China Law Blog

By Steve Dickinson, from Shanghai

The Chinese media response to yesterday's Sichuan Province earthquake has been unexpected. When these sorts of things happened in the 80s or the 90s or even two years ago, there was a virtual media blackout. Not true for this disaster. Local newspapers were full of stories with precise details. On my television, four stations were broadcasting live footage of the damage and the relief efforts. This is a striking change from the past. As I was watching the coverage, CCTV 4 (central government owned and controlled) ran a story about the response of foreign governments to the disaster. Messages of condolence and offers for aid were published from four countries: Japan, the United States, France and Germany. No such messages were broadcast from Russia or India, two countries bordering on China who are in the best position to provide immediate assistance. Maybe I am reading too much into this, but I see it as a gesture from the central government to portray the four countries mentioned in a positive light after the recent wave of anti-western sentiment related to the Olympics torch relay.

I think it also bears mentioning that the English version of Wikipedia has been unblocked for the past several weeks. There has been no announcement of why this has occurred or for how long it will last. I assume the reason for this unblocking is that Wikipedia is now such a critical source of information that Beijing has determined denying its citizens access to it will just hurt China with little corresponding benefit. If I am correct about this, it should remain open indefinitely.

UPDATE: Jonathan Ansfield has a great post on Newsweek's Countdown to Beijing Blog, entitled, "Seismic Shift: State TV on Speed," focusing on China's state TV coverage of this disaster.

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Cn Reviews, has a very informative post entitled, "AAMA Panel on 'Silicon Valley-Style' Startups in China: The Next Wave," on getting a startup going in China. The post is on a recent Asia American MultiTechnology Association dinner where a number of clearly qualified people spoke on China startup information.

I really liked the following advice by Eric Chen, on whether to use or avoid government:

There really are two schools of thought. The first school is to avoid, and stay under the radar screen of the government. For some areas, like internet and wireless, you can start out small enough to fly under the radar. The second school is to use the government as a strategy to secure grants, land, financing, concessions. This makes more sense when there is larger capital to be raised....

However, I was less thrilled with this advice regarding how to get started:

Getting started can be easy. You can create a special purpose vehicle in BVI or Cayman Island for no more than a few thousand dollars. It's a cost-effective way to get started. Then do your fundraising. It's easy to start with a representative office in China. Can be fast and easy.

If you are on a shoestring budget, you can just set up a cheap offshore structure to do preliminary activity. There is no need to set up a Wholly Owned Foreign Enterprise (WOFE). Don’t let people tell you that it costs $80k to set up a WOFE, you should be able to set it up for about $25k. Should be comparable to setting up a business here in Silicon Valley. There is also a registered Capital requirement of at least RMB100,000.

Not sure if this was actually the advice given, or just how it was recorded, but it definitely goes against the grain of how things really should be done in China, particularly in light of all that has transpired in the last few monhts.

One should be very wary of going in as a representative office just because it is initially cheaper than a Wholly Foreign Owned Entity (WFOE). Representative Offices are simply not legal for all sorts of activities, including making money within China. It is usually not cost effective to start out as a Representative Office and then have to switch quickly to a WFOE.

I also do not like the advice of going into China without a business entity. There are all sorts of reasons not to like this, but two spring quickly to mind. The first is that it will probably be illegal, which could lead to your business being shut down soon after it starts. My firm received a call from an American company just last week that had been ordered to shut down for not having registered. As everyone knows, China has really stepped up its law enforcement against foreigners in the last few months and now is not the time to be starting an illegal business. The second is that having a business entity has become nearly vital for securing a decent China visa. I agree that one should not be paying $80,000, but I also think one should not have to pay even as much as $25,000 either. It is somewhat misleading to say the minimum capital requirement is at least RMB 100,000. That is the written minimum for all of China, but in many of the most desirable cities like Beijing and Shanghai, it is virtually unheard of to get a WFOE going for anything less than USD$100,000 in capital.

The post is also really good for Chinese Americans thinking of going to or returning to China.

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Excellent post up by my friend Jeremy Gordon over at China Business Services. Post is entitled, "Statistics That Don't Add Up," and it is on the notorious unreliability of Chinese economic statistics. Where it excels is in breaking down and recalculating the numbers and in giving us a Goldman Sachs roadmap on determining reliability.

The post is based on an Economist article, entitled, "An aberrant Abacus," which posits that China has actually been underestimating its economic growth over the last few years. The article also puts forth the following "guide (developed by Goldman Sachs) to the reliability of official Chinese number" by ranking the reliability of Chinese government stats from 1-5, with 5 being the most reliable:

• Foreign Trade: 5
• Money Supply: 5
• Industrial production: 4
• Consumer Prices: 4
• GDP: 3
• Retail Sales: 3
• Fixed Investment: 2
• Employment: 2
• Average Earnings: 1
• Unemployment: 1

Seems like the accuracy declines the more the numbers might affect the CCP's position with its own people. What do you think?

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Project Alpha just posted the transcript from a very enlightening panel discussion on private equity/venture capital in China. The discussion was at JP Morgan's recent China conference in Beijing. I attended this discussion and found it very informative.

Shaun Rein (Managing Director, China Market Research Group) did an excellent job moderating the discussion between Robert Theleen (CEO, ChinaVest); Joel Kellman (Managing Partner, Granite Global Ventures), and Brandon Lin (Partner, SAIF Partners).

All three of the panelists have done big deals in China and all three did a great job conveying what it takes to succeed as a VC there. If you have an interest in China private equity/venture capital investing, you absolutely should read the transcript.

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Kyle over at BizCult has posted on what is becoming a much more frequent occurrence in China: an encounter with the police over a visa issue. The post is entitled "You Are Big Brother's Keeper" and it starts out with what we lawyers call "factual background."

Kyle came to China eight months ago on a tourist visa because such visas were (eight months ago anyway) easy to get. Upon arriving in China, Kyle did not stay in a hotel, which stay would have caused him to meet the requirement that he register his residence within 24 hours upon arriving in China. Instead, he stayed on a friend's couch for a couple weeks. Kyle then found an apartment, registered with the local police station and paid a 500 Yuan fine for his two weeks of "floating" in China without registering. Kyle thinks this put the first "red flag" on his file.

So a cop is now calling Kyle wanting to know why Kyle has not re-registered with his new visa, because surely his initial tourist visa has expired. The cop also wants to know why Kyle failed to come back and re-register after he left the country for a week for Chinese New Years? Okay, and people, please be honest with me here, but how many of you know you are required to re-register under these circumstances? I am guessing around 5%.

The cop tells Kyle's Chinese speaking roommate that Kyle must go to the police office the next day "to pay some fines." Kyle gets some "helpful tips from locals" who suggested he go in "very meekly and apologetically to the office" and he ends up being let off with a warning and "some gruff reminders."

Based on this experience, Kyle now graces us with the following helpful tips:

1. When in doubt, register with the local station. And then register again. When anything in your status changes, from visa to phone number to address to just-back-from-holiday, it is always a good idea to let the authorities know (as creepy as that seems).

2. Do not attempt to fight back (too hard). The sentiment of the authorities seems to be tilting in the direction of contempt of foreigners who think they can do whatever they want. When I suggested to Mr. Officer I was never told that I should re-register upon re-entering the country, I was shown the “Arrival Card” that everyone fills out at customs that states in fine print something to the effect of “failure to register with the police department within 24 hours of arrival can lead to you being deported.” Point taken

I have some additional advice based on having spent nearly my entire career having to deal with all sorts of governments and courts and having dealt with countless sticky visa issues all over the world, including the following:

a. Being held up for 24 hours at the border into Greece from Turkey in a train where the air conditioning has been turned off and where the Greek police every so often ask you why you wanted to go to Turkey in the first place. Trust me, there is no good answer to that question.

b. Running into someone you know only because the two of you attend the same tiny college in Iowa on a train going from the Netherlands to France and then having the police come in, search this person, find a small quantity of pot and then because of this seek to block you from returning to France where you are spending your semester abroad.

c. Going into England when England's economy is in the complete toilet and being held at the border by a bunch of Brit immigration thugs who are insisting you are coming there to get a job. Having to recover from being so young and stupid that you come from the United States where "we actually have jobs" and that with all the countries in the world that are capable of actually creating enough jobs for their own citizens, nobody with an IQ over 70 would be trying to get into England for a job.

d. Being detained/arrested by the police in Vladivostok, Russia at 11 pm for not having a visa for that particular city.

e. Securing a US Federal Court order to stop a flight leaving Anchorage, Alaska, for Magadan, Russia, after it had already started taxiing on the runway. The order came down before the taxiing (of course) but we did not serve it on the airline until the plane containing our 60 or so Russian clients who were being deported had already left the gate.

My advice is as follows (yes, I know some of it is really basic, but please bear with me).

1. Know the law and follow it, not what someone tells you they heard someone else get away with. There are murderers who never get caught, but that does not make it legal nor does it mean you will get away with it. Want to know the law? The best way is to read the webpage of your embassy or consulate or chamber of commerce and to talk to people at your embassy or consulate. Or hire a lawyer who deals in this arena every day.

2. Keep a copy of your visa and your passport with you at all times. Make sure everything is current.

3. Be civil. Be respectful. Keep your cool. Tell the truth. If you get caught in a lie you are done. Done. Do not make jokes and especially do not make jokes about China. Do not act arrogantly. Act respectfully (I am intentionally being repetitive). Make the job of the authorities easier, not more difficult. Just remember, the people in front of you are just doing their jobs and no matter what you do, your actions that day will not advance democracy or human rights or any other ideal one iota further in China.

4. If nothing seems to be working, ask if you can call your embassy, your consulate, your lawyer, your Chinese joint venture partner, or anyone else you think might be able to help you. Immigration people in every country of which I am aware have amazing flexibility. They are human beings. Give them a reason to cut you a break. This does NOT mean paying a bribe, which has the very real potential of getting you in worse trouble than being deported.

5. If you think you might have China visa issues down the road, deal with them now. Start your application, find the right lawyer, talk to your embassy or consulate. Whatever. Just do not wait.

6. Any other ideas, people?

Update: Beijing is now admitting getting a visa has gotten tougher. Three cheers for transparency after the fact.

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Uber-reliable Danwei just did a post on the current situation (or at least word on the current situation) involving China visas. The post is entitled, China Visa Confusion, but, unfortunately, the post itself is quite clear: getting a Chinese visa of any kind between now and October is going to be extremely tough. If anyone can confirm or deny the information set forth in Danwei, please comment below. If all of this is correct, I suspect Hong Kong, Singapore, Seoul, and Bangkok, will very soon start having an influx of temporary refugees.

If all of this is correct, many are going to be hurt by it.

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The Economist Free Exchange has a post, entitled, "Fondly Remembering a Deflationary China," (h/t to Experience Not Logic) on how China has moved from being a deflationary force to an inflationary one. At JPMorgan's recently completed China Conference in Beijing, one of the best speakers I saw was James Kynge, of China Shakes the World Fame, whose talk was on how China had moved from deflation to inflation and how that would impact the rest of the world.

The funny thing about past Chinese deflation was how few people in the West appreciated it. Most complained about the Yuan being too high, and about China polluting the earth and subsidizing its factories by allowing ridiculously low wages and unsafe working conditions. The problem with those arguments was that it ignored the huge swath of poor and middle class who were benefitting greatly from reduced prices at their local Wal-Mart. Now that China deflation is history, it is being recalled with fondness. For an example of how this deflation to inflation shift will affect consumer electronics prices, check out this post over at Chris Carr's CalPolyMBA blog.

Be careful what you wish for.

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David Dayton over at the consistently enlightening Silk Road International Blog did an interesting post comparing China to Thailand for manufacturing, entitled, "Thailand vs. China." (h/t to China Economics Blog) David is eminently qualified to make this comparison because his Master's Degree focused on "Comparative Chinese and Thai Corporate Cultures," he is fluent in both Thai and Mandarin, and has spent considerable time doing business in both places.

My business/legal dealings with Thailand have been so few and far between that I am just not qualified to opine on these things, but I would, of course, love to hear from readers familiar with both countries.

Dayton starts his post off by quoting a friend saying that “Every thing in Thailand is slow except for the internet.” “Everything in China is fast except for internet” and then sets out the following eleven comparisons:

1. "legal requirements for export are not nearly as burdensome here [in Thailand]."

2. "Thailand’s infrastructure is at least as good as China’s East Coast’s—ports, airports, toll-ways. Nothing new, I know, but this is one of the major drawbacks of working far inland in China or even close to large cities in Vietnam or Cambodia. The big plus in Thailand is that there are no inter-provincial tariffs or restrictions on the flow of goods like there is in China."

3. "Even with the recent wage increases labor is still more expensive in Thailand than in China. I’m seeing cost differences of about $50 to $75 a month between factory workers in China vs. Thailand."

4. "The environment is much more “international” in Bangkok than it is in Shenzhen—more so than even Hong Kong, I’d say. Sure there isn’t as much English on signs but the exposure to “the west” is certainly as much or more—To me, Bangkok seems to be becoming more western and Hong Kong more Chinese."

5. "The advertising is much more sophisticated in Thailand than China where it’s still a relatively immature industry. I was consciously amazed at the higher quality of both radio and out-door media advertising."

6. "Nationalism is alive and well in both countries but Thailand’s flavor is much less strident. China seems to be a bit more angry, with something to prove, while Thailand is much more comfortable with its unique place in the world."

7. "As I work with people in the jewelry industry here I’m constantly being told the same thing when I tell people I live in China, 'You know, labor is more expensive here, but you get better quality work too.' Almost to a person, this was the response I heard—more than 10 times in just one day."

8. "Thailand has a very well developed export base for automobiles, machinery and electronics, according to the Bangkok Post today. While China does have some of this too, pick-up trucks and hard-drives are especially well developed sub industries in Thailand."

9. "Staffing in China is difficult in both retaining top-level local employees as well as low-end factory labor. Thailand has similar tight market in top-level employees. Service levels are much higher in Thailand as is education in general. Professional standards seem, to me, to be higher in Thailand as well."

10. "The traffic in both Thailand and China is horrible—but each has its own perils. In China you are literally taking your life in your hands when you get into a car—the roads are some of the most deadly in the world. It’s scary, and for good reason. Thailand is completely different—you’re never going fast enough to be in a dangerous situation! The traffic, in Bangkok, is so bad at almost all times of each and every day that estimates are it lowers annual GDP by multiple points!"

11. "Banking (I can’t believe I’m going to say this); hands down China has better banks—in terms of service and accessibility. In China if you need a bank, you can get one open from 8AM to 5PM 7 days a week. Thailand is 9AM to 3:30PM five days a week and off every holiday known to man."

What do you think?

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While in Qingdao the other day, I went out for a sushi dinner with co-blogger Steve Dickinson and a long time Japanese fishing industry client in Qingdao on business.

Steve had been to this same restaurant a few months earlier and raved about the food. The first few dishes were excellent, but the sushi platter contained tuna that looked to be a few months old. Steve informed our waitress of this fact and her reaction was to shrug. That got the three of us talking about China food quality, and at that point, Steve (who can speak and read Japanese) and the client told me that the topic of the day in Japanese magazines is "poisoned food" coming in from China. They both said that many of these articles accuse the Chinese of deliberately poisoning food going to Japan. I failed to ask if this "deliberate" poisoning was being done to save money and increase profits, or to get at the Japanese. They both said that Japan was making every effort to cease buying any food from China.

The AP is just out with a story saying food sales from China to Japan fell 30 percent in February and from Shandong Province the fall was an even steeper 60 percent. These figures are in comparison to February, 2007. Based on my dinnertime conversation, it would not surprise me a bit of sales have fallen even further since February.

Will China's food sales to Japan recover or will this plunge spread to Korea and beyond? In other words, is this just a Japanese thing?

For more on this issue, Check out "Japan Steps Up Quality Efforts in China Following Gyoza Scare," at the China Game. Also, to see how Chinese food can improve (albeit probably only temporarily) your home run hitting skills, check out "Swinging Away: Olympic Menu Wars" at Absurdity, Allegory and China.

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I admit it. I love Hillary. The more she lies, the more she attacks, the more she says things just to get elected, the more she just flat out refuses to give up, the more I think she is exactly what this country needs. I am NOT kidding. Hillary does not believe the crap she is spewing and she would never let herself be bound by it once she becomes President. Obama and McCain scare me mostly because I fear they actually buy into the ridiculous things they say.

Take China, Hillary (please). Great NYTimes column (and how often do I say that?), entitled, "The Cognitive Age," by David Brooks on how technological change plays a much bigger role in shaping our world than globalization (read China):

The globalization paradigm has led, in the political arena, to a certain historical narrative: There were once nation-states like the U.S. and the European powers, whose economies could be secured within borders. But now capital flows freely. Technology has leveled the playing field. Competition is global and fierce.

New dynamos like India and China threaten American dominance thanks to their cheap labor and manipulated currencies. Now, everything is made abroad. American manufacturing is in decline. The rest of the economy is threatened.

Hillary Clinton summarized the narrative this week: “They came for the steel companies and nobody said anything. They came for the auto companies and nobody said anything. They came for the office companies, people who did white-collar service jobs, and no one said anything. And they came for the professional jobs that could be outsourced, and nobody said anything.”

That Hillary would take a poem on inaction during the Holocaust and use it to get elected is conclusive (albeit somewhat disgusting) proof of the fact she would do anything to get elected.

Brooks goes on to talk about how "very convenient" it is for politicians to use globalization and foreigners as an excuse for economic woes:

It allows them to pretend that by rewriting trade deals, they can assuage economic anxiety. It allows them to treat economic and social change as a great mercantilist competition, with various teams competing for global supremacy, and with politicians starring as the commanding generals.

But the biggest problem in blaming globalization is that it is not true.

Globalization is real and important. It’s just not the central force driving economic change. Some Americans have seen their jobs shipped overseas, but global competition has accounted for a small share of job creation and destruction over the past few decades. Capital does indeed flow around the world. But as Pankaj Ghemawat of the Harvard Business School has observed, 90 percent of fixed investment around the world is domestic. Companies open plants overseas, but that’s mainly so their production facilities can be close to local markets.

Nor is the globalization paradigm even accurate when applied to manufacturing. Instead of fleeing to Asia, U.S. manufacturing output is up over recent decades. As Thomas Duesterberg of Manufacturers Alliance/MAPI, a research firm, has pointed out, the U.S.’s share of global manufacturing output has actually increased slightly since 1980.

The chief force reshaping manufacturing everywhere is technological change:

Thanks to innovation, manufacturing productivity has doubled over two decades. Employers now require fewer but more highly skilled workers. Technological change affects China just as it does the America. William Overholt of the RAND Corporation has noted that between 1994 and 2004 the Chinese shed 25 million manufacturing jobs, 10 times more than the U.S.

The central process driving this is not globalization. It’s the skills revolution. We’re moving into a more demanding cognitive age. In order to thrive, people are compelled to become better at absorbing, processing and combining information. This is happening in localized and globalized sectors, and it would be happening even if you tore up every free trade deal ever inked.

The globalization paradigm emphasizes the fact that information can now travel 15,000 miles in an instant. But the most important part of information’s journey is the last few inches — the space between a person’s eyes or ears and the various regions of the brain. Does the individual have the capacity to understand the information? Does he or she have the training to exploit it? Are there cultural assumptions that distort the way it is perceived?

The globalization paradigm leads people to see economic development as a form of foreign policy, as a grand competition between nations and civilizations. These abstractions, called “the Chinese” or “the Indians,” are doing this or that. But the cognitive age paradigm emphasizes psychology, culture and pedagogy — the specific processes that foster learning. It emphasizes that different societies are being stressed in similar ways by increased demands on human capital. If you understand that you are living at the beginning of a cognitive age, you’re focusing on the real source of prosperity and understand that your anxiety is not being caused by a foreigner.

Oh, and Germany is still the world's biggest exporter.

I'm Dan Harris and I approve of Brooks' column.

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Last week on a Shandong Airlines flight, I overheard someone in the seat behind me say something to his fellow traveler along the lines of the following, in reference to a front page headline in the China Daily (I think):

"'Chinese people's feelings hurt by foreign media.' What kind of mature country has a headline like that?" The two of them then launched into a fifteen minute discussion excoriating China's English language media. I was reminded of that conversation today in reading a post on James Fallows' blog, entitled, "The bright side #4: Why I've missed the (English-language) Chinese press." In his post, Fallows rightfully makes light of the May 1 China Daily's lead headline, which reads "Happiness abounds as country cheers" and includes a picture of T1bet*n university students in rejoicing over the Olympics. Fallows tongue in cheek take on this story:

There are serious aspects to the enormous gap between Chinese and international coverage of the Olympics, T1b*t, etc -- but for another time. For now it's great to see these publications in top form.

All true. China's press is oftentimes laughable, and not just to foreigners. But -- and please hear me out here -- it is not THAT bad.

I say it is not that bad because mixed in with the http://www.publiceyeonline.com/archives/003055.htmlhttp://www.publiceyeonline.com/archives/003055.html discussed above, there is actually some pretty decent stuff to be found in newspapers like the China Daily and the Shanghai Daily. Their international stories are not bad and relatively unbiased. Their business reporting is also generally pretty decent. Would I want my only news to come from these two papers? Hell no, but they do make for a nice adjunct.

China's English language press is about ten times better today than it was five years ago and I will bet it will be at least twice as good in five years as it is today. Ten years ago, Korea's English language newspapers were a complete joke. I would read them on airplanes only, and could do so in about five minutes. You know when a country purchases 3-5 pages of advertisements in a newspaper to pitch itself as a country in which you should invest? Korea's English language papers read just like those. Today, however, papers like the Korea Herald and the Korea Times are actually quite decent. The same was true of Japan's English language newspapers fifteen years ago, but now papers like the English language version of the Yomiuri Shimbun are well worth a read.

So the defense is that it could be worse and it is slowly getting better. Of course, the major difference between the press in China today and in Korea and Japan ten years ago is that China's is state owned and that will limit real progress.

What do you think?

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When it comes to China PR, if Will Moss over at ImageThief says it, I view it as gospel [definition number 4 in the link]. In a recent post, entitled, "Inside Carrefour's crisis management in China," Will sets out the gospel on"some of the basic rules of crisis communication for foreign firms in China":

Be prepared to respond fast. Silence often equals guilt in the eyes of the public. Have an issues management kit that anticipates possible crisis scenarios in place beforehand. Don't rely on guidance from overseas headquarters.

Pay close attention to the tone of public communications. Address concerns. State positions. Don't condescend or talk down to Chinese audiences.

Get everybody on the same page. Limit public comments to the minimum number of spokespeople and throttle unauthorized communication.

Brief employees so they know what is expected of them and how to respond to media queries, ambushes, etc.

For consumer brands, ongoing monitoring of the Internet is a good idea. Internet scandals are often flashes-in-the-pan, but they can erupt into the mainstream. It's better not to be caught by surprise.

Is this any different from how such a crisis should be handled stateside? A few months ago, I spoke at an excellent conference in Las Vegas on "Managing the Risks of Manufacturing in China." One of the speakers, Neil A. Goldberg, nicely summed up how US companies should react to a China manufacturing crisis by saying they needed to be like Andy Petite, not like Roger Clemens. Sounds like good advice for a China crisis also.

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My roommate from college sent me an email with the subject "Ordos" and the tagline, "this is wild." It is.

The "it" is a New York Times article, entitled, "In Inner Mongolia, Pushing Architecture’s Outer Limits," on the Inner Mongolian boomtown of Ordos. The article nicely conveys China's Wild Wild West feeling and the almost giddy sense of unlimited opportunities China presents.

More importantly, it is interesting as hell.

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Anyone with a business in China knows how difficult it is to retain Chinese high level Chinese employees. Rapidly rising salaries are obviously factor into this difficulty, but according to Andrew Hupert at ChinaSolved, a China retention policy must consist of more than "just dumping cash, bonuses and big commission payouts on star employees."

In his post, "China Key-Person Retention Planning now a Strategic Battle," Hupert sets out what he calls "3 arrows in the quiver of China Key Man Retention strategy":

1) High-end health care plans. Hupert calls for a family plan so that the spouse of your key person "will get used to the convenience and prestige in a hurry – and thus become your advocate in the household."

2) Pension plans that vest over 3 – 5 years. "There are many ways to structure a company retirement or long-term savings plan, but the key is Vesting." Set up the plan so that the longer your employee stays, the more portability he or she will have. Do not make the vesting period so long as to be unattractive to your employees or potential employees, but do not make it so short that you are doing little to stop the revolving door.

3) Company ownership and profit sharing. Hupert sees this as the "least valuable" because if company growth slows or reverses, it serves as little to no incentive to stay. "It’s still a great idea for building long-term loyalty and motivation, but you’ll find it doesn’t help you much when you need help the most."

All great advice. Any other ideas?

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Just arrived Beijing a few hours ago. Came in via the new Terminal 3. Here is what I was thinking from the time I arrived to the time I unbelievably quickly cleared customs:

-- It's huge
-- It's huge
-- It's so incredibly big
-- It's awesome
-- It's huge

Co-blogger Steve Dickinson arrived Beijing from Shanghai around 20 minutes before I got here from Seoul and I called him to figure out where to meet. We decided we would meet in front of the Starbucks at domestic. I took a 3 minute or so train and found the Starbucks and called him again. Turned out I was in the wrong terminal so had to take a bus to Terminal 2. The bus took about 15 minutes and it was hotter than hell. More thoughts on the new terminal:

1. It's really incredibly large
2. It actually works
3. It's not bad looking. Not bad at all.
4. Why are the damn shuttle busses packed to the gills and not air conditioned?
5. Why are the terminals so far apart that at one point I thought I might have accidently gotten on the bus going to the city center, not another terminal?

Got to Terminal 2 and found Steve.

Read up a bit on Terminal 3 (here, here, and here) and all of this got me to thinking. Heathrow has been having all kinds of problems with its new terminal. Denver International barely worked during its first couple of years. And yet, Beijing builds the largest terminal ever and it seems to work flawlessly from day one.

So here's my question. How is it that this can be accomplished and yet securing quality products from China's factories is so problematic?

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A couple years ago, I attended an incredibly bad China seminar in Seattle (one of the speakers got me in for almost nothing and I really needed the CLE credits) at which one of the speakers essentially told everyone to locate in Chongqing. His rationale (replete with way too many pictures of him smiling and eating with purported high level government officials) seemed to have been based on the following:

1. Chongqing has a lot of nice people.
2. Chongqing really wants foreign investment.
3. China really wants foreign investment in Chongqing.
4. The Sichuan food is really cheap and good there.
5. Look at all these pictures with me smiling.
6. Ford is there. Intel(??) is there.

Now other than number 4, I do not see how any of this relates much to the average business looking to go into China and so I decided I would press this speaker a bit regarding why Chongqing is a paradise for foreign companies:

Q: Are there any English speaking accountants or lawyers in Chongqing who have even the most basic knowledge of what it takes to represent an international company?
A: Yes.
Q: Can I get their names from you later?
A: I don't have them but they have to be there because Ford is there.
Q: I can understand how Chongqing can make sense for Ford (who presumably got all kinds of big time benefits for locating there) and can bring in its own people to do just about everything, but is there really an infrastructure in place there to handle a 200 employee manufacturing business.
A: Yes. If there is enough infrastructure in place for Ford....
Q: What about enforcement of intellectual property rights and the overal legal system in Chongqing .... how does it, let's say, compare with Shanghai and do you think it relevant for companies to consider this.
A: Well I am sure Ford considered this when it chose to go to Chongqing.

I will admit I am embellishing here and I don't really remember the full sequence of my questions and the speaker's answers, but you get the drift. It's like Hillary in

William Dodson has an article out in Eurobiz Magazine, entitled, "Parts missing:
China's interior still requires systems upgrades for it to become viable for international companies," that treats the issue of China's interior (mostly Chongqing) far more sensibly and with far more nuance.

The article starts out describing Chongqing "as having 21st-century hardware and 19th-century software and stating that "Western companies all know central and northeast China hold great promise as colossal consumer bases, as well as possible refuges from the increasing costs of doing business along the coast." Nonetheless, even though Beijing is "ploughing billions of euros into developing the infrastructure of provinces like Chongqing, Tianjin and Anhui - and connecting remote locations through rail and roadway arteries - the interior is still a long way from becoming a viable, wholesale investment target for any but the largest Western companies."

I agree and Dodson explains why:

Great hidden costs lie in store for potential investors, like government corruption, changeable policies, inflated costs of production inputs, a lack of skilled labour and experienced management, as well as reasonable salary levels for local hires.

The article then talks about a person named John who is building a factory in Chongqing for an American company and how his "greatest challenge" has been "resource constraints:" \

"Components and parts for machines and facilities have been difficult to come by out here," John said. He conjectured, "Ford must have all their parts imported, because I can't find what I need here."

And then there is the problem of finding the right people:

Another constraint was supervisory: "If you consider it took me four times the resources I had planned to build my Kunshan operation; it is taking me 10 times more in Chongqing. There just aren't very many engineering supervisors, construction supervisors, safety inspectors and the like out here that know what quality work is and can watch over construction and engineering teams that know even less."

Hiring qualified staff has been another of John's investment demons: "All of my staff are either locals who already live here or who wanted to return home. They're young, in their twenties, early thirties, with little experience. I have no intention of staying on past my three-year contract, so I have to find a replacement now; a local, trustworthy, with experience, someone I can train. It's not going to be easy."

Even junior-level positions can be difficult to fill in China's hinterland.

Another friend, Robert, told me recently that an Australian avionics-parts plant he was in charge of establishing between Beijing and Tianjin, in a county-level district, had a difficult time even hiring an experienced, bilingual secretary into the area. "We received a lot of calls from people in Tianjin and Beijing, but when they found out where the plant was they were no longer interested in the position. … In the end we had to pay a young lady twice what she was being paid in Beijing to hire her, supply her with a rent-free apartment in the nearest thing to an expat compound here, and provide her with a ride wherever she needed to get in the area. Hiring engineers was the same: we had to double their salaries, provide nice housing and drive them around. They all essentially had expat-style packages, though they were Chinese!"

I am certainly not saying Chongqing is wrong for everyone (we recently helped an IT client get set up there and they are doing just fine), but, like Dodson, I am saying that "investors need to approach potential investment locations with deep, up-front investigation and analysis of hidden costs."

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Xinhua article just out on rapidly (I think) increasing salaries in China. This article, entitled, "Average salary increase of urban workers rises to six-year high," contains many salary numbers and statistics, but it is so vague both with the numbers and with the writing that I cannot parse out its highlights. Yet, because I am so often asked about wages in China, I am linking to this article in the hopes others out there can figure out what it says.

May he or she with better numbers or real analysis, throw the first comment.

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Got an email yesterday from Shaun Rein, a leading expert in China markets and marketing. Shaun's email described an article he wrote for Business Week based in large part on a survey recently conducted by Shaun's Shanghai based company, China Market Research Group. The article is entitled "China's Rising Retail Market: Chinese youth intend to spend "considerably more" in 2008 than they did in 2007. Multinationals had better start thinking young," and Shaun's email summarizes it as follows:

While retail sales are plummeting in the US, sales in China are continuing to boom, driven by optimistic shoppers largely shielded from the global economic malaise. China as a market to sell into rather than a place to source cheap products from has become a major engine for growth for even the largest companies worldwide. But there are changing demographics and needs by Chinese consumers that make it necessary for global companies to understand their core target markets' needs and motivations and deliver the products and services they desire. Key takeaways of our research:

1) Target markets are often younger in China than elsewhere with Chinese youth as a major driver for growth in China's retail sales. Understanding what they want and what channels to sell and market to them is key. Digital and mobile phone marketing is becoming more important and mainstream -- it cannot be viewed as a cheap alternative for marketing but a critical component of brand building and marketing communication.

2) No more lazy localization -- it is critical for companies to bring the right products and marketing message to China, simply bringing what worked in other countries to China does not work. Developing a China strategy is key. Companies need to rethink their brand strategy like YUM brands has done with Pizza Hut in China to huge success or else flounder in China as Wal-Mart has done.

3) Marketing messages/ campaigns must relate to Chinese consumers. The failure of Motorola to do that by utilizing funky Hong Kong models rather than what Chinese youth aspire to be like. The opposite tack was employed by Adidas with their Olympic campaign.

4) The importance of delivering the right in-store ambiance and culture for your target market is becoming more and more important as Chinese middle class consumers are becoming far more demanding in service wants.

Though I do not believe China will be immune from a US recession (if one occurs), I do think there has been a tremendous shift in thinking regarding China on the part of American and European companies. Certainly, this is what I am seeing among those companies coming to my law firm for legal assistance in getting into China. Two years ago, the overwhelming majority of these companies were seeking entrance into China strictly to manufacture there. Now, it is the rare company that also does not plan on conducting research or design or sales there as well, or even exclusively.

China's metamorphosis from factory to the world to a prime market has begun. Do you agree?

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Paul Midler's always excellent China Games blog just did an interesting post, entitled, "Survey: Testing Affects Price," on the correlation between price and quality in China. The post is on how prices quoted for Williams Loft, a distributor of mattress products, rose after Williams Loft made clear it would be verifying quality:

The company [Williams Loft] sent out requests for quotation (RFQ) to twelve suppliers in China. Each was given the exact same set of specifications. The company did nothing with the quotes, but went back to the same factories six weeks later. On the follow-up, they mentioned in passing that they would be verifying quality through a testing agency. Guess what the impact was of mentioning a third-party tester: Ten out of twelve factories immediately moved to raise prices by an average of 20%. Why would a factory raise its prices after learning that customer would be checking quality?

The answer to Paul's question is that, at least to a certain extent, the initial quotes were based on a different product. The initial quotes were probably issued based on a belief that Williams Loft was not terribly serious about quality; the second sets of quotes were based on the assumption that Williams Loft meant what it said. Now I know this sounds funny, but this sort of thing runs rampant in certain industries. For example, in the fish business, many companies order ten kilogram boxes of fish, but with a wink and a nod, the Chinese supplier provides nine kilogram boxes. I have a client who, unwilling to go along with this artifice, makes very clear to its Chinese suppliers that it truly wants ten kilograms of fish in its ten kilogram boxes. Not surprisingly, the price is about 10% higher.

The lesson to be learned here is that if you are serious about quality, you must tell your Chinese supplier of this again and again. One of the things we always advise our clients is to be sure to put all quality specifications in writing, in excruciating detail. Assume nothing and reveal and be clear of everything.

UPDATE: China Economics Blog just did a post on this that teases out a bit more from the survey and postulates the following three reasons why the Chinese suppliers increased their prices when told there would be quality testing:

The question is why?

Clearly, it costs more to produce higher quality but given the request was for identical products, quality should have been equal and hence price should not change.

Possible answers include:

1. These companies usually cut corners allowing them to undercut rivals - an example of quality fade. Because the buyer is signalling its serious attitude to quality the firm provides the "real price" for a given level of quality.

2. The firm, by signalling its intention to employ independent inspectors, that it can afford to pay more and thus the price is hiked up on them.

3. The sellers increase their quotes as they see the buyer as "trouble" that will induce additional internal costs of monitoring and the potential for damage to its reputation from any returns or failed inspections. Thus the price rises to compensate for the extra hassle.

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The PN China Blog recently posted on counterfeiting and poor quality products in China. The post is entitled, "A Monumental Blacklist" and it discusses why Chinese companies so frequently and confidently engage in unfair business practices (including counterfeiting) and what needs to be done to stop it.

The post starts out answering "why unethical business practices are so rampant and what counterfeiters thrive on" by quoting a Chinese friend who says "it's OK to burn your customers and not expect them to come back, because if you burn every Chinese person [of the 1.3 billion] once, you'll make a fortune already." PN China takes agrees there needs to be more accountability:

That's sort of true. But more fundamentally, it's because China doesn't have a credit monitoring system for individuals or record keeping agency for foul businesses. No Better Business Bureaus. Consumers are in the dark. Therefore, even if the bad businesses, mostly very small in scale, get exposed by the press, the owners often disappear overnight and start a new shop the next day.

Things are improving, "gradually:"

Thanks to the wave of recalls of Chinese-made products in the West, the Chinese government, worried about the export-led gross domestic product, started right away pushing for mechanisms that track product information. An unprecedented "Product Quality Credit Scores" database was launched January 15, 2008, by China's Administration of Quality Supervision, Inspection and Quarantine. "Focus on product quality and credit, establish good faith," it says on the Web site. Anyone can use the online system to search the records for a company name or product name as well as browse relevant laws, standards and announcements. The system has six channels, 17 sub-databases, and 430,000 records. It also keeps track of all recalls of made-in-China products by the U.S. Consumer Product Safety Commission.

PN China tested the database and found 831 problem companies listed and concluded it to be a "good starting point." It is right now in Chinese only and I am less optimistic about a database like this. I believe that for something like this to work (and something like this could work), it needs to be in both Chinese and English. It also should be run by a private company, not by a Chinese governmental entity, though China is reticent about allowing private companies (particularly foreign companies) to get involved in this sort of information dissemination. Most importantly though, there will have to be a better way to monitor the companies that shut down due to problems and then open again under a new name.

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The Wall Street Journal has a story out today that reinforces my contention that while low end manufacturing (what I call rubber ducky type products) is declining in China, higher end manufacturing is booming (see my posts here and here) The story is entitled, "China's Challenge to Italy
Now, a Rival to European High-End Suits," and it talks about how China is starting to make high end suits for men.

Full Disclosure: I hate wearing suits; I wear them only when I am in court, meeting with German or Korean clients, or giving a speech. But, Emenegildo Zegna is all I buy.

The WSJ article starts out by asking the million dollar question: "Can a Chinese factory make an $800 suit that is just as good as a $1,400 suit made in Italy?" Those suits are still being made outside China:

While production of most clothing has long ago moved to China, expensive men's suits -- those costing $800 and up -- have represented the last frontier in Chinese apparel manufacturing. Such suits, whose jackets are by far the most technically complicated pieces of clothing to make, have typically been made in Italy or North America, or London's Savile Row if the suit is custom-made.

The WSJ sees this as a "new benchmark for Chinese manufacturing" and I tepidly agree.

Jhane Barnes is not just not hiding the fact it suits bear a made in China label, it is touting it:

In light of the strong euro and steep prices for Italian suits, Jhane Barnes is touting the suits' provenance as an advantage. In their pitch to retailers, sales representatives for the label claim that the quality of its Chinese-made suits is as good, if not better, than higher-priced suits made in Italy or the U.S.

These two suit experts compared a $795 Jhane Barnes China -made suit made to a "$1,395 suit made in Italy from Corneliani, a $1,495 suit made in the U.S. from Hickey Freeman, and a $998 suit made in Italy from Brooks Brothers. During the test, all the suits' labels were covered with tape."

The results were as follows:

The results were mixed. Both experts thought the Jhane Barnes suit appeared to be well-made, but they said it needed more polish in order to truly rival the more expensive Corneliani suit made in Italy. They disagreed over how the Jhane Barnes suit compared to the U.S.-made Hickey Freeman suit and the made-in-Italy Brooks Brothers suit."

Mr. Brandt of Parsons deducted points for the inferior workmanship at the sleeve and in the shoulder area. He says the sleevehead and the collar felt meager and hard, for example.

He also faulted the jacket for not conforming with the wearer's body. A spokesman from Jhane Barnes says, "Based on our feedback from renowned master tailors, the shoulder and sleeve construction was quite satisfactory." Mr. Logsdail liked that the manufacturer took the time to sew in cloth for the interior jacket pockets, rather than using lining as the other suits did, a more decorative and more labor-intensive process. The pick stitching made him conclude more work was put into this suit than the Hickey Freeman and the Brooks Brothers suit.

Verdict: Mixed. Nice suit for the money but ultimately not as polished as the Corneliani suit.

My law firm represents a large number of companies in the worldwide yacht business, both manufacturers and sellers. In that industry, Italy is the standard for mega luxury yachts, but China is becoming known for producing good (not great) quality yachts (in the $1 million to $10 million range) that come loaded with extras.

Jhane Barnes' going to China is a harbinger, and not just for suits:

Robert Burke, a luxury-goods consultant based in New York, says Jhane Barnes's shift to China is likely to be a harbinger. "Part of the reason is the Chinese have made major investments in factories, in training, in equipment," says Mr. Burke, a former fashion director at Bergdorf Goodman. "Chinese product can be as good with the proper training and machinery."

While Mr. Burke acknowledges that there is still some stigma associated with suits made in China, he can already see men's resistance softening. "I also remember five years ago that if dress shirts weren't made in England or Italy, they wouldn't be considered good shirts," he says. "Now that's no longer the case."

But old habits do die hard:

Some consumers may also take a pass. "Typically, paying $800 or more would warrant a garment made in Italy, the U.K. or the U.S.A., made of the finest fabrics," says Zachary Paul, a New York-based stock trader. "I would need a lot of convincing to spend that much money on an item made in China."

Jhane Barnes says it is saving on labor and suits that took two months to make in China are now taking six weeks in China, even with greater "handwork, such as visible pick stitching. The jackets are now fully canvassed, meaning they have a full canvas interlining sewn into the front to give it its shape, rather than having the front and the lining fused or glued in place, as was the case when the suits were made in Italy."

Retailers are testing the China suit waters:

Macy's started carrying Jhane Barnes's made-in-China suits and sport coats at its New York flagship last fall and began carrying them in two other stores in the Northeast this spring. Saks Fifth Avenue, which didn't carry Jhane Barnes suits when they were made in Italy, was intrigued enough by the Chinese-made suits to carry them in its New York flagship beginning last fall.

Saks has since ordered more of the suits, but executives still consider the line "a test" and are waiting to see how the suits do for spring. "We carry clothing that's made all over the world," says Men's Fashion Director Michael Macko. "In the end, the end product and whether it is good is the most important thing."

Next thing you know, Jaguars and Land Rovers will be coming from India....

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Veteran China hand, David Dayton, of Silk Road International, did a post a while back on the effectiveness of international management practices in China. The post is based on an article on Phys.org, entitled, "Multinationals in emerging China should stick to their own ways of managing," and subtitled, "When it comes to breaking into the lucrative Chinese market, foreign multinational retailers should keep largely to their own, time-tested management techniques, according to new research funded by the Economic and Social Research Council (ESRC)." Dayton's post is called "China—not so inscrutable after all."

As you can probably tell by now, the gist of the article is that "whilst it may be necessary to adapt to some extent to local conditions, time-tested management practices actually translate well across cultures.”

Dayton concurs and says that he does not believe "there is a 'Chinese way' to do business," though "there are characteristics about the Chinese business culture that are unique in their combination and influence." I like and agree with that description.

Dayton goes on to note that this means that if you are "successful in your business at home you have a great chance of duplicating that success here in China" and there is no "secret to cracking the Chinese market":

No magic bullet, no golden connection that will give you the country on a silver platter. If anything China just requires more of the same: more due diligence, more QC, more management on the ground, more training, more time invested into starting up, more patience, more “buy-in,” more cautions and legal protections.

He is absolutely dead on.

Dayton then lists out the following nine items (why nine? I always go with either eight -- in deference to it being a lucky number in China -- or with ten -- in deference to our Western desire for roundness and symmetry) of which one should be aware to “adapt” to China:

1. Labor/people are more often the answer to problems than a tech or money solution.

2. Language is key—Learning Mandarin is a great advantage.

3. Regionalism—From differences in language and trust to manufacturing/industry to intra-province transport tariffs, China is more like a group of loosely federated states.

4. Scarcity mentality—there is not enough for everyone, there never has been and there are too many people. Throw in political turmoil and you’ve got the scarcity mentality that most business owners grew up in.

5. Change and irrationality—Local, Provincial and National government policies can be created, changed and/or (un)enforced for completely political motivations.

6. Nationalism—it’s very real and very active.

7. The personal nature of business and the converse lack of trust between strangers doing business.

8. The incredible numbers that are China.

9. Business is not M-F, 8-6. Its all day all night until the sun goes out.

Anything else?

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How to Solve Inflation 101 (h/t to Shanghaiist).

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Earlier today, I posted on how China is still the place to manufacture all but the lowest end products. That post is entitled, "Goodbye China. Good Morning Vietnam. I Don't Think So, Part II." As is par for the course on this blog, I received a number of excellent comments. These comments raised new issues warranting this new post.

The first came from Ashton Udall of the Product Global blog. Ashton is in Asia right now on a sourcing mission and he just did a post on this same topic, entitled, "The Next Sourcing HotSpot: From China to...Madagascar?!" This post talks about rising costs in China, but notes costs are rising everywhere. Ashton then goes on to note the complexities involved in calculating manufacturing costs and how those costs vary from business to business, such that even Madagascar might make sense for some:

But what will many businesses do? Many will begin to look elsewhere for lower cost labor. Currently, there is no "next-China" on the horizon. Some are looking at inland China, but many are also eyeballing Vietnam, India, Eastern bloc Europe, and Africa. Many of these destinations may make sense currently and will likely become more prominent in the future. But China is far from being dislocated as the epicenter of manufacturing soon. Remember, it's not just your factory that you will move, but all of the supporting supply chain that must be found anew in your next destination. This will not be easy, as demonstrated by the extreme case of...Madagascar.

The most exotic destination I've heard of a company moving to, to date, is Madagascar. That's right--the exclusive home of the Dwarf Lemur and the Aye-Aye. One of my supplier's other customers has actually set up a source in Madagascar to assemble product. Contrary to intuition regarding a supply chain like this, the company claims they are saving money. While I find it hard to believe, I know very little about their situation. I do know that supply chain flexibility and responsiveness must not be critical to the business model. Keep in mind that Madagascar has little to none in the way of a manufacturing base. This means that the company must continue to source an overwhelming number of items from China and ship them to Madagascar. They cannot even get shipping cartons in Madagascar, so they must ship the shipping cartons from China.

Reminds me of how I once worked many weeks on a project for a client looking to set up a food processing operation in the Gambia. Wage rates were absurdly low (I think it was around $25 per month). The facility was already set up and ready to go and would be given to my client by the government. Shipping costs to get finished product to New York City were surprisingly reasonable. In the end though, my client backed down because the last two foreign owners of this facility had seen it expropriated by the government. It's always something.

The always insightful TwoFish (anyone who names a blog after a Dr. Seuss line is is presumptively insightful) asks for a comparison on the competitiveness of China's interior as compared to Vietnam. Great question, but unfortunately beyond my ken. Also, I would think the answer to this would very much depend very much on the product.

"Bill" then quotes me as saying "Vietnam's manufacturing capabilities are just not there yet" and then asks me to use "my experience in China" to ask me when I "think Vietnam will be 'there'? Another great question, but again, I have to bag off on it because I just do not know manufacturing or logistics well enough to answer. But, I am going to try to answer it very crudely and by analogy. In comparing Vietnam's legal system to China's, I would say Vietnam is about ten years behind. Perhaps it is in the same place in manufacturing? Then again, does the much smaller Vietnamese labor and consumer market (i.e. population) mean Vietnam's manufacturing will develop on an entirely different track than China's? Will not Vietnam be able to learn from that which China has done wrong and that which China has done right, so as to be able to develop faster and better?

Last, but surely not least, my friend from Fear of a Red Planet, to a certain extent answers all of the above questions, by noting the following:

When I left Foxconn at the end of last year word was they were bringing in 20,000+ Vietnamese for training in their Chinese plant who are going to form the nucleus for a workforce of 200,000+ that they are hoping to have working at their Hanoi operation. Sure, things are just kicking off there, but there's no reason why anyone with deep pockets wouldn't want to get in there early. China's just a safer option for companies that can't afford to lose out on their first deal.

FOARP is absolutely right to distinguish between the large companies going into Vietnam and, to a certain extent creating their own infrastructure there, and the smaller companies, which must rely on the infrastructure already in place. Where you go and how you go very much depends on who you are. I had this very discussion yesterday with co-blogger, Steve Dickinson, who is in the United States this week. We were talking about a US business that had come to us for help on a dispute it was having with one of its suppliers in Shandong province, where this US business is also based. This US business does around $10 million in revenue a year in China and it wanted us to meet with our Qingdao affiliated law firm to get a lawyer there to meet with the local mayor, who in turn (according to this US business, anyway) would lean on the mayor of the city in which the Chinese supplier is located (different city) to force a successful resolution of the problem. He was convinced his plan would work because he had heard of some huge company [whose name I will not mention] having done this same thing a few years ago. We felt very strongly otherwise.

So the lawyer's answer is, it depends.....

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Experience Not Logic has a nice post, entitled, "China's Manufacturing Competitiveness Is at Risk": Sort Of," on the recently published Booz Allen/AmCham Manufacturing Competitiveness report, somewhat wrongly titled, "New Challenges for Foreign Producers: 'China's Manufacturing Competitiveness Is at Risk." This report affirms what I said previously in my first post in this series:

My own unscientific sampling reveals that in most sectors of manufacturing, Vietnam's manufacturing capabilities are just not there yet. I have asked around ten of my firm's manufacturing clients and five or six manufacturing/product sourcing consultants where Vietnam fits in the manufacturing picture. All the manufacturers said Vietnam is not ready to manufacture their product and all the consultants said something along the lines of, "clothing and rubber duckies, yes. Much more than that, no." This is not to say big companies like Intel will not be establishing their own manufacturing operations in Vietnam, but it does say we should not expect a wholesale transfer of manufacturing from China to Vietnam in anything approaching the near term.

Manufacturing outsourcing to both Vietnam and to China will continue increasing. Obviously, there will be many companies that choose Vietnam for their manufacturing who would have chosen China a few years ago. There will also be many who are in China now who will choose to expand their manufacturing operations in Vietnam instead of China. But China will remain the overwhelming choice for manufacturing and few companies manufacturing in China now will up and leave for Vietnam. Vietnam is not a panacea and it is not a replacement for China. Not even close.

Experience Not Logic cites a recent Knowledge@Wharton article, "New Challenges for Foreign Producers: ‘China’s Manufacturing Competitiveness Is at Risk" concurring with my rubber ducky conclusion:

K@W summarizes the [Booz Allen/AmCham] report and conducts its own research to discover that China's manufacturing sector is still strong and that we should only expect a decline in the competitiveness of the "high labor, low value-added area" (read: basic cheap stuff).

K@W notes that it is only the low-value added companies that are moving out of China because the profit margins that these companies operate under are slim enough that they will see a significant gain by moving to India, Vietnam, Thailand, Malaysia or Brazil. And, these firms that are leaving are largely Taiwanese and Hong Kong companies that first opened factories in China back "in the late 1980s and early 1990s." They set the trend with moving into China, and they are setting the trend in moving out of China.

K@W notes that high-value-added manufacturers, such as heavy harbor equipment manufacturers, have plenty of room for profit growth in China because there are many compelling reasons to keep factories in China:

China is still the right manufacturing choice for most American and European companies, most of the time. What do you think?

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David Dayton at Silk Road International Blog did a post on a topic near and dear to my heart, "Returning Products to a Factory in China" (h/t to Source Juice). I deal with this issue quite often when Western companies seek my law firm's assistance in securing a refund for bad product from a Chinese company that is not budging.

I will first set out Silk Road's excellent business advice to a friend interested in returning a container of product to his Chinese supplier. My comments are in italics.

1. This will kill any good will you may have developed with your supplier. You will need to find a new supplier. My belief is that Chinese style “cooperation” means that you allow for a few mistakes/problems and still accept the product for the purchase price. Now you are calling their bluff and asking them to actually put up cash (redoing the order is cash out of their pocket).

All true.

2. You may not get the product back into the country—especially if it’s defective or already opened because of import restrictions. There are limits to what China (and all countries) will allow into their country. Rejected product and or second hand items are often not allowed into China. You need to confirm with a freight forwarder before you start negotiations with your supplier that this is really an option.

All true.

3. You must decide who will pay and where the cash will come from before you take any unilateral action (”I’m just going to send it right back to them, dammit!”). Phone calls and verbal commitments from your factory rep are ABSOLUTELY not enough. You need to get a written, stamped document from a factory manager/owner that says exactly what you agree to.

Completely true. I had a Polish client who returned playground equipment to a manufacturer here in the United States (how is that for a reversal) and the equipment just sat and sat. For all know, it is still sitting.

4. There is really no such thing as “credit”—the cash for the redo has to come from somewhere. Be careful. If your factory says that they’ll “credit your account” you’d better know how much actual cash and what that will buy next time. If you think that you’ll get another order for free (especially if you can’t send it back) you’re probably wrong.

True. And what is it that makes you think that your supplier who got it all wrong when you were actually paying in full is going to get it all right when you are paying it even less this time?

5. You will see the returned product again, somewhere. If the product is usable and if you can send it back into China and if you are getting a second order for free I can guarantee you that the factory will sell the stuff to cover their costs. They don’t care about your reputation in the industry—they are concerned about their bottom line, first and foremost. Be prepared for customer service calls from Karachi.

This too happened to a client of ours, who gave very explicit instructions (but did not go monitor) to destroy the inferior product. Only in this case, the goods did not go to Karachi, they came to Seattle, where a retailer called our client and asked how a distributer was able to sell our client's normally $100 item (wholesale) for $35. Our client tasked us with researching whether they would need to honor their warranty on the grey market defective goods but then called us off the project the very next day after making the business decision to honor the warranty no matter what..

Dayton rightly calls for a balancing approach in determining whether to return your product:

What will it really cost you in terms of time, shipping costs lost clients due to the production flaw, etc? You need to balance the nature of the problem with the fact that giving the product back will destroy your factory relationship and your product will still find it’s way into the market and you’ll have to pay costs (return shipping at least) that you don’t have now.

Dayton then sets out the only real solution:

DON’T EVER SHIP BEFORE YOU (YOU PERSONALLY OR SOMEONE OTHER THAN THE FACTORY) APPROVE IT. It doesn’t matter how “good” your relationship with the factory is. It doesn’t matter if you’ve shipped the same thing a dozen times before. It doesn’t matter how big your order is or how many other future orders rely on this shipment.

He's right, but seeing as how this admonition is violated more often than note, and oftentimes because the buyer has no real choice, I will add the following:

1. Get your China supplier to sign a really good contract with you.
2. Most of the time, your contract with your supplier should be in Chinese. If it is in English and you need to use it in a Chinese court, you do not want the Chinese court doing the English to Chinese language translation.
3. Most of the time, your contract should provide for arbitration, with a carve out provision allowing you to pursue injunctive relief (for instance, to stop it from manufacturing your product) in the Chinese courts.
4. Your contract (and this is the key here) must be unbelievably explicit about the product standards your product must meet.

Good supplier contracts serve two main purposes. They make transgressions by your supplier far less likely and they increase your chance of prevailing should a transgression occur.

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Bizcult has a post up, entitled, "Old China Hands Face Off in Knowledge Duel", highlighting the following nuggets from a podcast of James McGregor (One Billion Customers) and Tim Clissold (