Assorted ramblings on doing business in China
As I was trying to say, it has been quite a while since I’ve had the opportunity to write a post on business. Too long in fact. And that is perhaps my fault. I obviously do business with Chinese on a daily basis. Perhaps the proximity of such makes for poor observation. But events over the past few months have led me again to question why The West acts like it does, when dealing with Chinese businessmen?
At least in my field.
In my profession we willingly deal in reclaim parts. Or what one may call secondhand parts. Why do we do this? Because they are cheaper than new original parts. With a shorter leadtime, at 80-90% the quality. Sometimes even better than 90%.
Pricing for these parts is typically 20-25% the cost of the original parts (OE). Although more sophisticated parts can only be had at 50% cheaper.
So great deal, right?
On the face of it, yeah. Absolutely great deal. Why go pay $150 for a new OE part when you can get a reclaimed version from those hard working Chinese for only $70? And there is no 2 month leadtime to worry about! If the Chinese have it in stock I can buy it right away!
That is until the business of “making money” collides with the bureaucratic notion all large companies have of “risk”.
You see, the Chinese have a stubborn habit of wanting to get paid in advance. And well, that is simply anathema to most large corporations around the world. Because the name of the game is mitigating risk. Corporations in the West want their cake and want to eat it, too. They want the savings, and they love the satisfaction of buying something right away.
They just don’t want to pay for it right away.
And there lies the rub.
Fantastic savings at our fingertips.
Until corporate reality comes crashing down.
“Can I have 45 day terms for those parts”?
“Oh yes, make sure I get a warranty for those super cheap parts that I’d have to wait weeks and
weeks to receive from the original manufacturer should I choose to go that route”.
I find that in my business the corporate mentality of avoiding risk quite often tends to get in the way of making money.
I once did a deal with a company that repairs Samsung product. They openly told me something I knew already, that the leadtime for receiving parts from Samsung would be 45-90 days. Samsung had the right to cancel the purchase order at anytime. There was a 30 day warranty and payment was always in advance. So this company that really needed Samsung parts simply asked me to build them a generic version of what was needed. That is, they want parts that look as near identical to Samsung as possible, but of course without the Samsung logo. Which made the whole thing legal.
I quoted the deal. Admittedly it was a bit high, but the factory I was working with had a nice reputation as well as a long history building parts for several well known companies. Apple, Amazon…..and even for Samsung itself.
Turns out their price was only slightly below what the customer would be able to get the parts for if they were to buy from Samsung itself direct. Except the factory had a long warranty as well as 45 day payment terms. Much better deal than anything my customer could get with Samsung. But the person I was dealing with balked. You see….she wanted her cake and she wanted to eat it, too. Just like every other American company it seems.
But this post is about Chinese companies and how they do business with us, and it’s an interesting tale.
In essence with the West, the goal is to avoid risk. Reclaimed parts after all may have “inferior” quality. (their reclaim parts, right?)
And paying in advance ties up cash. And tying up cash is oh so anathema to everyone. Anybody paying cash in advance will get a “WTF??” email from Finance.
At the end of the day, “greed” motivates the West to do what it does. That is, to buy parts at a deep discount, knowing those parts can’t possibly 100% the quality of a new part.
But what motivates the Chinese I deal with day in and day out?
The Chinese have a fantastic fear of being cheated. When doing business with the West, the overriding concern of the Chinese is they simply won’t get their money.
Ahh….so the Chinese want to mitigate their risk as well!
Chinese fear of being cheated shouldn’t surprise anyone that does business in China. The Chinese after all are the pre-eminent World Class cheaters. They are in a class all their own, bar none. Chinese cheat each other at a drop of the hat. If the courts were to take such a thing seriously nothing in China would ever get done. In a society so pent up with revenge and perceived slight (so typical of face driven societies), people would never stop suing each other. (Anyone remember what I said if guns were suddenly allowed in China if just for a day? The population would be reduced in half overnight)
The fear of Chinese of being cheated is reflected in the reality that Chinese cheat each other all the time. As such, they assume non Chinese act the same way.
The factory I extensively used for years was in my pocket for the simple reason I paid on time, every month. No, that doesn’t make me a capitalist hero. But in the world of the Chinese, that gives me leverage that never goes away.
“I pay you on time. Stop complaining.”
As simplistic as it sounds, China’s perception of “everyone a thief” goes a long way when they find out some of us are not thieves. Indeed, most Chinese factories simply budget “being cheated” into their annual budget.
The factory I mentioned above had annual revenue of about $80 million. Yet they were annually cheated out of $1million per year by other Chinese factories. Customers all. Years later I found out this factory I had given so much business too, was itself not paying up.
Want to have a good relationship with the Chinese? Pay on time!
It’s a tough world where trust is so paper thin, that every factory in effect can cheat each other and get away with it. Why is that? The Chinese courts simply are not an effective tool of meting out financial justice.
The Chinese are well aware of their reputation. I once had a friend of mine in Guangzhou approach me to invest in yet another club in the city. (like America with lawyers, the last thing Guangzhou or Shenzhen needs is another night club) He offered up a 20% stake. My reply was swift and true:
“pay my 20% stake up front than”
Eventually this fellow went to a mutual acquaintance of ours and asked, “佬外是否认为我们中国人都是骗子”？
Foreigners never impress me when they exclaim their “doing business” with Chinese. Good luck with that. Good luck working with a culture that see’s cheating as simply “getting ahead with Chinese characteristics”.
The only way to work successfully with the Chinese is simple: protect your own financial position while assuming the worst from both the foreign customer and the Chinese supplier. I realize what I’ve written above is too generic. There are indeed good Chinese out there, and I’ve been fortunate to get good product from them. And there are just as many scoundrels in other countries. (And as difficult as I’ve made the Chinese sound, the Indians are just as difficult to work with.)
The best way to succeed with the Chinese is to convince your customer to pay in advance. That will mitigate a lot of one’s risk. I speak only from a small businessman’s point of view however. Sure, there are instances where people will come out of the woodwork and say things like “I have a warranty!” or “I have payment terms!”
My reply is “I have a warranty too”….until I pay in advance. Then I lose all leverage. From a small businessman’s point of view, I don’t care about terms as long as my customer pays me in advance. When dealing with reclaim parts that I can buy 25 cents on the dollar I find my suppliers inevitably find something “wrong” with the defective parts my customer wants to exchange for better ones.
Dealing with large customers is always a hassle in that regardless of their savings buying reclaimed parts for mere pennies on the dollar, they still expect “good” parts that work. And if the supplier refuses or is unable to exchange parts than tough shit, the customer will want a refund!
I’ve often had to tell the “we won’t let the Chinese push us around!” clique to basically shut the fuck up, or at least tone it down, or the Chinese will walk. Than what Big Boy? No parts for you! Go back to buying parts from the OE, in advance, with a limited warranty, at triple the cost, and wait 3 months for them to arrive. That is, if they don’t cancel the PO in the interim.
And remember if you can the name of the game is to make money!
(Wait…wasn’t the original intent of this post about the difficulties of working with the Chinese??)
Our greed as businessman has long since forced us to so ignore the extent of how China’s business overlords make their money that we no longer even hold our noses. Find me a successful Chinese businessman in my industry and I’ll find one that has probably broken an environmental or labor law cum America 1905.
The world of the Chinese businessman is a harsh one. They are constantly trying to figure out who to bribe. What laws they can get away with ignoring. Which new location to run too should they avoid paying a supplier bill.
But one easily forgets (or just doesn’t care) that the Chinese themselves have to buy the parts they sell to us, from somebody else. Quite often they have to buy the parts sight unseen and pay in advance as well.
As such, do not the Chinese also have RISK?
For one, the Chinese have to hold inventory, while hoping us laowai customers will follow through with the deal. The parts they’ve bought have become a sunk cost. A laowai may order a large number of product, only to follow through with maybe half the order. Then what? The Chinese seller gets stuck with the balance. Or the Chinese trader may take decidedly inferior product and “mix it in” with qualified product, hoping the customer is none the wiser. This in turn will alienate a customer, as the quality downstream will eventually be found out, but if the customer has paid cash in advance, he’s still screwed. Both scenarios in my business are all too common.
Unperturbed, the laowai simply goes off to find “another supplier”. Except in China one cannot just find “another supplier” without a lot of legwork. And when one does, it takes a long time to establish that all important specter of TRUST.
Dumbass American managers show their ignorance in the ways of “doing business in China” when they utter the simple phrase “just find another China supplier”.
It’s so simple, right?
If I had a dollar for every dumb son of a bitch American manager I’ve come across dealing with China I’d make Howard Hughes(look him up!) look like a pauper.
“Just go find another supplier”.
“Just tell him we aren't payin'. He wants our business, right?”
“I want my 500 line supplier assessment filled out or he is not working with us…..”
Always followed up with the Grand Finale:
"Why can't we find any suppliers?"
All the while these same “managers” or “directors” are running around like headless chickens because their department is losing money left and right, and well, they just don’t know what to do!!!!!
Perhaps I find the Chinese easier to deal with than most folks do.
Meet them. Get pricing. Get samples. Then slowly escalate the monetary value of any buy, than stop.
Once the quality is there and they see the amount of business increase, it will be time to talk real terms and well, if you want larger business from us, that means agreeing to payment terms. When working with the Chinese you gotta have terms. But it is not something one needs from Day One.
That is a pipe dream.
All the same, a timeline has to be in place. That means more visits with the target supplier. Face to face, etc. This is how one builds trust. And more times than not, it is not the Chinese supplier standing in the way, but the American Manager that won’t allow you to spend the time or effort it takes to establish a relationship with the supplier. Yeah, the one we get our savings from. That one.
Your company in your country may have the same problem so many companies here have. An untouchable, arrogant class of managers that like to utter things like “we need to find savings!”, but won’t let those with the knowledge base manage the Chinese with the goal of accomplishing just that.