Foreigners from Europe or from the US often have a hard time dealing with the way business is conducted in China. Understanding cultural differences is already difficult. Addressing them effectively is the most difficult.

I started thinking about it after reading a conversation on the China Law Blog Group, on LinkedIn.

(By the way, if you have a LinkedIn profile and you have a certain interest in China, go and subscribe to this group now. The discussions are all of the “what do you think of this” type. Nothing like the “who is looking for the service I sell” crap of other groups.)

So, here are a few extracts from a recent conversation:

Someone asked this question:

How do YOU cope with the Chinese way of doing business?

I’d like to know what y’all think, not get tips and advice… I just like to know, because I’m curious.

I read this question after an unpleasant discussion with a supplier of one of my clients, so here is the comment I wrote:

Stay calm whatever BS they tell me, be patient in re-explaining the requirements that I already sent them by email, and let their customer bang on their head if they deserve it. I got into a few ugly confrontations in the past that got personal (as everything tends to get here), and the most important is to ensure that it does not ever happen again because it’s the least effective solution.

I have to admit, other members of the group offered much more interesting insights. Here are a couple of good excepts, from two different commenters:

The Chinese way of doing business tries your patience if you think linear and get attached to the idea of things happening in a certain way. If you spend enough time in China – especially if you show up when you’re only 21, like I did – the way people do things “back home” starts to look rigid, fueled by premature ideas and prevailing, often artificial sense of urgency.

However, in my experience here in the United States, I’m often surprised by how similar things work in both cultures. Maybe you are from a different country, but in America, many westerners do not fit into the stereotypes we Chinese have about them. For example, it’s not uncommon for businessmen here in US to beat around the bush, not saying exactly what they think – not that they are insincere, but it’s a business strategy, especially when the trust is not there yet or there are conflicts of interest. Poor planning and execution are not rare. No offense – this happens everywhere. It’s also common in US for businessmen to take their clients or associates to dinners and pay for them.

If you are already logged into LinkedIn, click on this link to join the group…

I had an interesting discussion today about the new developments in the exports sector in China. Some purchasers are surprised by a change of attitude of some fairly large Chinese suppliers. They used to be hungry for new business, and suddenly they do not accept any order involving new developments, preferring instead to go on with repeated products.

I have no definitive answer for this new attitude, but here are my guesses:

1. Fewer workers means less capacity

Many factories do not produce at full capacity. Wages–which are usually well above the legal minimum–have gone up because of market forces. Instead of increasing salaries across the board to attract new hires, some factory owners prefer to keep paying the operators at a level that they think is reasonable.

2. Focusing on low-risk orders

Repeat orders are always a godsend for a factory. They have already noticed the sensitive issues of the product, the workers are immediately operational, and above all there is little confusion on the factory floor. It means the real production costs are much lower.

On the other hand, new developments take more time both from managers and from the prototyping team. Operators often have to be shown how to do their job, and there is usually some rework at one point or another. But the worst is that big mistakes are much more frequent–sometimes a whole order has to be sold at a hefty discount because the original buyer has refused it.

3. The sub-suppliers have the same problems

As overseas orders pick up, some components suppliers of exporting factories have problems delivering in time. In this case, recurrent and “easy” products are also given priority.

4. A general uncertainty about what the future is made of

The increases in minimum wages and the RMB appreciation signal a clear change in Beijing’s priorities, from sustaining the export sector to boosting domestic consumption. Add to this the ever-increasing competition on prices and all the talk about other Asian countries, and factory owners are no longer certain to make profits in the coming years.

On the other hand, real estate and the stock market are pretty tempting. Should they keep investing to grow a business that might have no future, or should they buy more tangible assets?

Many importers have no clue about the factory location. All they know is the general area, when they purchase in FOB terms, because they know the port of shipment (for example, if they purchase “FOB Shenzhen”, the assembling factory is in the South).

Buyers often get to know the factory address in Chinese, especially when they need to send an inspector there. How to read it and visualize its location at the same time? Google Maps is an excellent tool for that.

Now there is one small difficulty for non-Chinese speakers. If you paste an entire address such as this one, it won’t work:

广东省广州市海珠区琶洲大道东1号保利国际广场南塔1305室

You need to decompose the address. It is actually easy because the same characters are always used to designate the province, the city, and the city district.

Here are a few things to know:

• The Chinese start with the general and go to the particular. So they write the country, then the province, then the city, then the district of the city (if applicable), then the street address and/or the name of the building, and finally the block and the office number (if applicable).
• If they give you their address in China, they will generally start with the province or even the city (and omit the country, which is obvious).
• 省 indicates the province, so 广东省 is the province.
• 市 indicates the city, so 广州市 is the city.
• 区 (or 區 in traditional Chinese) indicates the city district, so 海珠区 is the city district.
• Whatever is after 区 is seldom found by Google Maps, so you can cut it off (except if you need the precise address). In our example, if you search “广东省广州市海珠区”, you’ll get a result. And you see that this address is right in the center of a major city (Guangzhou), so you know it can’t be a factory address.
• If you see an office/apartment number, such as “1305室” in the above address, chances are that you were given an office address rather than a factory address. It might mean that you work with an intermediary.

So let’s start again with another example:

南昌市青山湖区羅家鎮

This time the province is not mentioned. There is probably only 1 city with this name in China. If you cut off what comes after 区, you search 南昌市青山湖区 and you see it is in Nanchang city, Jiangxi province.

Any other tips?

In China, suppliers seldom speak out about their most important concerns, but they usually do something about it. Many importers feel that factories make them pay, in one way or another, for everything they resent. A few examples:

• A shipment delay due to an out-of-the-ordinary complexity in the breakdown of the orders,
• Slow sampling and a “can’t do” attitude because the buyer wants something they have never done before,
• A price increase because the buyer insists on sending quality control inspectors who piss everybody off (that’s what I pay “paying twice for quality control”, and I know that some importers are afraid of it).

David Dayton wrote 2 insightful posts entitled ”Chinese Culture for the Frustrated Foreign Buyer” (see part 1 and part 2) on his blog. This paragraph made me think of the topic for today’s post:

When you make small cultural mistakes like not using the public chopsticks or bowing (Chinese don’t bow) or slapping a female co-worker on the shoulder or a million other little things you’ll be completely forgiven. It’ll just be chalked up to “stupid foreigner.” But when you make demands on a broken contract or hold people accountable in public for personal mistakes or force specific processes to get things done you will be punished for it. I promise.

Does it mean that buyers should avoid doing anything that displeases their Chinese suppliers? Should they forget about quality control, as some small buyers do? Certainly not. As Dayton also writes in the same article:

If you’re not here, it doesn’t matter what you want or what you say.

Factories themselves tell us this ALL THE TIME! The client places an order, doesn’t hire any 3PQ and the factory is just left to produce product on their own. Sure, most of the time they don’t produce complete crap, but who is deciding what’s crap and what’s not? Yup, the very people who stand to make the most money from doing as little QC as possible.

Then the real issue is: how to avoid “paying twice for quality control”, and more generally all kinds of hidden punishments?

1. Basic diplomacy

If you come on site, make sure you don’t piss off the middle managers in the factory, because they are the ones you really need–see my previous post: How to behave in a Chinese factory.

If you are particularly unpleasant, or point to certain people’s faults, you are making yourself some enemies. Don’t do it, unless you have a big problem to solve right now.

This is one of the advantages of third-party service providers: they only produce a report for the buyer–they don’t cause anyone to lose face publicly.

2. Quality inspections are “company policy”

Make sure the suppliers see that quality control is part of your work process and that it is not negotiable. Equally important, never waive it to avoid a shipping delay, except maybe with suppliers who have proved to be both helpful and reliable.

If you give a supplier the impression that a QC inspection was booked exceptionally for his order, he will feel cheated and he might retaliate in one way or another.

3. Let factories work the way they prefer

Sending your own technicians, or engineers from an independent company, can be very helpful… If the factory is used to it and understands from the start that it is indispensable to get your business. This is common for complex industrial products, for instance.

When it comes to consumer goods, factories are not used to seeing somebody coming in and showing them how to process a particular batch. You might be able to twist their arm and get what you want (as long as you have a presence in the factory), but you might well run into other problems that are seemingly unrelated.

The key is to choose the right factory from the start. “Right” means “small enough to value our orders” but also “already close to where we need them to be”.

4. Quality control is a tool and inspectors take no decision

Do not EVER threaten to cancel the order or to ask for a discount “if the inspection is failed”.

Do you like to get a speeding ticket? No, and neither does the factory. Avoid putting unnecessary pressure.

5. Jump on problems and ask the tough questions immediately

Do not systematically ask for re-inspections when something is off spec.

Some buyers have this reflex when they are not in a hurry–after all, they re-invoice the costs to their supplier. Last month we did a 2nd, a 3rd, a 4th, and a 5th inspection on the same production run. There was always something wrong, and the trading company just couldn’t get the manufacturer to do something serious about it.

If a bad situation drags on and on, and the factory sees inspectors coming regularly, of course they will think QC is the source of all problems. Do not ever get to that point…

I just listened to a great podcast on China’s kickback culture, where Bill Dodson (who writes the This Is China blog) explains how difficult it is to avoid kickbacks.

There are mainly two difficulties for foreign companies, whether they simply import from China or they have established local operations:

• Making sure the employees who approve the choice of suppliers and service providers do not use their position to get kickbacks. It is very widespread and difficult to prove.
• Communicating to all related parties that no gift is allowed, explaining the reasons behind it, and respecting that line no matter what.

Why is it so difficult? There are mainly two reasons:

• China, and South-East Asia in general, has a gift-giving culture. It is impolite to refuse a gift. But where does the difference between a gift and a kickback start?
• Purchasers can multiply their income by many multiples without substantial risks, and in many companies it is an established system.

We are talking about very small businesses (where the assistant gets something for herself when arranging a driver or a hotel) and about very large business alike. A friend in Huawei told me that the purchasers at Foxconn “ask for higher prices”…

Of course, the quality control industry has the same challenges. Whenever I meet someone working in procurement/sourcing in China, I have a 50% chance that this person asks me questions about inspectors corruption.

Everybody has a story about a representative of a large inspection firm getting bribed and accepting defective products. The three largest QC firms have a very poor reputation in China. I am sad to confirm that it is grounded in reality.

And it has two consequences on the industry. On one side, some buyers are afraid of it and manage their quality control themselves. But on the other hand, it is a good sales argument for smaller inspection firms who follow their inspectors closely.

Related articles:

Corruption of quality inspectors

Giving money to inspectors? It’s normal!

In my last post (Relationships with Chinese suppliers: be clean!), I suggested that importers keep their distances with their Chinese suppliers. Do not let them think business can be conducted the “local” way, and they will take your standards and deadlines more seriously.

This is all fine for email/phone/in-person communications with the salespeople. But if you go into the factory, and if you are in contact with the managers and technicians there, think twice before starting the conversation. Make sure you don’t seem unreasonable or unpleasant in their eyes.

These people are not used to being face to face with foreigners. They can easily be shocked by your behavior, but you will probably not even notice it (even I, after several years living here, still have trouble decoding their body language).

Why is it important? The middle managers in the factory are the ones who make most critical decisions. They decide whether your order will be made on the good lines or the not-so-good lines. They are the ones who initiate the launch of a new production (earlier… or later).

Of course the top management tells them what is more or less urgent/sensitive, but they tend to have a lot of freedom when it comes down to the details. It is (very) good if they associate your person with your orders, and if one of your representatives shows up in the factory from time to time (and pays them beers).

However, if the factory people don’t like you, they will just look somewhere else. Without the proper attention from managers, don’t count on “the factory’s established procedures and systems” to save you. You are going nowhere.

I still remember when one of my clients came to visit one of their regular suppliers. The meeting was to take place the day after an inspection. We found some really, really bad quality issues (the new hires after the New Year had done a terrible job, and no one had caught it). And to make things worse, the client’s internal controller found problems on a small–and very urgent–air shipment that we had not inspected and that had just been delivered.

The meeting took place in the factory. The discussion focused only on the problems. First about the urgent delivery that could not be sold. Then we went to see the products we had checked (and rejected) the day before. The client’s representatives were very tough with the factory, and it lasted the whole morning.

What the “rude foreigners” did not understand is that their attitude was absolutely counter-productive. The salesperson did not know what to say, and was feeling completely lost. The three factory people hated this experience. Two years have passed, and I still feel the factory managers don’t like my client and don’t want to make efforts. It means lower quality, slow repairing, and more delays. Make sure you don’t repeat that experience!

Anybody has other tips on how to get the factory people’s support?

Since Chinese New Year, several cities–located in the most productive areas of China–have significantly increased minimum wages. Does it mean your purchasing prices will go up? I don’t think so. Don’t let your suppliers invoke this reason for raising prices.

Global Sources just published an article entitled Higher base pay not a salve for labor shortage. They rightly conclude that “Raising minimum wage levels is not likely to curb worker deficit, nor is it a big concern in China’s export manufacturing industry”:

For instance, the [average] wage at several furniture makers in Dongguan, Guangdong province, ranges between 1,000 and 1,300 yuan ($146 to $190). The anticipated increase in base pay for the city is [up to] 920 yuan ($135).

Even so, many plants continue to remain short of hands. This comes despite offers of free board and lodging on top of a 1,500 yuan basic salary. The high cost of living in the coastal cities has made migrant workers reluctant to accept jobs there.

I actually think this increase in minimum wages is good for importers, and I see two reasons for this.

First, some potential migrant workers who have never worked in factories might be tempted to go to the coastal regions. They have a better chance of getting a decent pay as soon as the first year (even though all factories will not respect the law when paying unskilled workers).

Second, low-skill jobs will be performed better, simply because workers will tend to be paid more and to stick at it for longer. An example is the packaging activity in 95%+ of local factories: it is performed by unskilled workers who get little money and don’t give all the attention their job deserves. It is also done by part-time workers, hired by the day. In many cases, the assembly job is done adequately but the packing job is terrible, and this can lead to serious quality problems.

Some other factors will have a stronger influence on prices:

• The threat of a revaluation of the RMB (more and more “experts” predict that it is coming soon on public TV…),
• The material costs, which might become more pricey as global economy rebounds,
• The salaries of factory workers, driven by market prices rather than local regulations,
• The VAT rebates for exporters, which might be reduced.

Importing products that were made in Chinese factories is considered forced labor and is forbidden in several countries. It is also a very high risk in terms of PR/reputation for the importer and the retailer.

It is hard to detect and even harder to prove. But it sure exists. Here is an example from when I was working in a trading company. I was searching online for the contact information of a Chinese supplier my company had recently purchased from (since I did not have any namecard). I found a report from the US Senate blaming that precise company for procurement in Chinese prisons!

I remember, for a brief moment I thought “if I make copies of the letter of credit, which was opened by the retailer and transferred to that black-listed supplier, this story could make a lot of noise.”

Is it an isolated case? I don’t think so. Several purchasers of textile have told me how prison labor was proposed to them as an option to get lower prices. In one case, the difference was as much as 40% (on complex denim products requiring a high amount of labor).

Of course, all suppliers are not that transparent. But offering prison labor is not a bad strategy. There is an understanding that the buyer cannot ask for a factory audit or product inspections. Low risk and easy follow up…

This is one more reason why importers should spend more time getting to know their suppliers and following production!

Back when I was purchasing from Chinese suppliers, I was regularly frustrated by what seemed like irrational behaviors. I was wondering if some suppliers were just plain crazy, if they were incapable of consistency, or if they were faking it to their advantage.

For example, they would quote a price for an item. Then a price for another item, that I negotiated down. When I summed things up and I reminded them of the price of the first item, it was up by 10%… even though they knew I had written the original number in my papers!

Another example from last week: we did an inspection in Ningbo, and the buyer was not pleased with our findings. There were 7 references, 5 or which were clearly substandard in one way or another. Instead of looking for a solution about these 5 styles, the Chinese factory kept insisting that the other 2 references (which amounted to a very small quantity) were good and should be shipped out immediately.

This is what Andrew Hupert calls “a Mystique of Madness” in a brilliant post about the negotiating methods of China as a country. He contends that it is a tactic used consciously. Here are a few excerpts:

China-as-negotiator has been enshrouded in a Mystique of Madness – the notion that it will behave irrationally if refused or denied a bargaining point. Observers tend to regard China as a hair-triggered, unpredictable powder-keg that is not bound by the principles of self-interest or civilized behavior. The latest spats over Google, censorship, RMB exchange rates and international trade are all case studies of a China that cultivates an air of volatility to control expectations and wring concessions from counterparties.

Mystique of Madness is a tactic, and an effective one. It becomes even more successful when third parties carry the torch – competitors, commentators, consultants and media pundits spread dire warnings of vendettas and revenge only to have Beijing step in as the soft-spoken, harmony-seeking good guy. When it serves their interests, the Beijing party leadership is extremely flexible.

Hupert then lists the main advantages of this seemingly irrational tactic:

1. The other side is confused and loses his priorities.
2. The other side ends up in the position where it pushes for a concession that is in the Chinese side’s self interest.
3. Negotiations can take forever, so that some key urgent points become irrelevant.

Then, how to deal with Chinese suppliers who use the “Mystique of Madness” tactic? According to Hupert:

If the bluff is called once, it loses its effectiveness and forces the negotiator to take real action. Unfortunately, that’s precisely how trade wars and international tensions escalate.

This is so right… Importers should not be afraid of being direct and asking why their suppliers seem to be inconsistent/irrational. This is much easier if the purchaser has (1) put up a document with all the specifications and got it signed by the supplier, and (2) can find records of all past communications in a written form.

But usually the buyer had better avoid voicing suspicions too bluntly. If he does, the supplier may feel that confidence is lost forever, and they may conclude that the order will probably be cancelled anyway. This is not the best circumstance to receive on-time and up-to-standard shipments…

See the original post: Negotiating in China: The Mystique of Madness

Related post: When a relationship turns sour with a Chinese supplier

Have Chinese companies screwed some foreigners? Yes, it happens, and not only in international trade. For examples, it seems like most joint-venture deals have performed poorly because the Chinese partner took advantage of the situation.

But are foreigners targeted in particular? Yes and no. Nothing is black and white.

The myth:

Some importers imagine that the Chinese have a “us versus them” mentality, and that it encourages unethical behavior in their direction. A few weeks back I found an article entitled A cautionary tale from China (h/t to China Law Blog) that echoes this feeling:

“There is an attitude among many in the Chinese business community that foreigners are rich and stupid and therefore fair game; that deceiving them is somehow acceptable in a way it wouldn’t be if they were Chinese,” says one intellectual property lawyer who has worked in China for nearly two decades.

Most people here will tell you this is wrong.

Foreigners are seen as “rich and stupid”, right… That’s why the price of the bananas I buy from street vendors is always higher than it should.

But it is wrong that “deceiving them is somehow acceptable in a way it wouldn’t be if they were Chinese”.

The reality:

In China, people from a different place are seen as outsiders. Whether you are from a different city or a different country does not make a huge difference in terms of trust (communication is a big issue, though).

A few examples:

• I have seen many Guangdong factories staffed mostly with Sichuan people, simply because the boss is from Sichuan.
• Some companies in Shenzhen only hire Hakka employees, predominantly from Meizhou city.
• And, of course, “sensitive” jobs like accounting are always given to the owner’s family members (except in large or state-owned firms).

So, why do foreigners get screwed so frequently? According to Sam Goodman, author of Where East Eats West, “It is NOT that the Chinese are out to screw over foreigners. It is simply easier to screw over foreigners.  The business environment here can be harsh even to other Chinese.”

Very true… It is much easier to take advantage of a trusting Western businessperson who does not know the local system, than it is to screw another Chinese company.

Conclusion for foreigners:

A good rule of thumb for anybody doing business in China is this:

DO NOT place another party in a position where they can screw you, benefit from it in the short term (even at the expense of the long term), and get away with it.