My friend Gaetan, from Eyo Green Alliance, told me about an incredible story. I mean, incredible to people who don’t know the Chinese business environment. He gave me some photos as illustrations, and he blurred them to avoid any dispute.

Last month he scheduled two factory visits over the same day, in the city of Shenzhen (between Hong Kong and Guangzhou). He was looking for a good manufacturer of LED lamps.

The factory he saw in the morning seemed to have a storage problem — they even placed some cartons in the reception area.

In the afternoon, Gaetan noticed he was driven to the exact same building. It was the same place!

Below is a photo of the same reception area. You will notice two things:

• The cartons had disappeared, and revealed a large logo.
• The company name on the wall was different.

Oh, and also… The prices he was quoted in the afternoon were 25% lower than in the morning!

Could he have spotted it before the visits? No. The company names were different, and one address referred to the area while the other gave a street address.

Read the whole thing.  I have thankfully not had anything so dramatic happen to me, but this is an example of why it pays to do your homework and have an agent on the ground. If this kind of thing happens to experienced buyers, what makes you think you can avoid such situations buying online from the USA?

My view on China sourcing can be summed up thus:

1. I might change things in the rulebook if it were up to me, but it’s not.  The games is played by rules written by others, and until someone makes a change, the world is a global market and one man or one company cannot change the system by refusing to play.  When I came back from my first experience living in Asia in 1994, I told everyone in our company that the “great sucking sound” from Mexico was not what we were really hearing.  It was the tidal wave headed across the Pacific from China.  I knew that our company was not going to stop that wave and we could either drown on the beach trying, or get a board and learn how to surf. PassageMaker’s services can be described many ways – China supply chain management, vendor coordination, China sourcing, China contract assembly, blah blah blah blah blah – but we are really surfing instructors for hire.  It’s my job to keep you from drowning, not change the world.
2. China moving from a desperately poor nation to a more prosperous one is a good thing.  I would rather 1.3 billion Chinese people feed themselves than starve waiting for foreign aid.  That doesn’t mean I’m in love with the government or that I think Chinese people are perfect or better than Americans.  America’s problems are mostly our fault and entirely up to us to fix.  The solutions are there, and most business owners I know, regardless of political affiliation, will prescribe the same solution – get the government out of the way and let me get to work.  Nothing is accomplished by blaming others or giving up hope.  To quote Jerry Pournelle:

Despair is a sin.

At the end of World War II, much of Germany was in ruins. Large parts of its infrastructure was attacked or bombed by the Allied Forces. The city of Dresden was completely destroyed. The population of Cologne had dropped from 750,000 to 32,000. The housing stock was reduced by 20%. Food production was half the level it was before the start of the war; industrial output was down by a third. Many of its men between the ages of 18 and 35, the demographic which could do the heavy lifting to literally rebuild the country, had been either killed or crippled.
During the war, Hitler had instituted food rations, limiting its civilian population to eat no more than 2,000 calories per day. After the war, the Allies continued this food rationing policy and limited the population to eat between 1,000-1,500 calories. Price controls on other goods and services led to shortages and a massive black market. Germany’s currency, the reichsmark, had become completely worthless, requiring its populace to resort to bartering for goods and services.
In short, Germany was a ruined state facing an incredibly bleak future. The country was occupied by four nations, and soon it would be divided into halves. The Eastern half became a socialist state, part of the Iron Curtain that was heavily influenced by Soviet policy. The Western half became a democracy. And caught in the middle was the former capital of Berlin, which was divided in two, eventually separated by what became known as the Berlin Wall.
But by 1989, when the Berlin Wall fell and Germany was once again reunited, it was the envy of most of the world. Germany had the third-biggest economy in the world, trailing only Japan and the United States in GDP.

Read more: http://www.investopedia.com/articles/economics/09/german-economic-miracle.asp#ixzz1YRwTIuT4

There is a way out of this Depression. Our lands do not lie in ruins. Our fields are not cratered from bombs and filled with mines. Many of our idle factories still exist. Wonderful machine tools and laboratory instruments are sold at scrap value on eBay and at public auction. There is lots of unused productivity in this land, and we know the formula for prosperity. It is liberty. That has always been the secret of American exceptionalism. We had founders whose goal was to insure the blessings of liberty for themselves and their posterity.

Freedom is not free. Free men are not equal. Equal men are not free. We have always known this. We know it still.

China sourcing is a tool businesses can employ to help make themselves more competitive.  That doesn’t mean you should source in China. And that doesn’t mean it is the only way to compete.  Blaming others solves nothing.  Time to get to work.

Since I suck at blogging on a regular basis, you should really read Dan Smith at China Law Blog and Renaud Anjoran at Quality Inspection Tips.  It’s not that I don’t see two dozen things each day I want to blog about – I have hundreds of articles archived that I fully intend to blog on someday, probably after each is three years out of date – but I just run out of time each day.

Well today Dan had something that really struck a chord with me.  In his post, “Moving On Out To China’s West Side. Why Things Go Slowly.“, he writes:

…we were hit with a flurry of companies looking to move out from places like Suzhou and Shenzhen and Dongguan to places like Yantai, Jinxue and Datong. Two of these have already begun the process. Note though that I intentionally used the ambiguous term “move out from” as opposed to “leave” because in none of the cases is the company going to shut down any operations. At least not yet. Their plans are to open ancillary facilities elsewhere, see how those go, and then, based on that, decide what to do with their existing facility or facilities.

This is priceless advice.  In years past it was not uncommon for me to have clients shut down existing domestic supply chains before the Chinese supply chain was properly up-and-running; in some ridiculous cases, before the Chinese suppliers were even really identified.

DO NOT DO THIS.

If you are ever thinking of establishing a new supply chain, regardless of where it is, get it established and running in parallel with your current system.  And then run it in parallel for a couple of years, slowly changing the ratio so that the majority of your product comes from the lower cost source.  Then once all the bugs are worked out and you are absolutely convinced you are ready to shut down the old in favor of the new, run them in parallel for another year just to be safe.

PassageMaker can help you manage your Chinese suppliers, but I will advise you NOT to give me 100% of your demand right away if you have existing suppliers or your own production lines. Keep your existing system as back up and average your costs down.  My goal is that you be successful and making me immediately responsible for your whole world is not a good decision for anyone.

But that’s just my rant for the day.  Your thoughts, please.

The article spends a good deal of time talking about the recent suicides at Foxconn, which were tragic and not to be dismissed.  I did not blog about the suicides at the time, but it occurred to me when I read this article that at roughly 900,000 employees, Foxconn has a larger “population” than the following US states:

• Alaska (149 / 681,111)
• South Dakota (102 / 795,689)
• Wyoming (101 / 523,252)
• Delaware (95 / 861,953)
• North Dakota (95 / 637,904)
• Vermont (89 / 620,748)

You’ve probably figured out that the first number is the number of suicides, the second the state’s population (2007 data from the American Foundation for Suicide Prevention).  Frankly, we should be surprised there were not more than 12 suicides, just given the sheer density of the living and working conditions.  Or maybe that helped prevent them?  Lack of privacy denies you the opportunity or provides something of a support structure whether you like it or not?

Anyway, money ‘graph:

Gou has plans to capitalize on the changes he has wrought. Perhaps most intriguing is his plan to move additional production to the U.S. The company currently employs about 1,000 workers in a Houston plant that makes specialized high-end servers for corporate clients the company declined to disclose, and Gou envisions a fully automated plant to produce components within five years. “If I can automate in the U.S.A. and ship to China, cost-wise it can still be competitive,” he says. “But I worry America has too many lawyers. I don’t want to spend time having people sue me every day.”

I’ve said it before and I’ll say it again – bean counters, lawyers and @$$hat corporate buyers took all the fun out of US manufacturing and along with unions have done their damnedest to destroy what was left.

Anyway, enjoy the article about the “new Henry Ford”, and say a prayer for the departed.

My client, a good guy from Canada, found his own supplier here in China (something that PM also does, but is able to do a much more thorough job of investigating as it’s a backbone of the business).  And of course, the supplier has not really been a good fit so PM has been hired to help clean up the mess, and get his project finished and sent out.

I feel for our client, as he’s spent a lot of money on what I would call a very luxurious model in this particular market.  He’s gonna have to spend a lot more money to get this project out of china and into the stores.  He himself has seen the light and will most likely use PassageMaker for any future orders he may place.

I don’t really think it’s a situation that the supplier doesn’t care, but I also don’t get the feeling that my client is this supplier’s biggest customer either.  My client is a good source of some money, but certainly not the big fish in the pond so to say, and so things get done, just slowly and not as thoroughly as it could be.  But soon enough this project will be done (knock on wood) and the client can move to a better situation via PassageMaker.  It’s a good account to start with, and I see things only getting harder from here.

It got me think about our services.  Despite the copious amounts of verbiage on our website, I spend a good chunk of each day explaining what we do and how we do it – which is one of the drivers behind developing the upcoming video tours, which we hope to post soon.

Some time ago, casting about for a good analogy for our company, my obscene fatness landed upon the concept of an a la carte menu.  You can use our services in the typical order – Sourcing Feasibility Study (sample report here), Vendor Coordination, Assembly-Inspection-Packaging (sample Product Quality Manual here), etc. – or you can start anywhere in the process you like.  Skip the salad and go straight to the main course.  Or eat dessert first.  We are nothing if not flexible, and our only goal is to help the client be successful in China.

And now I want ice cream.  Damn.

If you’ve noticed that blogging has been slow these past weeks, it’s been because a number of trips, client visits, etc., but the main reason has been an ongoing grind of computer trouble.  I have a high-end Windows machine from one of the big American brands.  It was bought a year ago because my prior machine, a super-crappy XP laptop from one of the other big American brands had finally given up.  The new machine purchase was ill-timed as I had to get a Vista machine.

Short version, it sucks.  Vista is, was and will be terrible.  But the machine itself was not much either.  Fit and finish were poor (screen was scratched and scuffed out of the box) and like all Windows machines, the thing was crammed with bloatware.  Despite its specs, it was slow from the start.

Three weeks ago, Windows download a bunch of updates and all hell broke loose.  The Blackberry also updated its software at the same time, which caused another slew of problems.  Worst of all, Outlook, which is the only Microsoft product I prefer to use, stopped working reliably.  I tried Thunderbird but found it a poor substitute (I love Firefox though).  After four (4) different IT folks took a look, after upgrading to Windows 7, after reinstalling Outlook twice, I gave up.  My Macbook Pro arrives today.  After 20+ years as a Windows user, I am switching (back) to Mac.

Note to Steve Ballmer – when your “productivity software” is this unreliable, it is no longer productive for me to use it.

It will be an adjustment, I am sure and there will be plenty of cussing no doubt.  But I had the opportunity to play around with one the IT professional’s Macbook and his iPhone 4G, and both blew me away.  I have bitched before about how little I like my Blackberry Storm 2, how unimpressed I am with my current carrier and now I am plotting my move (back) to AT&T so I can get a phone that was designed from the ground up to interface with my computer.  When the only office you have is two devices you can hold in your hands, you just can’t afford this kind of garbage.

Why do I include this in a blog about doing business in China?  Because both my current laptop and the new Macbook were made by the same company – Foxconn – and yet the fit and finish are night and day.

I have the feeling the company who’s name is on the current Windows laptop just goes to Foxconn and asks what’s new that they can slap their name on and market.  I know that Apple does not do that.

I have said it before and I’ll say it again now – you get the quality in China you are willing to pay for.

Had a discussion the other day with two super knowledgeable China people. Both of these people are businesspeople. Both are fluent in Chinese. Both have been living in China for at least a decade. One is a marketing person. The conversation started with my bemoaning how my favorite restaurant in Qingdao so rapidly deteriorated, in every respect. These two people said that virtually always happens and then they proceeded to give me the chronology of what happens to so many good restaurants in China:

1. Restaurant opens with nice space, really good chef, plenty of staff, and no skimping on ingredients.

2.  Restaurant gets really popular and then chef asks for more money and when that is refused, he or she leaves. New, cheaper chef comes in and food quality starts to decline.

3.  Decline in quality from #2 above leads to a small decline in customers.

4.  Seeking to make up for the decline in customers, the restaurant owner starts skimping on the ingredients. Maybe they go from top quality fresh spices to cheaper dried spices.

5.  Decline in the quality of ingredients leads to a decline in the number of customers.

6.  Seeking to make up for the decline in customers, the restaurant owner lays off some staff and starts skimping on overall upkeep of the restaurant.

7.  Decline in customers accelerates and restaurant eventually shuts down.

8.  Owner blames new restaurant down the street for the problems.

We then started talking about how we had seen the same sort of thing with some Chinese products and Chinese suppliers of product to foreign buyers. We talked of how this sort of decline is nearly inevitable if you believe price is what drives your customers.

There is a whole lot of the above going on with Chinese companies and this sort of business is not going to endear one to Western buyers. But we three also talked about Chinese companies we knew that had very consciously broken the above mold and by having done so were thriving in both China and overseas.

Is the above what is holding back Chinese companies from better competing in the West? Is this changing? I say “yes,” to both though I think it will all take a long time.

Sadly, we see “vendor fade” too often.  Clients come to PassageMaker and China Quality Focus because after many good shipments, all of a sudden everything is garbage.  Shipments late, containers of defects, warranty claims out the wazoo.   The value a supplier provides – especially smaller suppliers – is often dependent on a plant manager, production engineer, quality manager, etc., that the Western buyer probably never even met.  That person leaves and the whole place goes off the rails.

Part of our job is to dig into the supplier and try and identify where these potential fault zones are, though there’s often little we can do other than catch the fade when it starts and take corrective action.  We can’t run the supplier’s company for him.

One of the reasons we perform Sourcing Feasibility Studies is to have a bench to go to if the first team fades.  For most customers, we recommend having parallel supply chains – at least two vendors making the components.  I often recommend that one of those suppliers be in the client’s home market.  Little counter-intuitive for a company based in China, but our ultimate goal is the customer’s success.

• MSNBC – Clinton says world must respond to N. Korea
• Financial Times – US warns over Beijing’s ‘assertiveness’
• DER SPIEGEL  – Interview with Economist Nouriel Roubini: ‘We Will Have Even More Crises in the Future’ (hat tip Matt)
• Real Clear Politics – Depression 2010? (whether you agree with him or not, this future is not clear or bright – there is much excitement yet to come I fear)
• Reuters – Factbox: Sources of tension between China and the U.S.
• Reuters – China and U.S. look to close world’s biggest trade gap
• Reuters (again) – Clinton avoids China disputes, hands out teddy bears (avoid confrontation and carry a teddy bear – not exactly what the Teddy for whom the bear is named advised, but then he never had to deal with being in debt to your competitors)
• CNBC – US Plays Down European Crisis but China Worried (as they should be)
• USA TODAY – Private pay shrinks to historic lows as gov’t payouts rise (that’ll work)
• Reuters (yet again) – How Greek debt crisis could save America (God, I hope so)

Maybe get to some travel blogging tomorrow.  Or not.  You’ll have to check back to see.

Too many American industries rely on illegal labor to remain cost competitive, thus the constant drama on the border issue.

The China nearly every Westerner sees is the coastal veneer.  The majority of China still dwells in the poor, mostly agrarian interior.  Their source of cheap labor in internal.

And as this article in Slate by Brett Edkins points out, in a sense, many of those Chinese migrant workers are “illegal” anyway.  Key paragraphs:

The United States could begin by conceding one of China’s principal arguments: Human rights are not just about individual liberty, but also economic opportunity. The Chinese “economic miracle,” which lifted 500 million people out of poverty in just one generation, is itself an unprecedented human rights achievement. Yet it gave rise to other pressing human rights concerns, including an issue that threatens to destabilize China’s Communist regime—growing discrimination against the roughly 200 million Chinese citizens who left their rural homes to find jobs in China’s booming cities.

In many ways, these rural migrants resemble undocumented immigrants in the United States. In China, they provide indispensible labor for vast urban construction projects and work in menial jobs as guards, waiters, cooks, or barbers. They are often mistreated by employers, generally live in poor conditions, and receive few social benefits and limited protection from the police. And their children are regularly denied public education.

Chinese newspapers, “Netizens,” and even Communist officials are calling for reforms. Their main target is China’s 50-year-old household registration, or hukou, system. Began as part of China’s state-run economy, the hukou system labels individuals as “rural” or “urban,” indicating their proper place of residence and binding laborers to the land. Today, rural residents are permitted to travel to the cities, but they can still be fined or forcibly returned home if they are caught working or living outside their designated hukou. Obtaining a temporary urban-residency permit from the police is beyond the means of most migrants, requiring a fee and employment documentation. Permanently changing one’s hukou by attending university or joining the military or the Communist Party is similarly out of reach.

Life for a city dweller with a rural hukou is difficult. Their hukou denies them urban welfare and access to public housing. It also excludes them from publicly funded health-insurance schemes. Since fewer than 3 percent can afford health insurance, most avoid medical care altogether. City judges often impose harsher sentences on rural migrants, and employers frequently withhold wages, knowing undocumented workers cannot complain to police without risking exposure.

I will admit I not a fan of the author’s wording, “undocumented migrants”.  If you illegally cross a national border anywhere else in the world (including Mexico), you’ve broken the law.  Only in the modern American journalist and politician world does that deserve an obscurant euphemism.

However, the point of the article is that despite the rapid advances, parts of the Chinese state are stuck in the Maoist past.  One good thing about dealing with PassageMaker, you know our employees are treated well and legal.  As a foreign owned firm, the government would come down on us like a ton of bricks were it otherwise.

Regardless, I am happy to see people in China, including members of the Communist Party, start to address the problem.