This is China! blog

In the span of the past six weeks the wives of three Western friends of mine in Suzhou have had babies. The guys didn’t do much during the nine months preceding the births – nights out with the lads, business trips throughout China and even to India, punctuated with a few more nights out with the lads – and then BOOM! now they’re fathers.

Their wives are all Jiangsu Province natives, bright, articulate Chinese women. All the newborns are girls. I am genuinely happy and excited for my friends and their newly expanded families. In particular, I’m glad to see the maternal instincts sprouting in these hard-drinking, mono-syllabic fellows: hurrying home directly after work; forgoing pub crawls to curl up with baby; taking just three more rounds instead of the perfunctory five to run errands before dinner. They’ve all been in China at least eight to ten years, and are all committed to staying for as long as China finds a use for them.

One of the things in particular that excites me at the prospect of these special births is that my mates’ children are BOTH Western AND Chinese. NOT six of one and a half-dozen of another. The children -whether they and their parents like it or not – are genuine bridges between cultures: in their blood, into their bones and sinews. These children are the ones that through the simple act of being themselves in both worlds will present to others that many of the differences we fight about across borders are ideological – mythological, even.

In-betweeners, outliers, the liminal – whatever you choose to call them: all of them will re-shape if not completely erase those borders that create so many conflicts between cultures and traditions. They are the true leaders and inspirations of the world. Not the politicians, not the great and the good, not the preachers.

Welcome … and thanks already for your contributions.

The European Union Chamber of Commerce in Shanghai recently hosted an insightful talk with the author of The China Price, Alexandra Harney. The American writer spent nearly two years in Guangdong amongst factory workers and their bosses understanding the work and economic environment. Penguin press published the book last year, just after the Perfect Storm of the Blizzard of 2008, price deflation, buyer exhaustion, salary and commodities inflation struck China.

Her presentation, “Factories in crisis: The Future of Chinese Manufacturing”, was an update of the material she wrote about, with observations on how the factories of the Pearl River Delta contributed to the global economic downturn, the affects of the downturn on the factories, and China’s future after the the world has moved through the financial crisis.

Some insights she shared that actually made me take pen to paper so as to not forget them included:

Currently, no one trusts anyone any longer in the international supply chain: “no one is honest about their true condition,” she said. Buyers are more frequently performing due diligence on suppliers; and suppliers are more often requesting credit checks on buyers.

The “Cluster Effect” of suppliers grouping together in cities throughout China (for instance, Dongguan used to produce 70% of the furniture manufactured in China) has become a “Domino Effect,” with great swathes of industrial parks and avenues idle now.

She sees a major shift in the Pearl River Delta from factories owned and operated by Taiwanese and Hong Kong businesses to Mainland ownership.

Workers in the last two years have become very conscious of the employee rights. “In general,” Ms. Harney said, “workers feel optimistic about the future, despite the downturn.” Ms. Harney saw no worker revolt on the horizon.

However, one of the greatest challenges Chinese leadership faces is the huge swell of semi-skilled factory workers who will still need to work for the next 20 years. Many of the factory jobs they used to have will simply not be coming back.

Ms. Harney believed that the West’s emphasis on currency exchange rates in China was misplaced. “Factories are not dying because of the exchange rate, but because of the lack of demand.”

One of the greatest differences she sees between Western management systems in China and Chinese (and especially Taiwanese and Hong Kongese) is that “Western companies treat labor as assets rather than as liabilities.” This is especially important for a workforce that is increasingly changing its value system: “Experience, skills development in a company that is striving forward is more important to today’s workers [than to their forebears. Now, they don’t just want to get a salary and then return to their hometown after a few years.”

And despite the race to establish export manufacturing bases in Vietnam in particular, Vietnamese workers tend to be rather militant, and less disciplined than Chinese workers, while Vietnam has a population the size of Jiangsu Province. “The alternative to China will be China for many years to come.”

An American friend has been interviewing developers of embedded software. Embedded software typically goes inside devices like mobile phones, game consoles, even washing machines now.

“These developers are easily the most capable, the most professional of any supplier I’ve ever met in China.” He’s been living and working in China eight years now. He was very excited at the find.

Of course, not all the developers were equally capable.

“The sales guys of one company had as the first point in their presentation to me that their company had just been bought and they were in the middle of restructuring the business.” My friend shrugged his shoulders in disbelief. “Can you imagine: these guys were actually proud of being in the middle of restructuring and wanted customers to know.” Apparently, the owner of the company was also proud of the fact. My friend told me the owner has several companies he has bought and sold the past ten years. The owner is so proud of the fact, he makes sure that’s included in the slide presentation, as well.

“And then they sent me a 700-word long email with all these technical questions. They were show-off questions; had nothing to do with the RFQ I had sent out.”

“But then there was one vendor that just towered above the rest: the owner personally drove here from Nanjing, spoke English beautifully. Delivered a professional and polished presentation. Had just a few questions for clarification. Then within two days sent a beautiful presentation.”

My friend passed the report on to the engineers back in headquarters, in Europe. “They were really impressed, too.” The proposal included the approach the company would take, the names of the engineers, summaries of the engineers’ backgrounds, the salaries of the engineers, references and more.

“The vendor is planning to open offices in Japan, Europe and America soon.”

Sounds like they’ve got a winning formula.

Your Services Will No Longer Be Required

Apparently, about 40 to 50 teachers at one of the international schools in Suzhou will not be returning to teach in the Fall. “They asked the teachers what their plans were for next [academic] year,” a British friend said round a table of beers fogged in with cigarette smoke. “If they were even a little unsure,” he made a chopping action in the air, “they got their notice.”

Of course, that led us all at the table of ten hardy fellows to wonder if Suzhou would ever have the number of expats it did at its peak in the Spring of 2007. The Brit said, “I asked what nationalities were pulling out of the schools. The teacher told me, in this order: the Koreans, the Taiwanese, the Hong Kongese, the Mainlanders.”

I offered that it would be several years before Suzhou would have such a glut of Westerners – and easy money. And, of course, with new Western restaurants (owned by Chinese) still going up, it’s a wonder if there’ll be sufficient business to go round to them all.

“Chinese people don’t like Western food, for the most part,” an American chipped in.

But the city will sure miss the income and business taxes their currencies brought in.

Laying-off is Easy To Do

A German friend told me over dinner (his, not mine; I had already eaten and was drinking a beer) recently that he had not been looking forward to laying off 25% of his staff. “We thought it would be a lot of paperwork and hassle and the local government [in Suzhou Industrial Park] would push back.

“I sent my HR manager over to the HR Administration building in the Park to find out what to do. They told her, ‘fill out this paper, that paper; what’s your reason for laying them off; ok, fine.” The German wiped his big hands in the air, like he would brush bread crumbs from his fingers. “It was so easy,” he said, and took a draught from his beer mug.

“The hard part was when some of them started haggling about the package,” he said. He looked weary from the memory. “And I thought about those kind of guys, ‘you, I should have fired you a long time ago.’”

Ignorance is Dangerous

A Danish manager of software development company in Shanghai told me over a terrible cup of instant coffee one morning in her office how concerned she is about how exposed her company is to IP (intellectual property) infringement lawsuits. The company uses subcontractors in China to produce graphics for the applications the company sells in the international market.

“We found out one of the subcontractors was simply going onto the internet and copying images to put in our software, without permission from the original designers and artists. When we told them that was illegal and we could all be sued, they said they didn’t know.”

One instance in which ignorance clearly was not bliss.

Salary Rises and Falls

A young Chinese told me how she remembered that her first job ten years ago had a starting salary of 300RMB. “I was so happy then! It seemed like such an unbelievable amount.” That was for office work in Suzhou, back then. The young lady then opened her own business about three years later, an graphics design company for advertisements for Chinese companies in Nanjing.

“I was making as much as 3,000RMB a month in salary; so much money back then [in 2003].”

“My sister was making 3,500RMB up until the end of last year, as an interpreter for an American company. That’s good money for that kind of position. But she was stupid and sent a letter to her boss that said she worked so hard and did so many things and that she should make more money. The company fired her instead; said that business was bad.

“Now, she just found a job with a German company in Suzhou doing some training. After sending out hundreds of CVs and a lot of interviews, she could only find this job.”

Starting salary: 1,500RMB.

Ah, for the good ole days.

It seems almost every month now Western friends are leaving Suzhou, re-patriated from whence they came. Timing’s everything, they say, and the Times have forced companies to dramatically re-think the way they use expats in China. In one instance, a friend’s Australian company – in the household goods manufacturing industry – just simply doesn’t exist any longer. For another mate, the early retirement package the company offered is far greater than if he just continued working in Suzhou another two years and then retired as a matter of course.

In the March 2009 issue of Eurobiz Magazine I write about succession matters in companies in China, and why it’s important for Western companies to plan for and cultivate talent that will eventually assume the role of General Manager of a company:

Robert, the British GM, also stated that succession Matters ultimately come down to an issue of trust. “It is important for Chinese managers to establish credibility with Western managers abroad.” Without trust there cannot be effective, transparent communications between two sides separated by vastly different value systems.

And trust, we all know, is a precious commodity in the business world.

I recently had a very pleasant visit to my office from an old friend from the Ningbo Meishan Free Trade Port. Meishan is a remote island off the coast of Zhejiang, an hour-and-a-half drive from Ningbo. I had published an article about the port in the July/August 2008 issue of Chaina Magazine.

The port will in many ways be like the Shanghai Yangshan port just to the north of it, except that it will address much of the logistics needs of provinces south of Jiangsu Province: Zhejiang and Jiangxi, more specifically. The Port was just approved by the national level government a year ago. Administrators for the Port are looking for two 100,000 ton berths to be completed by the end of 2010 next year. They are also currently building one of four bridges from the mainland to the island, as well as carrying out a massive landfill project to extend the length of coastline along which they will build nine more berths. Interestlingly, the global economic downturn has in no way affected the massive construction project, which is slated for completion by 2020. The project is likely one of those that is being touted as part of the US$586 billion stimulus package the national government has been promoting the last five months.

However, other parts of Ningbo have been affected economically.

Monday, 28 March 2009 at the Benelux Chamber of Commerce in Shanghai I’ll be talking about the overall investment environment in Ningbo as well as some of the regulatory hurdles the region presents to foreign investors. Hope to see you there!

Email me… your name, company name, industry and country in which you are working to get a PDF copy of the article.

Brian Schwartz has a well-researched article in the March 2009 issue of China International Business Magazine on the development of China’s IT services outsourcing industry. He asked me some of my thoughts on the topic for the article, one of which involves the relationship between the Indian outsourcing platform and the Chinese. I responded in the article by saying:

The Indian government is continually having difficulty rationalizing a business sector capable of capitalizing on the outsourcing services in its own backyard…

Certainly, two things I’ve been struck by in the global financial downturn is the sheer number of Chinese IT service providers that keep on keeping on: they have made it plain they are not going to close shop any time soon. Though far smaller than their Indian counterparts, they are eagerly moving up the customer-service learning curve while keeping costs low.

The other interesting point is the very reason behind the staying power of Chinese IT-service vendors: they have a domestic market that is increasingly becoming rationalized. Rationalized in this context means that local regulations, transportation and information infrastructures, staffing levels and more are well enough mature in China that IT services companies can actually get to and support customers in a somewhat timely and effective manner.

Until India has this kind of domestic customer base, it will always be at the mercy of the international markets that have caused massive layoffs of staff at their outsourcing facilities, salary deflation and customer flight to competing countries – like China.

Email me… your name, company name, industry and country in which you are working to get a PDF copy of the article.

National Public Radio recently interviewed me on the Chinese government’s interests in promoting a domestic wind industry. The piece, run by the talented Scott Tong out of the Marketplace’s Shanghai bureau, is called, “Wind farms change the air in China.” I admit I got a bit woolly when I said:

“We may see wind turbines off the coast of Saudi Arabia, or off of Vietnam, off the Ivory Coast. Because the Chinese were able to bring the technology down to a cost level that these developing economies could afford.”

Wish I could have taken out the Saudi Arabia bit; after all, they won’t be running out of oil for another fifty years.

Still, I was able to make a couple other good points, which did not make it into the piece; like, the Chinese government is requiring that domestically made wind turbines have 70% domestic content. Now, since domestic makers like the National Railroad Company do not do a good job at making such components, international components makers from Denmark and Germany mostly are making their way in-country.

However, the international players do not seem to realize that very shortly not only will domestic Chinese manufacturers learn how to make the same components, but the Chinese will more quickly customize the sets for Chinese geographies and economies, and will produce competing parts at half or less the cost – and perhaps half or less the lifetime.

It’s typical in China for Chinese companies to have accounts receivable for 120 days and more. Western companies that choose to form joint ventures with companies are often shocked that Chinese managers tend, in general, to be comfortable with such long lags between delivery and payment. Payment in China, however, can come in a variety of forms: barter; favors; gifts; long bouts of KTV with attendant hostesses; new and promising deals.

Western companies do not have such AR tolerances, and prefer payment received within 30 days, if not sooner, no matter the nationality. But what do you do in China when a customer – actually, another Western company in Zhejiang province – has had its Chinese finance manager kidnapped in another province, and is unable to pay any of its bills. Well, you do what I did when a customer – a Westerner who’s also a good friend – told me just such a story: you laugh.

It seems the company had a joint venture with a Chinese company in southeast China, where Chinese employees had not been paid their salaries for a couple months. Of course, in today’s climate in which factories are shuttering at an alarming rate, a lack of salary payments for several months would of course imply their employer, too, will soon fold. The Western company was apparently responsible somehow for the monthly payments.The financial manager, surely aware of the lack of appropriation, had actually gone down to the southeastern operation ostensibly on a separate – though assuredly, related – book keeping errand.

Seeing their opportunity to finally get some leverage over the plight, the disgruntled employees grabbed the financial manager and put him under house-arrest. They made the demands clear to the Western operation up north: they would release him when they got paid their back salaries. I’m not clear on how many days he was actually held; but it was a nontrivial length of time, apparently.

Eventually, they got paid their salary the day the Western manager called me to apologize about the late payment of the invoice. At least, I could expect payment the beginning of the following week, by which time the hapless financial manager would have returned to home office in China.

“It’s alright!” I laughed through tears, “with a story like that, take another couple weeks!”

“Well,” my friend retorted, “if I’d known it was that easy to get an extension I would have told the story a while ago!”

This is China!

One of my employees is marrying this weekend. Chinese wedding banquets on average are quite expensive affairs: photo shoots that last a day long; banquet tables for perhaps hundreds of family members, friends and party crashers; gowns, dresses, ill-fitting tuxedos; way more food than anyone can eat; rental cars -  Mercedes Benz, of course, though BMW doesn’t hurt, either; and perhaps accommodation for the out-of-towners.

Chinese wedding banquets, though, are profitable for the newlyweds. Guests pass the happy couple red envelopes of money, instead of buying gifts. Each packet can easily have several hundred dollars U.S. folded inside. Literally at the end of the day, once everything has been paid for, the couple may walk away from the entire affair several thousand dollars ahead in cold, hard cash.

Of course, money-givers expect to receive the same in kind from the couple at future wedding banquets. It’s a safe, effective way to share the wealth, as it were, amortizing investments over time.

The Chinese central government is doing the same thing, effectively, in having local governments and banks subsidize Beijing’s grand plans for priming the domestic economy. The International Herald Tribune reports:

China and the United States leverage themselves in different ways. America uses government credit to raise money directly from the market.

China uses quasi-government financing, so that the real costs of the plan – though indirectly ultimately a cost to Beijing – are impossible for investors to gauge…

As one Hong Kong analyst comments in the article, it’s the Chinese Way to keep transactions opaque. However, the article points out a potential downside risk to the approach:

Beijing will have no trouble finding local governments and banks eager to help finance the stimulus plan for two reasons: It’s in their political interest to please the central authority, and with liquidity abundant, they are eager to lend. Projects in the stimulus plan at least have government backing…

“The main problem with relying on banks rather than incurring a larger explicit budget deficit is one of transparency,” said Tao Wang, head of China economic research at UBS. “Relying on bank financing makes it less transparent how much spending takes place in relation to various stimulus projects…”

“On the surface the government has little financial burden but the reality is it just puts risks at another place,” said Vincent Chan, head of China research at Credit Suisse.

Still, Beijing just in the end might be able to afford itself a nice honeymoon, after all.  Hainan, anyone?