This is China! blog

A British mate of mine who has worked with Chinese supply chains since the late 1990′s told me he is seeing a sea change in domestic manufacturing. He’d worked in manufacturing in Britain for several decades before coming to China. The Chinese owners of the factories in China are beginning to reign in waste in their production processes. “Before, if they screwed up an order they’d just call in another hundred bodies for pennies, have them work overnight to remedy the situation, then let them go,” he told me. “Now,” he explained, “pay rates have gotten more expensive, material inputs are more expensive, and there’s not as much business to go around. So Chinese owners are beginning to look at how to improve their processes, get the orders right the first time the most efficiently they can. That’s another reason why some of them are looking into or investing in robots to do some parts of the job. Fewer errors.”

The former plant manager put the change into context for me. “It was the same in Britain in the sixties. We wasted a lot of material, made a lot of mistakes. Then, in the seventies, everything began getting more expensive to manufacture. We cleaned up our lines, our processes. Things like Total Quality and Lean Manufacturing came along. It’s a natural process. China’s not special in that way,” he added.

China’s going to find one day that economically, middle age sucks.

Technorati Tags: bill dodson, china, lean manufacturing, manufacturing, suppliers, supply chain, total quality

I’ve always advocated that looking to what Wenzhou business is doing around the country is a leading indicator of where the rest of Chinese business will be following. They were amongst the first Chinese to burst onto the export manufacturing scene in the 1980s: Zhejiang province – compared with northern China, especially – was relatively free of the encumbrance of State-owned Enterprises. They were also amongst the first of the migrant workers to settle in the periphery of Beijing in the early 1990s to set up small manufacturing and trading operations, and to have their settlements destroyed and the migrants sent packing home.

Their revenge since that time has been to build an export base in the city that manufactures the majority of the world’s trinkets, including cigarette lighters 60-percent, apparently), creating one of the highest concentrations of millionaires in the country. Wenzhou wives are reputed to work in local circles to pool their money to buy up real estate around the country, in cities in Shanghai, then to sell off the properties after they’ve risen in value.

Now, Wenzhou is signaling exporters are increasingly having a difficult time getting bank loans to continue or expand operations. The Wall Street Journal reported, “that 90-percent of Wenzhou’s 360,000 small businesses” are not able to get loans for their businesses from local banks. So, what, you might say, it’s been tough for most small and medium sized businesses in China anyway.

Even Chinese consider Wenzhou people special businesspeople, however. Wenzhounese are especially cliquey. They have especially tight ties within their business community and with one another throughout China. The tight circles of relationship and reciprocal obligation are called guanxi in China. So, if Wenzhou guanxi with their local banks is not enough to facilitate loans with their own ilk, that’s as clear an indicator as any that the SME-exporters in other parts of the country are in for a tough time.

The report concludes that some of the Wenzhou businesses are on the verge of closing down. We may be at the threshold of another export manufacturing shakeout in China, very much like that which began in the Fall of 2007.

Stay tuned.

Technorati Tags: Doing Business in China, economic trends

The Wall Street Journal has a DIY Guide to Exposing Dodgy Companies that reminded me of a due diligence trip I took in China a couple years ago. I was leading a group of European investors through deepest Zhejiang province. They were interested in acquiring a Chinese company in the home decoration industry. We had identified three potential targets. All it took, though, was a visit to the first company for the group of straight-laced Westerners to understand how businesses operate in China – and just what sort of business model many Chinese companies are attempting to export to the world.

Two brothers in their early thirties owned that first company. The factory was actually in the middle of the city, in a compound that had once been the site of a State-Owned Enterprise. The brothers were soft-spoken, courteous even, and solicitous. Settled in the spare conference room, the parties talked about the business and prospects for growth. The Europeans asked to see the accounting records for the company. One of the brothers and an assistant, a young woman in a factory smock, brought out two great ledgers, hand-written. Two books? the Europeans queried.

“Oh, one book is for us and the other for the tax authorities,” one of the brothers answered blithely. “They don’t want us to report too much income, so we have to keep the records elsewhere.,” he explained. Apparently, the difference in actual vs. reported was negotiated and channeled to tax patrons. Neither of the brothers considered maintaining at least two sets of books or tax negotiations or contorted shareholding structures at all improper. It was just the way things ran in China. Visits to the remaining two targets revealed the same modus operandi.

It’s no wonder, then, that Chinese businesses seem genuinely aggrieved that Western shareholders and stock exchanges consider their business dealings improper at best, down-right illegal at their most dramatic. After all, what’s worked for a society for thousands of years must be good for the rest of the world.

Mustn’t it?

image credit: factsanddetails.com

I recently had a couple beers with an American quality manager who had been to China a couple times, but who was just now settling into a six-month contract at a Suzhou factory. He had had no idea, he told me, how difficult it was to find local professionals. He was charged with building up the quality assurance team for the company. “I want people who will stay around for years, not hop from job to job,” he explained. It’s not been easy going for him and the Chinese supervisor, who himself was from Chongqing.

“We did find one guy, though,” he offered, “and gave him an offer. He sold me my bike! “the  Ameriican beamed. The bike shop was in downtown Suzhou. He explained, “I watched the put my bike together, then true the wheels. He put so much attention on the job, so much care. He clearly liked what he was doing and took pride in the job.

“I figured, the hard part in China is finding people who care about doing a good job. The rest is just training.”

I don’t know, though, if the bicycle shop fellow accepted the position, but I liked the American manager’s thinking very much. A guy like the bicycle builder could theoretically go wherever he wanted in life, simply because he’s mindful of what he’s doing and takes ownership of the finished product.

Pride in one’s product and actions is something that comes from within; no amount of propaganda or exhortation or rote learning or robot behavior can substitute for the real thing.

image credit: jeffreyhill.typepad.com

Technorati Tags: Doing Business in China

I was quoted in a recent Bloomberg article about the dangers of Westerners relying on Chinese friends to set up domestic companies in China. The article discussed the South China case of a couple brothers from Chicago, the Fiocci’s, who, while apparently waiting two years for establishment of their WOFE, relied on a Chinese friend to set up the business for them, presumably under the Chinese person’s name, and not rip them off. Dan Harris, of China Law Blog fame, highlights the fact in the article it’s illegal for foreigners to have any ownership in a domestic company.

I have dissuaded people from following such an approach, as it’s fraught with all kinds danger, number one of which is losing the business lock, stock and barrel. I’ve gone to great lengths here in China and invested a great deal of time and energy in keeping friends in China from following this path. I’ve seen too many business tragedies first-hand to allow that sort of thing to happen.

The article says,

“China Inside Out” author Bill Dodson says he’s heard of foreigners using Chinese citizens to form a domestic company and then contracting with the Chinese citizen to be able to control the company, but warns “it’s dangerous, because the Chinese person who sets up the business has the license, controls the chops, and has the relationship with the local government officials.” Jim Fiocchi says he wouldn’t recommend the approach he took with his brother.

Then again, neither would I recommend a poke in the eye with a sharp stick.

Read more of the article here.

Technorati Tags: Doing Business in China

Apparently people from Hubei have fallen to the bottom of the list of desirable candidates for hire in China. Hubei is a province directly west of Shanghai, its snout nestled between Anhui province and Jianxi province, directly east of it. Wuhan is the capital of the province. According to the young Chinese who told me this, Hubei people like to bring their brethren into the companies into which they’ve been hired, which sounds all well and good. Apparently, though, if a Hubei employee becomes distressed at the company, he’ll round up his buddies to beat company bosses to a pulp. I asked the Chinese where in China this was happening. Everywhere, she said without missing a beat. “In Jiangsu province, too.” Suzhou is located in Jiangsu, a stone’s throw to Shanghai. “Some companies even have signs in front of their companies that say, “Hubei people need not apply.”

So much for equal opportunity employment in China.

image credit: edrugsearch.com

The Romanian online news site Hotnews.ro recently interviewed me about social, economic and political issues relevant to China’s current condition and future direction. Bet you think my Romanian is pretty good, huh? Actually, the interview was emailed me in English, the same language I used to answer the questions. The reporter, Adrian Novac, asked some pretty pointed questions, the answers to which you can find – translated into Romanian – in the article entitled Ascensiunea Chinei.

Or, you can read the English answers below:

1. What exactly is China today: an aggressive Communist power bent on intimidation and domination, an emerging giant, a superpower? Is China an opportunity or a threat? You frame the question in a very Manichean way: good v evil; heaven v hell; master v slave; conqueror v conquered. China is a heavily populated country that has finally gotten its act together after 600 years of insularity and decay to take advantage of the technologies that abound in the world today and of the West’s profligate spending and extreme financial over-leveraging. It’s a challenge if you haven’t figured out where the opportunities lay.

2. Has China’s rise been good or bad for US and the world? No better no worse than the rise of the Spanish, the French, the English, the Americans, the Soviets. And before that the Moors, the Ottomans, the Romans, the Greeks.

3. How do the Chinese themselves see this impressive growing especially considering that various indicators suggest elites are cashing in quickly, while ordinary Chinese are falling behind and the country is also the scene of rampant corruption? What you are saying about China is also true today about America and Russia and the UK, most African countries, certainly the OPEC countries and, perhaps, even Romania (according to a British friend who did business there for the past two years. He finds his return to China to work refreshing after dealing with the government and workers in Romania).

4. Some are cheering the extraordinary boom of Chinese economy. For example, according to the Conference Board, a highly respected economic research association, China will overtake the US as the world’s biggest economy by 2012.  Others have argued continuously that the Chinese economy is in a delicate state. Is China going to have the kind of economic growth in the future that it has had over the past 30 years? In about 15 years the economy’s development will begin to slow as most of the cities have been built, as well as the highways and railways and airports; the population en masse will be aging with about 30% of the population over the age of 60 (by 2050, 60% will be over the age of 60). The social security system will begin to falter because the one child policy did not permit the creation of enough young people to pay into the retirement funds. China’s already desperate water problem will become extraordinarily difficult, with the occasional rationing we see today becoming a part of normal life. And China will never seem to have enough energy, as most of its population in 2025 will be in the middle class living in cities with cars and TVs and Iphone-25s.

5. Is China using capitalism to advance the cause of communism? How come the world’s biggest communist country ever created the most freewheeling market in world history? Communism in China died with Mao Zedong in 1976. The country was backward and bankrupt, without foreign currency to continue running the society. It could either follow North Korea, or it could follow its cousin, Taiwan. Now, it’s form of government – whatever the name – is much closer to that of its Asian neighbors than ever before, with countries that have had one-party rule for decades, with an occassional pause.

6. Many commentators argue that China’s growing economic might has yet to translate into the self-confidence needed to spur much-needed political reforms. China’s next generation of leaders are to take power in 2012. Should we expect after this date to see the democratic changes the world is waiting to happen in Beijing?  China’s leadership has made changes in its governance approach to the society far more dramatic than either Western Europe or even America. China thirty years ago was totalitarian; now, it is merely authoritarian. In some ways, local government officials are far more accountable to the people than in Russia or even Japan. China must and will evolve into a government structure that balances power somehow; the most effective is a judiciary that is not a slave to the Party. Whether or not Chinese people want or feel they even need the vote will be up to them.

7. Some say there are heavy social costs to such pushes: China is the biggest emitter of greenhouse gases, it has a vast waste and the physical environment is a disaster. Can’t they find the adequate solutions to stop the negative impact on the environment?  The government is applying itself to environmental issues; however, as has been and still is the case in the West, economic development always trumps environmentalism. China at least has a national policy and subsidies to support a grand push to the development and implementation of alternative energy sources; neither the European Union nor America does.

8. Everything made in China is cheaper than made in the USA and the rest of the world. Why? A surplus of young people born after the Cultural Revolution supplied labor to the factories at a time when the West wanted a lot of stuff made cheaply. Its government also held down wages to keep the export sector super-charged. That is changing dramatically this year, with companies increasing salaries as much as 50%. The last thirty years of China’s success and development have happened because of some very special trends that came into confluence. China will have to work harder the next thirty years to continue the same level of economic growth and sense of sacrifice on the part of its citizens.

9. Some say China’s success is “Made In The U.S.A” and that the American consumer has, in large part, financed the strengthening of the Chinese state through their purchases of cheap products made in China, which, in turn, has helped to destroy US’s manufacturing sector and the jobs. Are these commentators right? The US dollar is both a foreign currency exchange and a foreign reserve. That made interest rates the American government and its citizens took out on loans cheaper than it should have been if, for instance, gold had remained the reserve. Americans, still clinging to post-World War II sensibilities about its economic preeminence dismantled the regulations and oversight that would moderate how it financed asset purchases. Americans, in other words, began spending money they did not really have on quantities of goods the world had never seen before. China was at the right place at the right time to take advantage of American and European excesses. China, however, did not destroy manufacturing sectors in America the Americans had already decided were not worth supporting. The American economy in the 1970s was already shifting toward a services economy, and is now 70% based in services – not manufacturing. China entrance onto the trade stage merely facilitated a shift that was already happening – first to Mexico and Japan. Now, China is seeing a similar flight of manufacturing to India, Vietnam and Bangladesh. China is gradually becoming uncompetitive in some manufacturing industries through the same processes.

10. How do you think the United States has responded to the Chinese growing? What have the Americans done right and what have they done wrong? America effectively misspent the funds that became available through China’s suppressing the interest rates on American T-bills through its extensive purchase program of the American bonds. Americans over-leveraged their homes, bought a lot of stuff they didn’t really need because it was cheap, and created a debt load future generations will still be responsible for decades to come. Blaming China for American economic woes merely obscures the fact that the international economy is undergoing a dramatic rebalancing and that America needs to restructure its own economy to meet upcoming challenges.

11. Many see Beijing as a potential threat to Washington’s once unrivaled dominance of the Pacific. But is China influence limited only to the Pacific? Because it seems to me that the reach of the People’s Republic is far and wide, extending from the Far East to Africa to Latin America. The question mixes trade and national security. China’s trade reach certainly extends to Africa and Latin America; its national security sphere does not. It defense posture has developed to the extent that America is no longer the big fish in the Pacific Ocean. And with the development of a naval base on the coast of Burma, Chinese vessels will be able to ply the same seas as the Indians. This has made the Indians and the Americans insecure.

12. Besides its economic grow, China has also adopted a more assertive military stance, expanding its naval reach with new ships and submarines in what Beijing says is a purely defensive move. Can this growing military buildup hide aggressive intentions? China is not shy about displaying aggressive intent in its own neighborhood: the recent spat with Japan over the Senkaku islands is one example, as well as the continued build-up of forces along the border of the disputed territory of Arunachal Pradesh, which the Indians hold dear. China is no longer holding to the philosophy/slogan it promoted the past ten years of a “peaceful rise”. Further abroad, China has no interest in conquering foreign lands; only of preserving its national sovereignty and preserving its energy independence.

13. Many say U.S.-China relationship shifts toward deep mistrust in the last year. Chinese leaders became infuriated when president Barack Obama met with the Dalai Lama and when Washington announced plans to sell sophisticated weapons to Taiwan.U.S. officials tried in vain to get China’s leaders in May to condemn its ally North Korea for the sinking of a South Korean warship and then became alarmed at Beijing’s bellicose response to a September incident involving a Chinese fishing boat and a Japanese patrol ship. How do you see US-China relations now? The Chinese leadership sees the American leadership as uncertain, splintered and at cross-interests with itself: on the one hand encouraging tariffs while United States governors host trade missions to China for their local companies; discussing closer military ties while selling billions of dollars of armaments to neighbors Taiwan, Japan and South Korea; of preaching fiscal responsibility to China while America continues to spiral into greater debt without additional job creation. China is very much like the teenager who is feeling more certain about himself while laughing at the middle-aged “adults” whose power is waning.

14. The new generation of Chinese military, much more than the country’s military elders, view the United States as the enemy. Chinese military’s hostility toward the U.S. is not new, just more open. But is China capable of flexing its military muscle towards the US? Do they have the military capabilities to confront US? China does not have the capability to confront the US in a sustained, full-frontal confrontation. No one does [without the threat of Mutually Assured Destruction – MAD]. The only way for China to win is as it always has through history: through the sheer weight of numbers of its people; guerrilla tactics and attrition – that is, simply wearing the opponent down. China’s approach to the world in trade and defense is one of asymmetry; they always see themselves as having the disadvantage – and so do not meet engagements square-on, where they always believe they cannot win in a fair fight.

15.  President Hu Jintao will visit Washington in January. Could this trip help reset the relationship with China? Because China seems disappointed by the Obama administration and Beijing thinks he has no essential difference from other previous US presidents. The trip will have no substantive results. Hu Jintao has already set his stamp on his Presidency; he is now setting the stage for the handover of power in 2012, which pretty much means more of the same discussions on the currency come Jaunary. China – and much of the world – see President Obama as a lame duck, likely to change come 2013, after the November elections of 2012.

16. The foreign ministers of China, India and Russia pledged recently to step up cooperation in trade, energy and geopolitical affairs including climate change, international and regional issues. Should US and UE be afraid of the cooperation of these developing giants? No. Cooperation is good; and the more there is between these three strong personalities, the better. The US and EU embrace this sort of exchange.

17. China’s rapid rise is taking place at the exact same time that the U.S. is losing its global economic dominance. It is possible to substitute soon “The American Dream” with “The Chinese Dream? Should we all start learning Chinese? If you are going to do business in China, it’s nice to learn a bit of the language; however, Romanians have nothing to fear that their language will be replaced with Chinese. Frankly, it is the Chinese who have in place national policies to increase the number of its citizens who speak English language, and with greater fluency. China has no intent to rule the world; however, it is intent on maintaining its regional hegemony and energy security. The world is simply a source of raw materials and cash for China. It prefers to eat at home.

image credit: the-romanian-women.blogspot.com

A Danish friend recently told me of the revenue growth targets for 2011 company headquarters has set for his China operations. “They set my goal for 25%!” he said, sounding anxious. His company sells widgets into the China market. The highest quality Danish widgets, of course.

“Twenty-five percent. That’s rather ambitious?.”

“Ambitious? You’re kidding, right?”

“No. I mean, let’s face it,” I leveled with him, “your product is a commodity. Double-digit growth of any kind is amazing for the industry. Especially with the economy overheating, the central government is likely to slow things down a bit over the coming months.

“What’s your growth rate been this year?” I asked.

“Fifty-five percent,” he said soberly. “So the 25% takes into account possible government policies to cool the economy. So why is it so hot now?”

“I figure the US$2.4 trillion dollars in loans the central government let fly out of Chinese banks these past couple years has finally worked its way through the entire system, like a huge shot of adrenaline to the heart that needs time to work its way through the veins.”

“No worries,” I told him.

“Many more worries,” he said.

image credit: labs.chinamobile.com

A recent round of banquets with local government officials inspired me to post a blog on The Diplomat:

One of my colleagues refers to the endless rounds of saucy dishes served at government banquets and countless rounds of toasts as ‘speed dating’. The idea at these meetings between government officials who want to entice investors into their region and these potential investors is to bond as quickly as possible by making one’s body as uncomfortable from over-consumption as possible. Hosts call out to banquet guests ‘gan bei!’ (empty glass), with toasts between two people more like races to the bottom of the glass. As one government official in the Shandong Province coastal city of Yantai once put it to me, ‘I am ruining my health for our relationship.’

Check out the rest of the article here.

Image credit: Cultural China

I’ve been writing some exclusives for The Diplomat website, based out of Tokyo. I’m one of the guys on the ground here in China, chiming in with the odd observation, analysis and what-not. This week I comment in my entry China’s Casino Economy on the rapidity with which Chinese business investments come and go here in China.

“Businesses in China are structured to be obsoleted when they don’t provide the kind of pay off owners expect as quickly as they’d like. Businesses across the services and manufacturing sectors come and go in China with head-spinning rapidity. Restaurants, bars, clothing stores, entire malls and factories come and go with a speed difficult to match in Western countries.”

A couple of the comments I’ve received indicate that I’m making much ado about nothing about business closures here in China. Having opened and lost a couple businesses myself in the States, I can most assuredly say the approach Chinese take to starting up and terminating businesses is much more akin to speed-dating in the States than to the sort of sober financial planning/business planning/support group/networking group hang-in-there approach Americans attempt to apply.

And for those who don’t believe me, I encourage you to start up a business here with a Chinese partner.  Boy, are you in for an adventure. Let the Games begin!