Cultural Stereotyping

It seems several China-related blogs have recently written about negotiating tactics, interest in quality, or other business-related cultural stereotypes of Chinese people. Maybe the new milk quality issues are triggering this new wave of generaliztions.

Although there are cultural differences between Americans and Chinese people, the stereotypes are almost useless in individual interactions. Chinese people don't act one way in a negotiation or related to product quality any more than Americans. While it may be somewhat helpful to be aware of cultural differences while negotiating, my experience has been that the principles of establishing trust and understanding the other person's position far outweigh any perceived cultural tendancies.

I do sometimes catch myself referring to Chinese factories like they are one entity. Afterwards I usually reflect on how inaccurate my comments were. There are the same range of quality options in China that there are in the USA. There are high quality factories there just like there are here. It is a developing country, so the range of factories may tend to have more low-end factories than we have here, but there is no "Chinese quality" or "Chinese negotiating tactic".

Beware of Americans that claim to know how Chinese people "are" and how you should deal with them. These people likely have a pretty narrow view of the world and business. I advise keeping an open mind and judging people (Americans and Chinese alike) on their actions, not what you have heard about their culture.

Tainted Milk Crisis and What You Can Learn

The pictures and stories about kids with painful kidney stones from tainted milk are extremely difficult to see and read. I can hardly imagine how mad I would be if my children were in such pain caused by a (seemingly) intentional act. Of course, those responsible should be prosecuted to the full extent of the law.

What can companies outsourcing to China learn from this latest crisis? Here again are my suggestions for avoiding quality problems in China:

1. Build a relationship with the supplier. All the detailed specifications in the world cannot protect your company from an intentionally bad action. Getting to know your suppliers and allowing them to know you and your company builds trust and shared values. OPSA has always encouraged our customers to get to know the factories we use for them and to visit as often as they want.

2. Have detailed specifications. They are still important. Supply contracts are an extension of your documented expectations and can also be helpful.

3. Get third-party inspections. Catching quality problems when you open the container is better than having your customers find them, but finding them in China before they leave the factory is much better. Because of the distance and cultural differences involved in dealing with Chinese suppliers it is very important to have additional inspections.

4. Communicate early and often. In addition to your specifications you need to be in consistent communication with your suppliers (or the link to your suppliers) to make sure all is well.

5. Finally, be a good partner. People cut corners when they are desperate. Listen to your suppliers. Be open to investigating when they say cost pressures are impacting their ability to service you well. "Bully" purchasing may get results in the short-term, but in the long-term is a losing philosophy.

Let me know if you have specific questions about quality assurance in China and I'll do my best to help.

Pollution Contols In Beijing End, But the Benefit Stays

The pollution controls that the Chinese government put in place around Beijing for the Olympics end this Sunday. The most publicized control implemented was the limitation on driving only every other day depending on your license plate number. Some polls show a strong majority of Beijing residents favor continuing enforcement of the controls.

I've written before that the main think I don't like about traveling to China is the pollution. I know it's no worse that what the US was like during the stage of development China was in, but it still bothers me. I am optimistic for rapid improvement in coming years. I also believe US companies will have a large role in the improvement.

What's interesting about the Beijing controls is the response to them. Beijing residents have clearly enjoyed the improved air quality. Those that drive probably have not liked the limitation on when they can drive their cars. All tolled I expect this situation to expedite the Chinese public's call for cleaner air and water. The government will have to listen and improvement will accelerate. Watch for developments.

OPSA Just Right in the Middle

While reading about some of our competitors this week I realized how much I like our model compared to theirs. We have many small "one-man or two-man show" competitors. These are mainly people who have made contacts in China and travel there a few times a year to work with factories. They have no consistent presence in China, or they have one partner there that makes contacts for them. These small competitors do not offer inspection services or engineering support in China. They essentially are trading companies and work well on commodity items. For custom components and assemblies they do not offer enough services to significantly reduce risk.

On the other side of the spectrum are our large competitors. These companies have lavish offices in premier locations of Shanghai, Hong Kong, and/or Beijing. They are sophisticated and offer special services like online order tracking. These companies have very high overhead and charge more than OPSA. They also work on very large volume projects. They are appropriate for large companies here in the US only.

OPSA fits nicely in the middle. Our offices in the US and China are utilitarian. Overall our overhead is very low, but our service is intense. We offer all the key risk reduction services in China and are improving them every month. We do not offer special services like online order tracking that our large competitors offer. We also don't work on any commodities. Our customers are SME's (small and mid-size enterprises) rather than very large companies.

I know this post sounds like an ad, but I really like the way we go about our business. Like almost all companies we have processes I'd like to improve, and we are getting there. We're growing fast and expect to be a much larger company in a few years. However, we'll still keep our overhead low and will keep the focus on what benefits our customers most.

How to Ensure Quality in China

With all the recent news about more problems with baby formula in China, I am going to touch again on the number one issue US companies ask about regarding imports from China - quality.

Quality is an issue with suppliers no matter where they are. The same things that help ensure quality from suppliers in the US will greatly help with suppliers from China. First, have excellent specifications and update them as needed. Second, build a relationship with your suppliers so there is a shared value on and understanding of expected and required quality levels.

Because the supply chain is much longer (in miles and in terms of culture) when dealing with Chinese suppliers, there are other actions US companies can take to ensure quality. First, have a consistent physical presence at your suppliers. OPSA fills that role for our customers. Second, perform extra quality inspections during production and before shipment. OSPA does this for our clients and there are several third party quality control firms (3PQ's) that focus only on performing inspections and audits. Larger US companies that source significantly from China maintain there own offices there and have QC staff on payroll.

Supply contracts also can help, but some companies fail to take care of the issues above because their contract gives them a false sense of security. At OPSA we've begun using contracts more extensively. They are becoming more useful in China.

In summary, no action can guarantee quality from any supplier. It's all about reducing the risk of quality problems. I strongly suggest communicating clearly and often, building relationships, and verifying quality. With regard to the last point, Ronald Regan's famous quote comes to mind - "Trust but verify".

Inflation Slows, But So Does Growth

The Chinese CPI (consumer price index) rose just 4.9% in August. Although the PPI (producer price index) is more important for OPSA and our customers, the CPI slowdown is significant. It is down from 6.3% in July and 7.7% back in May.

However, as price increases slow, so has growth. Second quarter GDP growth was only 10.1%, down from 10.5% in Q1. I've often read that China needs about 10% growth to maintain a stable employment level. Some economists are now predicting growth will fall to single digits in Q3.

Several economists in China are now calling for economic stimulus to businesses to jump-start growth. The stabilization of the RMB to the USD may be part of this stimulus.

It sure didn't take long to go from talking about an overheated economy, to a slowing one in need of stimulus. I will be watching to see what all the macro developments mean for our business and our customers.

Opportunities Lost and the Roller Coaster

I've written before about how being in a small and growing business can be like a roller coaster ride. At OPSA we experienced the downside of the roller coaster in August. Because of shipments timing, we shipped fewer orders and volume than we planned in August. Although we are having another year of very good growth, a bad month still hurts.

We also had a potentially large new opportunity go away in August when an OPSA customer lost a large new contract they were working on. We had supported this effort and had quite a bit of time and effort into the project.

Luckily we have several other opportunities we are working on, and a handful are very high potential. It still hurts to lose one.

The answer to both issues is to buckle down and close the opportunities we have before us and generate new ones. If our history is a guide, tomorrow or very soon the direction of our roller coaster ride likely will look much better.

RMB to USD Rate to Stabilize

I'm reading more and more from China that the exchange rate will stabilize longer-term. In the short term the RMB actually lost ground to the USD in August. It was a small depreciation, but a significant one given the history of the exchange rate since the July 2005 un-pegging.

In a Financial Times interview, Cheng Siwei, vice-chairman of the standing committee of the National People's Congress, notes that the RMB does not need to appreciate any more versus the dollar. He notes the RMB will likely strengthen against other currencies, but as the dollar gains strength around the world it will stabilize versus the RMB.

Some stability in the rate would be very good news for US consumers fearing continued inflation and for OPSA. The fall of oil prices over the last several weeks is also good news for OPSA customers and the US economy. I'm betting and hoping oil falls to about $95 a barrel for a while. At the same time I look forward to new breakthroughs in energy that will reduce reliance on oil and be better for the environment.

Optimism reigns on this first day back to school for kids here in the US!