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An Entrepreneur’s Bone-Chilling Story Of China Business And Betrayal Writ Not So Large.

Posted in China Business

I started the Inc. Magazine story, “Betrayed in China: One Entrepreneur’s Hard Journey East,” with much anticipation.  The writer of the story had interviewed me a bit regarding the story (and I show up in the sidebar at the end) so I knew him to be a really sharp guy with an penchant for accuracy and detail.  And I just loved the sub-title: “Adam Kasha was proud of his from-the-gut approach to doing business in China. Then his partnership with a Chinese trading agent went spectacularly bad, and he realized he was being taught a hard lesson in how things actually work.”

I knew it would have gems for those doing business in China and, more importantly, I was salivating at the thought of being able to add adding it to the following pantheon of our “writ large” posts:

Now I am not so sure.  It makes for great reading, no doubt, but I am just not sure how much it really applies to doing business in China.

The first 2/3 of the story read like a primer on how not to do business in China.  As I was reading that portion, I kept thinking of how it would make a great business school case study of how to set yourself up for failure in China.  Our erstwhile hero’s mistakes were almost too many to bear. This cannot end well, I kept thinking.

But then, just as the protagonist’s back was against the proverbial wall worse than it had ever been before, he (Adam Kasha) pulls a rabbit out of a hat and all of a sudden starts realizing that he can no longer deal with his Chinese counterparties as though they are just like the people he knows in Ann Arbor, Michigan.  No, a wiser Mr. Kasha is going to go “all native” on us now heed the advice he was given in 2002 by the Chinese man he is now fighting: “When doing business in China, trust no one.”  Or as, Mr. Kasha somewhat more subtly puts it, he now realizes that “what trust amounted to for an American in China …. [is] created by the possibility of future business, or by a financial incentive. That wasn’t really trust. It was a practical, amoral trellis to help the little green vine of trust grow.”

Spoiler Alert:  Mr. Kasha becomes a Machiavellian-esque tactician, outwits his Chinese partner, and saves the day/the shipments/his company’s relationship with Wal-Mart.

Does it make for a great story?  Yes.  Are there lessons to be learned from this story, beyond the level of trust one should display?  Probably.  Are there lessons to be learned from The Dark Knight?  There are, but as a simple China law practitioner, I am just not sure I am the one to be dishing them out.  And since it is late on Friday, I am not even going to try.

So I turn to you, dear readers, for some help on this.  What are the takeaways from the Mr. Kasha goes to China story?  Or were his mishaps so obvious and his comeback so fact-specific that the story’s value resides solely with its literary merit?

  • CT

    Your link starts on page 6 of the story.

    Why put the spoiler in your article?

  • Steve

    It must have been lat because the takeaway is what you are always telling us about how we should have a good contract from the very beginning because those can help keep your Chinese partner in line. I think that if Kasha had had a contract with a good penalty cluase and clear explanations of roles this probably would never have gone bad.

    • http://www.akashaaccents.com/ akasha1

      Hi Steve, I have those kind of legal and binding contracts now with penalty clauses; do they work – NO! Leaving for another supplier, YES! My industry is too small and under-developed to support enforcement. Adam Kasha

  • ollumi

    Heh.

    I don’t really empathize or sympathize with this Adam character. It does read like he’s a true entrepreneur and not some corporate mouthpiece, however.

    He pushed his investors out of his own company, pushed his expansion plans on his “partner” regardless of their willingness, and then expect what? Tears? Cheers? When he labels some local hand a scamster or betrayer because the local hand is not willing to swallow the initial outlay on what sounds like a low margin business? Really?

    Granted, there wasn’t enough detail in the story to really know what’s going on but there are red flags everywhere. So the guy who you handed your supply chain to because he can get it done quick and dirty without costing you an arm and a leg tells you ahead of time he has a problem with your expansion plans and you press ahead anyways and he’s the one who betrayed you? Really? You use this guy to skirt around the rules the “brotherly way” and then suddenly you’re bringing in an auditor because what he’s doing on the China account is terribly immoral and eating your well earned profits? Really? What percentage of the 1 or 2 million was compared with the actual receivables on the containers?

    You are quite right, this isn’t a cautionary tale about China, it’s more about how not to do Business, even the way-lawyers-don’t-like.

    • bannedforselfcensorship

      I bet Adam was squeezing Rex so that Rex was not making any money and thus did not care about his business or expanding it. Also, didn’t Rex get 10% of the US company? What happened to that I wonder? Did he get bought out? Costs were soaring in China in 2007 even as American importers were squealing for lower prices. No wonder the break came then.

      • http://www.akashaaccents.com/ akasha1

        please see my comments. Adam Kasha

    • http://www.akashaaccents.com/ akasha1

      Please see my comments, Adam Kasha.

  • nathan

    X number of years ago when I first got to China, like most fresh expats I was really ‘good’ at identifying Chinese characteristics. Nowadays (many years later) I find it harder and harder to distinguish ‘Chinese’ business practice from ‘Western. My brain just files things under good or bad now.

    It does sound like Adam and Rex made a really good go of it until things went sour, presumably due to Rex’s increasingly erratic behaviour (we’ve only got one side of that story so I’ll take it for granted). That is not at all unusual in business partnerships. The constant rhetorical emphasis on ‘trust’ is about the only thing that strikes me as typical to China business.

    Having said that, I think it’s fair to say that I know of, and have heard of far more incidents of foreigners getting drawn into a deal they might otherwise avoid back home, than of similar incidents in Europe or North America.

    • http://www.akashaaccents.com/ akasha1

      Thanks, Nathan. See my further comments. Best, Adam Kasha

  • http://www.akashaaccents.com/ akasha1

    Hi Thomas, Rex took the order from Wal-Mart and my money – but, he didn’t execute the plan we agreed to, nor conduct business in a responsible or professional manner – a pattern that progressively went south over a period of several years – once I decided to audit his books. I would note that Rex was Taiwanese – surprisingly NOT noted by INC. His statement was: Mainland Chinese could not be trusted, and that Taiwanese, like himself, maintained traditional Chinese cultural business practices and ethics. Actually, when it comes to leverage, I discovered that I had a lot more than I thought. While my supply chain was controlled, it turns out that the one who holds the purchase orders – the sales – has the greatest chance to win. Rex tried to hide his tracks (his face) and extort a retirement. He could have damaged AKASHA’s reputation by failing to deliver – that would have been expensive. However, the US held the designs (11,000 US Copyright Registrations) and the US managed all the sales. Once you have mass market PO’s – which is tough! – getting suppliers is the easier part. All the best, Adam

  • http://www.akashaaccents.com/ akasha1

    Hi East Asia, I don’t discount your comment. The world is not that black and white, though. Turns out Rex was smarter than anyone I had met at the Canton Fair – first went in 1997. Vendors at the Canton Fair are often just middle-men representing small craft factories by providing English speaking, professional agents. Rex was Taiwanese, spoke Mandarin, Cantonese, Malay, Indonesian and had vetted 700 factories over a course of 20 plus years trading with China,, Vietnam, and Indonesia to his family’s chain of stores in Taiwan. Vetting of his professional capacity happened when sober. Later discovery that Rex was a heavy whiskey drinker, however, should have been a warning sign. Lesson learned. I appreciate your comments. Adam

    • http://twitter.com/theeastasiaco East Asia Co.

      Adam: Fair enough about Rex. You of course know him and I don’t. My comment was somewhat tongue in cheek of course.
      I agree with you that there one can waste a lot of time at the Canton Fair. But I find that is more inclined to happen when one just walks around without having done research on exhibiting companies before the fair ( most people who go to the show fall into this category sadly to say). Half of the vendors, you are right, are just trading companies you don’t want to deal with, But you can find that out if you do your homework before you go to China and avoid them. The CF can then become a very good place to meet vendors. A lot of riff-raff to be sure, but plenty of good suppliers as well.
      Kudos to you for learning Mandarin. Makes all the difference in the world.
      I miss Ann Arbor. Spent 4 years there. Great place.
      Good luck

  • http://www.akashaaccents.com/ akasha1

    And now, a few words from the “erstwhile hero” himself…

    First, thanks for everyone’s comments!!! Kudos to writer Burt Helm for cramming 6 years into 7 pages. INC magazine came to me in June of 2012. I agreed to let them report my most challenging China business experience as long as it would be educational to other entrepreneurs. On the surface, the March 2013 article seems to have achieved this basic objective. Nevertheless, while I am grateful the article was not entitled “The Village Idiot Goes to China”, it was impossible to avoid omitting some significant detail and taught readers a bit more:

    I am a pure entrepreneur. I started my company with $5,000 in my Ann Arbor apartment and grew AKASHA with twigs and spit. I have conducted business directly in Mainland China since 1996 and selected Rex Wang as my partner in 2003 after watching his performance on several smaller deals. My business partners liked Rex and only “hated” the idea of making him a 10% partner – mainly, because it would dilute their shares, and less so because of any jingoistic mistrust. After buying out the minority shareholders that opposed Rex’s partnership, I loaned Rex enough money to purchase 10% of the pie. Within a few years of demonstrating solid performance, I raised his salary above six figures. I should have known something was up when Rex showed little appreciation for the significant annual rise in his salary. Moreover, while Rex’s ownership incentive did lead him to find more profitable pricing of raw materials and efficient manufacture and assembly, it also allowed him to see exactly how profitable the US side was – and, as evidenced by his actions (at least those that our accountant discovered; e.g. the purchase of several residences in his girlfriends name) indicated that he decided to take more for himself.

    Let me add a couple more specific insights:

    Bootstrapping any entrepreneurial venture – whether it be in the US or China – can certainly be done without taking shortcuts in vetting your partners, or cutting corners in establishing binding legal contracts with manufacturers and employees, and, certainly, one shouldn’t nix making rules in advance regarding financial transparency. I violated several of these principles – most importantly, not establishing rules with respect to regular financial audits. Keep in mind, when it comes to the hand-made craft industry and manufacture of inexpensive decorative products – like AKASHA makes – you are working with cottage industries in China and there isn’t a whole lot that a contract will do for you when your partner-factory, or agent, takes advantage of you and/or screws up. Today, you can sue small
    Chinese business owners, but it is unlikely to be effectual. More likely, you will scare up a reputation that you are a bully not worth the risk of partnership. Word travels fast!

    The preventative cure is expensive – not the “thousands” of dollars INC. reported it costs to establish a WOFE, but, in our case, $500K of investment capital to establish a trading company with manufacturing rights. But, that’s only the first of several steps towards more fully protecting your backside. Owning your manufacturing in China can make a difference. But, if you can’t afford the investment in manufacturing and you don’t want Chinese employees, then – when the veritable shit hits the fan at your designated plant – the best choice, usually, is to move to a more qualified supplier. In my case, that meant moving again and again … while doing my best to follow the age old adage not to burn your bridges behind you.

    Owning your own trading company also makes a difference – you can select the factories you want to partner with. But, in the end, you will depend on your Chinese employees, just like you would in the US, to make decisions in the interest of the enterprise they work for – and that is about trust. Amassing a team you can trust takes time, in particular, to observe how your employees handle themselves in a crisis – but, don’t worry about that – you are doing business in China and there will be plenty of crisis. My current China GM, Mr. Li, was a trusted friend for 4 years before his hiring – and he proved his merit by finding me an excellent Chinese-born, international attorney, acting as an intermediary with Rex Wang to facilitate as amicable a closure in our business relationship as possible, and working with me night and day to rally our suppliers behind our new China entity, Crystal River Shanghai Trading LTD.

    Finally, being fluent in Mandarin is also a backside saver – but that took 6 years of discipline fueled by the motivation to not get burned again.

    Some further comments (a collective answer to some of your responses):

    Before the expansion of our Wal-Mart contract, AKASHA had grown 5 x in in 6 years, and actually the overall pace of growth between 2008 and 2009 was on par with previous rates of increase. The $1MN upfront capital to get the materials needed to get the 2009 Wal-Mart contract rolling was agreed to in advance – however, even with this capital, Rex Wang did not want the additional growth because he was comfortable with the size of his operation. Rather than expand, Rex wanted to retire and pocket whatever he could on the way out the door.

    In March 2008, Rex had agreed to sell Bai-Shi Craft to AKASHA, but when the rubber met the road – i.e. our Chinese-born, Western-educated, Ernst & Young-trained accountant-lawyer arrived to determine the enterprise value and draw up documents to transfer control – instead of enduring a level of scrutiny that would have fully fleshed out the level of embezzlement that was going on, which, moreover, would have been an enormous loss of face to the only man that I should trust in China- Rex determined to extort his retirement.

    For 6 years, Rex was my key supplier and shareholder-partner. I paid his salary and that of our team. I paid for the operational costs of the warehouse enterprise. I accepted every price that he calculated for our cost of goods. I allowed him to control my supply chain because I trusted him and for years did a great job. His disappearance at a most critical juncture amped up my concern about whether or not he would fulfill his duties. His reappearance in 2009 and increasingly unreasonable demands further foreshadowed that I was headed for a war, that, from Rex’s perspective had already begun, and, by the time I figured out that the war had commenced, I was uncertain I could win.

    The complete story of how I managed to avoid submitting to a more dreadful outcome (bankruptcy, delivery failure, destruction of company reputation) was hardly “erstwhile”. It involved great planning to establish our WOFE (requiring the establishment, first, of a Hong Kong Holding Company, then a hybrid WOFE/trading company owned by AKASHA-HK Holding, along with a FICE arm that allowed for the import of goods into China as well, gaining expertise in international related-party transactions in China, expert support from China accountants on domestic tax laws, training a Chinese team to do trade, and so forth). It also involved careful execution to establish a parallel supply chain that numbered more than a dozen suppliers (not just Tiger Hou), the delicate coaxing of key employees to leave their post at Bai-Shi Craft to join my new enterprise. Constant positive action … and, plain old non-stop, smart and hard work.

    Best of luck to everyone!!!

    Kind Regards,
    Adam Kasha,
    President & CEO, AKASHA-US & Crystal River-Shanghai LTD
    http://www.akashaaccents.com

    • http://www.chinalawblog.com/ Dan Harris

      Adam,

      Thanks so much for checking in and providing us all with more information. A story like yours no doubt needs a Mr. China like book to explain in full, but your comments do definitely give us a better understanding.

    • http://twitter.com/theeastasiaco East Asia Co.

      Adam:
      I enjoyed reading your reply here.

      You obviously have learned a lot about China in your time there including:

      1.) Trust in China takes years and years to build. I personally think six years is a long time to be with a partner/vendor/agent etc in China but a short time to trust someone completely. A relationship that starts over business often ends over business too – esp in China.

      2.) The Chinese are not happy with the salary you are paying them if they know you are making much more. Proably why Rex did not express gratitutde with the six figure salary you paid him. I have worked in China offices and no matter how well locals are paid they are well aware that what they recieve is pittance compared to the real profits they never see. There are always overtones of colonial exploitation as far as ex-pat/local salaries go.

      3.) Contracts are of little use in the handicraft product industry in China. So true. I think it all depends on your industry/location/vendor. But as you say “moving again and again” is what many small companies who source in China have to do. The key is just realizing this, continually looking for other vendors and growing your business at the same time.

      4.) As you say “word travels fast” in China and if you have a reputation as a problem customer, many vendors in your industry will hear about it and will not want to deal with you. That is why it is always good to end relationships in China amicably if possible. Don’t burn your bridges as you say.

      5.) Knowing Chinese is essential when you do business there. I would argue that it is also a sign of respect which cannot hurt you when doing business there.