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China, US to boost quality control

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Julien Roger, Managing Director of our sister company, China Quality Focus, sent me this short article on a declaration of China’s commitment to improving quality control.

Now the cynic in me would like to make a snarky comment on the pointlessness of such government pronouncements right about now, but I won’t for two reasons:

  1. Many of the quality problems pinned on Chinese manufacturers are at least 50% the fault of foreign buyers who fail to define expectations, perform proper due diligence, establish effective quality control regimes, etc., to say nothing of those clients who expect the vendor to do the engineering for them. Then when the design fails, they blame the vendor instead of themselves. PassageMaker exists to help our clients avoid each of these pitfalls and it is the reason why we created our Endorsed Service Provider network. The reputation for poor quality is a major issue for China, and the government is dead serious about rectifying the situation.
  2. As with so many areas of their society and economy – industrialization, intellectual property law, financial infrastructure – there has been astounding progress in just a few short years. Certainly there is still a long way to go, but the improvements are real. When I first went to China, I had to buy our vendor basic measuring devices like calipers, height gauges, surface plates, etc., and train them how to use them. Now there are numerous testing laboratories in every major city and companies like China Quality Focus and PassageMaker thrive by providing customized quality control and quality assurance solutions. The net effect of our efforts and those of the Chinese manufacturers is a measurable improvement in a short period of time.

China is still a darned challenging place to do business, and I don’t see that changing. If I didn’t believe PassageMaker had a bright future ahead of it helping our clients succeed on Planet China, I wouldn’t waste my time here. But I do see the progress China is making, and have to give credit where credit is due.

The Law of Conservation of Filth

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The Law of Conservation of Filth: In order for something to get clean, something else must get dirty.

Corollary to the Law of Conservation of Filth: It is possible for everything to get dirty and nothing to get clean.

This is one of Murphy’s Laws. I used it in my answer when asked recently about whether “green” technology had caught on yet in China. Short answer, not yet.

Sadly, many products are just plain dirty to make and China is using the energy resources they have available (coal), and the production technologies that are easiest and least costly to adopt – that is the “brown” versions. Environmentalism as currently practiced in the West is essentially a luxury good, and I have yet to see a “green” technology that actually costs less than the “brown” alternative. Only by penalizing the “brown” and subsidizing the “green” can the case be made.

That is not to say that things aren’t changing in China. This article on the recent record-setting pollution in Hong Kong highlights the issue:

The problem of air pollution in Hong Kong prompted Australia earlier this year to include a health alert in its advice to travellers to the southern Chinese city, warning that it could aggravate some medical conditions.

Pollution has in recent years become an increasing health and economic headache for the authorities in the city of seven million.

Emissions from the factory belt in southern China over Hong Kong’s northern border combined with local emissions from power plants and transport to generate a thick haze over the city for large parts of last year.

The government has stepped up efforts to cut vehicle emissions, including offering tax concessions to users of environmentally-friendly hybrids.

Now the article does not make completely clear which government is trying to curb vehicle emissions – the Hong Kong Special Administrative Region’s (HKSAR) relatively independent government or the PRC government across the border. I suspect it is HKSAR, as I have seen no such effort in PRC, and it makes sense for HKSAR to do so. It is a wealthy city and clean air is a sign that you’ve reached a level of affluence where the manufacturing and resource extraction is no longer the driver of your economy (e.g., Singapore).

Most of the great cities around the world have traveled this path. The early industrial towns of England had skies so black with coal soot that children developed rickets from lack of sunshine. The industrial hinterlands of New York City poisoned the oyster beds surrounding the city, forcing a culinary switch from the local seafood to hotdogs. The Cuyahoga River famously caught fire in Cleveland in 1969 (and at least 9 other times going back to 1868). Rob Gifford in his brilliant book, China Road, writes about the terror of bicycling through a northern Chinese coal town.

I am not trying to weigh in on global warming or pollution in general. Everyone wants clean air and water. It is just that the Kyoto Protocol was doomed to failure on Day 1, as it exempted the developing world, especially China and India. It also failed to recognize that wealth is created in the manufacturing sector, and changing production methods and energy sources was not going to be easy or inexpensive. Such improvements can only be effectively implemented with a level playing field (compliance costs equal to all competitors). In a free trade environment, the cost advantages to sourcing in China, Mexico, India, etc., insured that the Protocol would fail. No wonder the US Senate voted unanimously to reject it. While some in the developed world may speak blithely about bankrupting core industries like coal, China and India do not have the luxury (yet) to pursue such a path. They each have over a billion overwhelmingly poor mouths to feed.

PassageMaker can help find Chinese firms who use green technology – like the Hong Kong-owned plating company we found for one project that recycles 100% of its effluent – as our clients’ require it. However, such suppliers are the exception to the rule and always more expensive. Our Sourcing Feasibility Study is just that – a study to determine if the client’s goals are feasible. Often clients want a “green” product for a “brown” price. And most of the time, that’s not feasible. Yet.

China steps up, slowly but surely

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In my post yesterday, I wrote that China was not embracing “green” technologies… yet.

This article in The Washington Post gives a good overview of the steps China is taking to make that ‘yet’ come quickly. Nuclear may not be everyone’s idea of clean energy, and certainly there is a large CO2 cost upfront to build the reactors, but once past the hurdle, you aren’t burning coal anymore. As someone who was once lost on the streets of Beijing in clouds of coal smoke, this would be a very good thing.

OK, so I was blind drunk at the time, but less than 100 ft of visibility is still really, really bad pollution. I make the point to American environmentalists all the time – you really don’t know what pollution looks like if you’ve never left southwest Virginia. Heck, I would argue you don’t have a clue until you’ve left the United States

China in general is progressing at an astonishing rate – industrialization, legal framework, financial systems, the largest mass migration in human history – and hopefully rational environmental policies follow suit. As I see it, the Chinese labor pool is so vast (at least until the demographic time bomb that is the one-child policy causes an economic implosion in about 30-40 years) that they can maintain their manufacturing cost advantage and still provide a (marginally) healthier environment for their citizens.

I hope for the sake of our staff in Shenzhen, that the government gives this effort more than lip service.

Global economy has no substitute for falling dollar

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Short Sunday post – interesting opinion piece in the Times of London on the dollar, including why the Chinese renminbi (RMB) is not a substitute (yet). As long as the RMB remains pegged to the dollar, Chinese exports will have a substantial cost advantage.

The saddest part of the article (from my perspective anyway, and it’s my blog) is that the dollar’s ultimate fall has far more to do with American policy than the emergence of China. Key paragraphs:

Still, doubts about the dollar’s future persist. Its recent decline may be consistent with its performance in previous currency cycles. And the drop might be due to a willingness by investors to take on more risk now that the recession seems to be ending, rather than to a lack of faith in the safety of the dollar. But investors remain worried that the dollar’s decline, so far acceptably gradual, will turn into a rout, perhaps not next year, but in 2011.

Ben Bernanke, Federal Reserve Board chairman, says that this can be avoided if two policy steps are taken. First, the American government must make “a clear commitment to substantially reduce federal deficits over time”. Second, Asian countries must boost domestic demand so that they don’t have to rely so heavily on exports to America, and allow their currencies to appreciate against the dollar so that the US trade deficit continues to fall as a percentage of American GDP.

What Bernanke did not say, perhaps because he was playing the discreet central banker, is that neither of these things is likely. The Obama administration has already pencilled in eye-watering deficits for a decade and more, and is in the process of adding perhaps another $1trillion to the US deficit by “reforming” healthcare — claims of savings are somewhere between delusions and lies. It will then turn its attention to the energy sector, and the subsidies required to fund its green revolution.

Meanwhile, the Chinese are unlikely to allow their currency to appreciate in value, and other Asian nations will continue to intervene to prevent their currencies from rising against both the dollar and renminbi. Trade imbalances will, therefore, persist.

Which puts the ball right back in the Fed’s court. Unless Bernanke drains liquidity from the financial system, and shrinks the Fed’s balance sheet by winding down $2 trillion in support programs — and does so precisely when the recovery takes hold so as not to cause a relapse by moving too early — the dollar’s decline will accelerate, shattering confidence in its long-term value. One well-respected expert tells me that in two to five years the dollar will no longer be considered safe enough to be the currency in which the world does business. Its replacement: separate deals in local currencies — the Chinese paying for Brazil’s oil in renminbi, which the Brazilians use to purchase stuff made in China — and the International Monetary Fund’s drawing rights, bits of paper backed by a basket of currencies, including but not limited to the dollar. That would mark the end of an era which has seen world trade flourish and millions emerge from poverty. Sad.

Suffice it to say, as an American and as a businessman who’s made a considerable investment in China, I like the status quo. The dollar peg makes PassageMaker’s job much easier. I hope that the author of this opinion piece is wrong and that Washington finds the sense to turn things around. I would rather not have to negotiate a currency swap every time we arrange a shipment for our clients.

A Rivalry on the Roof of the World

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I haven’t read TIME magazine regularly in years. My parents had a subscription and I read it weekly as a adolescent. When I was living in the UK and then later in Singapore, I started reading The Economist as a far more comprehensive weekly news magazine than either TIME or Newsweek. Both of those magazines engage in panic journalism – headlines always screaming about the latest end of the world – whereas The Economist and the Asian Wall Street Journal (which I picked up in Taiwan) were more reliable for sober news. However, I spotted this interesting (if a bit overwrought) article on the tensions between India and China. Regular readers on this blog know that the ultimate goal for PassageMaker is to expand into all the emerging production centers around the world, first with sales offices, followed by Sourcing/Assembly Centers, making our model of Trust & Transparency truly global. First up with most likely be Mexico, but India is high on the list.

PassageMaker has a number of long-term Indian clients, and during October’s trade shows, our team met with many Indian businessmen currently doing sourcing in China or looking to start. While there is competition between the two countries, there is also the recognition that China is the more developed industrial nation and the locale to sets the “world price”. I don’t get the feeling a shooting war is on the horizon. Tension, yes, but there are still many opportunities for Indian buyers, and PassageMaker has years of experience helping our Indian clients succeed in China.

In Chinatown, Sound of the Future Is Mandarin

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Fascinating article on the switch to Mandarin from Cantonese in American Chinatowns from the NYT. One of the accomplishments of the PRC has been universal Mandarin instruction, providing the country with a standard dialect for the first time in its history. American multiculturalists undervalue universal English – one of the reasons India lags behind China is the lack of a truly common tongue. Hindi is not even 50% of the population, and English a distant second. Though China has a multitude of dialects, the younger generation in China have all been taught Mandarin, providing a solid foundation for economic growth.

Now if only Mandarin were a straightforward, non-tonal, alphabetical language!

Mike Bellamy knows his stuff (part 2)

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For anyone thinking of doing business in China, please listen here for an excellent interview with PassageMaker founder Mike Bellamy. In this interview, he focuses on practical measures to protect your Intellectual Property (IP) when dealing with Chinese suppliers.

PassageMaker has years of experience protecting our clients’ IP, including filling Chinese patents and trademarks using our Endorsed Service Provider for legal services, Ms. Li Yan of the JunZeJun Law Firm. All of our core service offerings – Sourcing Feasibility Studies, Vendor Coordination, Assembly-Inspection-Packaging, Factory Formation – were developed with the primary goal of IP protection.

And don’t ignore protecting your design in your home market. For our American clients, we recommend Michael Mann and Todd Serbin of Nexsen|Pruet.

If you’ve spent the time and money to design the product, why would you not take every effort to protect it from theft? Contact PassageMaker and let us show you how to successfully and securely manufacture your product in China.

They levelled the playing field

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There has been lots of ink lately about Mao the “political philosopher”. I won’t get into that other than to say that if any one person deserves credit for China’s economic transformation over the last 30 years, it is Deng Xiao Ping, not Mao.

It was either Mr. China or China Road (both wonderful books) that pointed out why China’s business environment was able to change so rapidly. For better or worse, the Maoist era had wiped away the old entrenched power structures, including family business empires, and also eliminated most of the atrocious sexism of traditional Chinese culture. Whichever book it was made the comparison to Indonesia and India, where business was tightly controlled by family conglomerates and outsiders had far less opportunity to set down roots, to say nothing of the limited role of women in the economy.

Though it is a gross oversimplification, and does not address all the things that went wildly, tragically wrong during the first 30 years of the PRC, Deng did have a “level playing field” to start with. If you are going to re-light the entrepreneurial spirit of the Chinese people and try to attract foreign investment, starting from nothing is actually an enviable situation.

I am often asked about India. With English widely spoken, the British legacy, democratic government, etc., it seems a better choice for business. The Dragon and the Tiger have the world’s rapt attention, but for manufacturing, the choice so far has clearly been China. I’ve seen figures quoted that China has 10 times the number of factory jobs as India despite comparable populations. And I’ve had Indians tell me the reason they are trailing China is because they have so much cultural baggage, whereas China is in some ways like a new country. This article in the BBC about the beating of ‘witches’ in rural India is a good example of the press that makes investors hesitate. [Note – I admit I have never been to India and know next to nothing about it other than what you can read in a book or newspaper. My sister travels there regularly, and through a family business, we’ve been doing business there for decades, but I have no personal experience to draw on.]

Expatriates often lament the hyper-capitalist zeal of the new China. Indeed some of the Chinese I meet lament it as well, which accounts for the rebirth of religion in the officially atheist PRC. But I find the rule of the almighty RMB reassuring in way. Capitalism at least has clear incentives and bridges cultures.

It is not for nothing that China is referred to as the new ‘Wild West’. Mike Bellamy was one of the few white faces in town when he arrived in Shenzhen in 1998. The positive and open business climate allowed him to put down roots and PassageMaker was born. And while we have long-term plans to expand into India (PassageMaker-Mexico will be first, perhaps in 2-3 years), China will remain the core for years to come. Our services – Sourcing Feasibility Studies, Vendor Coordination, Assembly-Inspection-Packaging, Factory Formation – are all designed to help clients succeed and thrive in this crazy boom town that is China.

Trade Show Season 2009 is different

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In years past, the China trade shows were dominated by American buyers. What we’ve seen at the trade shows in April 2009 and so far this October is an increase of attendees from the developing world. It is not for nothing that PassageMaker opened our first two satellite sales offices outside of the USA in Mexico and Brazil.

This article from the NYT provides a good overview of the current situation. Key paragraphs:

As throngs of prospective buyers swarmed the exhibitions, equal to five times the floor space of the Empire State Building, Chinese exporters were upbeat. By keeping China’s currency, the renminbi, tightly yoked to the weak and weakening dollar, Beijing had made Chinese exports increasingly competitive around the world.

“We are very confident,” said Liu En Tian, the marketing manager of the Huasheng Jiangquan Group, a manufacturer of ceramic tiles in Linyi City. “Already the buyers who are coming this morning are more than last year.”

Like those of many Chinese manufacturers, his company’s exports fell by nearly half last winter because of the global economic slowdown, but they are now down only 20 percent from their peak more than a year ago because of a surge in sales to South America and the Middle East. “The economy will get better very soon” around the world, Mr. Liu said. [ed. – emphasis added]

While Washington seems hell-bent on borrowing / printing / spending money in reckless abandon, almost as though they want to destroy the dollar and the rest of the USA economy (much to the horror of American businessmen like me), other markets around the world are recovering quite well. It seems that many nations know that Keynesian economics is bunk without having to try it out each and every generation.

I’ve avoided commenting on the decline of the dollar, mainly because it feels like commenting on a slow motion video of a train full of children hitting a bus load of nuns, but as a global company PassageMaker is working daily to position ourselves to take advantage of the global rebound. We have sales representatives in Mexico, Brazil and Europe and are interviewing for sub-Saharan Africa, India and Australia. Like it or not, China is a global player and PassageMaker is well positioned to help our clients succeed in China. Please contact us an let us know how we can be of assistance.