China’s Big Political Picture Writ Small for Business.

China Lawyers for Manufacturing Contracts

I am not generally a fan of extrapolating the way a country conducts its politics to the way its enterprises conduct their business, even in China where so many businesses are government owned. I am not saying it cannot be done, but I generally find it too complicated for too little value.

David Dayton, who truly knows the way China conducts its manufacturing, just came out with an analogy laden post, entitled, Rio Tinto and Urumqi as Corporate Culture Lessons, linking China’s recent handling of its Western region with how its factories treat foreigners. Though I am dubious of the value (beyond entertainment) of making this linkage, I am convinced Dayton is spot on regarding Chinese factories and I am going to focus on that.

Dayton sees China using the following four step process to deal with its problems out West:

1. Round them up.
2. Insist everything is okay.
3. Identify a common enemy.
4. Show them the money.

1. Round them up. Anyone against the factory will be removed. In other words, that factory floor manager with whom you have had a great relationship for the last two years? He will go silent as soon as you have a problem. Dayton advocates handling this by tying payment to the Chinese factory not to its own assessment of quality, but to that of a third party quality assessment company:

This isn’t arrogant or obstinate it’s just a fact—3PQ reports are directly tied to payments and there isn’t really any room for discussion if the product doesn’t pass. Just stick to this and never give in and you’ll be fine. Give in once and every question from there on out will be a major battle. You’ve been warned.

I agree with Dayton on this. When possible, using an unbiased third party service to determine quality/payment benchmarks is a great way to go. The problem is getting both the foreign outsourcer and the Chinese factory to agree on the third party.

2. Insist everything is Okay. Deny any and all problems:

I’ve had people hold product and Pantone color chips and literally tell me that a red color isn’t really red but that my color chips must be old or incorrect or even that the colors match perfectly (even if they are totally the wrong color). My friend Mike tells of story of “red” fire trucks that were actually florescent orange and the factory had no problem with the difference. Remember, if no one admits to the problem then it doesn’t yet exist (at least in the minds of the factory managers). And that’s the goal—to eliminate the idea of a problem rather than solve problems.

I am betting every single reader out who has dealt with a Chinese factory knows exactly what Dayton is talking about here and probably every single reader out who has not dealt with a Chinese factory thinks Dayton is exaggerating. He isn’t.

When faced with this, Dayton prescribes the following:

What can you do about this attitude? Probably nothing. Just agree with the fact that they do indeed do this for other people. But remember, it doesn’t matter what other clients accept or what the factory “typically” does. If it’s not what you agreed to (in your written contract) then you don’t have to pay for it, regardless of how typical it is.

3. Identify a common enemy. Once you get the factory to admit there really is a problem, you then need to figure out from where it stems and how to fix it. Dayton accurately describes the different thinking on this:

My experience is that while I’m interested in getting problems fixed (solutions to meet deadlines) the factory is more often concerned with finding someone to blame—usually a sub-supplier. It’s always the sub-suppliers fault.

No matter how many times it happens it’s always amazing to me how factories are willing to throw their sub-suppliers under the bus and assume that they have no responsibility for their quality. Of course, they chose the sub-suppliers (often without telling us they were even involved) themselves and they paid them for work — and therein lies the problem. Factories just assume (or hope in vain) that blaming someone else will end the problem. It’s like they expect me to say: “Oh, it’s the sub-supplier’s fault? Well then, we’ll just let it go. Sorry for bringing it up.” Once something has been paid for it doesn’t matter who the buyer is, a foreigner or a local factory, no supplier is going to fix stuff that is “finished” and already paid for and shipped out. Bad quality components most often have to be replaced at the factory’s expense since they can’t get their sub-suppliers to pay for them once they’ve taken delivery.

Dayton’s solution to this is to not fight the blame game, but to focus on fixing the problem. I would add one thing to this. Make very clear in your contract with your Chinese manufacturer that the manufacturer will be responsible for all quality problems and make very clear the extent to which subcontracting will be permitted, if at all. For more on how to handle the subcontracting issue, check out The Seven Keys To China Quality.

4. Show them the money. Dayton outlines what happens virtually every time there is a manufacturing problem and it goes like this:

This is what happens next. You find a problem, they deny it, then finally admit it, blame the sub-supplier and offer you a discount for the next order. Notice, fixing the problem, resolving the concern, changing processes, or giving you a discount for the current (incorrect) product are almost never options. The key is to get you to take as much of the current crap for the fixed price as possible and then spend money (future discounts) on other projects to pacify you. If they can get current product moved at the agreed upon price, the next goal is the reorder—if that means promising discounts now, so be it. There is always time to increase the costs late

Dayton does not tell us how we should handle this and that is the problem. My experience is that the foreign company pretty much has only three choices (really two) at this point. It can keep trying to negotiate better compensation from the Chinese factory, but it probably will not get it. It can walk away and never do business with this Chinese manufacturer again. Or, it can threaten to or actually sue the Chinese manufacturer. But if it does not have a well drafted contract (preferably in Chinese) that outlines very clearly exactly what was expected of the Chinese factory, its chances in court will likely be pretty poor.

11 responses to “China’s Big Political Picture Writ Small for Business.”

  1. “Pretendism” is a phrase used to describe how things work in China. As in “let’s pretend the product is what you ordered, let’s pretend we have a harmonious society, let’s pretend that 8% GDP growth is a real number, let’s pretend that housing prices are sustainable” …

  2. This boils down to how everything works in China. It does not matter if you are ordering a meal in a restaurant or executing a multi-million dollar contract, the process is always the same. Who here (who has been in China) has been to a restaurant when they mess up your order? It’s the same process, they never just say, “oh, sorry, we messed up the order. We will take it back and fix it (prepare a new one, see below), and by the way, because of our mistake, we will offer you a round of drinks on the house to placate you for our error”. First they act as if there is no problem. Then they try and blame it on you. Then they may say it was the chef’s fault (of course the chef is not there in front of you so it is easy to blame it on him). Then they insist you should take it any way (even if it not what you ordered). When you refuse and ask them to take it back and fix the problem, they are indignant and surly about the whole thing and never say sorry or offer to make it up. (I once ordered a salad with oil and vinegar dressing. When they brought it out, they had Russian dressing on it. I refused to take it and asked them to take it back and bring out a new salad with oil and vinegar. They took it back, poorly attempted to wipe off the Russian dressing (they did not get it all off) and then pour the oil and vinegar on it. This is instead of just making a new fresh salad. I refused to eat it like that; there were still bits of Russian dressing on it (it effects the taste, especially mixing vinegar and Russian dressing). Without eating any of it, I then informed them that I did not want any salad at all and just to bring my main. Well when I got the bill, they charged me for the salad that I did not eat and turned away. Then a big argument ensued with them insisting I should pay for the salad —-Remember we are only talking about a RMB30 salad) they were angry and surly and basically ruined my dinner with my family. Yet they were determined that they were going to get that RMB30 out of me. Finally, I had to just throw down the total amount on the table, minus the RMB30, and walk away. They finally gave up, I never went back again and tell all my friends not to go there either).
    I am not exaggerating and this is the point. As stated above, Dayton was not exaggerating. They will go to the ends of the earth to avoid accepting blame for a mistake they made, no matter how minor or trivial. I always ask them, “Why should I pay for your mistake?” I have yet to get a good answer.

  3. The problem is the word “exactly” in specifying what the product should be. Even for reasonably uncomplex products, there are so many things that can be changed and go wrong…
    The process (in my particular industry) is usually that the (at this time: prospective) supplier sends samples, these are tested and on that basis a release is given and orders are placed. Any change compared to these samples has to be documented, validated and approved (which implies “no subcontracting, no change of materials, nothing”).
    A contract that included all specifications and requirements for the product would effectively publish massive amounts of know-how and be completely impractical to produce.
    I do however hope that the procedure above could also be worked within the Chinese legal system (as long as the validation samples were really well documented, for which the industry in general has an abundance of tools, although usage in China can be less than complete).

  4. “Pretendism” is also how things work in the U.S. Create an “image” or “brand”, and then watch everyone “pretend”/conform to the image.
    Use emotion (desire, fear) to undermine people’s critical thinking and then bomb them with repetition of the message. Result: everyone pretends. Everyone pretends that the economy is getting better; Everyone pretends that we are winning 3 wars; Everyone pretends that a very mild swine flu is the end of the world; Everyone pretends that “Change Is Come’n to America”, etc.

  5. The implication here seems to be that Chinese people are somehow inherently dishonest. I couldn’t disagree more. Only a fool expects everyone everywhere to be honest but most people, including Chinese, will in fact go out of their way to do the right thing. The four step process described by Dayton is really just a product of the emphasis that Chinese place on face and general low standards. The key to dealing with these problems is not to be suspicious or look down on Chinese people. Heap copious amounts of praise on others, criticize people carefully, privately, and in a non-personal manner, make standards clear, make all concerned understand why those standards are important, and verify the ability and willingness to meet them. If it becomes apparent the other party does not want this kind of relationship extricate yourself in the cheapest manner possible and move on. There are lots of good business people in China who want to deal with you in a constructive manner.
    On a tangent: I got a big kick out the remarks about problems with suppliers getting colors incorrect. Chinese people just don’t generally see this stuff as important. I had to go and check on a retail store that is supposed to open in a few days. The contractor somehow printed red sign in spite of the fact that corporate VI calls for a very specific shade of orange. He got a color card. He got a detailed list of design requirements. He ignored them because he thought red would look better. I see bad judgement like this all the time and it makes me nuts.

  6. There is very little in this sort of behavior that I see as being particularly “Chinese.”
    One reason for this is that customers are often looking for the lowest price, and the price comes out of customer service.

  7. Chris:
    The root causes of the term labeled here as “pretendism” are the desires to preserve both money and face.
    Upon discovering a problem, Chinese appear willing to often dismiss its existence. Why? First, there is a monetary cost involved in making any correction. This is something the Chinese particularly hate to absorb. Out of a sense of magnanimity, you probably should have taken this hit. The folks at the restaurant are not operating in the same economic strata as you. Right?
    Second, by pointing out the error, you have created a loss of face. And, you have done so in a direct fashion. This requires someone to take the blame so that the individual before you can extricate him or herself from the situation. It’s for this reason that the chef is blamed.
    Note though, you too have lost face by seeking to place the truth before harmony in such a triffling matter. I suspect that it is for this reason that you received such “angry and surly” behavior as you sought to pay your bill.
    So, how would a Chinese person seeking to maintain harmony relate their unhappiness with the situation, express their magnanimity as to absorbing the cost of the error, and put the errant server on notice that better service is expected?
    She would do so with a deft flick of the wrist two or three times and simply say: “Suan le ba.”
    Try it next time, a RMB30 salad is not worth ruining your family’s dinner. Cheers!

  8. (Anyone else here that is actually Chinese? I’m surprised at this fortune cookie advice that seems to me to be mostly non-sense.)
    American: The four step process described by Dayton is really just a product of the emphasis that Chinese place on face and general low standards.
    I don’t think so at all. It’s a product of the fact that when American companies go to China they are looking for the lowest cost bidder. If you want high standards and excellent service, you can get it, but it will cost you.
    I’ve never had much of a problem with Chinese restaurants messing up an order, because if I find a place with bad service and awful food, I just don’t go there again. The places I go have good service and good food, and I’m willing to pay extra for it. If I find a nice place to eat, I just keep going there.
    Zierman: This is something the Chinese particularly hate to absorb.
    I don’t think that this is particularly Chinese. Costs are something that low margin transactional businesses hate to absorb. If you have someone operating on razor thing margins, then they are going to be rather annoyed at anything that would eat into that margin.
    Zierman: Note though, you too have lost face by seeking to place the truth before harmony in such a triffling matter. I suspect that it is for this reason that you received such “angry and surly” behavior as you sought to pay your bill.
    It’s not triffling. 30RMB is likely to be one days wages for the chef. Just imagine a situation in which saying sorry will cost you US$300, and you can see why people might be a bit defensive.

  9. “Upon discovering a problem, Chinese appear willing to often dismiss its existence. Why? First, there is a monetary cost involved in making any correction. This is something the Chinese particularly hate to absorb. Out of a sense of magnanimity, you probably should have taken this hit. The folks at the restaurant are not operating in the same economic strata as you. Right?
    Second, by pointing out the error, you have created a loss of face. And, you have done so in a direct fashion. This requires someone to take the blame so that the individual before you can extricate him or herself from the situation. It’s for this reason that the chef is blamed.”
    I don’t buy that EVERY error pointed out to a Chinese person involves a “loss of face”, and to suggest it does is ridiculous. For one thing, it means that Chinese don’t (or worse, can’t) differentiate intellectually between the trivial and the serious.
    I cannot be the only person who has been involved in a situation where a trivial error was pointed out to a Chinese person and the error was simply corrected. I have certainly experienced the “won’t budge, not at all” scenario over small matters, but I would hardly suggest that this was the rule. Further, why do you assume that this restaurant was so downscale that omitting the profit from a 30 RMB salad would break it? Any restaurant that has the necessary refrigeration and kitchen space for salads could certainly take such a “hit”. I have sent back plates in 3rd and 4th tier cities, had my order corrected, and no one died of embarrassment or deep personal shame. I do understand the willingness to be culturally aware, but I disagree strongly with the tendency to infantilize others. That is, i do so if “infantilize” is a real word.
    I agree wholeheartedly with Twofish that this sort of behavior isn’t uniquely “Chinese”, although there are certainly reasons why it is more common in certain cultures than others.
    That said, it must be a wonderful experience indeed to be a Chinese businessman who profoundly messes up an order – and completely changing a color is a profound messup – only to find that his foreign customer will accept the order as is because he is too well-mannered to cause anyone to lose face.
    The term “face” doesn’t mean “farce”.

  10. I concur with Twofish’s assessment as to the restaurant not wanting to absorb the cost. It is a lot of money to them. However, to Chris it presumably is not. And the Chinese will think this too.
    So, for the sake of smoothing things over “when” it does appear that there is a problem, I’m suggesting that instead of allowing this to errupt into a fight over the cost of the bill, and instead of him just letting it go with “bie qi” in his belly, Chris might consider waving it off with a “suan le ba.”
    Now, “when” did the problem actually occur? To Chris, it was a problem when the second salad was still not to his satisfaction. Did he mention this to the server?
    No. Instead, he let it sit on the table uneaten presumably thinking that the server would come around and ask what was the matter.
    Well, it just doesn’t work that way in China. Without rejection, by default he has accepted. Or, to tie this rather ridiculous exchange back to the purpose of this blog; this is “Accord and Satisfaction” (writ small).
    These sorts of “incremental negotiations” occur all the time.
    So, “when” did the problem erupt? From the restaurant owner’s point of view, when Chris informed them that he wasn’t going to pay. Hence, the fracas over the trifling “and” huge stakes.
    Now with that said, I am also willing to look at this from the other side. This business appears to want to serve foreigners. (After all, we are talking about a salad and the Chinese generally do not have much appetite for cold greens. Right?)
    When a restaurant holds itself out for business to foreign clientelle, they “ought” to expect to service that clientelle in the way that it expects to be serviced.
    So here, that would mean boosting up prices a notch to cover (the restaurant’s own) errors as a simple cost of doing business. Do competitive pressures allow this? Maybe? Chris thought this was enough of a high-class joint to offer a round on the house to placate him for their error. On the other hand, this restaurant may be operating on razor thin margins.
    All I am suggesting is that some battles in China are just not worth it and it’s nice to know how to deal with them.
    “Suan le ba.”
    Cheers!

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