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An American in China

Posts Tagged ‘Product Quality’

Made in China- China’s Dirty Secrets Part 3

Posted by w_thames_the_d on March 23, 2010


Great post here, I will provide excerpts below. This is from an interview with a guy named Paul Midler, a Wharton grad who authored the book, POORLY MADE IN CHINA. The guy has some good insight, and it mirrors my own experience in China.

“As a fix-it man for overseas importers and retailers sourcing from China, Paul Midler, a Chinese-speaking Wharton MBA grad, gained a unique perspective into the Made-in-China story. That experience, during which he worked with hundreds of Chinese factories, made him an eyewitness to the manipulation of product quality by factories and the other ways in which they bamboozled overseas businessmen and partners. In an interview to DNA Money’s Venkatesan Vembu, Midler, author of Poorly Made in China, reveals the dark secrets of the Made-in-China story. Excerpts:

As someone who has visited hundreds of factories, what are the most common manufacturing ‘tricks of the trade’ you’ve encountered?

The business strategising aspect of China manufacturers is actually as interesting as the Quality Fade. Manufacturers are generally very quick to agree to certain conditions and terms: it’s part of the success of the China model. It’s not just that they quote low – low-balling on the bidding to win projects is common anywhere; what’s really striking about China is that you have operators that bid below any expectation of profits. In the book, I call it ‘Profit Zero’.

So, how do they find their profit margins? The key is to capture the customer. They know that down the road they can engage in some ‘price creep’, where the price will be ratcheted up in different ways. They do it just before the order can be produced, saying they need another 10%, which moves some of the profit margin from the importer to the factory in the short term. Then, over a series of time frames, they reduce the quality in small, incremental amounts that the customer doesn’t notice. In the meantime, they’re learning about the business. They say, ‘Maybe I don’t make any money on Customer A, but I can take this knowledge and information and I make money on Customer B.’ That’s also part of the business strategy.

There’s a willingness to move fast, they’re eager to please, they price low. Yet, a lot of American importers that go to China end up regretting it, because a deal with one of these factories is never as good as it is in the beginning. Things tend to get worse over time. That’s a bad sign.

If there’s hope for the China-US relationship, you’d think there’d be signs of the relationship getting better over time. With China manufacturing, it actually gets much worse over time. We’re being set up for being taken advantage of.

If that’s the case, why don’t importers switch manufacturers or countries? What about India, Vietnam, Bangladesh as alternative sourcing destinations?

India vs China is an interesting case, and before the book was written, I was listening to a lot of chatter about that. But one of the problems with India is lead time. Think about this: if China is competing with India in manufacturing, why are there so many Indians sourcing from China? I’ve had clients who are Indian, they could be sourcing from India, but they say they can’t wait six months for a product to be introduced.

There’s trade-offs between advantages and price. Vietnam is in a similar situation. The labour is cheaper, but unless you control your own production, it’s a nightmare to get anything done. No other country has put together what China has. Take China’s clustering phenomenon. You want to purchase knives? You go to a city where they have nothing but knives. I don’t know any other country that has not just economies of scale but levels of convenience.

China’s infrastructure is all set up, right down to a larger number of agents on the ground. In many cases these middle-men are the guys who are running the show: they make the decisions about where the product is to be made, and they are the real deflationary heroes, more than the factory owner who makes the product and the retailer who sells it. It’s he who keeps prices down, who threatens to move to another factory when things don’t go well…

But that never happens…

They say it all the time: it’s just a Western habit to bang on the table and threaten to walk away, but they never do. And the factories know this: they’re aware of American negotiating tactics. It never happens.

Also, in the past 10-15 years, there’s been a lot of disintermediation. Let’s say there’s an importer, who was importing $50 million worth of goods from China; one of his customers, who is purchasing $10 million, decides ‘I don’t need this guy, I’ll go to China myself and get better margins.’ Now, the customer who was importing $50 million worth of products from China is suddenly competing with five different customers who are importing products for $10 million each. That’s a proliferation of importers, and in such a situation your buying power shrinks. If I go to a factory with a $50 million order, my buying power is obviously stronger. If I show up with a $10 million order, my buying power is weaker.

These importers were made to think that things are so easy in China that they would somehow come out ahead. One of the factors for rising prices for American companies is that they are going to China with less buying power. And a lot of people who go to China directly realise it’s too late because they have already burnt their bridges with the big importer.

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Made in China – Dirty Secrets 2

Posted by w_thames_the_d on March 22, 2010


Great post here, I will provide excerpts below. This is from an interview with a guy named Paul Midler, a Wharton grad who authored the book, POORLY MADE IN CHINA. The guy has some good insight, and it mirrors my own experience in China.

“As a fix-it man for overseas importers and retailers sourcing from China, Paul Midler, a Chinese-speaking Wharton MBA grad, gained a unique perspective into the Made-in-China story. That experience, during which he worked with hundreds of Chinese factories, made him an eyewitness to the manipulation of product quality by factories and the other ways in which they bamboozled overseas businessmen and partners. In an interview to DNA Money’s Venkatesan Vembu, Midler, author of Poorly Made in China, reveals the dark secrets of the Made-in-China story. Excerpts:

How much of the Quality Fade is because importers are trying to beat down the ‘China Price’ excessively?

If you’re dealing with someone who is unethical, and if you’re suggesting that that someone is unethical because the price is too low, my view is this: if they’re unethical at a dollar, they’re not going to suddenly become ethical for $1.20. The really unethical player would convince you to pay more and will still deliver bad products.

Let’s say a factory gives you a C-level product for a dollar; you want an A-level product for $2; instead of a C-level, you might get a B-level. But it’s still not the A you expect and are paying for.

Chinese manufacturers are savvy business owners. They operate in a tournament-like business environment: only the fittest survive. The factory owner knows how to prevent counterfeit goods from being passed on to him; in some cases, he may know how to engage in counterfeiting. He or she is very good at negotiating. I’ve a difficult time believing suppliers who say, ‘We didn’t know we bought things that had lead in it. We didn’t notice.’

I’ve seen factory owners, when they’re purchasing stuff, go piece by piece through things – because there’s so much corner-cutting in China…

Every manufacturing economy, from the US in the 19th century to Japan in the 1950s, went through a phase of ‘Quality Fade’. How is China different?

In terms of the quality, there is this tendency to compare China to Japan or Taiwan. I don’t think that’s what we’re seeing. The political environment in China may be contributing to it somewhat – I don’t say heavily; the Chinese government can change its mind at any time about anything. When you operate in an environment where you don’t know what’s going to happen tomorrow, you tend to think fairly short-term. And this has affected the culture of the manufacturing sector in China.

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