Why incentives from US companies are rarely effective in China

It seems that every company I have ever worked for has tried to implement an incentives program for vendors in an effort to get them to produce quality product and ship on time. I once worked for an American textile company, the owner of which had the idea to reward top performing vendors with trips to the US home office. What management of the textile company did not understand was that most of the vendors had absolutely no interest in getting on a plane and going to a country where the Chinese food in a five-star restaurant was probably inferior to the gruel they were accustomed to eating in their own factories. Not surprisingly, the incentive program was a failure. Another company I was employed by gave brass plaques to its top performing vendors, only to find that quality showed no improvement and, in some cases, got worse.  I mean what of what value is a brass plaque of recognition from an American company to a vendor far off in China ?  The answer is very little.

Providing vendors or workers with incentives is a classic example of a management program that works in the US but does not work in China. Why don’t these incentive programs work in China? I think there are a few  reasons:

1.) In China there is sometimes a tremendous degree of mistrust in personal and business relationships (perhaps the legacy of the Cultural Revolution when neighbors turned on neighbors). Most vendors regard incentives from US companies with a great deal of skepticism. They simply do not believe you will pay up, so to speak.

2.) More importantly, many vendors endured the bone-grinding poverty of pre-reform China and lost myriad career opportunities during the Cultural Revolution. For this reason, vendors have a “cash-in-now” mentality, and focus mainly on short-term gains. It never ceases to amaze me how few vendors in China look at relationships with American customers as long-term and mutually beneficial.  Of course incentives are part of a long-term program.

3.) To meet production goals requires vendors to invest more in production.  Yet vendors do not want to invest more in an order than is absolutely necessary.  No vendor in China is going to spend more out of their own pocket to get an order out on time simply because they covet that brass plaque you promised them.

More importantly offering incentives to your China vendor may in fact be counterproductive. If you give your vendor production or QA targets, he may feel he has reached these while you feel he has not. This just leads to conflict, an erosion of trust and you are soon looking for a new supplier. I have seen this happen.

For these reasons, it is probably best to avoid offering vendors any kind of special incentives. The best you can do is tell them they will get more business from you if the current order goes well, work closely with them on quality and hope they follow through accordingly. On your side, do everything you can to make those order QTYs bigger with each order.

IMG_8676

Advertisements

When to split a Production Order (PO) between vendors

I had an email today from Chuck over at Supplier Global Resource magazine, a magazine for the promotional products industry. Supplier Global Resource Magazine.  Chuck is doing an article on China and had a question for me as follows:

“The process you describe in your four-post series is pretty thorough, and seems to cover a lot of the bases. But I was curious if, at the end of the process, a company had 2 or 3 Chinese candidates they felt comfortable proceeding with – would there be any benefit to placing an order with more than one manufacturer, possibly splitting a large order, to best determine the qualities of each manufacturer?”

My reply:

Good question. It is a good theory but in practice I don’t think works, at least not for most of the small businesses I assist. And for this reason:  Most companies that source in China have hard orders they have to fulfill and there are expectations from their customers, usually big box retailers, as far as delivery dates, not to mention quality standards and pricing. So most small companies do not have the luxury of time nor the resources to try out hard orders on as yet untested suppliers. They usually have to designate one supplier and hope things go well. If they don’t they salvage what they can and move on to the next supplier.The one exception would be if I had a new product that I was marketing online only, and the scope of my business was small,  Then I might try as you suggest. In this case, I would not have firm delivery dates to meet and could proceed cautiously, maybe trying out multiple suppliers at the same time to see who might be a good long term partner for me.

I will say that I have worked with companies that have resorted to the practice of splitting large orders between suppliers but usually those suppliers are already verified suppliers. And usually there are two reasons they do this.

1.)  They have a big order and one supplier alone cannot meet the delivery dates. Most of the time it is for this reason.

2.)  They have had a problem with one of the suppliers in the past e.g. usually quality or late delivery and are nervous about giving a big order to this supplier. Dividing a production order among 2-3 suppliers ensures that they will have at least some good product to pass on to their customers in a timely manner.

I would add that I have always found it very risky to divide production between suppliers. The reason is this:  Let’s say you have an order for 50,000 promotional shirts for a large US retailer. This retailer has very strict compliance guidelines.  50% of the order you do with Vendor A and the other half with vendor B.  When the shirts come in you find that the shirts from Vendor A are a slightly different color than the shirts from Vendor B and the large sizes from Vendor A’s are also running small.  The result is that your customer is not happy with the  wide variance in quality, issues charge backs and cancels all future orders.  In short variation in production lots from just one vendor can be a major challenge depending on the product.  So when you have more than one vendor producing the same product it becomes a major challenge to maintain product standards and consistency.

In sum: I have always advised people to try to have as few vendors as possible, a major vendor or two and then a couple back ups.  In Chinese there is an expression. 人多手杂。 Trans:too many cooks spoil the broth

IMG_8028

Some things to consider when you have a new product and need a mold

Someone came to me with a new product the other day, an artistic and fanciful light fixture that they want to have made in China. They have tried to find someone to manufacture the product here in the US but, as you would expect, the cost is prohibitive.  The person has had some rough molds and prototypes made here and suggested that he could send these to China and have someone there run some samples for him and then maybe a small production order.  Not a good idea, I said.  There are a few things to consider here.

  • The molds this person has made might not be compatible with machines in China In fact, I bet this would be China vendor response were he to send the molds to China.
  • Compatibility of machines notwithstanding, vendors in China stand to make a good profit if they make a mold for a customer and they do not want to forfeit this profit.  And this is why when you get quotes for molded products the mold costs can be all over the board, so to speak. If you ask three vendors to quote on a mold, chances are their quotes will be off by thousands of dollars, because someone is making a hefty profit from the mold. I had project a few years ago for which I needed a mold and the quotes, for the same mold, were anywhere from $3,000.00 to $20,000.00.
  • If you send a vendor in China a mold you may not be able to get the mold back. You never know who you are dealing with and the vendor may just take the mold and start using it themselves.

If you do get your mold made in China make sure you know who you are dealing with because sometimes a factory will claim they own the mold, even though it is your design and you have paid for the mold.  There have been so many disputes like this over the years between SME’s and vendors in China that you just have to expect it to happen.  Just go over to the China Law Blog for some stories. To protect yourself you should have everything spelled out clearly in writing, as to who owns the molds and when they will be returned to you, and you should also be sure you have legal rights to your design before you ask someone in China to make the mold for you.

Finally, really the best way to do a molded product would be to have the CAD work done here in the US, including drawings and 3-D renderings, and then to send these to China so a mold can be made for you. In this way, you can project to vendors in China that you are serious about your product, for drawings look official and will show all proprietary information. Should any dispute arise with them you will have a record of your designs, what you would not have if you asked the vendor to do both the CAD and mold for you.

Needless to say, these are all costs you have to expect to incur if you have a unique product that you want to have manufactured overseas.  But if you can do it, it is worth it.

IMG_6960

Book Review: Age of Ambition, Chasing Fortune, Truth and Faith in the New China. By Evan Osnos

I always enjoyed Evan Osnos’s articles on China when he was the Beijing based correspondent for the New Yorker. Osnos lived in Beijing for eight years and speaks Chinese, two attributes that informed his writing on China which I have always found to be informative and entertaining.

Osnos’s recent book on China, Age of Ambition, Chasing Fortune, Truth and Faith in the New China is every bit as good as his writing in the New Yorker. He paints portraits of some of today’s most well-known dissidents including Ai Wei Wei and Chen Guangcheng as well as the popular anti-government blogger Han Han. And there are profiles as well of figures who have risen to become part of China’s elite, including a lady who runs China’s most popular dating site and a prominent journalist. In some instances these are the typical rags-to riches tales that are recounted so often in books on China nowadays and in this respect  Age of Ambition mirrors other recent books on China. Osnos’s book stands out, however, because he has access to many of China’s most central figures, by virtue of his assignment in Beijing for one of America’s most established magazines. For this reason we are often on the receiving end of the Government’s attempts at coercion and censorship, sometimes successful, often not. And that is what this book is really about, China’s hectic change and the Government’s attempts to keep up and to keep order.

There are also very good sections about the China Bullet train disaster, an accident that was very much owing to corruption, and a well-publicized incident in the South in which a small girl was hit by a car and no one came to her aid. These were big news stories both in China and overseas and Osnos gives us riveting accounts of both.

Still there are weaknesses. The Age of Ambition would have profited had Osnos spent a few months in 2nd or 3rd tier cities feeling the pulse of rural China which still makes up over 50% of the population. For example how effective are the Government’s efforts to curb freedom of expression in cities other than Beijing and Shanghai, where Osnos seems to spend most of his time ? In fact Osnos focuses almost exclusively on establishment figures in modern day Beijing, Starbucks or upscale office buildings being the setting for many of his interviews. A portrait of a textile factory owner in Jinagsu grappling with issues such as pollution and labor unrest would have been preferable to the portrait Osnos gives us of the blogger Han Han who, as both fervent anti-government blogger and amateur Formula 1 driver, obviously has some credibility issues. Osnos glosses over the hypocrisy of Han Han and his often banal blog posts and seems more dazzled by Han Han’s celebrity.

Osnos is also overly critical of China’s progress. He lambasts the Government’s censorship efforts, without acknowledging that mob unrest has a long history in rural China going back to the early Nineteenth Century and that Government fears about internet rumors fanning mob violence are in some cases well-founded. Religious cults, for example, pose a far more serious threat to political and social order in China than they do in more advanced democracies like the US or Japan and China has good reason to worry. Osnos moreover belittles China’s achievements in science and technology, not to mention the achievements of a couple of the individuals he has befriended and whom he profiles. He mocks the English teacher Michael’s attempts to master English and yet he portrays Michael as a friend.

Like other more recent writers on China, Osnos lacks the perspective of someone who was present in China in the 1980s and early 1990s when the country was mired in backwardness and had yet to experience the fruits of the Deng reforms. China was one of the poorest countries in the world then. Today it is one of the richest. Development on that scale means big problems and yet too many writers on China today, Osnos being one of them, focus on the problems and seem to forget the achievement, an achievement that long-time China watcher Henry Kissinger calls the “miracle of our time. “

kyotosf2003 048

Building trust in China – a letter to a prospective client

What people are saying about Mulberry Fields
“Your blog speaks to the many issues I have experience with when doing business in China.”   – a company in California

I had someone come to me this week asking me about helping them out in China.  This is a startup consumer products company and they are worried about protecting their IP as they begin to look to China as a manufacturing base.  They seem to be genuinely concerned about this so this is how I responded:

Dear So and So:

One of the realities of doing business in China is that you may lose your IP.  In fact a client of mine just skyped me two nights ago and told me that someone had seen his product ( currently only  sold in the US and Canada ) on an online B2C site in China. I looked into it and sure enough, there it was. But my advice to him was simply that, hey, if you have to lose your IP in China in order to build your business in North America it is probably worth it. He agreed and was even able to laugh about it at the end ( a good thing because he is currently on vacation in the Caribbean ).  Having said that there are things you can do to protect your IP but they are very expensive, time-consuming, will give you a lot of sleepless nights and more often than not are ineffective over the long-term, if you go by all the trouble big multinationals have protecting their IP in China. The example I like to point to is the Subway Sandwich Corp which spent how many tens, if not hundreds, of thousands of dollars and eight long years trying to close down a fake Subway shop right in the middle of the financial district in Shanghai ( the fascinating story is told  in a new book,  The End of Cheap China by Shaun Rein). 

Doing business in China is difficult to begin with esp for the issue you mention, trust. There are many good people in China but trust is NOT something that comes easily. I have ex-colleagues and friends in China that I have known for 20 years.  They are wonderful people and I truly value their friendship. I trust them but only because I have worked closely with them and known them for 20 years.  So for this reason your attitude going into China should  be ” I will try to build up trust but will ALWAYS verify.  I will NOT trust people blindly. Yet I will NOT be paranoid about being ripped off or having someone steal my IP.  I understand that it may happen but if that is what it takes to put me on the map in my industry in the US, then so be it.”   Companies that think like this tend to do well in China because more than anything else they are practical. Companies that go into China seeking to impose their value systems and business culture on their Chinese partners tend not to do well. 

I am sure you know a lot of lawyers who would disagree with this and tell you that you should always take steps to protect your IP in China. I read blogs by China-based lawyers and consultants and they often, though not always, give this advice ( as is to be expected because that is their bread and butter). For big companies with a lot of resources and clout IP protection is probably a smart thing (though the Subway example does not inspire confidence). But for startups and small companies on a shoestring budget it may not be.  As I said it is very expensive and it may not be effective at all – depending on your product and the extent of the protection you afford it. Your time and energy would probably be better spent working with your vendors on quality and other issues so that you can deliver the best possible product to your customers and grow your business where it counts most, in the US. When the time comes and you really have something to protect and then means to do so then you can worry about IP

Good luck ! 

Sam

 

www.theeastasiaco.com

 

IMG_6759