The 3 No’s of ChinaSpeaker: Joseph V Fabian

Case Study of the “Failure to Understand the 2 Culture Business mindset”

Rollins CollegeCrummer School of Business

Orlando FloridaUpdated 2007

Brief Background

There are 3 areas in China that account for most of the country's output; Guangdong, Shanghai & Beijing.

Guangdong Province

• Major cities are Dong Guan, Guangzhou and Shenzhen.

• Same size at Missouri, with 15 times the population - 36 Million, most of them from Western Provinces.

• Produces 11%+ of China’s GDP• All areas within a 4-hour drive of each other.• Hong Kong is the busiest harbor in the world.

The primary motivation for the majority of the people ofChina is survival. Unemployment is running at 4.3% -20% depending on the area, officially 19M but realitymay be closer to 35M.Factory workers are facing forced retirement at 50.

The Chinese can no longer depend on governmentowned factories with guaranteed jobs. Unemployment insurance for the lucky few in the ‘rich’areas (Shanghai) is around $34 / month. They have no guaranteed social security, welfare orfood stamps. They are on their own.

The result ?As a nation, the people are focused on survival andmoney they equate it to success in whatever they do.

They had to quickly adopt an entrepreneurial spirit tolive.

Production workers in the factories are focused onmaking the best products. There are no personaldiscussions during the work hours.

When there are problems, production is stopped, theproblems are resolve and documented.

American Business• Production in the USA

always plans for failure, shrinkage and fallout.

• Build 1,005 to meet the order for 1,000.

• Track the failures (no fault mentality).

• Documentation is haphazard due to time constraints.

Chinese Business• Production in China

plans for success• Build what was

ordered, 1,000.• Failure is personal,

perfection is rewarded• Detailed documents

ensure repeatability.• The company is a 24 /

7 operation since the employees live there.

ma yo wen ti (No Problem)In the rush for the Chinese to please the customer andbuild their business, almost any request is respondedto with ‘ma yo wen ti’ (no problem).

This plays in to the American companies’ expectationsof a ‘Can Do‘ attitude.• Corporation needs cost benefits now - stock market• Mandate a move of production to China• Start production after 3 months• Approve and start shipping after 6 months• Chinese companies say ‘ma yo wen ti’

ma guang si (No Matter / Mind)Once the contract was signed and started, problemsbecame apparent.

• Approved parts only available in USA• Substitute parts are not tested or approved• Procurement times exceeded the delivery date• First time build at the factory, new documentation• Purchased parts did not match drawings • Reluctance of American middle managers to the

move operations to China slows the process.• Ultimately the Chinese believe that all the problems

lie with them, it is their responsibility ‘ma guang si ‘

ma bann fa (No Way !)After enormous effort by the Chinese to understandand fix the problems and meet their commitment, theyreluctantly say, ‘ma bann fa’ and lose face.

• But the failure is reflected back to the Americans – Unknown USA assembly techniques aka; ‘tribal knowledge’– Defective components, poor documentation– Unrealistic production start dates – Poor product forecast– Movement of tooling was not factored in timeline– Regulatory approvals were not factored in timeline– Shipping, duty, customs delays were not factored in costs

Thus the 3 rules of China Operations were bornDue Diligence, Due Diligence, Due Diligence

The outcome of the effort was the successful transferof production with reasonable cost savings.

But it can cost careers

The jobs of the Group President, VP / GM of a division, the controller and the purchasing manager. Theresulting turmoil at the American company damagedthe development of Quanxi (relationship) between thestaff of both companies.

Advantages for Americanbusinesses in China

• Growing university educated middle class, with 300M+ per YEAR by 2007.

• Broadband Internet, satellite TV, cell phones creates a desire for more.

• Huge demand for high style foreign goods available for a very limited few.

Disadvantages forAmerican’s trying to do

expand into China

• Dual Income families in China spend from 10 - 25 times their annual income on homes.

• Disposable income cannot support imported goods.

• The majority demand low cost domestic products over imports.

• Almost every American has an extremely limited view of China.

– It is a sweat shop manufacturing country– The population is uneducated living in abject

poverty– Everything produced in China is tainted and

poor quality– The manufacturing companies don’t care– The country is completely repressive and the

spirit of the people have been broken

• The reverse is closer to the truth. – Like every country, there are “sweat shops”, even in the

USA. Due diligence dictates that you visit the factory, observe the people and if possible, observe the workers after normal working hours.

– The majority of people are uneducated, but in 2007 China graduated more Engineers than the entire USA graduates in all categories, 300,000+.

– Chinese products are tainted and of poor quality. But quality control is our responsibility and our lack of due diligence is our fault. We have our own problems with spinach, lettuce, carrots and cars, we even have formal recall processes in place.

– Chinese people do care about producing quality products and they will stop production when there is a defect!

It is difficult to talk about China and give the audience a true sense of reality, without showing you the

contrasts.

China is a conundrum.

As you will see in the following slides, there is abject poverty next to unexpected opulence.

A country struggling to pull themselves into the 21st Century with unexpected sights every day.

But, there is a unique spirit within the people, a spirit of friendship with a burning desire to learn.

Shipping Container Homes

14 one room homes

Largest 2 story Wal Mart in the World

Opulent condominiums in Shenzhen

Luxury Golf Course Condo 180 Hole Championship Golf course

Delivering Acetylene on a motorcycle Chinese built Buick Shanghai

Toyota Land Cruiser Police cars Modern Expressways, Dual Language

Even Friday nights take their toll on the working man

Thank You for your time, here are a few suggested Links for China Business

www.ssd.comSquire Sanders Law Offices - Searchable database with newsletters onChina discussing IP and other regulations.

www.tdctrade.comNewsletter on issues in HK, China and Asia,they have a newsletter that comesout several times a week, http://tpwebapp.tdctrade.com/edm/pdm/index.htm

www.hktrader.net Hong Kong newsletter

www.chinaonline.comChinese newspaper in English