the most obvious piece, but there are others too—auditing, social compliance, printing, packaging, licensing, exporting, international shipping, customs clearance, product warranties/guarantees, return policies, etc.  These things will cost you time and money.
22. Suppliers will NEVER offer to pay for the cost of missed delivery dates.  And they’ll only pay for anything “extra” if they are either contractually forced to or if you have the cash leverage that allows you to withhold payment.
23. Bad product will NEVER be returned to China for repair/replacement.