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Is India the future “China” in the making? YES!

12 October, 2007

What a busy month. My industry is synthetic leather and we manufacture and distribute chemical materials, pigments, finished synthetic leather and equipment. We are exploring the synthetic leather markets in Turkey, India, South America and Mexico. We just left Istanbul, Turkey and now we are in India – for the first time.

Investment in synthetic leather manufacture from Taiwan in the late 1980s was one of the first successful industries in China. As the Taiwanese synthetic leather industry grew in China it was only a matter of time before Chinese manufactures developed and grew at a phenomenal pace until China is the global hub of all synthetic leather manufacture. Today China produces about 75~80% of the world’s consumption of synthetic leather. This development of Chinese synthetic leather directly created ancillary industries for raw materials, PVC and Polyurethane (PU) resins, pigments, chemicals, fabric and equipment.

With high quality domestic synthetic leather available Chinese manufactures of shoes, garments, bags, furniture and sports equipment developed rapidly. These industries helped to develop other industries such as other plastic items such as household items, toys and so on. In my opinion the development of the Chinese synthetic leather industry helped China develop in manufacturing as a whole.

India is beginning to find its place in the world. We all know about the Indian IT industry but has anyone wondered why India and not China? Communication! English has no part in Chinese everyday life even though English is required and taught from primary school to university where one must pass an intermediate level English proficiency test (CET Band 4) to graduate one is hard pressed to find someone who can actually put two English words together. (Anyone who has traveled to China is nodding their heads in agreement at this point). India on the other hand was a former British colony and English is part of Indian everyday life. Everyone in India it seems has some English knowledge with most business people quite fluent. China is not deficient in technological skills compared to India but there is no way to communicate at the same level.

China is a maturing market and competition is forcing Chinese manufacturers to look else ware to set up shop. Many Chinese businesses are investing in India and one industry is synthetic leather. China started with PVC synthetic leather – the cheap leather that feels like plastic. Today about 90% of the 430 plus Chinese manufacturers produce PU synthetic leather which can has the look and feel of natural leather. India on the other hand produces PVC leather with only two manufacturers producing PU leather – most for domestic consumption. Therefore India imports higher quality PU leather from China for its demands however this is beginning to change. India is where China was in the late 1980’s a growing industry of higher quality PU leather. This will have the same effect it had in China with ancillary industries developing to meet the demands of the new PU leather industry. With this development other related industries will develop in kind as if did in China. However there is one large difference – India can communicate!

With India developing a manufacturing base as China has there will be rapid shift of foreign manufacturing from China simply by ease of communication. For a foreign company to set up in China finding English speaking qualified staff is a nightmare. Usually one must hire Chinese who are an English major and then train them or if they are lucky they can find qualified Chinese staff who happens to have English as a hobby. This will not be a problem in India as even many factory workers have simple English skills.

Within 20 years the ‘Made in India’ label will be on most items sold in Wal-Mart!

There is much more to add but it is late and I have a meeting to go to in the morning. I hope I can write more, more often.

Cheers

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Leaving For One Month to ‘The New China’ – India,

26 September, 2007

Well this is my second posting in my otherwise pitiful blog. I suppose I ought to spend more time here than commenting on Dvorak Uncensored.

I have a lot of postings running through my thoughts, one of them is India. I have read in the media that India is not expected to be the new China. However from what I see this will not be the case. China is becoming more expensive with the appreciation of the RMB to the point now that many Chinese companies are looking to manufacture in India – to save money! When with this end?

We have started trading with India and we are currently looking at investment there to catch the wave – hence this first trip out. When I return I will have a better insight of India and will post my thoughts.

We will also be traveling to Turkey this trip – I keep thinking about that movie “Midnight Express”, funny how we label things so easily – Hmmm.

Cheers

 

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An Insight to the Chinese Toy Recall and Chinese Business

3 August, 2007

“Toy-maker Fisher-Price is recalling 83 types of toys — including the popular Big Bird, Elmo, Dora and Diego characters — because their paint contains excessive amounts of lead.” – News Yahoo

http://news.yahoo.com/s/ap/20070801/ap_on_bi_ge/toy_recall

“Mattel Inc., the world’s largest toymaker, said a recall of 1.5 million Chinese-made products will reduce second-quarter operating income by almost 50 percent and that it will review the production methods of all its contractors in China.”

http://www.bloomberg.com/apps/news?pid=20601080&sid=aS2NWxBlHNUw&refer=asia

“The recall is particularly alarming since Mattel, known for its strict quality controls, is considered a role model in the toy industry for how it operates China .Fisher Price Toys have been a model manufacture in China” – Bloomberg

“Tainted Products

U.S. officials have raised alarm about tainted products from China, which produces 80 percent of the world’s toys, including seafood containing harmful drugs, toothpaste with an ingredient found in antifreeze and pet food containing a chemical used to make plastic.” – Bloomberg

These stories of made in China products are occurring at a frighting rate and begs the question on how could something so simple as using lead based paint occur?

Perhaps I can offer some insight on how toys can be painted with lead tainted paint.

I am a manufacturer in China for many years and I can give my insight on how Toys painted with lead paint is possible.

Lets set up a typical business situation in China. Say I am a supplier of paint which I want to sell to company A.

Say my sales team has failed to close the deal with company A and after a while I would need to take this to another level to close the deal.

To do this I need to get friendly with the person who is responsible for making the decision to buy my paint. Normally this is the purchasing officer but it could be someone higher up the ladder or the chief ‘engineer’, factory manager and accountant is usually in on it as well.

It will take time to develop “guanxi” which is Chinese for a (business) relationship with this person. I would offer bribes, dinners, karaoke, girls or whatever it takes to push this person’s button. This person in company A knows his power and uses it to get some benefits. I also keep in mind that if I ‘flip’ this person to agree to buy my paint there may be others who will want a taste of the action as well.

If I am successful in developing a better guanxi with this person over the guanxi he has with other my competitors I can sell paint to company A and I must pay a kick back to this person for all orders – and possibly to others as well depending on the scale.

For example I don’t know of any purchasing officer who is not on the take in one form of another – they believe this is part of their remuneration. Chinese companies all know this and its part of the cost of doing business in China. Most is harmless kickback so you hope you don’t lose too much or worse the product which was good at first now is not and it gets you in trouble. A good purchasing officer has all the connections, knows a wide range of suppliers, gets the best price even with the kickbacks.

All is fine if my paint I am selling to company A is what it I say it is but this can change either with my knowing or without. I must be vigilant with my purchasing officer as well as workers in the factory as they can all benefit from someone wanting to make a ‘deal’. The good materials in the factory I use for my products might be sold to someone out the back door which is replaced by some inferior material with counterfeit labels, drums etc. For large companies in ‘deals’ like this even the senior management like ‘wet their beak’.

From the Fisher Price story: “Allmark said the recall was troubling because Fisher-Price has had a long-standing relationship with the Chinese vendor, which had applied decorative paint to the toys. Allmark said the company would use this recall as an opportunity to put even better systems in place to monitor vendors whose conduct does not meet Mattel’s standards”.

What Allmark said might be true and is the only thing he can say to the media. The example I gave is endemic to China. To Chinese this situation is normal and sometimes you have to take a hit and lose so that is the price you pay. Any Chinese company owner must be vigilant and trusts no one. To this end it is quite usual for a Chinese owner of a company to position their family members in key positions for trust. Even then, there is no assurance of trust. I know of one Chinese company where the owner’s brother was selling material out the back door and replacing it with inferior materials. When the brother was found out he wasn’t even fired because he is a family member and the father forbad it. Yes this sounds like something from the Sopranos doesn’t it? Sure does to me!

Foreign companies in China will attempt to do the same by using their own foreign staff in key positions just to avoid the problems of kickbacks and so on. I know of many foreign staff in foreign companies who after firstly refusing bribes and kickbacks find that a couple thousand dollars here and there for giving the nod to some supplier etc is too good to refuse. I know some individuals who as a matter of course expect the bribe and have gone ‘native’ in this respect. The temptation is too great when they compare the life they had back home.

In an attempt to prevent their foreign staff going native some German companies I know only allow a maximum of two years in China for their expatriate staff – sometimes even less. “This is to maintain the influence of home office fresh” as they put it.

We can see what may have happened with Fisher Price / Mattel. The situation may be more complicated than my example but in essence that is how it happens. Somewhere in the material supply chain or in the factory there is someone who exploits whatever power they have and flips. The paint supplier may have not even been aware that the paint was not lead free – even routine government tests for heavy metals may have been compromised.

Government tests can be up for for sale, if you have good guanxi. I know of a company which tests regularly for heavy metals and each test from the government testing lab costs about $200 so getting 100 tests done is far too much. What to do…they negotiated with the person in charge of doing the tests and now they pay him directly – $20 per test. They didn’t want the test results fudged (and have never broached that subject) only a lower cost was sought. This is in Shanghai where controls are the strictest but you can imagine what can happen elsewhere where controls are lacking.

Another way to enforce consistent quality and protect their IP is not to use Chinese staff at all. Not so far fetched. I know of Japanese factories (some Taiwanese too) here in China with only Japanese workers (including security) using only imported materials. So they literally ‘beamed over’ a Japanese factory to China. This is the only way they felt they could keep control of the quality and protect their intellectual property. Why do this? Well for one factory costs in China are a fraction of what it would be in Japan, they might sell their products to Chinese companies so it is very doable.

I have found that in particular American companies set up in China have many difficulties in understanding the Chinese and their culture. I met many Chinese working in American companies who think Americans are…well…stupid. What gets them the wrong way is the American attitude that even American shit is better than anyone else’s. Well that is the America culture I suppose but it doesn’t do well outside of America as many Chinese have even less moral problems in getting what they want.

About 5 years ago I knew one of the Chinese senior accountants working for an American automotive manufacturer here in Shanghai. According to her the person directly above her was the American CFO who felt that all Chinese were incompetent. His salary was $300,000+ per annum not counting all living expenses paid such as his house rent at $12,000 per month. She felt she did all the work and got paid $13,000 per year which at that time it was a good wage for Chinese staff. So how did she feel – how you would feel – what would you do if given the opportunity?

Many foreign and Chinese companies and I know outside of Shanghai are very mean with their Chinese staff and can get away with it.  Common things are poor wages, safe working conditions, few benefits and so on.  For many Chinese workers there is no such thing as getting paid overtime, they don’t even expect it, 12 hours a day 6 days a week is the norm even though government regulations limit the working week to 40 hours and caps overtime per worker to 32 hours per month. Think of what companies like ENRON was able to do in America – imagine what an “ENRON” company with no scruples would do in China.

In these situations there are many employees who see no moral problem with wanting to take whatever benefit they can – even in Shanghai as well. This has become part of the culture and it is not seen as a bad thing.

If the employees feel cheated by a company and want to complain to the government the company usually has very good guanxi and the complaint goes nowhere. If the company is ever fined it is usually very little and the employees get the sack, so you can’t fight Chinese city hall.

In fairness to the Chinese government they cannot possibly control what many businesses do. Its on a scale you can’t even imagine – hundred of thousands of companies! There just isn’t the infrastructure or manpower to deal with it and there is the element of trust in as there is a lot on money in guanxi. Power equals money. Many government officials see the power they have and the money they get as part of their remuneration. Is this only a Chinese condition? Look at the US congress…

Having said that, the sad thing is many Chinese government officials simply do not believe the stories are as bad as reported such as the tainted pet food. Many feel it is just a political ‘beat up’ to force China into less than favourable trading arrangements.

As the Chinese currency (RMB) gets stronger against the dollar (it is currently undervalued by the government) export companies will have it harder to make the money they had been making in the past.  What also occurred recently is until June 30th this year the government would kickback Chinese companies 13% of the value of certain goods exported.  Removing this export benefit has a tremendous impact on Chinese export companies as they based their pricing on getting that government 13% kickback.  Nearing the deadline of June 3oth there was not a container to be found to export goods out of China.  There were lines of container truck kilometres long waiting to get to port.   Losing the government 13% kickback and the appreciation of the RMB will motivate more and more Chinese companies to cut costs as much as possible.  Therefore I would expect more of these sorts stories we are seeing in the news about bad Chinese exports  occurring more frequently.

Its not all doom and gloom.  Eventually the pendulum will settle somewhere in the middle and the ‘Wild Wild West’ (Chinese style) will fade away. This has occurred somewhat with Japan and Taiwan in the past in trade with the west. The difference from today being that regulations and world trade was not on the same scale they are today. China is a MUCH larger pot and with both Japan and Taiwan extensively shifting manufacturing to China, Chinese exports dominate world trade and will continue to for at least the next ten years or so.

After when China becomes a very large ‘Japan’ with higher costs and wages than today where will Chinese and other companies go to?

Of course everyone is quick to point to India and I agree India is about where China was 20 years ago but India will share its economic growth with Indonesia.   This might be a surprise but Indonesia is better positioned for a economic boon than India.  India may be more technologically advanced so I see this shifting over there but what of everything else say cosmetics, food, household items and so on?  Made in India – I hope not!!!   Lets stop here and leave this for another post!!

Cheers

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29 July, 2007