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  • Mini-Book Review — Midler — Poorly Made in China

    Posted by James McCormick on April 13th, 2010 (All posts by )

    Midler, Paul, Poorly Made in China: An Insider’s Account of the Tactics Behind China’s Production Game, John Wiley 2009, 241 pp.

    Paul Midler began his academic career in Chinese history and literature and then went to Wharton for an MBA and further graduate work in East Asian business. Fluent in Chinese, over the past ten years he spent his time in southern China working as a consultant to American importers and was witness to the economic boom that’s amazed the world.

    This book, however, is about all the other things he witnessed … the methodical transfer of technology and profit to Chinese manufacturers and the methodical transfer of risk, liability, and innovation/marketing/design costs to American companies. “Poorly Made” is a master class in how ill-equipped American companies are to operate in “low circle of trust” cultures … even when those American companies are managed by savvy mercantile clans and even organized crime!

    Midler introduces to the manufacturing world of south China through the eyes of his clients … names changed to protect the “innocent.” For Midler, his experiences formed a perfect complement to his academic training and the over-optimistic economic estimates created by his friends in the financial analysis business based out of Hong Kong and Shanghai. From a distance, it all looks pretty good. Close-up, when one watches how the factories operate, how products are formulated and packaged and shipped, it’s clear that a foreigners are veritable “babes in the woods” in the Chinese market.

    Midler organizes the book into a series of educational vignettes in a variety of industries: health and beauty products, store display equipment, diamonds, aluminum construction equipment, paper recycling. He also uses his book to introduce the honeymoon and “marriage” between a crafty businessman trying to move into the US cosmetic product big leagues and a start-up Chinese factory that is just as interested in letting him unwittingly finance and develop their own growth into his business.

    For the sake of brevity, let me paraphrase Midler’s “fable” which he introduces toward the end of his book. Say you arrive at a Chinese airport late at night and hail a cab … negotiating an inexpensive price for a trip to your hotel … US $20. Half-way to your destination, on a dark isolated stretch of road, your cabbie pulls over to the side of the road and declares the distance to your hotel is more onerous that initially thought and the price will now be $30.

    Do you (A) pay the $30, (B) get out of the cab and stand by the road, or (C) accept the new price and try to pay $20 instead when you get to your hotel?

    “Tough” businessmen, by the way, would typically opt for C and find themselves in a Chinese police station at 4am explaining themselves (and paying the $30 if they’re lucky).

    As Midler illustrates through several hundred pages, in the absence of transparency in commerce and culture, options A, B, and C are effectively the only options the foreigner has. And, of course, a few months later, you’ll arrive back at the same airport to find that the cabbie now runs a fleet of cabs, all relentlessly subsidized by hamstrung foreigners. A year or two later and the cabbie has moved into real estate and is half-owner of the hotel you stay in.

    This fable illustrates the method by which Chinese companies acquire foreign business and then squeeze up pricing on their customers until there’s no profit at the US (or foreign) end. By low-balling initial costs of goods, the Chinese partner acquires a source of funds and technology with little or no possibility that the foreign partner can discover where products are being diluted, adulterated, counterfeited, or sold out the back door to other countries or even First World competitors.

    What the importer and customer doesn’t know literally can’t hurt them. Unless there’s melamine in the dog food or lead paint on your toy products … in which case the Chinese government and manufacturers will blame *you* and insist you apologize to them for any slur on their reputation caused by your complaints or threatened lawsuits … or you face expulsion from their country, loss of your assets, and collapse of your supply chain. Nice doin’ business with you.

    So this is a situation where it’s “heads I win, tails you lose.” Business relationships are very easy to start (business travelers are generally safe and there’s a tremendous willingness to prototype products quickly) but profitable ventures are increasingly difficult to maintain … a tendency which Midler describes variously as “quality fade” when referring to products … and “relationship fade” when referring to the relationship between foreign and Chinese business partners.

    The smaller foreign operators are working at an inherent disadvantage since they deal in smaller volumes and rarely have proprietary products or technology to give their manufacturers. As a result, they rarely receive discounts … and may watch their own products walk out the back door of the factory to the Third World with their labels on them. No need to counterfeit what you can steal directly.

    Giant companies like Wal-Mart can initially get massive discounts on pricing but soon find that Chinese manufacturers (having been briefed on all the technology and market trends necessary to enter the American market) soon become indifferent to manufacturing quality. Wal-Mart may press back, or hire quality control staff at their own cost, but eventually the compliance and liability costs outweigh any potential profit at the US end. At some point, the Chinese manufacturers decide that “formerly manufacturing for Wal-Mart” is actually more valuable to them in the marketplace than continuing to manufacture for Wal-Mart. And suddenly Wal-Mart, mighty Wal-Mart, will find itself without a manufacturer.

    Midler does a great job of showing the logical rationale for the Chinese treating each customer, even each batch of product, as an opportunity to maximize profit. In an environment where there’s no shortage of customers and no effective penalties for contractual malfeasance and domestic collusion, the sensible long-term Chinese view is to use each customer as a source of funds for rapid development and manufacturing “know-how.” Once sucked dry, they can be tossed aside. Importers get dispensed with as Chinese companies deal directly with the importer’s customers. Then the importer’s customers are next in line for pricing coercion and product liability. Pecked to death by ducks, a succession of bigger and bigger companies are taken to the cleaners.

    All this makes fascinating if rather sickening reading. Long before Midler stops using any Chinese products on his skin (he doesn’t trust even the US brand names), one wonders whether the author figured that he was enabling staggering amounts of crookedness. Making a bad situation better still doesn’t make it good.

    As the book concludes, Mr. Midler devotes only a page or two to hypothesizing that China, Inc. is using identical methods in its foreign relations as its manufacturers do with customers. Crying “poor mouth” and then throw a nationalistic hissy-fit when anyone questions whether a Han boot naturally belongs firmly on the world’s neck. Power without accountability appears the ultimate goal. Whether some kind of environmental or social catastrophe intervenes before we see the denouement of this strategy is anyone’s guess. The world is giving entirely positive reinforcement to the Chinese at this point.

    What isn’t debatable, in my opinion, is the quality and value of this book for understanding the Chinese cultural and business perspective at this point in their history. Contrary to the pundits, Midler has made a strong case that a wealthier China will not be easier to deal with, will not be any more moral, and certainly won’t be volunteering to help make the world a better place. Expect lots more poisonous products showing up out of the blue in your local stores. And don’t expect the Chinese to accept responsibility for a second. Caveat emptor. Apparently, people and cultures that are so stupid in their negotiations deserve to be fleeced.

    Anyone with an interest in foreign policy, and the meeting of industrial and industrializing nations will find this book of great interest. It’s a perfect companion to Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy which I reviewed a few years ago on chicagoboyz. Between products that are illegal and those that are relentlessly substandard, there’s little difference. Our gluttony and greed are fueling globalism as relentlessly as cheap fuel and telecommunication.

    A final bit of food for thought.

    Wonder where all that spam comes from?

    Midler found a wonderful paper recycling plant in southern China where paper products were resorted into 30 categories from the initial 12 categories used by the US. The local workers make 1/25 the daily wage that the illegal immigrants in the US get paid to do the preliminary sorting … plus the Chinese workers sleep on-site and buy their food from their boss. Much more efficient. And the owner’s warehouse? It’s filled with business correspondence and print-outs from Wall Street that are a treasure-trove of names, phone numbers, job titles, e-mail addresses, and company initiatives. Little wonder that American IT companies are sieves for Chinese hackers and Google is their main target. Sweet dreams!

     

    16 Responses to “Mini-Book Review — Midler — Poorly Made in China”

    1. Nicholas Says:

      So is screwing people over considered moral behaviour in China?

      BTW so far the service and quality I have gotten from China has been pretty good although I have gone through Western intermediaries who communicate with the factory on my behalf.

      Also you forgot option (D), get out of the cab and start walking.

    2. fmc Says:

      Ordered that book. Thx for drawing my attention to it. Sounds like a well written book with a lot of experience behind it. Some of this seems familiar from talking to people who do business in China although I also have been told about positive examples of working with Chinese partners (not in manufacturing, though).

      FMC

    3. sol vason Says:

      I love that warehouse full of sorted memos, reports, contracts and forecasts.

    4. clazy8 Says:

      Any business that doesn’t shred its documents should expect them to be picked over, whether in China or closer to home.

    5. Mike H Says:

      I had a similar experience not too long ago when a Chinese client insisted that some of the equipment we were proving for them be produced in mainland China. We agreed that about 1/3rd of the process equipment would be Chinese made, and I spent about 3 weeks visiting some fab shops to find one that I thought was qualified to do the work. I then spent several more days negotiating a labor and materials agreement with the vendor, which both parties signed and I was provided a quote for the work. Our labor and materials agreement spelled out in great detail that I was to provide engineered items (valves, pumps, instrumentation and the like) and that my contractor was to provide all other items (pipes, steel, flanges, wires, etcetera) and labor to fabricate.

      Management was thrilled because the quote was 35% less than our US based fabricator would have charged for similar equipment. So naturally it was a win for us.

      Not quite. The Chinese fabricator wanted 75% upon signing the PO. I thought this was high, as we usually don’t pay more than 10% ARO, but our resident “Chinese business expert” explained to me that the Chinese credit market is very immature, especially for smaller businesses like this one, and that I should go ahead and pay it. A week later my contractor asked where all the materials for the project were. I told him that they had all the items I was providing. He then told me that I was to provide all the pipe, fittings, steel etcetera. My response was that our LMA was quite explicit in who was providing what and that he should drop the matter an get to work, to which he told me that wasn’t his interpretation of the LMA and since he had most of my money as well as my engineered components, I should seriously consider seeing things from his perspective.

      When I brought this problem to management, they agreed to purchase all the material to save face with the client and make the schedule.

      At the end of the day, the equipment wound up 10% more than if I had it made by my usual fabricator, shipping and duties included (a point he was happy to rub in my face) and when I factored in the manhours I spent qualifying the Chinese vendor and cleaning up the mess, the cost difference was more like 40% more.

      Naturally, our “Chinese business expert” tried to dump this abortion on me.

      Let the buyer beware indeed.

    6. Daran Says:

      Taxi story reminds me of Budapest (although Budapest airport city centre is fixed price; pretty solid system). I prefer option D: book your taxis through the hotel (or kindly request your business partner to call one) until you know your way around (i.e. extending the trust relationship.)

      From the examples given the Chinese take things to the extreme, but I see great parallels with how many Western companies operate and treat their customers/consumers. I think everyone can relate to the terms ‘quality / relationship fade’ without any further explanation of the term.

    7. Simon Oliver Lockwood Says:

      Has anyone put together a web site or other resource that lists brands / labels that aren’t manufactured in China?

    8. cyclerider Says:

      I read this book about 6 months ago. It is a very good read! My favorite parts are his discussions with factory managers. For instance, when he objects to a worker with open sores on his fingers sticking his fingers into shampoo bottles, the manager’s reply is that the sores are caused by the product, so it is apparently not her problem! This line of argumentation is so tough for this anglo to deal with, and I regularly do deal with it, even in California.

      And the negotiations!

      I gave the book to a friend, who emailed the author and asked if he had been harassed by any authorities for writing this book. “Not yet”, he replied.

    9. cjm Says:

      one thing to consider is that the chinese are also doing this kind of thing to each other, which will prove to be very corrosive locally.

      my personal reaction is to buy fewer items overall, to minimize the amount of chinese products in my house. this will of course hurt American companies but they have created these circumstances.

      seems like small and medium sized companies here, could improve their margins and gain marketshare against larger competitors, by adopting a no-chinese policy (and advertising it). so far they haven’t done that though, so maybe the net effect will be to shrink the overall world trade levels, as more and more people shun mass produced goods.

    10. clazy8 Says:

      When I talk to people who are making major investments in China and Russia, I always come away wondering what they know that I don’t. To me these moves suggest the same gambling mentality that figured in the collapse of the financial markets. These people never think that they’ll be the ones who are burned.

    11. Harold Says:

      Reminds me of something pointed out to me a long time ago about Chinese and English furniture from the 1700’s-1800’s. The English furniture was fairly plain on the outside, though well finished. And the inside, drawers and shelves and such, were equally plain and solid and well contructed. The Chinese furniture was very ornate and decorated and looked fantastic on the outside. The inside was crap.

      And, the furniture point was used to make an analogy for their culture. Looks like things haven’t changed a bit.

    12. tehag Says:

      I read the book. I hope the Chinese aren’t making their software is way, except, of course the software for the PLA.

      American companies will go broke trying to make lower-cost goods of indifferent quality.

      I read a similar book in the 1980s about attempting to set up an auto assembly plant. Every error by the Chinese manufacturer increased payments to them.

    13. Jim Bennett Says:

      Tom Barnett, call your office.

      I’d like to hear from Tom Friedman abut this, too.

    14. tehag Says:

      It seems the Chinese have mastered the cost-plus contract, and the means by which many American corporations made millions from Uncle Sap by low-bidding, over-charging, and deception, which rarely went corrected or punished because everyone involved except the taxpayer profited.

      That no one, not the American consumer, American government, American retailer, American importer or Chinese manufacturer cares to verify the product being sold is the product ordered prepares the field for someone taking the fall when too many people buy deceitful goods.

      The situations described in the book make we wonder how Apple manages to get good quality from China, though lately there have been many news reports on compromised quality (e.g., the yellow and broken screens).

    15. cjm Says:

      shouldn’t this behavior eventually reach all levels of the production chain and result in the chinese being frozen out of western markets?

    16. elambend Says:

      China will cram down its neighbors too when it comes to natural resources:
      http://www.nytimes.com/2010/04/24/world/asia/24navy.html?hp=&pagewanted=all