Make It in China - 6 Secrets to Successful Sourcing

INTRODUCTION: WHY CHINA?

“We are not jealous of others’ success and we will
not complain about others who have benefited.
We will welcome them aboard the
express train of Chinese development.”

____________

President Xi Jinping, 2017

China’s eclipse of the US as the world’s largest economy is not a question of if, but when. There will be bumps along the way, but China is an arrow pointing up for the foreseeable future, and any wobbles are opportunities for entrepreneurs who are poised and ready. This chapter asks you to consider the compelling opportunities that exist for your business in China, and whether your business might or might not be a good fit for exploiting China. It concludes with a reminder that change is the only constant, and that it is how you deal with it that defines how successful you will be.

WHY CHINA?

China is poised to dominate the global economy—more than any country ever has—as one of the most capitalistic and entrepreneurial nations in the world. Whilst President Donald Trump is ceding the global leadership mantle that the US had taken up since World War 2 with his “America First” policy, China has seized the opportunity to lead many initiatives, including climate change, renewable energy, and the globalisation of trade. China has the scale, work ethic, infrastructure, and control over its centralised economy to be incredibly successful and regain what it lost to the West during the Industrial Revolution of the 18th century. The nation’s sustained growth is of a magnitude the world has rarely seen, achieving 8% annual growth in 2011, a year that saw the worst global financial crisis since the Great Depression of the 1930s, and continues to expand at an enviable 5-6% right now. There is the promise of even greater wealth on the horizon as China’s domestic and international businesses mature.

China is set to become:

• Provider of Asia’s regional and then the world’s global currency.1

• Base of regional headquarters for all global businesses.2,3

• “Prolific developer of new technologies including biotech, fin-tech, robotics, environmental, and sustainable-energy technologies”.4

• Best and fastest developer of new business, outpacing all other nations; it is already rated world number two.5

• Home to some of the largest and most strategically important cities.6

• Champion of domestically developed, homegrown global brands, helping it to become a leading consumer for all commodities and jumpstarting the largest spending boom in history due to its expertise in mobile e-tailing.7

• Provider of one of the most important and the most widespread languages in the world.8

It’s an exciting, awe-inspiring scenario. Add China’s ability to change directions as needed, and you have a situation where you can do well if you are nimble on your feet, and have something to offer that is innovative and relevant. The specifics that make China my preferred area include the following.

Great Work Ethic

Work ethic is China’s weapon. This nation of more than 1.3 billion people works with impressive intensity and quality. While wages are one factor, when you calculate the total cost of doing business, you cannot overlook work efficiency (productivity), which makes China the top choice as manufacturer and supplier to the rest of the world for the foreseeable future.

In China, getting workers to stop working is one of the biggest conundrums. Chinese factories, most prominently in the South, use itinerant labourers who live in dormitories at the factory. Each year, millions upon millions of Chinese from the countryside leave their homes to find work in the burgeoning assembly lines of Chinese cities. Their goal is to earn the most money in the shortest amount of time in order to return home and buy land, a house, or small business. Naturally, they seek out the factory that offers the maximum amount of overtime, which often means more than 100 hours a week. Spending leisure time in a shared dormitory isn’t attractive.

The downside to this work ethic is balancing what the workers want (when it comes to hours) with what Western companies and the Chinese government labour laws require. Western companies write into their supplier contracts clauses about the number of hours each worker can be on the clock, while China’s labour laws state that workers must be treated fairly with a rest day on the seventh day of work and a maximum of 60 hours worked in a week. If a factory boss stringently follows China labour laws and/or the rules set by their Western customers, and cuts hours and overtime, then his or her workers may quit and walk across the street to a competitor’s factory that doesn’t restrict hours.

When I took over the management of a lingerie factory with 2,000 workers in Guangdong, I faced a major problem: The factory was working excessive hours. The factory manager understood that this was a sticking point with the Western clients and explained that the only way to eliminate this was to implement two shifts, so no one set of workers worked beyond the legal 60 hours a week. The extra costs were affordable, so the second shift was approved. As a result, 40% of the workers quit within two weeks and went to work in a single-shift factory across the road where they could work upwards of 120 hours a week—a loud and clear message. We ended up going back to the original system. It’s difficult to balance what the workers want with the rules and wishes of the Western brand, who is probably envisioning sweatshops without understanding the reality on the ground.

Getting Things Done (Without Necessarily Understanding Why)

Chinese business owners and their workers have a can-do attitude that comes with energy and enthusiasm difficult to find in other parts of the world. The answer is very often, “Can,” even to difficult demands. They commit first, and then figure out afterwards how to do it and deliver on schedule. I like this attitude, and have adopted it as my approach to business. However, the only hitch to this equation is that you must negotiate with common sense and realistic expectations, or you are guaranteed to be disappointed with what is delivered.

Problem-solving is also refreshing. In the West, it’s very common in corporate culture to say, “I have a problem.” Often, you simply report the problem because you aren’t thinking about the good of the whole, or you might look at how other departments are underperforming and congratulate yourself. In China, it goes like this: “I have a problem and this is what we can do about it.” It’s more solution-oriented with less blame because it’s in everyone’s interest to fix the problem. Perhaps this comes from the Chinese agrarian background—a culture of practical solutions and getting things done. None of this means that things move seamlessly. You still must manage expectations with communication and training.

I was running a large trading company that had a sourcing office in Hong Kong, which is directly across the border from Shenzhen, China. I thought it made sense for us to downsize our Hong Kong office and open in Shenzhen because it would be cheaper to operate, with the added benefit of being closer to the factories. I challenged my China director to open a Shenzhen office in three months. Three months later to the day, I was invited to the office’s grand opening with a traditional suckling pig ceremony. While my China director had followed the brief by opening in three months with 60 employees, I quickly realised that many of the so-called Shenzhen staff were in fact commuting from Hong Kong at higher cost. I assumed that he would understand my intent, but he simply fulfilled the brief in the easiest way possible. I should have clarified my expectations and defined what a successful outcome looked like. The physical office wasn’t the goal; the goal was to cut costs and boost productivity by being closer to the factories.

A Dream Market

The Chinese market—home to more than 1.3 billion people with increasingly disposable incomes—has an amazing ability to both supply and consume all available products and services, which is an incredible opportunity for small-to-medium-sized companies looking to do business in China. In 2017, The Verge reported that Alibaba’s Singles’ Day sales amounted to USD25.3 billion, nearly double of 2016 Black Friday and Cyber Monday in the US combined.9 Meanwhile, high-end sales in China are rising alongside the nation’s wealth, increasing the demand for export-quality products at home. For example, wrinkle-free men’s formal business shirts that cost about USD10 to manufacture, retail for the same price in Shanghai as they do in San Francisco. Sure, the percentage of people who can afford such shirts in China is lower than in the US, but when you consider the size of the population, the sales are meaningful.

For the past seven years, I have been on the management advisory board of a company making premium shirts and suits for the export market, including brands such as Calvin Klein, Hugo Boss, Zegna, and Banana Republic. Other than production, they had nothing to do with China seven years ago. Now, 40% of their business comes from domestic sales in China with the same margins or better than those from their Western...