I heard this comment from many buyers:

Chinese factories are so disorganized!

Who tends to make this type of observation? Importers who chase low prices and/or who purchase low quantities (and whose production ends up in small factories). And, in their case, they are very right.

Small manufacturers in China often forget about some of the orders they have received. They often forget to push their sub-suppliers. They often pay salaries late. They often ship late. In short, they drive their customers crazy!

Why is that? As I wrote a few weeks back, they have no management system, let alone an IT system. But that’s not the real cause.

There are two opposite trends:

1. Chinese people can be totally disorganized, apparently unable of planning anything, and constantly putting out fires.
2. They can also be very strict and extremely detail-oriented in all their activities.

What makes the difference? The leadership and the structure:

• Go to a huge company whose boss was trained in the army (like Huawei, for example), and you’ll likely be impressed by how regimented the staff is. Yesterday I was in a facility that was part of a huge conglomerate, and the whole staff gathered on the grass at 4:00pm for a fire drill. Wow!
• Go to most small operations, and you’ll have to be careful not to walk on semi-finished goods. Sometimes, no one in the workshop is capable of finding the products we should inspect, until they call the right manager. I did several inspections in the owner’s office, because there was no other desk available!

Conclusion: don’t over-generalize about Chinese society (it is full of apparent contradictions). Just make sure you work with the right people.

On Sunday I met with an American importer who has been sourcing from China for many years, and who shared his frustrations with me. His biggest headache, it seems, is maintaining his quality standard.

Why is is so hard? Because of his customers’ pricing & timing demands. He has to pressure manufacturers on these two fronts, which tend to take precedence over quality. It is sad to see that pricing and timing are “order qualifiers” because they are easy to quantify and to compare, while quality is often “nice to have, at least most of the time”.

Well, guess what? Chinese suppliers get the message, loud and clear. And it is really hard to keep a quality standard up over time.

Let’s say a factory makes a mistake. Something that might cause rejection of the batch by the retailer (with a 15% probability, let’s say). BUT there is no time to fix it–the goods must ship out tomorrow, or it will get noticed and the order will be canceled.

In this case, buyers usually give this instruction to their Chinese suppliers:

We don’t have time to fix this problem. To avoid canceling the order, we authorize you to ship out, but this is exceptional.

Then the salesperson tells his production & logistics colleagues to arrange shipment. What conclusion does everybody draw, in the factory?

It is OK to make this kind of mistake for this customer.

So, next time they do it again, and the importer refuses, their response is invariably along the lines of:

But last time you accepted the same thing, so it is not a big problem for your customer, right?

Ouch. Help these people once, and they take advantage of it at your own expense!

What the purchaser should realize is that it is a game. So, why not also play a game? For example, here is what the buyer might write to his supplier:

If we authorize you to ship this time, will you promise to never mention this case to us again in the future?

Do you understand that this would be an exception and that 100% of future shipments will be refused if this same problem is found?

If you respond “yes” in writing, it will mean yes to these 2 questions, and then (and only then) you will be authorized to ship.

It might help. Unfortunately, the factory people (except for the sales person/agent/trader) will definitely remember the decision (OK to ship) alone. If that happens, the importer can ask for a letter from the boss stating that he understands this is an exception and that 100% of future shipments will be refused if this same problem is found. Or maybe ask the supplier to sign a letter of guarantee (they would pay all charges if this specific problem is rejected by the retailer).

Any other tips?

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Related reading: Managing urgent shipments in China

Last week I had an interesting conversation with a few friends. An American said “when I arrived here and I started sourcing products, what really hurt my business was all the assumptions I was making”. And another friend responded “what really saved me is that I come from Brazil, and in my country we can’t make any assumptions”.

So, what are these assumptions that Westerners tend to make, and that can hurt them badly when they purchase from China?

The short answer is: they are used to purchasing products on a catalogue, agreeing on a price, deciding on a quantity, and arranging payment.

Do that in China and you’ll run a 30% chance of losing the entire order! Many steps are missing. See my checklist for importers for more details.

Here are a few assumptions that need to be challenged on a daily basis:

• The supplier says, and even writes, that he will respect the shipment date. So I am fine.
• I have negotiated a good price. That’s what I will pay, so I am fine.
• The sample I approved is nice. So production will be nice, and I am fine.
• If the supplier says he is a manufacturer, it must be true.
• The supplier says he also sells to some big German and Japanese companies, so their product quality be good, and I am fine.
• The supplier says he already sells thousands of iPhones to importers in my country, so I will be fine if I do it too. It must be perfectly legal.

On the CSIC Linkedin group, I responded to the question “Is there a cultural element to intellectual property theft in China?” by writing:

If they think they will benefit from stealing your IP and they can get away with it, they will do it.

And another member of the group, Buck from the China Performance Group, wrote a very thoughtful response that I am pasting below in its near entirety:

I don’t think that the “if they think they can get away with it and benefit they’ll do it” mentality is unique to Chinese society. In most societies there will never be a shortage of people who will take advantage of others if a lack of legal protection exists. The difference in the West is that a robust legal framework is in place that could give the impression that we are perhaps “morally superior”.

I think that rather than it being a moral deficiency, practices such as IP protection are just culturally not held in the same regard for Chinese as it is for us in the West. For example, I’ll often collaborate on reports with my Chinese colleagues, who are from relatively good backgrounds, proficient in English, and with a good education, and yet part of my job is to actively identify plagiarism. These are honest and hardworking Chinese professionals, and yet when I tell them of the legal risk it puts us in or the danger to our reputation that could result from copying and pasting directly from Wikipedia or Baidu, they are legitimately surprised.

In the West, we have it drilled into us that when we use somebody’s work, you have to give them their due credit, and teachers will diligently weed out plagiarism. We are often even graded on our annotations and bibliographies. I don’t know this for sure, but I would assume this isn’t the same in the Chinese education system. When I tell my colleagues that copying is fine, you just have to provide the source of the information, again they seem to have been previously unaware of this option. So you can see, copying is just not seen in a negative moral light in the same way it is in the West.

I would have to agree with Michael on this one. I think one factor is definitely the notion of personal space that exists in China simply as a result of the sheer size of their population. I think another would actually be cultural as originating from Confucian practices. If you look at the ancient system of testing and qualifying for prestigious government positions, those interested had go through rigorous testing on their knowledge of the Analects of Confucius. However, if you look at the examinations, it was not generally your opinion or analysis of the texts being tested, but rather how perfectly you had memorized them. The exams were an evaluation of your ability to reproduce highly regarded intellectual material. This went on for centuries, and though we may see something wrong with that in the West, it worked very well for the Chinese for a long time as they maintained a position as one of the most politically and intellectually advanced nations on the planet for hundreds of years. “Copying” is fundamentally part of the Chinese culture and in fact used to be considered a highly regarded skill.

Does every one agree with this? I think Buck makes a few good points.

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Related reading: Why doesn’t China value intellectual property rights?

The Guangdong province of China (and specifically the Pearl River delta) was THE country’s hub for export manufacturing in the 1980s. But the situation has changed a lot:

• Local governments are pushing many industries out, to make room for residential buildings or simply to focus on the highest-value-added sectors.
• More and more factories are set up in other coastal regions and in inner provinces.
• The migrant workforce is increasingly reluctant to work away from their home towns.

So, is manufacturing going to leave Guangdong? I don’t think so.

First, a bit of historical perspective

From 1949 to 1978, China was totally closed. There was virtually no export industry.

In 1978, China starting opening up. The leaders of the day wanted to run an experiment as far from Beijing as possible, so the first “Special Economic Zone” was right across the border from Hong Kong.

Something absolutely unique happened at this time in History, as the CEO of Li & Fung explains in this video: foreign specialists came to set up production facilities, cheap migrant workers came by the millions, and this system has exerted a strong deflationary pressure on the World’s economy for several decades.

Right now might be the opening of a third 30-year period. China will still be a producer, but the factories tend to relocate to inland provinces.

What will coastal provinces like Guangdong specialize in?

The Pearl River delta’s industry is clearly moving up the value chain. Production of electronics, industrial goods, pharmaceuticals, and cars is slowly replacing textile, shoes, and cheap home appliances.

There will be two key advantages to manufacturing in Guangdong:

1. Higher quality and better understanding of foreign markets

The manufacturing sector is much more experienced, which translates into better average quality. These new factories in Anhui or in Hunan look nice, they are cheap, but they are probably not very reliable.

Hundreds of thousands of foreigners, including many Chinese from Hong Kong or Taiwan, live in (or commute weekly to) cities like Shenzhen, Dongguan, or Zhongshan. They have trained managers and technicians. They have experienced all sorts of production issues, and they have set up rules to minimize their occurrence.

They have also been in extensive contact with their customers. They have a better idea of what is acceptable and what is not.

What does it mean for foreign buyers? Higher prices but fewer headaches. For certain importers, this choice makes a lot of sense.

2. Higher flexibility

What happens when you have a massive production base in one place? There has got to be some interesting dynamics, right?

What is unique in Guangdong is that one can find virtually any manufactured product in a radius of 100 miles around Dongguan/Guangzhou. Local manufacturers represent hundreds of product lines, and their sub-suppliers (many of which are foreign-owned and have brought new technologies) are located next to them.

And let’s not forget about the Hong Kong and the Shenzhen ports, which are among the busiest in the world, and which are located right in the middle of the delta.

As David Levy wrote recently on this topic:

Producing in Guangdong, we can optimize the mature supply chain and logistical environment to add value by drastically lowering minimum order sizes and delivery times. That strategy may be more challenging in areas (or countries) where raw materials and components need to be imported in bulk, and where production management skills are suitable for large production runs.

I couldn’t write is better… Lower minimum order quantities, faster production, excellent logistics, and proximity of World-class ports.

Do you agree?

Many importers have been forced to accept sharp price increases in 2010 and 2011. And everybody is wondering, how long will it take before China loses its price competitiveness?

I just read an interesting article entitled China’s manufacturing slowdown on the China Sourcing Information Center’s website:

I am hearing over and over from my Chinese friends who own factories that line workers and especially mid level managers are asking for paychecks that are based on a perception that inflation will increase dramatically and that the economy will keep expanding so there will be more and more jobs at higher and higher wages for everybody.

As an American looking back at how fast things changed almost overnight with the Global Financial Crisis (GFC), I say to my Chinese brethren…the good times don’t last, you may not have felt the full squeeze of the GFC, but things can change REAL fast. Even in China.

Many job searchers today in China base their salary expectations on how the CPI (consumer price index) has been moving in past months in a (false, I predict) assumption that it will continue to rise in future years at the current pace. The CPI is not linear (I pray!). Their bravado in asking for a higher and higher salaries has been bolstered by news in the 2010 press and early 2011 that exports in particular, and the economy in general, are expanding.

The article predicts that Beijing is working on slowing inflation down, and that it is one of their top priorities. I can see why higher food and housing prices are a threat to social stability and to a “harmonious society”.

A lower inflation rate is good for foreign buyers. But my fear is that the exchange rate of the RMB will go up, as a remedy against inflation. A stronger currency allows for cheaper imported goods, slows down exports and overall production, and calms inflation down.

How was the RMB/USD echange rate over the last 12 months? The dollar depreciated by 4.5%. This trend might well accelerate.

For a bit of historical perspective: in the 12 month preceding the Beijing Olympics, the RMB had gained nearly 10% against the dollar.

I just read a very thoughtful article on David Dayton’s blog: When your supplier is not arguing to win.

David gives a list of reasons why it’s so hard to get a Chinese manufacturer to deliver on spec, in time, and without last-minute price increases. In many cases, once a deposit has been wired, the battle begins…

My favorite parts:

7. There is no trust. You can’t resolve concerns and fix issues if you think that your counter part is actively trying to rip you off. Everything becomes either a fight or a conscious exercise in doing as little as physically possible to appease the other person without actually doing anything. If you’re convinced that the other party is lying to you even before you start negotiations, the chances of a healthy relationship and a mutually beneficial outcome are slim to none. We usually get to a “trusting” relationship with factories during order 3 or so.

Sad but true. Manufacturers are very focused on their short term gains. They can’t be sure there will be re-orders… But they know they will make more money this month if they screw a customer today.

9. Lack of individual rights. It really goes without saying that individuals don’t matter. The all too common “there are too many people in China” sentiment, I think, affects the attitudes of everyone here. The reality is that there are literally so many people waiting in line just behind you that no one really has time or desire to treat anyone well. Ditto for factories with thousands of customers from all over the world trying to order. If there is a problem and you’re throwing a fit and threatening contractual penalties, it’s just much easier for them to wait to have you leave than deal with you. If you’re already threatening to make it a legal issue then ignoring you is better than talking with you and acknowledging your concerns (only to have those acknowledgements used to apply legal penalties later).

Again, sad but true. A typical factory’s “after-sale service” is terrible. Many importers do not understand this, and are horrified by the lack of follow-up during production.

This article is worth reading in its entirety, by clicking here.

“Microsoft Corp.’s revenue in China this year will be about 5% of what it gets in the U.S. even though personal-computer sales in the two countries are almost equal”, according to Steve Ballmer (in the Wall Street Journal).

Foreign buyers also suffer from China’s lack of respect for their intellectual property rights (their designs, their drawings, their samples, their brand names…).

When a Chinese manufacturer makes a product according an importer’s design, it usually tries to sell the exact same thing to other companies. Worse, samples and drawings find their way in the showrooms of various intermediaries.

Only the most professional and the largest exporters pay attention to their customers’ intellectual property. With all the others, foreign buyers need to deploy a LOT of persuasion, threatening, and monitoring.

Where does this problem come from?

I read several times that the Chinese tend to consider the act of copying as flattery. Only beautiful/useful things get copied, and it is good for society…

But there is another, and probably more profound, reason.

The China Sourcing Information Center just published a thoughtful article (Cultural element to intellectual property theft in China?) that describes the absence of the concept of privacy in China:

There certainly is a different mentality in China as opposed to the West when it comes to issues of what is considered private versus public. This difference was made clear to me many years ago on my first day as an exchange student back in the 1990’s at a Chinese university located in Harbin. I returned to the dorm after lunch and found my Chinese roommate sitting at my desk with his feet on my bed, leaning back in the chair while filing through my personal belongings in the draws and on the desk.

Tim Clissold described something very similar in Mr. China. He even noted that the Chinese didn’t have a word for “privacy”.

And there is a direct relationship between this cultural trait and the disrespect of IP rights:

The same mentality extends into the business world, yet is in dramatic conflict with the western mentality of public versus private domain. Just as the room mates in the dorm had no ethical objections to using my personal items like my computer, some suppliers may not even think twice, or feel embarrassed, about using for their personal gain, what you believe to be your IP.

What do you think?