I am not generally a fan of extrapolating the way a country conducts its politics to the way its enterprises conduct its businesses even in China where so many businesses are government owned. I am not saying it cannot be done, but I generally find it too complicated for too little value. David Dayton, a guy who truly knows the way China conducts its manufacturing, just came out with an analogy laden post, entitled, "Rio Tinto and Urumqi as Corporate Culture Lessons,"linking China's recent handling of its Western region with how its factories treat foreigners. Though I am dubious of the value (beyond entertainment) of making this linkage, I am convinced Dayton is spot on regarding Chinese factories and I am going to focus on that.
Dayton sees China using the following four step process to deal with its problems out West:
1. Round them up.
2. Insist everything is okay.
3. Identify a common enemy.
4. Show them the money.
1. Round them up. Anyone against the factory will be removed. In other words, that factory floor manager with whom you have had a great relationship for the last two years? He will go silent as soon as you have a problem. Dayton advocates handling this by tying payment to the Chinese factory not to its own assessment of quality, but to that of a third party quality assessment company:
This isn’t arrogant or obstinate it’s just a fact—3PQ reports are directly tied to payments and there isn’t really any room for discussion if the product doesn’t pass. Just stick to this and never give in and you’ll be fine. Give in once and every question from there on out will be a major battle. You’ve been warned.
I agree with Dayton on this. When possible, using an unbiased third party service to determine quality/payment benchmarks is a great way to go. The problem is getting both the foreign outsourcer and the Chinese factory to agree on the third party.
2. Insist everything is Okay. Deny any and all problems:
I’ve had people hold product and Pantone color chips and literally tell me that a red color isn’t really red but that my color chips must be old or incorrect or even that the colors match perfectly (even if they are totally the wrong color). My friend Mike tells of story of “red” fire trucks that were actually florescent orange and the factory had no problem with the difference. Remember, if no one admits to the problem then it doesn’t yet exist (at least in the minds of the factory managers). And that’s the goal—to eliminate the idea of a problem rather than solve problems.
I am betting that every single reader out there who has dealt with a Chinese factory knows exactly what Dayton is talking about here and probably every single reader out there who has not dealt with a Chinese factory thinks he is grossly exaggerating. Trust me, he isn't.
When faced with this, Dayton prescribes the following:
What can you do about this attitude? Probably nothing. Just agree with the fact that they do indeed do this for other people. But remember, it doesn’t matter what other clients accept or what the factory “typically” does. If it’s not what you agreed to (in your written contract) then you don’t have to pay for it, regardless of how typical it is.
3. Identify a common enemy. Once you get the factory to admit there really is a problem, you then need to figure out from where it stems and how to fix it. Dayton very accurately describes the different thinking on this:
My experience is that while I’m interested in getting problems fixed (solutions to meet deadlines) the factory is more often concerned with finding someone to blame—usually a sub-supplier. It’s always the sub-suppliers fault.No matter how many times it happens it’s always amazing to me how factories are willing to throw their sub-suppliers under the bus and assume that they have no responsibility for their quality. Of course, they chose the sub-suppliers (often without telling us they were even involved) themselves and they paid them for work—and there in lies the problem. Factories just assume (or hope in vain) that blaming someone else will end the problem. It’s like they expect me to say: “Oh, it’s the sub-supplier’s fault? Well then, we’ll just let it go. Sorry for bringing it up.” Once something has been paid for it doesn’t matter who the buyer is, a foreigner or a local factory, no supplier is going to fix stuff that is “finished” and already paid for and shipped out. Bad quality components most often have to be replaced at the factory’s expense since they can’t get their sub-suppliers to pay for them once they’ve taken delivery.
Dayton's solution to this is to not fight the blame game, but to focus on fixing the problem. I would add one thing to this. Make very clear in your contract with your Chinese manufacturer that the manufacturer will be responsible for all quality problems and make very clear the extent to which subcontracting will be permitted, if at all. For more on how to handle the subcontracting issue, check out "The Six (Not Five) Keys To China Quality."
4. Show them the money. Dayton outlines what happens virtually every time there is a manufacturing problem and it goes like this:
This is what happens next. You find a problem, they deny it, then finally admit it, blame the sub-supplier and offer you a discount for the next order. Notice, fixing the problem, resolving the concern, changing processes, or giving you a discount for the current (incorrect) product are almost never options. The key is to get you to take as much of the current crap for the fixed price as possible and then spend money (future discounts) on other projects to pacify you. If they can get current product moved at the agreed upon price, the next goal is the reorder—if that means promising discounts now, so be it. There is always time to increase the costs late
Dayton does not tell us how we should handle this and that is the problem. My experience is that the foreign company pretty much has only three choices (really two) at this point. It can keep trying to negotiate better compensation from the Chinese factory, but it probably will not get it. It can walk away and never do business with this Chinese manufacturer again. Or, it can threaten to or actually sue the Chinese manufacturer. But if it does not have a very well drafted contract (preferably in Chinese) that outlines very clearly exactly what was expected of the Chinese factory, its chances in court are likely very poor. For what needs to go into your China OEM contract, check out, "China OEM Agreements. Why Ours Are In Chinese. Flat Out."
Read more: China's Big Political Picture Writ Small For Business.
Stafford Publications is putting on a teleconference on the Foreign Corrupt Practices Act (FCPA) in China.
Before I talk about that though, there is one thing I have to get out of the way. Every time I see a very British name like Stafford, I cannot help but smile and remember a hometown friend of mine who named his business "Tafford." My friend's business has become quite successful on a national level and my friends and I still always effect a very British accent whenever we discuss it. Now here's the funny part, my friend came up with the name from an expression we back then: Take a Flying F--k On a Rolling Donut. That equals TAFFORD. Get it? Sorry.
Anyway, this teleconference will be on September 3 and it features really good people and it will be focusing on the following:
This seminar will examine recent FCPA enforcement focused on business activity in China, discuss the unique FCPA challenges of conducting business in China, and outline strategies for effective FCPA compliance.
The panel will review these and other key questions:* What risk factors increase the exposure of companies conducting business in China to possible FCPA violations?
* How are the U.S. and Chinese governments acting to enforce their respective anti-bribery laws against U.S. companies?
* What are the best practices for companies to utilize in developing anti-corruption compliance programs and due diligence efforts for their China operations?
The faculty consists of Kyle Wombolt of Goodwin Procter, Nathan Bush of O'Melveny, and Amy Sommers of Squire Sanders.
The US has been stepping up its prosecution of FCPA claims and it is critical that all US businesses in China have at least basic knowledge of what it is all about. Click here for more information on the teleconference.
Read more: Foreign Corrupt Practices Act in China. September 3, 2009, Teleconference.
Whirlwind China entrepreneur and friend Sam Goodman has a great and blissfully short book out on how to do business in China. I say blissfully short not because I did not like his book (because I did), but because its shortness is one of its strengths. Most people wanting to learn the ins and outs of doing business in China neither want to nor have the time to read an encyclopedia on the subject. They want something that gives them a full overview of the basics in a hard-hitting and relevant way. Sam's newly released tome, Where East Eats West, is that book.
Sam is a somewhat rare beast in China: an experienced and successful expat entrepreneur. Sam started a chain of cafes in 1997, called Beijing Sammies. Sam built these cafes into a real business and then sold them in 2003. His book does a great job distilling what he learned from those experiences.
The book consists of a series of many very short, very informative, chapters. Though I see this book's highest and best use as being for the person seeking to start a business in China, it also is a great read for anyone looking to learn more about how business is really done in China. I took comfort in reading how much of what has happened to my clients is not so unusual after all. It is appropriately subtitled, The Street-Smarts Guide to Business in China.
According to the book's website, reading the book will give you the following invaluable information:
Here are just a few things you’ll learn in Where East Eats West:
1. How to keep yourself in check in the first few infatuating weeks and avoid becoming delirious with China Fever (and then how to cope when the fascination ends and reality sets in).
2. Just enough background about business in China to help you understand where they’re coming from when you don’t see eye to eye (which will happen more times than you can count!).
3. What to expect and how to deal with China’s vast human resources, a.k.a. the enormous talent puddle.
4. How to break down the basics of ‘face’, ‘guanxi’ and so much more - so you get what you want for your business.
5. How to command respect (and avoid getting screwed over) by suppliers, vendors, and even your customers.
6. How to stick to your guns when the aforementioned suppliers, vendors and customers try to wear you down and bleed you dry (it’s not personal, it’s just business).
7. How to avoid offending your new friends and colleagues (a.k.a. a few touchy subjects to NEVER, EVER bring up).
8. How to avoid the most common scams to con you out of your money (if you do find yourself a victim, you won’t get much sympathy or help from the police or Chinese legal system, so you want to avoid these scams).
9. How to cover your butt before you face a business deal gone bad (and you probably will, at least once).
10. A roadmap to navigate the negotiating detours and potholes that come with Chinese business negotiations.
11. How to deal with bureaucrats and their constantly-changing rules.
12. The two most uncommon things in China – a friendly warning so you’re not caught off-guard.
13. The two most important rules to succeeding in the Chinese business market.
David Wolf over at the Silicon Hutong blog sums up the book perfectly:
Sam Goodman is the Harvey Mackay of China, a straight-shooting entrepreneur who has defied the odds and succeeded where some of the world’s largest and smartest companies have failed.
Get it for your Kindle by going here.
I expected the routine this morning from a Wall Street Journal article entitled "LG Display Plans Plant in China." I expected it would say that LG was going to be manufacturing in China either to save costs or, more likely, to diversify its manufacturing. But the following line from the article gave me an ah-ha moment:
"China's LCD market is growing rapidly, so we felt it's necessary to manufacture LCDs from the region in the long run," said LG Display spokesman Park Sang-bae.
Ah-ha!
Now I know many of you have already realized this (and on one level, so had I), especially those of you in the business of buying and selling product, but China manufacturing is in its second wave. China's first wave was strictly for cost savings; its second wave is for internal consumption. In a backward analysis brought on by this article, I realized that many (maybe as many as three quarters of them) of my firm's clients who we have been helping go into China are going there more to sell than to save. Now I realized this was true of the clients going there to start a restaurant, going there to sell beverages, or going there to provide business consulting services, but it only just occurred to me that many of our manufacturing clients are going there to sell as well.
After reading the article, I immediately recalled a recent conversation I had with a client who manufactures truck parts. I asked why they were going into China now (implying, as opposed to five years ago when things were even cheaper). The answer I got was that shipping costs had gotten too high and that they were worried about losing out to those already there. I also recall a similar conversation with a company that makes very high end, large and heavy testing equipment. Why was it going into China now, I asked (while thinking the answer would be that before now the capabilities had just not been there). The answer I got was that now that they had a strong sales and repair force in China, they were ready to start manufacturing there as well.
What are you seeing out there?
Read more: Manufacturing In China. Because There Are 1.3 Billion People There.
A couple of Chinese "executives" were recently found guilty in Seattle Federal Court of having imported and distributed adulterated (well it at least sounds like adulterer) and mislabeled honey into the United States. The honey contained "ciproflaxin, an antibiotic that is used to fight bacterial infections but in rare cases can cause tendon damage and is barred from the food supply."
The honey was also mislabeled as having come "Russia, Ukraine and possibly Poland" even though it really came from China.
This all reminds me of a couple very good clients who were subjected to full on federal investigations. To camouflage the client, I am going to be very vague here, but I assure you that you will get the gist. Here are the stories:
Client 1 is engaged in a very profitable business shipping food product to China, where it is combined with other product, processed, and then shipped to the United States. One day, around a dozen federal agents (from various agencies) show up, armed, and take all of the company computers. An investigation goes on for years and the company and many of its executives have to hire top flight white collar criminal attorneys to defend themselves. By the time the matter is resolved, the client has spent well over a million dollars defending itself. The charge was that my client knew that one of its products was X, even though it had been labeled Y. The Feds eventually became convinced that my client did not know it was getting X product and the matter was closed. It helped tremendously that my client was able to show that the price it paid for product Y was actually the much higher price that it would have paid for product X.
Client 2 is in the high tech hardware business. It has more than 100 employees and has been in the business of producing and selling its own hardware and that of others for many years. One day, about twenty federal agents (from various agencies) show up, armed, and tell everyone to clear out. The agents spent the next 48 hours (non-stop) going through my client's computers. We later learned that the Feds had been called to investigate my client for selling counterfeit product of a very well known hardware manufacturer. This powerful hardware manufacturer had reported my client as a counterfeiter and that was enough for the Feds. My client immediately admitted that it had, many years before, inadvertently sold less than ten counterfeit products, but as soon as it realized that the product (from China of course) was counterfeit, it ceased. It helped tremendously that my client was able to show that the price it paid for the less than ten counterfeit products was the price it would have paid for the real thing. My client had to retain lawyers for itself and for a number of its executives. Fortunately, this investigation was nipped fairly early in the bud and the overall cost to my client was only around $100,000.
The point of this post is that two innocent companies went through hell because they unknowingly received misleading product from their Chinese suppliers. Both of these companies had huge amounts of international and China experience before their problems arose and both of these companies are were and are very well run. What could they have done differently? I honestly do not know.
What can companies do to prevent this same sort of thing from happening to them? I can call for increased diligence, but that is about all.
What do you think?
For more on this case, check out the following:
-- "How Not To Avoid Anti-Dumping Duties"
-- "Chinese National Pleads Guilty in Illegal Honey Import Scheme"
-- "Honey Importers Caught, Convicted and to be Sentenced in November. A good day for U.S. Beekeepers"
-- "Honey laundering thrives despite fed crackdown on two operations smuggling tainted Chinese honey into the U.S. What’s on grocery shelves?"
-- "Is Your Honey Safe?"
-- "China honey might be contaminated with dangerous, extremely toxic, banned antibiotic"
-- "A Trade Twofer - Chinese Company Violates Two Kinds of US Trade Laws"
Read more: China Honey, You Are An Adulterer. Can You Stand By YOUR Labels?
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