Don’t heed false prophets

One of the biggest problems American business people run into when looking at China is the large group of “experts,” the consultants, articles and books with their generalized pronouncements about how to do business in China.

A lot of it is gibberish mixed with generalities aimed at getting you to engage their services or buy their publications. People flock to these prophets for simple answers because, like sheep, they are looking for a shepherd to guide them to greener pastures.

Unfortunately, like sheep, they often get fleeced or wind up on the local menu.

Here is an example that illustrates the advice of some China “experts.” I received a copy of a May 12 article in The Wall Street Journal from a college classmate entitled, “Making It in China.” It was co-authored by three U.S. professors. The article cited a case study about a U.S. company that entered into a sourcing agreement with a Chinese motorcycle venture. The relationship got off to a rocky start because the Chinese manufacturer was using substandard parts. The U.S. company solved the issue by hiring a representative to verify the parts being used. Five years of bliss and profits followed, but then the U.S. representative who was in charge of verifying the parts left and was not replaced, the Chinese manufacturer went back to using substandard parts and then things got ugly when the motorcycles started conking out after 200 miles.

The article then went on to talk about “different cultural and economic perspectives” as the problem. I told my friend, “Nonsense” (or words to that effect). The Chinese company substituted cheaper parts hoping it could make some money without getting caught after the U.S. company decided to stop verifying the parts.

The motorcycle industry and market in China is huge and internally and externally competitive. In 2005, China exported 7 million motorcycles valued at $ 2.4 billion, about a third of their total production. Between 1999 and 2007, the number of domestic motorcycle manufactures tripled. Despite the numbers and its market position, China’s manufactures are under pressure from foreign markets. Vietnam, India and others are offering cheaper labor, tax incentives and less stringent environmental standards or in some cases enforcement.

Does this sound familiar? As a contract manufacturer, the Chinese company knew the U.S. company would move its orders elsewhere as soon as it made economic sense.

Cheap motorcycles are a commodity, and in a competitive global market, the rules for commodities are few and loyalty non-existent. Why would the U.S. company assume that they had developed a business “trust” relationship? What was the mutual long-term commitment? Why would a company which is sourcing 50,000 motorcycles a year fail to replace their only in-country quality control representative?

Bottom line, this was less about “different cultural and economic perspectives” and more about greed on one side and poor management on the other. The U.S. company failed to see itself and its supplier relationship realistically, choosing instead to make a number of erroneous self-serving assumptions that backfired. The Chinese company’s actions were fraudulent at best, but given their previous behavior and the relationship, hardly surprising.

Yes, there are a lot of “different cultural and economic perspectives,” but money, contract, shipping, delivery, payment terms, responsibility, honesty and commitment mean the same in China as they do in the U.S. Attempts by “experts” to rationalize bad behavior and poor management as “different cultural and economic perspectives” are misleading and add to the confusion and misperceptions about doing business in China.

When you are thinking about going to a foreign market, take a look at your strategy and actions in terms of how they would play out if the situation was reversed and a foreign company was coming to your hometown. Do not rely on one person’s opinion, even mine. It’s your business. You have to sort out what makes sense. Apply your knowledge of human nature and most importantly remember it is not about trust, it’s about verification.

Observation 102: I have noticed that the last people I should do business with are often the first people I meet in a foreign country.

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