A Light Summer Read
July 14, 2009 by Thuy
Evolution of China's business climate
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Summer is here and it is a light summer read that we will offer you in this newsletter. Our theme: China, a never ending source of business wonders. Two recent anecdotes highlight the current business environment. Some details have been changed for privacy reasons.
1- Unbeatable service makes client happy
A tough customer situation
A high tech mechanical component business from Chengdu receives a large order for high end parts from a German conglomerate. Winning the deal comes with strings attached: delivery terms are extremely short, and in fact the factory has no chance of meeting them. It has some materials in process for other client orders. These could be used, but they are not enough to cover the full client order. Also, supply lead times on some critical components are extremely long compared to the deadline date, due in part to the very small number of vendors approved to carry the work. And of course the client, itself under strong pressure from final customers and seeking to protect itself, has imposed stiff penalties for late delivery.
Happy ending. Or is it?
It delivers the full quantity to its client before the deadline. The client assembles its product and starts a series of bench tests required by the final clients. Everything goes smoothly for a few weeks until some units start failing. Strangely, they all fail because of the same component, which mysteriously suffers dramatic and seemingly random performance loss.
The client contacts Chengdu, providing fault details and the serial numbers of failed units. The factory suggests that all failed units, and a few additional trouble free units with specific serial numbers, be sent back for investigation.
The client immediately sends back the requested units. The factory inspects them, identifies the problem and replaces all defective parts. A few days later it sends back the full lot to the client. The client is very impressed by this turnaround time: The identification of a problem usually takes weeks in the industry, and because of very long high value parts lead times any replacement can be even longer.
You guessed what happened
The real flow was: Upon receipt of customer PO, the Chengdu factory orders components from the approved supplier and a subpar supplier, delivers subpar products just able to meet end of production quality control tests to the customer, delivers to the client. Then after receipt of the good components, the Chengdu factory waits for the client report of problems. As soon the expected problems are reported, the factory replaces all subpar units with good units under the guise of after sales service.
Conclusion
The client is ecstatic to have found a factory with such able after sales engineers, and the capability to address a serious product fault in a matter of days.
2- Selective use of Chinese law and soft touch nationalisation
China’s new labour law, applicable since January 2008, has clarified and harmonized employee rights and employer obligations for hiring, employment and firing. It is well known in China that the new law applies differently to local and foreign companies. A Suzhou biotechnology JV recently learned it in greater detail.
A tough call for survival
The JV operates in a difficult market. It does not own much Intellectual Property even though its skills set is unique in China.
Shareholders, faced with strong market uncertainty and financing difficulties in the current environment, hesitate to bring new funds to the JV. They decide to start looking for a new shareholder able to contribute to a stock offering. They convince a large state owned company, with very close connections to national Party management, of the interest to invest in the company to save it from imminent bankruptcy and retain critical skills in China.
Miracle solution
Times are difficult. The state has created many stimuli to the economy, one of which is to ask banks, which it all controls, to lend loosely. As a state owned company, unlike the private sector JV, the new investor has access to bank credit, and its cost is very low. After due diligence the state owned company agrees to invest in the JV.
The new majority shareholder then convenes an AGM and announces:
- That all JV factory equipment will secretly be moved away from the JV’s factory the next week end, and reinstalled in a new location owned by the state owned company.
- That all JV staff will be fired the following Monday on arrival for work. To the suggestion “things could get rough” the answer is: “the police is already informed and will take care of it. And anyway if they demonstrate at the gate former staff will get discouraged by the end of the week and move on”.
- That key staff has already been informed behind the back of the original JV partners. Key staff has been offered a transfer to the new factory location. The transfer is for a lower salary than what they previously earned, but all staff has accepted because it is an honour to serve the party.
- That the JV ‘s former majority but now minority private Chinese partner is thanked for all his hard work and asked not to set foot in the company again. It is explained to him that he is a bad manager because he has always paid social contributions and taxes on time.
Conclusion
This very selective view of Chinese Labour law results in labour costs 50% lower than previously. No need to plan mass firings and to book restructuring costs, the police will restructure any demonstrators on site.
Conclusions and suggested action plan
- Check supplier relationships and technical capabilities on a regular basis, even with long term suppliers. Be wary of the “no problem” answer of some suppliers who will sell anything without knowing how to deliver. Check on site if a supplier can deliver, for each new project.
- Audit supplier production capacity on a regular basis. Map supplier peak production periods to find out if they are similar to your peak demand periods.
- Quality Control, Quality Control, Quality Control.
- The Chinese private sector is stuck between bad customer situations and banks that do not lend to it and prefer to lend to state owned companies. Check the financial standing of your suppliers frequently.