Ladies and gents, this is a three-alarm fire bell.  You are not dealing with a reputable firm if they won’t stand an independent audit.  They are a trading company or a bad factory, plain and simple.

I came out of the automotive industry, which the best crucible for grown-up business I know.  I can remember auditors from Mack Trucks, Peterbilt, etc.,  showing up unannounced to inspect our facility.  We even had an ISO audit starting when OSHA showed up for a surprise inspection.  I stood two audits in one day on my facility and passed both with flying colors.  So don’t give me your *bleeping* sob story.

A Simple Factory Audit is the cheapest insurance policy you can buy.  If your supplier won’t allow it, run screaming in the other direction.  It is only going to get worse if you stick around.

Had a discussion the other day with two super knowledgeable China people. Both of these people are businesspeople. Both are fluent in Chinese. Both have been living in China for at least a decade. One is a marketing person. The conversation started with my bemoaning how my favorite restaurant in Qingdao so rapidly deteriorated, in every respect. These two people said that virtually always happens and then they proceeded to give me the chronology of what happens to so many good restaurants in China:

1. Restaurant opens with nice space, really good chef, plenty of staff, and no skimping on ingredients.

2.  Restaurant gets really popular and then chef asks for more money and when that is refused, he or she leaves. New, cheaper chef comes in and food quality starts to decline.

3.  Decline in quality from #2 above leads to a small decline in customers.

4.  Seeking to make up for the decline in customers, the restaurant owner starts skimping on the ingredients. Maybe they go from top quality fresh spices to cheaper dried spices.

5.  Decline in the quality of ingredients leads to a decline in the number of customers.

6.  Seeking to make up for the decline in customers, the restaurant owner lays off some staff and starts skimping on overall upkeep of the restaurant.

7.  Decline in customers accelerates and restaurant eventually shuts down.

8.  Owner blames new restaurant down the street for the problems.

We then started talking about how we had seen the same sort of thing with some Chinese products and Chinese suppliers of product to foreign buyers. We talked of how this sort of decline is nearly inevitable if you believe price is what drives your customers.

There is a whole lot of the above going on with Chinese companies and this sort of business is not going to endear one to Western buyers. But we three also talked about Chinese companies we knew that had very consciously broken the above mold and by having done so were thriving in both China and overseas.

Is the above what is holding back Chinese companies from better competing in the West? Is this changing? I say “yes,” to both though I think it will all take a long time.

Sadly, we see “vendor fade” too often.  Clients come to PassageMaker and China Quality Focus because after many good shipments, all of a sudden everything is garbage.  Shipments late, containers of defects, warranty claims out the wazoo.   The value a supplier provides – especially smaller suppliers – is often dependent on a plant manager, production engineer, quality manager, etc., that the Western buyer probably never even met.  That person leaves and the whole place goes off the rails.

Part of our job is to dig into the supplier and try and identify where these potential fault zones are, though there’s often little we can do other than catch the fade when it starts and take corrective action.  We can’t run the supplier’s company for him.

One of the reasons we perform Sourcing Feasibility Studies is to have a bench to go to if the first team fades.  For most customers, we recommend having parallel supply chains – at least two vendors making the components.  I often recommend that one of those suppliers be in the client’s home market.  Little counter-intuitive for a company based in China, but our ultimate goal is the customer’s success.

• MSNBC – Clinton says world must respond to N. Korea
• Financial Times – US warns over Beijing’s ‘assertiveness’
• DER SPIEGEL  – Interview with Economist Nouriel Roubini: ‘We Will Have Even More Crises in the Future’ (hat tip Matt)
• Real Clear Politics – Depression 2010? (whether you agree with him or not, this future is not clear or bright – there is much excitement yet to come I fear)
• Reuters – Factbox: Sources of tension between China and the U.S.
• Reuters – China and U.S. look to close world’s biggest trade gap
• Reuters (again) – Clinton avoids China disputes, hands out teddy bears (avoid confrontation and carry a teddy bear – not exactly what the Teddy for whom the bear is named advised, but then he never had to deal with being in debt to your competitors)
• CNBC – US Plays Down European Crisis but China Worried (as they should be)
• USA TODAY – Private pay shrinks to historic lows as gov’t payouts rise (that’ll work)
• Reuters (yet again) – How Greek debt crisis could save America (God, I hope so)

Maybe get to some travel blogging tomorrow.  Or not.  You’ll have to check back to see.

Too many American industries rely on illegal labor to remain cost competitive, thus the constant drama on the border issue.

The China nearly every Westerner sees is the coastal veneer.  The majority of China still dwells in the poor, mostly agrarian interior.  Their source of cheap labor in internal.

And as this article in Slate by Brett Edkins points out, in a sense, many of those Chinese migrant workers are “illegal” anyway.  Key paragraphs:

The United States could begin by conceding one of China’s principal arguments: Human rights are not just about individual liberty, but also economic opportunity. The Chinese “economic miracle,” which lifted 500 million people out of poverty in just one generation, is itself an unprecedented human rights achievement. Yet it gave rise to other pressing human rights concerns, including an issue that threatens to destabilize China’s Communist regime—growing discrimination against the roughly 200 million Chinese citizens who left their rural homes to find jobs in China’s booming cities.

In many ways, these rural migrants resemble undocumented immigrants in the United States. In China, they provide indispensible labor for vast urban construction projects and work in menial jobs as guards, waiters, cooks, or barbers. They are often mistreated by employers, generally live in poor conditions, and receive few social benefits and limited protection from the police. And their children are regularly denied public education.

Chinese newspapers, “Netizens,” and even Communist officials are calling for reforms. Their main target is China’s 50-year-old household registration, or hukou, system. Began as part of China’s state-run economy, the hukou system labels individuals as “rural” or “urban,” indicating their proper place of residence and binding laborers to the land. Today, rural residents are permitted to travel to the cities, but they can still be fined or forcibly returned home if they are caught working or living outside their designated hukou. Obtaining a temporary urban-residency permit from the police is beyond the means of most migrants, requiring a fee and employment documentation. Permanently changing one’s hukou by attending university or joining the military or the Communist Party is similarly out of reach.

Life for a city dweller with a rural hukou is difficult. Their hukou denies them urban welfare and access to public housing. It also excludes them from publicly funded health-insurance schemes. Since fewer than 3 percent can afford health insurance, most avoid medical care altogether. City judges often impose harsher sentences on rural migrants, and employers frequently withhold wages, knowing undocumented workers cannot complain to police without risking exposure.

I will admit I not a fan of the author’s wording, “undocumented migrants”.  If you illegally cross a national border anywhere else in the world (including Mexico), you’ve broken the law.  Only in the modern American journalist and politician world does that deserve an obscurant euphemism.

However, the point of the article is that despite the rapid advances, parts of the Chinese state are stuck in the Maoist past.  One good thing about dealing with PassageMaker, you know our employees are treated well and legal.  As a foreign owned firm, the government would come down on us like a ton of bricks were it otherwise.

Regardless, I am happy to see people in China, including members of the Communist Party, start to address the problem.

He commented on my recent post, “Sheer Import Genius“.  This led me to read two excellent posts on the the good and bad trading companies in China.

His points are spot on.  One of the reasons PassageMaker formulated the Sourcing Feasibility Study (SFS) was to identify and eliminate piss-ant trading companies that don’t add value.

Li & Fung is a tremendous company, and we have sought to emulate them in many ways.  PassageMaker focuses on SMEs – Small to Medium Enterprises, not Li & Fung’s market.  Many of our customers are Tier 1 suppliers to Fortune 500 companies, but they themselves fall into the SME category.  In my mind, this is a fine market to serve.

PassageMaker is not a middleman.  We are not a traditional trading company.  We add tangible value with our SFS, Vendor Coordination, Assembly-Inspection-Packaging and Factory Formation services.  Most importantly, the entire process will be transparent.  We don’t exist by keeping our clients in the dark.

Let us know how we can be of assistance.  If you are not 100% sure about every step of your supply chain, you need our help.  Trust me, you do.

The importance of contracts and compartmentalizing your supply chain cannot be overstated.  You have invested too much to build the business.  Don’t give it away because you are too lazy or too cheap to do the work to protect that investment.

Money ‘graph:

The other day, a really savvy client of ours stopped by the office. This company has been doing business in China for a long long time and it has non-disclosure/non compete/non circumvention agreements with all of its Chinese suppliers and US Buyers I mentioned the above conversation (no names or other identifiers, of course) and we talked about the benefits of the contracts his company has both in China and in the U.S. He then reminded me that this was also one of the reasons his company had set up its own trading companies in China. This company gets its product from about a dozen different Chinese factories, but the records in both China and the United States all point to the U.S. company’s own trading company as the exporter. This company has never had a problem with its customers going around it.

PassageMaker can help you secure your China supply chain.  Our “Black Box” Assembly Center is a far less expensive option than setting up your own trading company.  If you still want your own presence in China, we can help you with our Factory Formation service.  Give us a call, and when you need a lawyer in China, you could do far worse than Mr. Harris.

I take full responsibility, as I am the only one who proofreads my blog posts.  I have dyslexia, so I always try and proofread everything 2-3 times before I send it or publish it.  After all, I get enough hounding from the clan in China, to say nothing of the Zen Dragon from down under, that I don’t need to make it any easier for them.

That said, my error sets me up for a good blog post today.  This experience underscores what I was saying in the original post – your business documents are far, far more important in China than in your home market.

Make a mistake or an error of omission on a purchase order, and you may very well be hosed.  Do the same on a Product Quality Manual (PQM), and I can guarantee trouble.

Some time ago, such an error of omission rose up and bit one of our customers rather badly.  We had followed the PQM as approved, but we had not been checking a particular dimension.  It had never been in the PQM, whether we didn’t include it when we drafted the document or whether the customer left it off the original drawing was lost in the mists of time, but the error had persisted undetected by all for nearly 4 years.  It was never a problem as long as the vendor providing that component did their job right, but we are all human and that finally didn’t happen.

Our team inspected the product to the PQM.  The error was so subtle, you would never notice it with the naked eye.  The client assumed all was well and shipped the product, which immediately were rejected in the field.  Long story short, everyone was unhappy and we all lost, but there was no warranty claim to be made against PassageMaker.  We’d followed the approved PQM.

Our policy is we will do what you tell us in the PQM, no more, no less.  It has to be this way, as the biggest problems in China are the admirable Chinese tendency to want to help too much or worse, to improvise when a problem arises.

I had a friend who was buying pillow cases in China.  All the samples came in exactly 1″ too big on every dimension.  Panicked, he called the factory and they told him they so appreciated the order (for several hundred thousand units), that they wanted to reward him by providing extra material at no cost!  After he got his heart pumping again, he contacted our friends at China Quality Focus who went on-site and got things back on track quickly.

Doing business in China is Murphy’s Law on steroids, acid and a truckload of uncut Colombian all at once.  Muse’s 1st Law is “Never Assume Anything“.  Make sure if you want it to happen (or not to) that you put it in writing.

I meant it when I wrote that we LOVE getting 17 pages of corrections back from the client.  It is far better than a cursory review and signature.

We have four (4) internal layers of proofreading for a PQM before it is sent to the client for approval.

1. The PQM is drafted by a Quality Technician, with input from the entire team, including the client.
2. It is then reviewed by the Production Engineer.
3. It is then reviewed by the Project Manager.
4. It is then reviewed by a member of senior management (most often by me).

Only then is it sent to the customer.

This is a time consuming process.  But the alternative is terrible to contemplate.  Anything worth doing is worth doing right the first time.

So make sure you proofread before you sign on the line that is dotted.

This put me in mind of the importance of making sure all your business documents say what you intend them to, ESPECIALLY when doing business in a foreign language.  One of the services PassageMaker offers our clients is help drafting the language on their purchase orders.  Many of our clients come to us after having a bad experience or two in China, and it is amazing how vague some of their purchase orders are.

The Chinese legal system is rapidly improving and a properly written purchase order is a binding contract that can be the difference between getting raked over the coals and being the one doing the raking.

I see similar issues with design databases.  Drawings are often given to us with no material specifications, no finish specs, etc.  I had a drawing once from an client that specified “aluminum”.  When I asked his engineer what type, he responded that he didn’t think it mattered.  This for a part to be subjected to high heat and load stress – you’re darned tootin’ it matters.

We have also received drawings specifying titanium fasteners.  After wasting time looking for these very hard to find fasteners, the project engineer in the USA tells us that he just cut and pasted the fastener drawing and forgot to change the material spec.  Two seconds of his time would have saved two days of our team’s time.

This kind of BS is why we have Endorsed Service Providers.  Choosing with the cheapest guy is very rarely the best deal.

Another area where we frankly NEED our clients to proofread is our Product Quality Manual (PQM), the core of our Assembly-Inspection-Packaging service.  As Mike Bellamy says, “we are generalists; we depend on the client to be the expert”.  We take the lead on drafting the PQM, and submit it to the client for approval, but once they sign off on it, that is what we are going to do, no more, no less.  It becomes our warranty and if the client forgets to tell us something, once they approve the document, that is now the official record.  We’ll happily amend the PQM for the next order, but if it wasn’t written down, not my fault.

Our system incorporates four (4) levels of approval before it is sent to the client for final approval.  From the speed at which some clients approve the document, I know they barely looked at it.  I would rather have a 17 page response as we got from one client than a signature 20 minutes later.

Doing things right takes time, but nowhere near as much time as doing things over.  If your project is valuable enough to bring to market, you have time for some proof reading.

PS – I have dyslexia, and have proof-read this damn post five times looking for typos.  I bet you all find at least one in spite of that effort.

And by this weekend, I mean most all of it, Friday, Saturday, Sunday and Monday morning.  Friday and Saturday were hot and humid, but Sunday was the gauntlet.  Day started early, hot and humid and ended in a cold rain at 1:00 AM Monday morning.  I had some work to do and did not get to sleep until 2:30 AM, back up at 6:00 AM to help them finish before the deadline of 9:15 AM (which we made by 5 minutes).

Why am I telling you about this, a blog ostensibly about China Business and my impressions thereof?  Two reasons:

1. I am a slightly overweight and out of shape 39 years old.  I like to drink more beer than I should and my Room 101 is a gym.  I have never been a good athlete, I have a bad back, so bad I had to wear a brace 24/7 for several years as a teenager.  And though today I am sore all over, my legs and my back feel far better than I’d expected.  I credit my TrekDesk.  I’ve mentioned TrekDesk before (here and here) and I walk several miles a day at an aggressive 8 degrees of incline at 2.2 mph, which will get your heart pumping.  I had not realized how well it had conditioned my legs and forced me to improve my posture.  Walking while you work really does rock.  I mention this because as I have blogged before, the TrekDesk is one of the best examples of our complete system of services – engineering by our Endorsed Service Provider, Contract Engineering Services; then Sourcing Feasibility Study, next Vendor Coordination and now Assembly-Inspection-Packaging at our Assembly Center according to the customer approved Product Quality Manual.
2. The USA’s trade deficit with China is almost universally viewed as a bad thing.  But the low-cost goods China provides to the USA consumer is a reminder that any transaction has benefits for both sides.  As I moved my friends’ copious amount of stuff, I was struck by how much of the contents of their home (and indeed, any American home) are now Made in China.  When I was growing up, I do not remember having that many clothes.  That is not to say I went about in rags; quite the opposite, my Father was successful and I had a wonderful childhood.  I just don’t remember having anywhere near the sheer volume of clothing my friends’ children had.  Today I have five (5) pairs of shoes.  I actually make a game of trying to minimize the amount of stuff I drag around with me – Exhibit A being the extended trips to China with one (1) carry-on bag.  Looking around my own house, each of my children has at least twice as many pairs of shoes as I do.  All are Made in China.  The prices paid for those are astoundingly low, even to me who has an idea of what they cost ExW.  While I am rightly concerned about foreign competition as an American manufacturer, it would be dishonest and foolish to say that there was no benefit to the American consumer from our trade with China.

All for today, much catch-up to do having lost the weekend.  It continues to rain soup, new opportunities daily.  Will try to squeeze in more blogging tomorrow.

Since my return from China two weeks ago, I have been working like crazy trying to bag all the new business raining down on PassageMaker, SafePassage and China Quality Focus.  The world economy is not out of the woods but we are definitely seeing an explosion of new RFQs, led by Australia.  They are booming exporting the raw materials for China’s industry.  Let’s all raise our glasses to Australia!  More on that later…

I have been picking away at the travel log in my minimal spare time, but here are some interesting articles (some a bit old, but nonetheless).

• Nixon wasn’t so bad after all – USSR planned nuclear attack on China in 1969 – and Tricky Dick stopped World War III.  This is the kind of stuff you do as President that you can’t talk about, you have to hope historians get it right.
• From Instapundit, a link to great blog about Japan, Ampontan.  Today’s post is called Lame and Shameless, about ridiculous Western reporting on Japan.  I am reminded of Andrea Martins, our representative in Brazil, who was actually born and raised in Beijing, the first and only Caucasian I’ve met who truly speaks native-level Mandarin.  She told me once that if you visit China for a week, you can write a book.  Stay for a month, you can write an article.  Live there for 25 years, you have nothing to say.
• Every once in a while you need to remind yourself how utterly insignificant you really are – Jupiter loses one of its stripes and scientists are stumped as to why.
• Every once in a while you need to remind yourself how great your life really is – N.Korean women up for sale in China: activist.  Tragic and terrible.  I hope China steps up.
• Interesting article from Mother Jones.  Yes, really.  The Last Taboo.
• The New York Times finally realizes that many jobs aren’t ever coming back – The New Poor: In Job Market Shift, Some Workers Are Left Behind.
• Speaking of vomiting…U.S. posts 19th straight monthly budget deficit.  (hat tip to Dave Learn)
• Dear God, let’s hope so – N.J. gov. sets tone for US – I have heard Christie speak, and it is QUITE refreshing.  He sounds like a no-nonsense CEO sent in to save a company on the ropes.  Math doesn’t lie.  There is no money tree.  You  have to cut spending.  However, if you could just raise taxes on The Real Housewives of New Jersey and leave the rest of the state alone, I think you could sell that.  My God, what tacky people.  The rise of China should be seen as largely a good thing, and maybe the Chinese economy will grow larger than the USA’s, but that was never a foregone conclusion.  Our current political leadership across the board seems hellbent on making sure it happens ASAP though.  As someone who has business interests in both USA and PRC, I just wish the USA would quit shooting itself in the foot.  We businessmen would be just fine if we knew from one day to the next what was coming out of Washington.
• Globish – I love it.  What a great word.  And the author nails it; I have had similar experiences many, many times in the Chinese-speaking world.
• And finally, I can’t resist – Dog on the menu for Chinese astronauts.  Actually, dog is pretty tasty, though I’ve only had it prepared in Korean restaurants in China, so I haven’t tried the Chinese version.  Have to put that on the to-do list.