‘Trust nothing, verify everything’

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I recently read the story of an Australian who came to China in late 2006 to find a company or companies to process wood flooring products for his market in Japan.

His concern was that rising costs and a strengthening Australian dollar would erode his competitive edge if he continued manufacturing in Australia.

After a year trying to find suitable suppliers, he decided to start his own factory. It was a learning curve; he survived by working with the local government, getting things in writing and being personally involved. For almost two years, things went smoothly. But, in December 2008 he woke up to find his local Chinese bank account frozen. There was no notification and no immediate explanation from the bank. After a couple of days he received a letter from the local city court advising that he was being sued for failure to pay a debt.

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The suit arose out of a situation where he asked the advice of a Chinese supplier he was doing business with, and whom he considered a “friend,” about purchasing some second-hand equipment.

His “friend” said he was about to leave for Vietnam and suggested he look at the equipment when he got back. On his return, his “friend” offered to help him purchase and install an entire production line because the “friend” had found a factory that had gone out of business in Shanghai (how convenient!). The “friend” claimed to have seen the equipment and said that it was only six months old. The business owner said he would not buy anything that he had not seen, but the “friend” responded that if he were to turn up with him, the price would undoubtedly be higher. The “friend” said that if he did not want it, the “friend” would take it himself. All he needed was a returnable deposit of 30 percent. He did not think that the “friend” would play any games, as they had known each other for over a year and a half, had conducted regular business worth about $25,000 per month and the “friend” had always kept his side of the bargain. Everything was put in writing, but not in a formal contract (in Chinese), signed by both parties.

Predictably, then, things went south. The equipment turned out to be four years old, not six months, essential equipment was missing or had been substituted, added costs were necessary to get things running, negotiations deadlocked, containers of materials delivered to Japan were held up, each side tried to use tactics to push the issues in their respective favor.

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This led to his accounts being frozen and the courts, lawyers and his “friend” in the end extracting payments from him. The situation crystallized for him when the Chinese judge, who was very diligent in pursuing the case, explained to his lawyer that they would win the case at the trial court level, but the appeal would be to the chief judge, whom everyone knew was an ally of his “friend.”

The matter was finally resolved, the lawyers were paid, a lot of time was wasted, his “friend” received in total about 60 percent of the contract price and he was left to reflect on what had happened.

His take after a few years of reflection was that his erstwhile “friend” did not set out to screw him. There were communication issues, and he realizes he should have been a lot tougher from the outset.

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His summation:

“Circumstances change, good intentions are forgotten and greed prevails. Rationalization ensues. There is no paradox, because here a deal is never a deal. I believe that when he saw the equipment some of it was very good. Indeed, it was too good, and I was getting too good a deal, and he really could use that sander and a few other bits and pieces. I was rich, and I could afford to pay anyway. Swapping them with his was not cheating me because I had not seen it. His equipment would do the job, and I would get over it.”

My summation:

He failed to abide by the first rule: trust nothing, verify everything. If he had looked at the equipment and bought it, there would have been no problem.

If you do not speak and read Chinese, be careful what you are signing. Details are essential, and in a language which can express things very vaguely or precisely, you need to make sure you understand everything. A good legal translator/attorney could have prevented a lot of the issues.

When you are in a foreign country, you do not have “friends.” You may have business relationships, but that is not the same. For example in Milwaukee, the Chinese group which bought Northridge, with big plans and much fanfare, are now leaving with nothing. How many of their Milwaukee “friends” are helping them? What kind of story will they tell about their Milwaukee adventure in China?

Don’t buy things from companies who are not in the business of supplying them. Why would he ask a supplier to help him purchase equipment and install a factory? China is a hyper-competitive market where margins are small and opportunities precious. The idea that your Chinese “friend” should help you, a foreigner, realize opportunities they could take advantage of, seems a bit odd.

Never be sole-sourced. His situation was compromised because he felt dependent on his “friend.” Never be dependent on one source. Have two or three to maintain your purchase edge and prevent being held hostage.

No understanding of “Chabuduo.” This is a Chinese phrase for “about the same,” which means to many Chinese “no difference.” This is the kind of linguistic and cultural ambiguity that lies at the heart of many tears and much anguish in China.

Failure to understand that local business people might have friends. It’s always mystifying to me when a foreigner in China is outraged when they find that their Chinese adversary has Guanxi (connections). On the other hand, they practically swoon when their Chinese connection boasts they have Guanxi. It would be hard to imagine how you could avoid knowing people in your hometown if you are a businessman.

So what is the lesson of the day? Trust nothing, verify everything.

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