This question has frequently been posed to me by two ethnic Chinese friends of mine who work/worked for massive “international” Chinese companies and one American friend who works/worked at a massive “international” Chinese company.  All three of these friends have lived in the United States for around twenty years and three of them are eminently capable businesspeople who could easily get high level jobs at American companies or have already done so. All three are completely fluent in both Chinese and in English and all three of them have excellent understandings of the business cultures of both the United States and China.  All three joined large Chinese companies to assist those companies in conquering the American market. The three companies for which these three worked are amazingly different in terms of their products/services. My conversations with these three people have been completely independent in that the other two were not present.  To better hide identities, I am turning these three people into a composite.

Okay, so here are the comments and musings I have been hearing, with at least 100 expletives removed, and camouflaged a lot:

  • When I joined the company, I really believed it wanted to become international.  I still think that was what it actually wanted five years ago, but it has gotten so far removed from that I do not think it even understands what that means any more.
  • In my early days, the company was committed to spending the money to become international, but now it is focused only on next month’s revenues. We are financially sound, but “like just about every other Chinese company, our services/products have become completely commoditized” and the focus is only on keeping up earnings from month to month.  We have gone from talking about what sort of company we will be three years out to making sure we hit our numbers three months out.
  • I am never going to work for a Chinese company again. “They just don’t get it.”
  • We recently brought on a new American employee. When I asked what his qualifications were, I was told that he spoke fluent Chinese. After it became clear to me that was his only qualification, I commented that there are 1.5 billion people who speak Chinese and why don’t we start hiring Americans who actually can help us on the business side in the United States? The response was that we can’t afford those sorts of people. We can afford them. They are just not considered important.
  • We have lost virtually all of the Westerners we initially hired because we refuse to compensate them accordingly. We are now in the process of losing all of our Chinese employees who truly understand the West as well. When I complain about our brain drain, I am told that I am “too concerned” about our employees and that anyone can be replaced. When I tell them how the American companies with whom we do business value continuity among the people with whom they work, they just shut me out.
  • Our home office views our employees as rats that can easily be replaced on the treadmill.  Our employees are viewed as commodities. They truly do not seem to care when someone leaves.
  • We used to communicate among the international offices in English, now it is just in Chinese. I continue to write in English because that was part of our plan towards becoming an international company, but I now get criticized for that and I have become known as the Chinese person who speaks Chinese but insists on speaking English.  There are still other Chinese in the company who want to speak and write in English, but I am sure most of those people will be leaving soon.
  • The home office does not seem to value the knowledge of the United States that some of us bring to the table. They act as though we Chinese here in the United States can easily be replaced by a young graduate who has never been here, but speaks English. They seem not to appreciate that we are two very different countries and being able to speak English does not mean you know how to do things the American way.
  • I am treated as suspect when I try to point out how things should be done in the United States, as though my believing there might be a better, non-Chinese way of doing something makes me anti-China.  It’s ridiculous. They don’t even seem to want the opinions of those of us here in the United States any more.
  • Look at the Chinese companies that have done well internationally. Almost all of them are in commodity businesses and almost all of them succeed on price.  Our plan was to rise above that and we had the capabilities to achieve that, but not the willingness to stick it out and really try.  Not the willingness to spend the money long term to achieve this.
  • Look at the big American companies doing business in China. They have adjusted to succeed over there.  Why are Chinese companies so unwilling to do that?
  • Will a Chinese company ever be truly international?

Does the above jibe with what you are seeing out there? Are there Chinese companies that operate internationally in a way like Proctor & Gamble or Caterpillar or McDonalds or Mercedes Benz or Siemens or Samsung or Nestle operate internationally?  Haier?  Lenovo?  What, if anything, needs to change? Will it change? What about Dalian Wanda’s purchase of AMC? How do you see that going?

You tell me…

Got an email from a client/friend yesterday with a link to an Industry Week Article and a note saying that I needed to give this “CLB’s dumbest article of the month award.” We do not actually have such an award (should we?) so for that reason alone, it is not in contention. Bad articles on China abound, but this one stands out because it is in a very influential magazine and because much of what it is wrong on has been repeated so often I fear it is beginning to pass for truth.

The article is in IndustryWeek Magazine and it is entitled, “Why Is China Cheaper?” It is written by Michele Nash-Hoff, President of ElectroFab Sales. She is also the author of the book, Can American Manufacturing Be Saved?

The main point of her article is that China manufacturing is cheaper than US manufacturing for reasons that go far beyond wage disparities. I do not dispute that point, but I do dispute much of what she says in support of that claim.

Her article starts out well by describing the costing differences between manufacturing a stuffed teddy bear and a Frisbee. Ms. Nash-Hoff points out that about 70% of the cost of manufacturing the teddy bear goes to labor, whereas the labor costs make up only around 20% of the cost of manufacturing the Frisbee. She then notes how because China deals in such massive quantities of the plastic resins that go into the Frisbee, its material costs for the Frisbee will be “as low as it could be.” I am not sure whether Ms Nash-Hoff is saying that the plastic resins will cost less in China than in the United States and I am not sure whether that is true or not.

Ms. Nash-Hof then tells us that labor is cheap in China because China has “one billion people living at the poverty level.” This is by far the highest number I have seen listed for those living at or below the poverty level in China but so be it.

As a result, wages have finally been rising by about 15% per year over the past four years. It took suicides by workers in the summer of 2010 to achieve additional improvement in wages and working conditions at plants that were more like prison camps with dormitories for workers to live on site and fences around the buildings so workers couldn’t leave the premises.

Okay.

This argument contains its own flaw. Wages in China have increased (fairly briskly) every year since the late 1980s and the average wage for workers in urban areas was four times higher in 2006 than in 1995. As Ms. Nash-Hof herself points out, wages have been rising “by about 15% per year” since 2006. With these statistics, is it really fair to claim that it took “suicides by workers in the summer of 2010” to achieve additional improvements in wages? Also, is she implicitly saying that it is not fair to the United States that China has so many poor people and that those people should not be employed? Or is she saying something else?

Ms. Nash-Hof’s third reason for China being cheaper is that China’s workers receive “nothing” when they are injured on the job:

Third, there are the costs of compliance to health and safety regulation and environmental regulations. These costs are less expensive in China than in the United States because the Chinese government imposes few health and safety or environmental regulations. China doesn’t provide workman’s compensation insurance for their workers so workers hurt on the job don’t receive any compensation when they are injured to the point that they are disabled.

Ms. Nash-Hof is both right and seriously wrong in this argument. Of course the cost to comply with health and safety and environmental regulations is way less in China than in the United States. I say “of course,” because even if China’s regulations were exactly the same as those in the United States and even if the enforcement of those regulations were exactly the same in China as in the United States, compliance would still be considerably cheaper in China. Compliance would be considerably cheaper in China because medical care and wages (and pretty much everything else) are considerably cheaper in China than in the United States.

But beyond that, Ms. Nash-Hof is right to claim that China does not enforce health and safety and environmental regulations nearly as rigorously as the United States, but she is flat out wrong to claim that China does not have workers compensation when it does and she is also flat out wrong to claim that “workers hurt on the job don’t receive any compensation when they are injured to the point that they are disabled” because they almost invariably do. Again though, a worker who loses a finger in China might get $500 while a worker who loses a finger in the United States might get $50,000. I wonder if Ms. Nash-Hof is seeking an increase in workers compensation in China or a decrease of it in the United States?

Ms. Nash-Hof then argues that China’s VAT law works in its favor as against U.S. manufacturing:

Next, there is the cost of taxes and duties. China is one of over 150 countries that utilize a Value Added Tax (VAT) system. It is a tax only on the “value added” to a product, material, or service at every state of its manufacture or distribution. The VAT rate is generally 17%, or 13% for some goods. Chinese companies receive a VAT refund from the government for materials of products produced for export. American imports to China are charged a VAT, but the U. S. doesn’t have a VAT to charge Chinese imports.

Help me out here readers because I am just not seeing it. Maybe I am missing something here, but I do not see how China’s VAT has anything to do with its manufacturers being able to produce for less. I just do not understand how charging the VAT for domestic sales, but refunding it for exports reduces Chinese manufacturing costs. Could I not argue that the VAT actually increases manufacturing costs by reducing domestic sales and thereby making it tougher to achieve economies of scale? Is not this exactly what pretty much every country does with its VAT and exactly what U.S. states do with their sales tax?

Ms. Nash-Hof then makes a completely off-base factual argument that I am seeing and hearing much more frequently of late, which is that foreign companies cannot go into China without a Chinese partner:

In addition, the Chinese government requires foreign firms to have a Chinese “partner” company, who maintains the majority interest, takes most of the profits, and has the real control of the company.

This is just false. Completely 100% false. When I wrote a Wall Street Journal article on China Joint Ventures back in 2007, “only 27% of new foreign-invested businesses used this legal mechanism [Joint Ventures] in 2006, compared to well over 50% in 2001.” I would guess that percentage is less than 20% today. China allows foreign companies to go into China alone in just about all industries other than media, military and mining.

Ms. Nash-Hof also gets it wrong when it comes to China R&D and technology sharing:

More seriously, China now requires U. S. companies to share their technology and relocate their R&D centers to China if they want to have access to Chinese markets.

This statement is just so wrong I hardly even know how to attack it. First off, there are hundreds of thousands of U.S. companies that have “access to Chinese markets” without having any presence in China at all. Every U.S. company that sells a product or a service to China has “access to Chinese markets” and many (most?) of those companies are not even in China, much less sharing their technology and relocating their R&D centers there. Then there are the foreign companies in China that do no R&D there and zealously protect their technology. China does not require U.S. companies set up an R&D facility in China or share their technology with China to have access to China’s markets. Apple Computer, KFC, The Gap, McDonalds, Price Waterhouse, and an endless list of other American companies that are thriving in China give lie to this bizarre claim. There have been instances of what Ms. Nash-Hof describes (see the Chevy Volt), but fortunately, that it is not the norm.

Unsurprisingly, Ms. Nash-Hof also attributes the China Price to China’s undervalued currency:

Above all, there is the ever-present currency manipulation, where China undervalues their currency by an estimated 30%-40%, which simply makes every product that China ships out 30-40% cheaper than those of a potential American competitor.

I am not going to dispute that the Yuan is undervalued, but 30-40% seems high to me. Is it?

Lastly, Ms. Nash-Hof talks about dumping and I am not going to fight her on that.

What do you think? Am I being too harsh on Ms. Nash-Hof? Is she right?

I just think that with election season upon us, it is more important than ever that we get our facts right.

Many years ago, my youngest daughter, now 11, would email the same-aged daughter of a Chinese lawyer with whom I had worked on a couple of cases and with whom I had become friends. What always amazed me about the correspondence (emails sent to my daughter were translated into English by the Chinese lawyer) between the two girls was how amazingly similar their lives were. Both listed spaghetti as their favorite food, though the Chinese girl was far more impressed by McDonalds than was my daughter. Both loved the social life at school but did not particularly like anything else about it. Both were taking music lessons. Both were doing gymnastics. And both thought Barbie was the coolest thing since….well….since Barbie.

I thought of these emails today after reading the China Herald’s recent post, entitled, “One-child policy supports Barbie ” on how China’s one child policy could be so favorable for Barbie’s China sales. One big difference between the Barbies my daughter had and those of her email pal is that my daughter’s were nearly all handed down from her mother, her sister, and from friends, whereas, the Chinese girl had to go out and buy each of hers.

Because Barbie is so relatively new to China, in terms of demand, hand me downs, and even image, it will probably take a while for it to develop a nationwide cachet among 6-9 year old females, as it has in the United States. (My daughter would probably kill me if I do not note that she ceased playing with Barbies years ago — right about the same time she ceased “playing” with friends and began “hanging out” with them). But this newness also means Barbie might have marketing opportunities in China that it does not have in the US. Mattel is seeking to market Barbie in China not just to young kids, but to twenty-something women as well. The new Barbie Store in Shanghai even serves a Barbietini, and though I confess to not knowing (or caring) what goes into it, I am betting it is pink.

I find it fascinating how Western products can be marketed anew in China. Examples of this abound. My international law firm has a client that makes equipment that in turn makes a very high tech computer product. Bear with me here as I essentially make up the numbers (as I have long forgotten the real ones) to make a point. The client’s machine is outdated and nobody buys it in the United States any more. The cost to our client to make the machine is about $100,000 and the client sells it for $200,000. Its “competitors” make a $1,000,000 machine and that is what Americans buy. In China, however, there are still a whole slew of companies that need this machine but cannot afford the $1,000,000 version. Those Chinese companies are our client’s customers. Our client has virtually no competition at their price level and it almost certainly never will because it would cost another company too much upfront money to warrant making this outdated equipment. Our client has a lock on this ultra-niche market until such time as all Chinese companies can afford the $1,000,000 machine or until used $1,000,000 machines become readily available at a substantially lower price.

For more on old time US products being resurrected in China, check out “China’s Resurrection Of The Tang — Long Shelf Life Is Key.

CFO Magazine has an interesting article on China’s anti-bribery laws, entitled, Corrupt or Careless? Written by Don Durfee, its tag-line is that “Enforcement of China’s anti-bribery laws is on the rise, and foreign companies could easily be on the wrong side of Chinese law without knowing it.

The article starts out by briefly describing the Shanghai police’s recent arrests of 22 McKinsey, McDonald’s, and ABB, employees on suspicion of bribery. According to the article, the local “Chinese press reported that in one case, a local computer company had admitted bribing employees in McKinsey’s information technology department to obtain a contract to install an IT network.”

The article rightly notes that because “shady deals” are nothing new for China and because “the country’s complex anti-bribery laws are often not rigorously enforced.” The arrests “came as a shock to multinational corporations and left unanswered questions. The MNCs are asking themselves in these arrests “signal a new focus on the activities of multinationals?”

According to Lesli Ligorner, an attorney with Paul Hastings, China is stepping up its enforcement of its anti-bribery laws, throughout China, not just in Shanghai. In many respects, China’s anti-bribery laws resemble the U.S. anti-bribery law, the Foreign Corrupt Practices Act (FCPA).  China outlaws bribing government officials and it also outlaws payment or acceptance of kickbacks in commercial transactions. The most a government official can accept is 200 renminbi ($25.80), “which is less than the cost of dinner at many restaurants in Shanghai.” Under China’s anti-bribery laws, a “government official” includes any employee of a state-owned enterprise (SOE).

“A foreign company could easily be on the wrong side of Chinese law without knowing it:”

In fact, the typical multinational corporation almost certainly is, says Steven Vickers, CEO of Hong Kong-based consulting firm International Risk. “Kickbacks, such as those we saw in Shanghai, are absolutely endemic,” he says. “It should come as no surprise to [multinationals] that they would be affected. Unfortunately, many of them have a veneer of legal compliance that covers a local company culture that remains very mainland-oriented.”

Ligorner urges foreign companies doing business in China “to increase compliance training and review employee handbooks in China to make sure that gift-giving limits are in line with local law.” In other words, if you are doing business in China, you must have the proper checks in place on your employees and you must be constantly training your employees on what they are not allowed to do on behalf of your business. If you do not have an anti-bribery compliance program in place at your company, you are at great risk.

Bottom Line:  Familiarize yourself with China’s anti-bribery laws and follow them. Make it clear in writing to all of your employees that you expect them to abide by these laws and there will be repercussions if they do not. Tell them this again and again through regularized compliance training sessions.  At minimum, your efforts to prevent corruption will help your company should it ever face corruption charges either in China or outside it.

I have been following with a great deal of interest the recent disclosures regarding various McDonalds and KFCs allegedly underpaying their employees. I was going to do a post on this, with the thesis that this is further proof that what is good for the Chinese domestic goose is not so good for the foreign gander. But, I just read an excellent post over at ImageThief, entitled, “Thursday PR blog: Finger lickin’ cheap” [link no longer exists] that comprehensively covers the various issues. ImageThief’s post rightfully approaches the matter from a public relations (PR) perspective.

For anyone who does business in China or is thinking of doing so, go read this post. And if you are doing business in China and you have Chinese employees, let this serve as notice to you about the importance of following China employment laws.

For the next ten days, the Marketing Sherpa website will be doing a series, entitled, “Special Report Part II: Internet Marketing in China — 100 Million Chinese Online & Counting.” Marketing Sherpa summarizes its report as follows:

Even though just 10% of China’s population is online, that’s still more than 100 million active Chinese Web users. Plus, they tend to be trendy young adults ages 18-30.

In Part II of MarketingSherpa’s China Report, discover how brands including McDonalds, Vidal Sassoon, Nike, Johnson & Johnson and Motorola are conducting online and integrated campaigns appealing to China’s emerging online consumer class.

Includes practical know-how, Web and email data, creative samples, and useful hotlinks.

I am looking forward to reading more of this series.