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!