Working In China

"Poorly Made In China: An Insider's Account of the Tactics Behind China's Production Game," by Paul Midler, makes for a very good read on doing business in China. The author made his entry into industry in southern China (Guangzhou) in 2001 with a Wharton M.B.A. and a fluency in Chinese, establishing himself as a representative for his Western clients (importers or manufacturers) by matching them with potential Chinese manufacturers to outsource their products. He makes his point on the pitfalls of doing business in China by relating several of his clients' experiences; he provides anecdotal studies to point out basic differences between Western and Chinese cultures and business practices.

By way of background, I am a technical consultant who assists pharmaceutical companies with document and systems preparation required by regulated countries (the U.S., the European Union, and Australia) to meet their respective Good Manufacturing Practices and to eventually pass each of these country's inspections. I have been in the pharmaceutical business for more than 35 years and have been consulting with Chinese companies since 1997. I have never had the problems encountered by Midler and have personally assisted with 22 successful U.S. Food & Drug Administration inspections in China. But I had a thorough understanding of my business before arriving in China, and pharmaceuticals are a highly regulated market that does not allow room for negotiation on production or quality.

The story of Midler's primary client, Johnson Carter, a personal care import company, runs throughout the book. Together, Midler and his contact, Bernie (he doesn't give a last name), the chief executive officer of Johnson Carter, experience every possible problem that could happen to an importer starting a business partnership with a Chinese manufacturer. After finding and deciding to work with King Chemicals, located in southern China, Johnson Carter and presumably Midler started making money by supplying personal care products—shampoo, conditioner, and body wash—to major retail chains in the U.S. But the products supplied by King Chemicals were not without problems.

There are some basic differences between Asian and Western cultures as well as U.S. and Chinese business expectations. Midler states the importance of developing personal and business relationships with Chinese manufacturers, but Bernie and even the author apparently did not make enough effort on this front. For example, they repeatedly refused dinner invitations and seemingly only discussed business during business hours. As a result, Johnson Carter's problems with King Chemicals included a label machine that didn't do the job, with the result that labels were applied crooked; a shampoo formulation that was not followed; bottles that were too thin, causing leaks and breakage; worker hygiene that could not be resolved with management; no interest to improve product quality; use of rejected (misprinted) labels to avoid discarding them, thus saving money; cardboard shipping boxes without sufficient strength to protect product packaging; underfilling of bottles; shampoo that "gelled" in cold weather because ingredients were substituted; and total product price increases based on one component's cost increase.

Basically, any problem that could happen did happen in Johnson Carter's relationship with King Chemicals. Johnson Carter supplied product samples to the Chinese factory without actually knowing how to manufacture or test the products. They provided neither specifications for the raw materials to be used nor product specifications or test methods, making it almost impossible to guarantee that King would provide satisfactory quality product. For any firm contracting manufacturing in China, the absence of a technical person to assist with production issues will mean that such problems will occur and magnify over time. Furthermore, without a quality assurance representative from the importer, rejected material will always be shipped. And finally, without specifications and test methods, unresolved quality issues will occur.

The problems faced by Midler in the Johnson Carter account continued with some of his other clients. An example is Build Corp., a San Francisco-based division of a large construction company that was purchasing aluminum frames for concrete castings. The casting frames were made increasingly thinner or with sections missing by the Chinese manufacturer, causing structural failures. This division went from most profitable to least, and was eventually sold to a Japanese company.

Yet another example is that of a U.S. cabinet manufacturer that could not compete without sourcing metal parts from China, but when pricing the product, issues arose in the contract. The cabinet manufacturer fixed his profits on an expected price from the Chinese manufacturer. The Chinese manufacturer offered a price that did not allow sufficient profit for itself. The hope on the Chinese side, according to Midler, was to get the business and either reduce quality or increase prices over time. Again, the author got caught in negotiating a business he did not understand well.

Midler also discusses the Mattel toy problem wherein a Chinese contract manufacturer used leaded paint contrary to Mattel's specifications. This led to a major recall in the U.S. as well as strained relationships with the Chinese suppliers and even the Chinese government when Mattel publicly criticized the suppliers. Eventually, Mattel had to apologize for this criticism. The fact was that Mattel did not have quality assurance presence in the Chinese factories, and it did not test its product routinely upon arrival in the U.S.

The common theme in the book is Western companies assuming they can approach their Chinese suppliers in a similar manner as in the U.S. or Europe: Give them the contract and assume that quality standards will be met or even solved by their Chinese partners. All of the disasters outlined in the book resulted from the Western business not understanding Chinese culture; company executives assumed that once a deal was signed, their expectations of what would be supplied would be met.

Although Midler does not specifically mention the root causes to all of his clients' problems, he makes clear by example that none of his unsuccessful clients had a continuous presence in the Chinese contract factories nor did any sufficiently develop the relationship required for a successful partnership. In general, the importers described did not understand their business or did not have the means or willingness to ensure continuous quality. They relied on their Chinese counterparts to bridge the gap for product expectations and to further improve quality.

The Chinese manufacturers were simply acting in the way they understand how to do business: Offer a low price (one that is maybe not even profitable) to secure a contract, then start to find their profits by reducing material costs, increasing prices, or finding secondary markets for the products as the orders are filled. Neither side fully understands the other's way of doing business in his examples.

To avoid many of the pitfalls described by Midler, it helps to understand the following:
• You cannot work in China without being mentally and culturally prepared (the last sentence of the book) or you will have unnecessary difficulties.
• The issue of saving "face" (not directly embarrassing someone publicly or in private) is a cardinal rule.
• Accepting dinner and social invitations is a part of business and should not be viewed as a social option.
• It is impolite to answer directly with "no" in Asian cultures, and you should never put your Chinese partner in the position of having to tell you no.

The book addresses the copying issue—manufacture of signature brands, for example, Gucci wallets, Levi jeans, Ping Golf clubs—rather well. Midler explains the various ways Chinese companies obtain product samples that they then copy. The author's personal care client, Johnson Carter, actually gave a sample of a Johnson & Johnson-brand shampoo to its Chinese manufacturer. Other Chinese companies have a strategy to set up shell companies in the U.S., request samples of brand/originator products, and send them to China to copy. But for most Chinese manufacturing companies "copy production" becomes a profitable side business with technology learned from the customer/importer. If you're going to do business in China, it must be assumed that your product will be copied, Midler writes. In fact, some Chinese businesses do not make any money from manufacturing brand products. All of their profit comes from copy manufacturing.

Midler also addresses the impact of outsourcing to China on U.S. jobs. The author seems to have mixed feelings on the subject. As any product goes through its life cycle from innovation to basic commodity, costs must be reduced and outsourcing to a cheaper labor source and lower overhead are usually necessary for business survival. This cheaper labor source is the value China provides to the U.S. economy. But it also takes jobs away from the U.S. On the one hand, outsourcing is taking manufacturing jobs from the U.S., but at the same time it is allowing otherwise unprofitable U.S. companies to survive, saving nonfactory jobs, Midler contends.

Earlier in my career, I saw it written many times that the world would need to learn Chinese. But money follows the language of business: English. The Chinese are rapidly learning English; in fact, there are more people studying English in China than there are people in the world who can already speak the English language. But from my experience you still need interpreters for most business ventures in China and, for that matter, Asia in general. Interpreters not only help with the language but also can provide assistance with cultural issues one might face.

Testing is an integral part of my business, pharmaceuticals. But neither Midler's clients (the importers), nor the customers, nor the factories were willing to pay for testing. Again, the lessons to be drawn from Midler's experiences are that you need to know exactly what you want and how it is to be made, and understand that a price too good to be true is just that. If you are inexperienced and accept such an offer, it will lead to the problems the author describes as he went along his learning curve doing business in China.

This book is a valuable to anyone just entering or considering a partnership with a company in China. Midler's stories are an amusing way to clearly point out the pitfalls if you enter into the Chinese business world without proper understanding and preparation.