Southern Perspective Shenzhen

For this situation, I don’t think there could of been a legally scripted solution to prevent this.

Like how most of these romance stories began, it was when the Buyer met the Supplier at the fair. A trade show fair that is …..

Something I should point out is, the product here is particularly specialized and the supplier is one of the biggest in China.

Unfortunately I have to keep it vague but it basically goes like this:

-Buyer meets supplier at fair

-Supplier sells a sample to buyer to approve

-Buyer approves sample and wants to start first order

-Supplier refuses to sell sample, as product is being sold to another customer in same country

-Buyer dumbfounded

-Supplier offers a “better and newer” product to buyer, yet still reluctant to sell this, but eventually does

-Buyer knowing holiday is coming up, flies to China to solidify the deal

-Buyer is hoping the new sample will be sent to home office to be approved before they arrive to China for meeting ….. but isn’t

-Buyer and supplier meeting again, supplier now will sell product and the originally approved sample

-Buyer still needs to approve the sample flying over the Pacific sea.

-Happily ever after?

Yes, an over simplified version, but it gets the point across.

Just looking at the story, it makes one cringe at the thought of doing business in China. It looks over complicated, unreliable, down right frustrating. Why did this all happen? Why so complicated? Why so much time and money wasted? Sometimes these questions can not be answered. Moreover, searching for these answers is not important. What is important is, getting what you need and finding out how.

Capitan Obvious’ observations:

Chinese mentality: Cautious, slow approach

Western mentality:  Time-line driven

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Chinese mentality: Indirect

Western mentality: Direct

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Chinese mentality: Willing to wait

Western mentality: Willing to compromise in lieu of waiting

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With all this being said, the beat of business is not done to the same drum. Also, the pace of commerce in the US is based on speed. For a lot of purchasers, they simply do not have the time to jump the hoops of relationship management and supplier development. It just does not exist the same way it does here. Therefore, they are locked into a system and working with China becomes confusing and frustrating.

For Chinese companies, working with foreign companies is frustrating. Relationship management is almost non-existent, business conduct is completely different. It is something that both sides have to deal with.

Again, what is the scripted answer?  I would venture to say there is none. The key to success here is, understanding your surroundings and situation. Preventative home work goes a long way in China and if you are doing business here it won’t solve all the headaches but it will make you more prepared for them.

We all know the Chinese love to save their money, it’s almost the national sport.

No wonder Shenzhen has all the money in the world and won’t pay for a decent football team.

So why are international financial service companies’ not making record profits in China?

The Chinese securities market is very different from western securities markets, learning what these differences are and how they could possibly change can increase your chance for success.

This and following posts will introduce some of the barriers that foreign companies face when trying to gain entrance to the market and how the Chinese market is different from other international markets.

The biggest difference in the Chinese securities market from other markets is the amount of ownership the state has through State Owned Enterprises (SOEs).

When a Chinese SOE opens itself up to investment through an Initial Public Offering (IPO) about two thirds of the shares remain in the hands of the government through SOEs.

This creates a potential conflict of interest because the state has a vested interest in the success of its own companies, as opposed to simply being a referee that ensures fair play.

The Securities and Exchange Commission (SEC) in the has a more clear cut task of monitoring and making sure companies are in compliance with regulations, on the other hand, the Chinese Securities Regulatory Commission (CSRC) must juggle the jobs of developing state assets while at the same time avoid social instability.

This puts many investors in a difficult position, both Chinese individual investors and foreign firms looking to develop a strong Chinese portfolio.

Both of these groups are not able to purchase a majority stake holding in a Chinese company and are not able to have an active voice in the direction the company takes.

This structure encourages investors to be short sighted with their investments, to be speculative and ride the ups and downs of the market instead of finding a company that they believe in and investing for the long term.

The Chinese stock markets will not be able to escape the fluctuations that have plagued the system in recent year until they can decide the position that the state will occupy.

Playing both a regulator and a heavily invested owner in the stock market is not likely to inspire confidence in neither foreign investors nor its own citizens, but maybe thats not the point.

It is not just China getting slammed with duties, Brazil and Armenia are on the list as well.

It was decide last week that a five year duty of 30% will be placed on the countries.

On the same day, they “slapped”  39.2% duty on steel seamless pipe  from China as well.

Beijing has just issued a circular to detail about the National  Day and Mid-Autumn festival  holiday overtime payment scheme.

4 days are considered public holiday while some might get 8-10 days. Only triple overtime wages will be considered for the 4 days that are considered a public holiday.

I play basketball with a group of foreigners in Shenzhen every week; we have been getting together for several years.

In a city like Shenzhen, people come and go quite often and it is nice to have a group of people from different walks of life that can get together.

Our group contains Americans, Canadians, Japanese, Chinese, Australians, French and occasionally African and Germans.

It is a great stress relieving therapy for most of us, a couple hours each week where you can run into people and talk about what frustrates us all about doing business in China.

One complaint that I hear quite often is about the lack of a legal system in China.

This is simply not the case, the system here is just very different from what most people are accustomed to in many other places.

In the US our legal system is designed to encourage its use in solving conflicts, in China the legal system is purposefully designed to dissuade you from ever setting foot in a Chinese court room.

This is the same for Chinese as any foreigner, the Chinese only use courts when there is ABSOUTLY NO OTHER CHOICE.

This quotation attributed to Emperor Kang Xi, (emphasis added)

“… those who have recourse to the tribunals should be treated without any pity, and in such a manner they shall be disgusted with law, and tremble to appear before a magistrate. …As for those who are troublesome, obstinate, and quarrelsome, let them be ruined in the law-courts – that is the justice that is due to them.”

M. Huc, The Chinese Empire (1855)

Justice can be had in China, but not through the same methods as in the west.

Choose your council wisely.

In this economic climate, the world is using its old tricks again. In the recent Xinhua article, they explain a current anti-dumping investigation against China by the European commission.

First, what is dumping?

Dumping is when a company exports a product below the market price. In the claim above, the European Commission is starting an anti-dumping investigation against companies in China selling:

Steel wire rods

Seamless pipes

Sodium Gluconate

Road wheels

Anti-Dumping measures result in tariffs and duties on the product to raise the price to a reasonable market price. This all a very simplified explanation.

As I said in the beginning, in the current economic climate, the world is looking for ways to protect their country’s interests. An anti-dumping measure is definitely one way.

Stuart Newman, who is a legal advisor for the Foreign Trade Association representing EU importers comments:

“When we experience a financial crisis, we can assume there will be more requests for anti-dumping investigations from manufacturers,” he said.

The investigations do not automatically result in high duties for imports in the long run, Newman said, but they do increase the cost of imports and expenses for consumers.

“Although companies may not increase the prices of their products immediately, they have to swallow the cost, reducing staff and imports,” Newman said.

America is no golden child in this arena either. An interesting paper titled, Unfair Play: Examining the U.S. Anti-Dumping ‘War’ Against China, Francis Tanczos gives some scary statistic about how many case have been directed at China.

Due to the large volume of its exports, it is of little surprise that China has been the primary target of anti-dumping measures. The sheer number of anti-dumping cases against China has made it apparent that China is perceived as a threat to many other WTO members: over the past two decades or so, more than 30 countries have opened about 600 anti-dumping cases in the WTO against 4000 different types of Chinese products. Over this same two-decade period, the US had made 110 petitions and 68 orders against Chinese goods topping the list among the US’s trading partners for such measures. Currently, 25 percent of all WTO anti-dumping investigations are directed at China.

Is China playing unfair or are other countries trying to protect their economy by any means? I think it would be unfair to claim one or the other. There is truth on both sides of the matter. On one side, a lot manufactures are playing unfair with lower priced goods. On the other side, a lot of countries just use this measure as protectionism for their country’s industry.

There are no angels in this game, but we are locked into a “race to the bottom” for goods. The more communities’ desire for something, the more variety and pricing structures will appear to fill markets. A trip to the local mall will make this pretty clear. Meanwhile, to produce those same goods in your home country would result in less variety and be very expensive to the end user. It is an interesting conundrum we are in.

Free market or regulate the hell out of it?  In the wise words of Bart Simpson:

Ms. Mellon: Bart, what other paradoxes affect our lives?
Bart: Well… you’re damned if you do, and you’re damned if you don’t.

Well said…

Another great point from David Dayton over at the Silk Road Blog on why he would want to work with a supplier that told him no.

In his latest post, Over-Promise, Under-Deliver and the realities of the Chinese Market, David makes the point that

“Chinese suppliers are infamous for never saying no, believing that if there is money then they can either figure it out or sub it out.  My theory is that if the factory is so honest that they’re willing to lose business by telling me ‘no’ then that’s someone I want to work with in the future.”

I had a recent run in with this same situation last month for an LED project I was working on.

I attended an LED show in Dongguan, at possibly the worst Sheraton in China, and was able to use my foreigner pass to be seated as a foreign buyer, which I guess is technically true.

I did not know much about LED’s but I was armed with my client’s specs and ready to take on all comers.

I was taken aback because the first couple of suppliers, with rather large factories and extensive manufacturing capabilities, told me “No, we can’t do that.”

I was told that reaching 2 of the 3 specs was doable, but they couldn’t hit everything I wanted.

Then I had several smaller companies tell me “Sure, we can do that no problem.”, now back in my early China days I would have jumped at these offers but now that I’m no longer a China virgin, something seemed fishy.

I went back to my client and told him what I had heard from suppliers and he admitted that he was testing my ability to find accurate suppliers and that their specs were not something widely available.

The first factories I contacted were the ones that originally told me “No, we can’t do that.”

If you are lucky enough to find an honest supplier like that, WORK WITH THEM.

For those of you doing business or purchasing in China, certainly this is a problem that you run into. A great article from David Dayton over at Silk Road International titled, You’re not getting what you asked for? Really? . It is from last year, but I think it is a great article.

He hits a lot of good points on what you want to get from your supplier.  I am going to cherry pick some from his list to show my point.

1.   If you’re not here, you’re not getting what you ordered.

10. Nobody cares about your product as much as you do, but if your supplier sees you regularly, knows how much you care and also cares about you/likes you, you just might get what you are asking for.

These two points above are one of the biggest reasons you might have communication drop off. If you are not here in the first place, they can simply ignore you.  Knowing that you are not even the same country, can lead to this kind of conduct when things might be going wrong or you have put on the pressure.

The solution then lies in number ten of David’s list. If you can’t be here representing your interests, (which is costly in plane tickets and hotels or a change in your life style and move to China), there should be somebody here to represent you.

To tie this to legal situations, I think this also holds true for the contracts you draft for suppliers to abide by. If no one is here to over see the enforcement of those terms, there is not much bite to your bark.

Now, this is not to say that you should be in the way and overbearing to your supplier. Being on site regularly helps drive home the idea of your commitment to them and the project at hand.

Writing a rock solid contract IN CHINESE is just one part of your interaction with the company. Backing up those agreements and showing commitment is the other part.

Interesting commentary by Stan Abrams over at China Hearsay about Huang Songyou, the former Vice President of the Supreme People’s Court.

Stan’s question is does admission of corruption at this high of a position give you more or less confidence in the Chinese Supreme Court?

All of us that eat, sleep and breath China know how important appearance or the mysterious “face” culture is here.

To me, seeing someone at that high of a governmental position removed from his post for corruption is a step in the right direction, as it is always difficult for people to admit that there are problems.

As David Dayton at Silk Road International  points out in his latest blog post, the western mindset is different from the Chinese.

3. Identify a common enemy. Once the cat is out of the bag and there is admission that there really is a problem (often a huge first step) then you have to find out both where the problem came from and then how to fix it.  My experience is that while I’m interested in getting problems fixed (solutions to meet deadlines) the factory is more often concerned with finding someone to blame—usually a sub-supplier.  It’s always the sub-suppliers fault. While it may seem antithetical to what you’ve been taught in business school, sometimes letting the factory place blame on someone is not always a bad thing.  Regardless of what (or when) the outcome is, someone will pay for the mistake and so getting the blame game over with as soon as possible is often the best way to move on to what the resolution options are.  While I never like seeing one person get nailed to the wall (as it’s never comfortable and almost never only one person’s fault) if you can’t avoid it, minimize it by moving on to the solution as quickly as possible.

Blame must be placed on a few shoulders as possible and once blame has been placed on a scape goat, it is time to move forward with the business at hand.

While I find it encouraging that the mistake was admitted (although not much else as it looks like Mr. Huang Songyou will walk away with just a slap on the wrist), is this an indication that the Chinese legal system is tightening on corruption or that it is more wide spread that was first believed?

In the famous words of Davey Crockett “Remember Rio Tinto!”, or something like that.

The majority of government regulations that divide the financial services industries in China are still in place, but as is often the case, there are ways of getting around these regulations.

Companies may apply for China Banking Regulatory Commission (CBRC) approval to engage in insurance or securities activities.

It then becomes the regulatory commission’s duty to oversee and inform the companies as to what ways their subsidiaries are allowed to cooperate, and in what ways they must remain separate.

Chinese banks are pushing the commission for a more universal banking regulatory framework, which is enticing because of all of the business growth opportunities it offers for the developing Chinese Financial market.

With international banks pursuing entry to the Chinese financial services market the CBRC will have the increasingly difficult task of developing regulation.

The CBRC must ensure that the Chinese financial market matures and develops while nurturing a young sector of China’s national economy to compete with mature international competition.

The fastest way to develop the financial market is for local Chinese banks to look for international talent and there isn’t much to slow local banks from hiring western talent, after the massive job losses western banks and financial service sectors.

Many have blamed the shortcomings of Western banks on overzealous greed, and lack of regulation in keeping the banking sector apart from the capital markets.

This accusation very well may be true, and the Chinese financial system should benefit greatly from looking at and analyzing, the cause of the Western banking system’s collapse.

The heavy regulations that led to the slow development of these separated Chinese banking, insurance and securities markets has greatly insulated them from the problems that currently face Western financial firms.

While I believe that this was due more to lucky timing, as opposed to prudent planning, the Chinese financial system appears to be poised to take a leadership role this century.

While the Chinese financial firms were straining to be released from the CBRC heavy regulation, as the early 2009 Citigroup restructuring shows us, this so-called ”universal banking” might not be the perfect solution that it was once touted to be.

There must be some balance between the financial service firms having the freedom to pursue profit and growth, and government efforts to monitor and regulate their activities.

As the western financial meltdown has revealed, massive profits are not necessarily an indication of the health of a business, especially a business that is so entwined with so many nations’ economic stability.

While Chinese banks dream of making the profits their Western counterparts did for some many years, the Chinese market will be much less responsive to the sophisticated financial products offered in the West.

 The Chinese are much less willing to take financial risks, especially now that the weaknesses of the Western banking system have been exposed.