I saw this article over how Paulson got sued over not doing enough due diligence on the Sino-Forest investment. Find the WSJ article here.

How should we understand the present problem with U.S. listed companies from China?

I do not think all Chinese firms should be delisted, but I am concerned over viewing Chinese companies like we view U.S. companies.

Chinese companies have a vastly different culture of transparency and use of their company.

I personally do not invest in the Chinese stock market.  It has both business risk and transparency risk.  So you should think more if you plan to.  Surely, to invest or do business with any Chinese company, you need a different and more detailed due diligence of the company.

I think we will do well to use worst case analysis thinking to face China.  Briefly, this means to consider what might happen if someone purposely sought to deceive or lower the price.   That does not mean all Chinese companies are falsifying their documents but differences in culture and practices and falsification all add up to a need to look more carefully.

I will give an example of this tomorrow.

Here is a Quote from the New York Times on the recent World Bank Report given in Beijing.

The World Bank said, The greatest risks facing China’s economy, the authors say, may not be external shocks like global economic weakness, but internal structural challenges, like weak domestic consumption, overinvestment in infrastructure and rising inequality among its people.

Internal challenges and a weak external environment are a big problem.  I would also add a blooming unavoidable labor shortage, and the New York Times article has more to say as well. The World Bank made a forceful and surprising statement on the urgency of Chinese reform.  

The China Performance Group can represent the optimistic side

In my opinion there are reasons to be optimistic. China’s leaders are focused on China’s success. Unlike the leaders of some other nations, they are professional, which means they spend their whole life studying the challenge and finding appropriate, timely solutions to it. They are also meritocratic in their own way, and those that make it to the top are highly respected. Over the last 30+ years I have observed China getting itself out of very challenging situations. I have studied China’s leaders carefully and met some of them. Most of them were impressive.

And remember The Coming Collapse of China?  Gordan Chang made a bold prediction in this 2001 book that China would crash very soon.  Far from it. Years later the West crashed.    It is fascinating to me that Gordan Chang stays in the news after being so totally wrong based on his own subjectivity.

I also have met at times with high government officials and have always found them to be very smart. They are more clear on these issues than we are, and they do not want to become a big Malaysia.

I sense they will find a way up and out, but they are already getting behind as they hesitate in reform at the wrong time and are missing about 300 million young laborers to power this critical 20 year stage, 2012-2032.

Thoughts?

I want to mention a book by John K. Fairbanks. It was published in 1967 and the title is  China:  The People’s Middle Kingdom and the U.S.A

In that time, China was in the middle of the cultural revolution and was killing and torturing itself in horrible ways. It was further vilifying America in every way it could.

At this time, an expert on China, John K.  Fairbanks, published in the hopes of helping the Americans to learn to understand China and not hate it in return  His actions helped pave the way for Nixon’s breakthrough visit in 1972.

In the opening of the book, Fairbanks moved me, for he said it would be no use to ask the question , “Why can’t they (the Chinese) be more like us?”  I had been in China a handful of years at that point and that question was within me. I had been unknowingly working to get them to come to me culturally in some ways.

He helped me see that I would not bridge 5000 years of separate social development by anything I did and best start to really learn about these Chinese people.  I suggest you do the same.  It takes effort to get past our wrong impressions of China and into any right thinking, but it will help you to be a better leader in China if you do.

Thoughts?

Just saw this at China-Window.  It is well done and you can get it here.

It describes how companies used to be careful coming to China but now they are accelerating their investments.  China is the biggest growth market in the world. Companies are seeing that the time is now to capture this market.

Here is a quote from that article.

A survey by the Boston Company not long ago indicates that 90% of companies in Europe, the U.S. and Japan have set a “China first” strategy. Their race to invest and relocate of their head offices in China clearly tells us: multinational companies have focused their key strategies on China, a stable and developing China can not be separated from the world, and the world can not be independent of China, which is creating external business opportunities.

30 years ago, Chinese people did not buy things that Westerners buy. No one used diapers for example. People felt this was just cultural difference while time has shown that it was an economic difference.  As soon as Chinese parents had enough disposable income, they started to buy diapers. The difference was merely economic. As Chinese people and businesses mature, they will buy more and more things and need more and more services that we naturally produce in the West.   Our best days are fast approaching.

The world’s largest companies realize China is the very best place to grow their  market.  SME’s are not mentioned in the article.  SME’s may not put their HQ in China like ABB and some other multinationals are, but they still would be wise in using a China First strategy for growth.  They should not ignore or settle for muddling along in China. China needs to be solved.

It can be.

I mentioned the top three concerns of U.S. companies in Shanghai recently here. Increasing Competition is Number 3. None of us should be surprised that competition gets tougher year by year as the whole China market matures.  Clearly, coming to China in a small way is a no brainer as too many possibilities in China for increasing the bottom line. However, the urgency of coming or expanding is getting greater as market share is being clarified in many industries.

Companies that are already here are finding that the learning curve is steeper year by year.  They need to work to stay on top.  However, they are finding they still can succeed and often are planning for expansion.

So, I sense many people who read this are doing well. Let’s not rest on that, but think how we can improve our game and find force multipliers rather than just squeezing out 1 or 2 percent improvements.

Lets reach high  Any thoughts?

I asked a few weeks ago, “How well do you know your suppliers? “   Today, I want to ask,  “How well do you know your people and what impact they are having on the overall company?”

I have seen people promoted who should have been replaced for the people they hired and even protected on the team in China.  Western HQ has no idea what is really going on and regularly support the wrong staff. I have seen it more than once that Western bosses protect the wrong people because their personalities are similar and they are unaware! The competition is rising in China and we are going to have to do better than protect people for subjective reasons and think we are doing it for the business.

We need to be open to hear all the voices. We are Westerners and are fools to think we understand Chinese people without Chinese help. Chinese people are masters of appearances. Even Chinese people struggle, so what about a Western boss who has no relationship except the Chinese manager who is manipulating him or her?

Thoughts?

A perennial problem in China is human resources, and so my company gets most of its work there.
I have written a lot about finding and keeping good people and you can find that here. The price of hiring the wrong guy can be so much higher and so much harder to realize than it ever was in your home country.  Having no one is a lower cost, but still too high.

I have seen top flight globally recognized China localized head hunters place people for Western companies that cost millions of U.S. dollars to resolve. I mostly blame the Westerners. They trusted the wrong folks. They used their home country thinking to face China and the world famous head hunters served them faithfully.

Finding good people is hard. We should open our eyes and think more carefully. A perfect resume is likely not what we want.  The competition for perfect resumes is high. You need to be careful. You need to consider values and whether your hire has the same values that you do. That will take you farther than a perfect resume that usually is not true anyway.  Most of your interviewing methods from the West are too weak here. You finally hire someone who has a very hard to find resume, and they are smart enough to steal your company or just bleed it.

Finding the right people who will make you successful is not easy. It takes lots of time and effort, but it is worth it. China has the people who can make you successful, but they often are not the people you expect. Use values matching for hiring in China. It will help.

Thoughts?

Foxconn said that salaries for many workers would immediately jump by 16 to 25 percent, to about $400 a month, before overtime. See the whole New York Times article  here

This is a good news/bad news thing naturally. If your factory is in China, and you are only exporting, your pressure just went up another notch.  You may need more than what I wrote yesterday.

If you are selling to the China retail market or thinking about it, congratulations as your customers just got a raise.

The trend will continue. Inflation will continue to castigate China as they keep pursuing an infrastructure strategy, and the aspirations of the next generation are high. Wages will keep rising.

The next generation will do better than this one. Happy President’s Day to all my fellow Americans.

Any more to add?

Foreign Entrepreneurs in China listed some top concerns for US companies in China.    Here are her top three from Amcham Shanghai:

Key Business Challenges in China (%) (*)

1. Rising Costs   (91%)

2. Human Resource Constraints    (90%)

3. Increasing Competition    (83%)

For her complete list look here.

Ah, rising costs has risen to the top, but keep in mind that the key rising cost is labor. The costs for common items for families have risen to a point where income is a bigger concern.  Housing for young professionals is prohibitive despite the  recent dip in prices.  Common food items like grains, vegetables and meat all have gone up largely driven by the cost of labor in them and thus driving up the cost of labor all around.  China is also running out of excess labor. Prices are going up for good workers.  It is hurting your China suppliers and you in China.  Cheap China is definitely a dieing model.

How do you contain rising costs without moving your factory/business?  Happy workers do not demand higher pay like unhappy workers.  Unwanted turnover is expensive and has many hidden costs. The value of good leadership that creates satisfied workers is very high. The cost of the turn over in experience and how the price rises as you turn over people has to be brought down.  Invest in your people.  They will invest in products and services that will help you to make money to offset rising costs.

Your marginal leaders who are skillful in some way but not listening to workers is a bigger cost than you know.  They need to be either professionally coached or replaced. They cause too much bleeding away of worker passion.  Chart worker satisfaction. Keep track if it, and you can see how some leaders or even you are harming the whole. Chart retention by leader.  This cost of churn and unmotivated workers must be faced down.  Find the source. Understand it correctly. Worker expectations have risen, and we need to adjust.  We need to raise the level of our leadership and demand it of our subordinate leaders all the way down the line. It will help us with our costs and even help us with revenue.

Thoughts?

I have watched Microsoft over the years in China from a distance as they say China is stealing their intellectual property.  Theft of Microsoft software is epidemic in China.  Yet I say that they have smiled all the way to the bank

15 years ago, no one had money or heart to buy proper software. Even U.S. companies were using pirated software.  However, Microsoft was causing it. They faithfully and carefully translated their software into simplified Chinese for mainland China and then sold five copies and those were copied and no one bought anymore.

Why was Microsoft smiling?  Translation cost them little, and selling MS Office for 10 yuan a copy on the streets of China meant that no Chinese company using cheap and capable software engineers could create any future competition for them.

With Microsoft’s mature products, fledgling start up software could not earn any money while it improved its software over a generation  They were destroyed and Chinese people learned how to use a distinctly American software that was culturally far from them. Gradually, everyone in China learned how to use Microsoft and in the present generation have more and more money to buy legal software. The future looks good for Microsoft. Chinese people culturally and by training are now Microsoft’s children. If they had not pirated and could not buy Microsoft as too expensive, they would have bought Chinese versions that would be giants now preparing to drive Microsoft out of Asia.

I know a Western automation software company that customizes for each machine, but does not protect the base program at all. They have found that it crushes the competition.The users they both want learn how to use their U.S.  software and how good it is because they got the pirated so cheap. Later they want full functionality and they come back to the U.S. company. Pirating costs the U.S. company nothing and serves their purposes.

Company trade secrets like how you make high quality product are another thing.

For some of my thoughts on IP, see How to Protect Your China IP

Any other thoughts?

Olivier Knox, Blogging for Yahoo! reported on how U.S. politicians are talking to the likely future leader of China.

The US vice president notably pressed his guest over rampant theft of US intellectual property, and on charges that Beijing keeps its currency artificially cheap in order to keep the price of its exports down relative to US goods. (Thus hurting US manufacturers and the jobs-hungry US economy — a regular chorus of US complaints sure to grow louder ahead of the November elections.)

It is a street market fight. “No Fair! You sold me those strawberries too cheaply. Charge me more or I will not buy here anymore!”  Surprisingly, I never hear this. China sells stuff to the world cheaply and gets criticized.  Further, if China raised the value of its currency too quickly it would cause a clear rise in U.S. inflation and destabilize its own economy which has given some hope to the world in these times. China has been smart enough to not listen to foolish economics from U.S. politicians who are pandering to an unthinking electorate.

Chinese currency will appreciate against the dollar. However, it should do so slowly so as not upset international or their own domestic economics.   Appreciation means exporters to China win and consumers in the West lose.

It also means it is better to invest cash in China now than later.  I hope U.S. politicians will focus on encouraging America to be its very best. America will not fade into the night anymore than it did when Japan rose 20 years ago. It has its own unique competitive advantage, and it should play to that and not whimper about how China is being unfair selling us good products too cheaply.

Tomorrow, I will write on intellectual property theft with emphasis on Microsoft as an example.

Any other thoughts?

Greater China has great opportunities, and China is at the heart of that.  Companies that get smart here in China will prosper, and as I have said before here, companies that wait for Chinese companies to invade the West will be hurt.

First let me paste a few points from All Roads Lead to China. He is writing on how some products Made in America have a future in China.

“Why would “Made in America” attract customers, particularly if they are going to make the purchase at a premium. Three reasons:

1) Quality -This is core of this article. Good old American made products that will last (value for money), and in my experience the drivers for this market are largely going to be the Chinese who have spent some time abroad and are willing to spend the premium.

2) Safety – This is the core of my experience, and anyone who follows food scandals will understand the drivers. It is a market dominated by new families as baby food and products lead the charge, and the volumes are huge.

3) Prestige – This market is perhaps best defined by the luxury market, but at a time was also a driver of the middle market, as firms like BMW and Volkswagen can attest to. It is not just about having a luxury price tag, but at times can also just be about being able to show that the product was one of the few items not made in China.

I want to note that you should get active in China even as a precautionary move as they will come to you and you should be ready.”

A first practical step in the water is having your own guy in China and doing it without too much risk, expense, or trouble. That one person working full time can open up vista’s for you in many directions some of which you will not have thought of before.  From there you will be safe from surprises and able to find benefits in unthought of ways in China. Naturally, there are other ways like traveling back and forth yourself to line up distributors. I suggest your own guy in China will do that much better and usually cheaper than you would yourself, but it is an option

Thoughts?

Hi, since I write this blog,  I want to give you a little information about myself.  Then,  you can know more about where I am coming from. See my short Bio below:

Jim Nelson graduated from West Point and later got an MBA in Global Economic Development focused on China.

He led a pager lamp factory supplying Motorola and an investment management company in the 90′s.

In the 00′s, he started a micro finance loan operation that became an industry standard for efficiency. He further led operations for a holding company with multiple and varied holdings in China leading to extensive experience especially in Western factory operations.

In the 10′s, he turned around a large failing Western auto part technology implementation and reorganized a Western information technology equipment solution provider to prepare it for sales to Fortune 500 companies. His focus on business development has led to extensive studies and experience in leadership, coaching, organizational development, six sigma, change management, and other pursuits all in China since 1991.

Today, I was thinking to write about sourcing and here was some great information that I had not read. China Law Blog mentioned them.   China Performance Group write this very nice piece you can find here.

The article shows how past performance is little indicator of future quality.  Go take a look.

This reminds me of an experience I had in 2010. (naturally some facts changed to protect identity)

The China factory is a one stop shop for a US based and owned company and had been for 10 years. The U.S. based purchasing manager and his team had been to the factory many times and had been given extensive tours.  The Chinese factory had not sought to deceive them in any way. It was an exemplary relationship.

One day rust shows up at a customer site on a plating part that came from the China supplier.

They ask us to look into it.  The U.S. told me the China factory had a multi -million dollar plating line that did their parts.  They said the problem could not be from there, but we should go talk with them.

I went over with a Chinese associate, and they showed us the equipment  They had five plastic barrels that they used to clean and plate. It was all done by hand.  The cleanest looked like a sewer.

I asked for their control plan. They changed the topic.  I asked more directly, and they told us they did not have one.

I asked him about the multi-million $ plating line.  He took me over there, and yes it was running like the U.S. said. I asked if they could run the  parts in question on that line.  They said they did not do that kind of plating on that line.

The U.S. did not believe me when I told them, and I had to send pictures.  They contacted them directly, and finally when denial ended, the whole U.S. team panicked.  Over a few months all was resolved. Really, this is an exemplary relationship.

How well do you know your China Supplier?  How are your parts being managed?

The increase in the value of the RMB has pushed many Chinese businesses to the breaking point. The Chinese government has pushed them very far to satisfy the trading nations and to satisfy other needs in the Chinese economy. Many Chinese companies are in trouble because of that.

When or if your suppliers close their doors, will they tell you that they are going to close shop? Will they make sure you have time to find another? Will they return all your molds. Will they maintain quality under pressure? Will they disappear when they have your cash? Would they give you back any deposit if you had any with them?

I have had a supplier who disappeared and had some of my money. I quickly called him up on the cell phone and he answered. He then agreed to meet me and give me my money back. Admittedly, I did not have a lot of money at that business, but it was good to see.

Do you know if your supplier would do that for you? Will they even keep that cell phone number when they leave? Having met the owners wife and kids is no proof they will not wait for your deposit and then run.

Pay a little extra to avoid having any significant deposit. However, the character of your supplier is of first concern. You should due diligence on them if you have any significant risk of them running. You should have copies of their business licenses and other legal documents. In most cases, you will want license that have real business behind them. You should see the ID cards and have copies of the ID cards of all principles in the business. Their attitude when you ask for these is key. If they do this readily, then you can feel a little better. You should find people who can tell you the truth about that business. You need people who will give you all the dirt. These people exist, but they do not show up in any normal due diligence.

Also, ask them lots of questions. Ask them deep questions in Chinese and face to face and watch their facial expressions. You can learn a lot.

Anything can happen in China. Do a worst case analysis, and then prepare for it. Think what you can do to mitigate risk. You should mitigate risk of their business failing and risk the owners will run even if they do not fail. You need to know if they ship quality product when they are short funds. Men and women of character will treat you well even in distress. However, most will not under stress, so choose carefully and do more than you would to investigate a U.S. supplier. Do a lot more, and Dun & Bradstreet may not solve this problem for you.

Thoughts?

Some of the things happening in China and happened in Japan are similar and some are not. Let’s take a look at a comparison.

We can see that China faces some future problems due to following the export/infrastructure model too closely.  The government knows this and will find a way to avoid.

As businessmen, we should note  point 5.  Surely many of you already have.  Chinese people have some nationalism to buy Chinese, but they will not buy if it will hurt their family or business to buy Chinese. They trust Western business to have proper materials and often proper quality.  The luxury market boom presently is one sign of a good future market for all.

So the future market for Western goods is very good.  This is not merely the best place to manufacture presently, it is also a market that is mature enough for Western products now like it was not 5 or 10 years ago.

Thoughts?  China Business Leadership Group on LinkedIn might be a good place. Comment here. You have to register to comment here, but do so. We really welcome all comments.

I saw this at LinkedIn recently.  “A recent survey by the executive-recruiting firm Heidrick & Struggles found that 77 percent of the senior executives from multinational companies responding say they have difficulty attracting managers in China, while 91 percent regard employee turnover as their top talent challenge.”

If you are in China, you did not need to hear this as you live it. We should ask whether we should complain about it or change our behavior.

I recommend changing our behavior. What can we do to be attractive places to work?  Just paying more money is a last course of action. What else should we be doing?

This blog gives a lot of ideas to stem loss of passion and experience.   I feel bad for HR.  They are powerless in most companies but leaders and workers blame them for the people problems. In other companies leaders only allow them to work to make people follow company policy. It is a thankless role.

So today I would like to say that we need to increase the voice of HR.  Good HR’s generally know why workers are unhappy, and they know why people really left.  Some companies hire good HR’s who quickly leave.  They are good enough to see what is wrong and see clearly that the company will not make the changes, and so they leave. Finally, in this process you could get a weak HR who would weekly push down worker issues and complain only at home.

If you are big enough, I recommend you get a good HR who really cares about worker morale and then welcome all their thoughts.  Good HR’s do not focus on payroll. They know that cultural change is the key to increased productivity, morale, and retention. They seek out many ways to improve the culture, and you need to hear them.  Some managers need coaching on how to think about people. They need to receive it, or you need to find someone else. Continuous bleeding and inability to hire top flight workers is a company leadership issue and not an HR responsibility.  However, a good HR can help you know why you are bleeding.  It is your job to implement change.

If you take care of workers, they will take care of customers and you. Go the distance. It will help pay the bills.

Thoughts?

The customer wants your organization focused on them. They see that your organization is often focused on you even though you say it is focused on them.

The junior salesmen often know why a product is hard to sell. They are near the customer every day. However, owners do not want to hear that they are wrong in any way. So salesmen are left trying to make quota and know what it takes but have a company that will not really hear the hard issues.

If anyone who touches the customer is the top of your organization, then you are starting to be on the customer agenda. People who make and deliver your products or service should be at the top of your concern. Salesmen and even marketers could be very high. Finance people and purchasers would be examples of people who are farther from the customer. They should be heard from less. Line workers would be very high. Service delivery people would be very high. Customer service would be very high.

A highly customer oriented organization is one where the right people are put on top and everyone else is working to support them.

While we must be more than blindly following the customer, we must be organized to work for them. When we really work for them to bring value, then we will be on their agenda and that is what any company needs.

Thoughts?

I will talk about customer agenda tomorrow Today, I will continue to develop yesterdays thought on getting unpleasant information. I go out of my way to hear people in the organization who I know have contrary thoughts. As a young manager, I even let one manager get out of line. Contrary thoughts should be heard and considered for what gem is within them. These people should show respect to you and should implement once you have made the decision, but they should be valued for their thinking and not punished for being in groupthink.

Your people should have alignment and a sense ownership. Ownership leads to more thoughts and even conflict. Seek it out. Finally, cut it off and implement with force in your chosen direction. Demand full support.

Then you will be a great leader in this area.

Thoughts?

How often do you sit down with your direct reports and just hear what they have to say? Have them plan a 15-30 or even 60 minute time with you. Assure them of non-defensiveness. Then really hear them. Interact but do not take over. I do some form of this monthly. Sometimes it is formal, and they can plan. Sometimes, I grab an opportunity to delve into their thoughts. 15 minutes can only touch one thing in any depth at all, but still do it.

Your direct reports need to be heard, and you need the data. As leaders, we need to get all the data, and we will only get it if we create the space.

The goal is not to hear and obey our workers. We must hear everyone we can.  We must especially hear the hard or disagreeable thoughts. They make us stronger. Finally, we must analyze and make decisions based on complete data.

Thoughts?