This is China! blog

The Financial Times reported in an October 27th, 2008 article that Walmart’s CEO recently handed down its gospel in China:

“Lee Scott, Wal-Mart’s chief executive, told a meeting of 1,000 Chinese suppliers in Beijing: ‘I firmly believe that a company that cheats on overtime and on the age of its labour, that dumps its scraps and its chemicals in our rivers, that does not pay its taxes or honour its contracts, will ultimately cheat on the quality of its products.’”

Logical; but it’s pretty much agreed that China’s eighth-largest trading partner contributed mightily to much of the corner-cutting amongst its vendors it is now condemning.

“Wal-Mart would begin demanding Chinese suppliers to stores in the US, UK and Canada sign up to rigorous environmental and social standards in three months. Within three years, all suppliers to Wal-Mart stores anywhere in the world would have to sign up.”

And so Walmart leaps to the head of MNC-pack in pushing for a new way to manage business:

“So how is Wal-Mart planning to marry improved factory practices with dirt-cheap products? Wal-Mart does not actually talk much about corporate responsibility. Its phrase, following recent corporate fashion, is ‘sustainability’. It has proved to be a sophisticated way to cut costs.

Sustainability involves reducing the amount of energy used in production and the amount of waste thrown away. Getting rid of unnecessary packaging also helps.”

But it’s not going to be easy herding Chinese suppliers that have weathered the Perfect Economic Storm of 2008 to get behind sustainability. As the article points out:

“… paying workers their overtime is more expensive than not paying it. Suppliers will be hard pressed to provide Wal-Mart with the products it wants at the price it demands – reduced energy inputs or not. Many will struggle.”

And some will die.

Last week’s Economist Magazine had an engaging article about the global outsourcing industry subtitled, “How the financial crisis will affect the outsourcing industry.” The thrust of the article can be summed up in the statement:

“As they struggle for survival, many banks have put discussions about outsourcing contracts on hold or just canceled them altogether. Once the dust settles there will be far fewer financial institutions around, so competition for the remaining contracts will be stiffer.”

The observation resurrects a thesis I proposed at the “Nanjing-Singapore Services Outsourcing Forum: Partnering to Successful Service Outsourcing Solutions,” held last month September at the Ascendas iHub campus in Nanjing Jiangning. During my talk I offered that the most natural course for development of Nanjing’s Services Outsourcing industry – indeed, for nearly all of the 10+ Services Outsourcing Bases Central Government is promoting – is right at its doorstep: it is the capital of a province found most attractive to multi-national corporations (MNCs). Never one to dissuade mavens with grand schemes of conquering the world, I proffered that Nanjing is representative in China as a Services Outsourcing hub to the many countries that have invested in local regions.

I’ve said this before in other posts and other talks that the keys to Indian dominance in the Services Outsourcing industry are found in the Y2K Big Bang and the resourcefulness with which Indian firms set about leveraging their knowledge and experience in IT to gain footholds internationally in Business Process- and Knowledge Process Outsourcing. Question is: what is China’s Big Bang and where is it?

China’s Big Bang came with its entry into the WTO, in 2001. China the debutante found itself courted by the most Foreign Direct Investment (FDI) ever to flood a country in such a short time. Almost overnight every major MNC set up shop in China, a great majority of which did so in the Yangtze River Delta. Concurrently, China’s Services Outsourcing industry – vastly dominated by IT – began sprouting. Still, nearly 90% of all Services Outsourcing in China is domestic, according to a report by Tholons, a consultancy, and is slated to be so for the forseeable future.

Now, the Yangtze River Delta – and Jiangsu Province in particular – is increasingly supporting a 21st-century transport and information infrastructures. Further, the highly competitive domestic market is forcing retail and manufacturing to early adoption of IT, while global economic and demographic pressures are forcing MNCs to reduce costs and increase effectiveness.

In other words, the Nanjing model shows China has an opportunity to develop its services outsourcing industry in a way India does not have because of India’s comparative disadvantages: a weak and fragmented infrastructure and an under-mobilized citizenry. It will take at least another twenty years for India to rationalize its domestic marketplace to the same degree China has, so Indian outsourcers can moderate their escalating costs and insulate themselves somewhat from the travails of the international marketplace.

The same Economist Magazine article points out:

“As they chase new revenues, outsourcing companies will also need to clamp down on costs. These have been soaring, especially in India, where a ferocious war for talent has driven up wages and led to very high staff-turnover rates.”

So what about Nanjing? The city does have one of the best university educations on offer in China, and the local government is hell-bent on encouraging MNCs to settle in or near the city. Jones Lang LaSalle identified in several reports: Nanjing has the fifth highest concentration of hi-tech companies in China (Suzhou is Number 6); the ninth most popular destination for R&d centers in China; in 2005 was the fifth most popular base for expansion of MNC activity; while half of all MNC activity is tied up in finance and banking, and IT and Telecoms sectors – sectors that are amongst the most avid consumers of Services Outsourcing. Nanjing also has at its disposal resources as the capital of one of the richest provinces in China, which also happens to be the province with the most outsourcing bases (which include Kunshan, Suzhou and Wuxi).

The Nanjing Model for Services Outsourcing in China will see service providers taking advantage of the international marketplace through the front door of the MNCs in or near their cities. The support of the MNCs in the region will provide outsourcing vendors the knowledge, experience, relationships and credibility that launched the Indian revolution eight years ago. Coupled with the results of outsourcing partnerships with Chinese customers, Chinese service providers will be able to take out into the world the innovative processes and technologies they’ve developed to meet the unique requirements of Chinese society and business.

One day perhaps, Chinese services outsourcers might be bringing their experience in the world’s most populated country to the world’s second-most populated country. Chicken-Feet Vindaloo, anybody?

It was one of the old timers in Suzhou who brought the fact to my attention that more than the fair share of Suzhou residents are leaving for other destinations. Sipping beers round a table at Blue Marlin 3, in Suzhou Industrial Park, a group of us went down the roster: British Dave from Nokia is off to India; another British Dave, a former GM of a packaging company, returning to the UK the end of the month; Ash, a South African mate, on to Beijing; Wim, a Dutch drinking buddy whose family has been involved in textiles in Asia for twenty years, just flew out to Singapore to establish a new beachhead for the company. And then there are friends of ours we haven’t seen for months, as they are setting up operations in India for their companies; these are long-term Suzhou residents.

Reasons vary for the migrations, of course. But two things are apparent: it’s been a while since we’ve seen such a burst of deployments; and the changes signal a structural change in the global economy, not cyclical. These fellows, though not around the eight and ten years that some of my mates have been in Suzhou, have been fixtures. Not like the fellows on two year and three year contracts that you’re sort of happy to see go when their term comes due.

The export-driven companies, in particular, are the ones that are reconsidering their international strategies. Textiles, we all know, it an industry that has been hit particularly hard. My Dutch friend and his family will concentrate on working with suppliers in Indonesia and Malaysia, with the minority now in China. The large multinational manufacturers this year accelerated their development of factories in India; one friend that works for a Danish company that has just finished equipping its new Indian operation said to me the factory still hasn’t any electricity or running water (and that the place is deadly boring for foreigners).

I’ll miss these guys: they were all good fun and never caused trouble (unless it was in good fun).

Your new homes will be that much richer for having you there.

It seems to me that the amount of fighting in the streets has increased in Suzhou since I came here six years ago. I’m not talking about street gangs that swagger down sidewalks knocking down old ladies and kicking pekingese dogs in the arse. Instead, I’m talking about a subjective increase in the number of scuffles myself and my friends have been noticing in Suzhou and even in Shanghai.

It’s pretty much accepted that Northern Chinese are hot-tempered and will fight at the drop of a hat. Indeed, I remember the first time I ever went to Beijing nine years ago that within the first half-day there I saw two fellows brawling in the street after a fender-bender between their cars. My favorite Beijing fight, though, was the two middle-aged women in the parking lot of a Starbucks hammering away at one tall, thick-set Chinese man who had no qualms shoving them back.

The Yangtze River Delta region, though, has the reputation of Chinese merely shouting and gesticulating at each other for a bit, then going on their relieved way. For instance, two weeks ago within a span of half hour I saw two groups in arguments within spitting distance of the same Bank of China: one seemed to involve a car parking where it shouldn’t have been and the other an electric bicycle where it shouldn’t have been. I don’t know how either ended because I tend to lose interest within a couple minutes of all the barking.

A week later one of the partners in my company told me his wife just the day before had been standing in line at the very same Bank of China in our office building. A middle-aged Chinese woman swept into the bank and barged into the front of the line ahead of another middle-aged Chinese woman. The woman in the line objected to the intrusion, especially as she was next up to the cashiers window. The barger over-ruled the woman’s complaints by claiming rather loudly that she had a lot of money in the bank and should be first. The bargee was not impressed and subsequently pushed the barger out of the line. Alas, the barger’s nails were long and sharp, and she took them to the face of the hapless bank patron who had shoved her. A scuffle ensued, during which the bank guards watched on with utter astonishment. Not until the women were screeching and pulling at one another’s hair did the guards think to intercede.

After the guards had taken the lady-of-the-talons away the bargee called her husband on her mobile phone. He had been waiting outside for her in their car. When the husband entered the bank and saw his wife’s disheveled hair and clawed face, he quickly realized service in the bank was not as advertised and began berating the guards. When he more fully understood the situation and saw the culprit behind the large glass pane being serviced by bank employees, he took it upon himself to get at the woman. The guards insisted he desist. He beat the guards. I’m sure the whole thing was caught on closed caption cameras and was shown on the Suzhou local news that night, but I did not see the report.

Days later a friend took a walk down Dong Huan Lu, which separates Suzhou Industrial Park from downtown Suzhou, around Modern Avenue. In one two-hour walk she saw two fights on the sidewalk, the most amusing of which was between four Chinese women in their twenties. One of the women had been a patron of their hair parlor and was not happy with the result. She refused to pay and stormed out of the establishment with her girlfriend, who had been waiting for her and who supported her friend’s decision that the result was more than simply a bad hair day.

And it’s not just Suzhou I see this phenomenon: entering the American Citizens Services Center on Nanjing West Road just last week I watched as a balding public worker in a bright yellow jumpsuit head-butted a clearly obnoxious citizen – while the police were attempting to intercede in the argument. Baldy’s co-worker followed up with a quick shove to the citizen’s chest. The policeman on the beat was useless, eventually realized as much, and called for back-up.

Of course, this is all very subjective, this observation of the increasing volume and frequency of fights on the streets, but I have been considering just why I and others with whom I’m acquainted have been seeing what we’ve been seeing. One reason could be the increasing stress residents may be feeling with the breakneck pace at which Chinese are trying to make money – or just trying to survive. Another reason could be that increasing migration throughout China has brought more northern Chinese into Southern Jiangsu and Shanghai – that would include people from Northern Jiangsu, which is much more culturally attenuated to Shandong province with its hard-drinking, hard-talking world view than its cousin south of the Yangtze River.

Whatever the reason, trust that street life in the Yangtze River Delta will become more colorful. And don’t forget to duck!

I tried this month in my Eurobiz Magazine column Challenging China to look from another view at the cultural issues dissecting investment in China: What are Chinese employees seeing of Westerners in the workplace? I asked. Typically, Westerners are pointing the finger at China workers as reasons for operational inefficiencies. But I’ve noticed these last few years that many times Westerners don’t make it any easier for businesses in China to operate smoothly, or for communications to range as openly as Westerners like to profess.

I write:

“A manager of a Scandinavian home furnishings manufacturer once told me how when he was transferred to the China operation he was appalled to see the Western managers all sitting together in the canteen upstairs, while all the Chinese staff sat together eating in the downstairs cafeteria. ‘I tried several times to sit with the Chinese staff downstairs to converse with them while we ate, but I got the feeling they felt I wasn’t sincere about wanting to break down the separation. The company culture seemed to have a built-in divide between the Westerners and the Chinese that the Chinese seemed quite aware of.’”

Westerners tend to have a Hero mentality to living and working in China. And it shows. It’s not as bad as The White Man’s Burden that colonialists carried round with them like some great bat over which they clubbed many a society over the head in Asia; however, there is a fair share of hubris that hangs around the operations of some Western companies in China like soot from a coal-fired generator.

Now, with the meltdown of the financial system in the West and Western institutions coming to cash-rich Chinese organs, it may not be a bad idea to actually consider creating “a level playing field” between China and the West – culturally speaking, that is.

How much more inspiring can you get in a symposium than learning about companies that seek to keep all waste to an absolute minimum – and that which is lost hopefully replenishes the earth – that support the local communities that provide the raw materials and talent, and which produce beautiful and functional items as well? I was fortunate as moderator of a full-day seminar on “Responsible Fashion and Design” in Shanghai to learn about business models that are helping to economically sustain poorer communities while turning a profit. The symposium was part of the Danish week-long program called “Responsible Fashion and Design.”

The seminar was just one program of many during a week of exhibitions and lectures about product design and doing business in China. The Danish programs were sponsored by the Danish Fashion Institute and the Royal Danish Consulate General’s office. Next door to the Danish pavilion at the Junckers Exhibition Hall in Shanghai the Dutch were running a similar program about The Dutch Way of design. The talks and exhibitions were all part of Shanghai Creative Industry Week, held at The Shanghai Creative Center, a post-modern campus at The Factory, No. 265, Lingshi rd., Zhabei District.

Companies represented at the day of seminars in which I participated included Kompan, the world’s largest maker of creative playgrounds; and the founders of companies such as: Jooi Design, which makes fashion accessories; Bambu, which uses bamboo materials to make kitchen and dining utensils; Torana Carpet, Tibetan carpet maker; and textile designer [ethicsandaesthetics]. All companies are for-profit, and seek to create business ecosystems that engage producers, buyers, designers and manufacturers in a generative cycle of value-creation and waste reduction.

Martin Haxhold of Kompan established the premise that a fundamental aspect of the sustainability of a product is its immunity to trends: the playgrounds the company makes appeal to various age groups in a timeless way. Immutability of concept and durability of materials also play an important part in creating a product range that outlasts disposable offerings.

Trine Targett, founder of Jooi Design, came to China in 1997 without a design background but with a strong desire to mesh traditional Chinese designs and methods with modern sensibilities. The result are handmade bags, pillows and other accessories whose designs literally cannot be replicated by machines!

The founders of Bambu, Jeff Delkin and Rachel Speth, take their bamboo materials from forests in China and Thailand and engage local communities that have little industry to hand-make and lacquer their beautiful kitchenwares and accessories. An interesting point they made in describing their efforts toward building a sustainable business involved packaging: they offered they spend more time designing sustainable packaging than on actual product design. However, sometimes even governments can get in the way of the best efforts. The Chinese government apparently requires a certain kind of plastic be included in the packaging of the wares they sell in the Chinese market.

Trine, Jeff and Rachel are co-founders of NEST, based in Shanghai. NEST is an incubator-space and forum that encourages other sustainable business models in China.

Chris Buckley described his journey to Tibet as a chemist (PhD) to build a sustainable and responsible business designing and weaving Tibetan carpets. He has two retail outlets now: in Shanghai and in Beijing. One of the strongest ideas I received during the day of talks came from his presentation. Chris indicated that, sure, the local Tibetan communities with which he works could easily mechanize the weave of their carpets to make and perhaps sell more product. However, within a matter of a couple years Chinese mills would quickly and easily copy and out-sell the Tibetans. Tibetan machine workers would then for lack of competitiveness have to take jobs as restaurant workers and hotel service staff. In other words, the traditional weaving techniques and natural dying processes are competitive advantages that are near impossible for commercial weavers to replicate and to market with sizable margins.

Daniella Schmidt in her new company [ethicsandaesthetics] is working with women in minority groups in China to incorporate their designs and weaving techniques into womens’ ware for the European market. For her, the company must not only be profitable, but must also communicate to the West the values and subtleties of China.

At the end of the day I summed up the symposium with some simple yet (for me) powerful observations, shared values and approaches of manyof the presenters:

• companies take it upon themselves to educate their local communities of designers and craftspeople with the methods, requirements and expectations of the international marketplace;
• keeping alive and building on the traditional crafts techniques of the local communities actually maintains a competitive advantage that helps keep residents from suffering sub-standard qualities of life that are difficult to reverse once the traditions are lost forever;
• it was important as part of the stories for all the founders to educate buyers inside and outside of China of the richness and vastness of China and its traditions;
• linking traditional/ancient craft heritages with modern techniques is important to achieve the sustainability and responsibility all businesses must work toward if they are to sustain their communities of producers.

I recently read a couple articles in the Sunday edition of The International Herald Tribune that set me to thinking about the similarities in the genesis of the Dairy Scandal in China and the meltdown of Wall Street in the States. The statement that opens the article about how Fannie Mae fell under the weight of its own risk-taking says it all:

“Almost no one expected what was coming. It’s not fair to blame us for not predicting the unthinkable.” - Daniel Mudd, former chief executive of Fannie Mae.

That’s really really lame. After all, there’s been a reason these guys – and they’re almost all guys – were put in the positions of responsibility they accepted and why they were paid stratospheric salaries: they’re supposed to manage risks that will harm stakeholders and, of course, find opportunities that maximize returns. They are suppose to manage growth, not plant explosives with timers.

“Fannie Mae faced the danger that the market would pass us by,” he [Mudd] said. “We were afraid that lenders would be selling products we weren’t buying, and Congress would feel like we weren’t fulfilling our mission. The market was changing, and it’s our job to buy loans, so we had to change as well.”

In other words, controls that had been put in place specifically to protect stakeholders – and I mean here American home buyers and investors – were ignored and circumvented because the market was HOT. No one wanted to play the role of Chicken Little, for whom the sky did eventually fall. In other words, the “checks and balances” that the American government is proud of, and with which it tweaks the noses of unelected governments the world over, were removed. Systematically. Because that’s what the people wanted, the Great and the Good assure us.

The IHT Dairy article reports:

“Regulatory loopholes and corruption are believed to be part of the problem. Many dairy farmers in the region said bribery was common at milking stations. And dairy experts say local regulators are also known to take bribes or favor companies that are partly owned by a local government entity, which sometimes means the regulator and the regulated are virtually one and the same.”

In other words guidelines, policies and regulations the Chinese government put in place were ignored – by those charged with policy-making, those in the role of enforcers, and those in whom a level of trust was placed that they would never do anything that would melt them down; that is, the dairy companies themselves.

Another article a couple days before in the 3 October 2008 edition of the IHT,  entitled “How US Regulators Laid the Groundwork for Disaster”, cites the US government’s misplaced sense of trust in an illusory instinct for self-preservation private companies are supposed to have:

“‘We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,’ said Professor James Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).”

http://www.iht.com/articles/2008/10/03/business/03sec.php

The point of a government as a caretaker of society seems to have been lost at the outset of this century, no matter the system of government one cares to name. Greed, speculation, and Get-Rich-Quick schemes have come to the fore on an order unprecedented in world history. Globalization has become the excuse for many of the transgressions: the Markets made me do it; the People pressured us. Hence, few will actually be brought to justice for such gross and purposeful negligence. Real people have been seriously wounded by the dismantling of systems meant to promote their well-being.

A simple tut-tut and slap on wrists sinched by Rolexes are simply not enough for crimes of these magnitudes, on either shore.

On October 16, 2008 I’ll be in Shanghai moderating the seminar program on “Responsible Fashion & Design” during week-long exhibition event of the same name. The seminar in which I am participating is sponsored by the innovative Danish maker of creative playgrounds KOMPAN.

“The seminar will answer questions like: What is responsible production? How to set up a “green” production in China? Why produce environmentally friendly products? Is there a market for these products? What are the economic incentives? Which companies are producing environmentally friendly products in China and what is their story?”

The program is part of a weeklong conference and exhibition in Shanghai that takes place at galleries, hotels and exhibition halls throughout the city. Exhibition and seminar underwriters include the Royal Danish Consulate General and the Danish Fashion Institute. The series of exhibits and seminars begins Tuesday, October 14. The Danish Prime Minister Anders Fogh Rasmussen will be attending the Exhibition on its last day (Tuesday, October 21), and will be attending a press conference and reception at the conclusion of the Program.

For more information about the seminar I’ll be moderating or about the entire Event contact Karina Junk at the Royal Danish Consulate General in Shanghai, phone: (21) 6209 0500 x 301, or email her at karjun@um.dk.

Be there or be square!

Good Help is Hard to Find
“The most difficult staff to find for our manufacturing operations have been good QC people and good financial managers,” a British manager said recently during a round of beers at the local Blue Marlin. We were bemoaning the point that QC managers with draconian approaches to imposing quality processes and testing on production tend to drive away the good engineers, while QC managers that just want to fit in get nothing achieved.” Meanwhile, “We’ve had four Financial Managers, and they all trust the computer,” the Brit said. “You’ll look at their reports, and you’ll say, ‘hang on here a moment, these expenses look way off.’ ‘Oh, no, can’t be,’ “they’ll say, ‘the computer said so. They trust Hyperion more than they trust common sense.”

“Guess they never heard of ‘Garbage in; garbage out,” I summarized.

Another British fellow offered, “Our financial guy is pretty good. Sharp. He also drives a BMW and has a house out by Yancheng Lake.” He paused. “I guess he came from a wealthy family,” he said quietly.

“Either that, or he’s a very creative financial adviser!” one of the other guys and I called out. Good laugh.

BYO GM
The former GM of a Canadian company recently told me he’s leaving China at the end of the month. “The Suzhou operation’s closing up. I’m going back home in a couple weeks.” I was disappointed to hear it, since I rather like the fellow and his Chinese wife and their energetic son. “There’s just no jobs around here.”

“But what about all the new factories opening up in SIP?” I asked.

“I guess they must already have their own people lined up the positions,” himself at a loss for the apparent dearth of opportunity in one of the fastest growing cities in China.

No joy.

Salary Cartels
“I’ve interviewed four people for a QC position, and three of them wanted 40,000rmb per month for the job,” a Western production manager said over a round of beers. Not only was that a sobering amount for the position, rivaling salary levels found in the States for the same job, but the consistency of the request was also jolting.

“I talked with my HR manager about the outrageous request,” he continued. “She said that local QC managers and engineers in some industries get together a few times a year. They compare salaries, then agree to an amount they should ask for during their next round of interviews.

“I have had some cracking candidates, though. One guy – who’s really good – first required 40,000; then 20,000; and now he’s down to the more reasonable 7 or 8,000rmb per month. We’ll see if he accepts the offer.”

I spent this past Saturday night in a hospital at the bedside of a Danish friend. His car had been smashed up at an intersection in Suzhou Industrial Park by a truck whose driver couldn’t wait the extra two minutes it would take to stop when the traffic light turned red on his side. It was late Friday night. He had had a long day of meetings. My friend was on his way home.

For twenty-four hours after the accident he was in danger of losing his life. The right side of his skull from the scalp across the eye to the cheeks had been shattered. The pressure on his brain had to be brought down. He was not permitted to move his head, or his body. One miracle was that it was only this patch of skull that was damaged; the rest of his body was without a mark. The car had been cleaved into crippled V-shape.

An insurance company representative came from Nanjing by bullet train a little more than half a day after the accident. She carried a bag of money. As long as the police were informed of the accident, there was little more for the insurers to do but to pay out for what is too common a problem in China: beating the stop light.

I spent the afternoon helping my friend’s American girlfriend with the local police and helping track down his passport; the police needed it to complete the report. There was no question in anyone’s mind who was at fault; indeed, the truck driver called his the owner of the local logistics company from the scene of the accident to say there was “a problem.” The owner raced to the scene of the accident and personally took my friend to a downtown hospital and paid cash so my friend would be admitted to the hospital. It was some four hours, though, before anyone knew where my friend lay.

Several days later and he is out of danger. He will be flown out of the country to reconstruct the shattered and fractured parts of his skull. The other miracle is that his body has stabilized quickly enough that he can withstand the travel involved for such surgeries.

One of the reasons one chooses to be an expat is to take advantage of work- and life-related activities that one likely does not have in his country of origin. Another reason is for the Thrill of the Difference: different culture, different food, different geography. There is even the sometimes the thrill of danger: the possible cross-cultural faux pas; traveling by bus or train to another city; crossing the street; even driving home after work. Of course, China is no different than other developing countries in the level of risk one assumes just living here; but, of course, the risks here have “Chinese characteristics”.

Some of the characteristics involve stupid, unnecessary risks to life and limb: for the Chinese themselves, for those just visiting, and for others who choose to make China their home. Let’s hope the Road to Civilization is not paved with too many more victims of The Chinese Way.
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