There has been a lot of talk lately about China’s inability to maintain its role as the world’s factory floor. Costs across the board are higher according to some, and it is just too much for them to handle… they are now looking at Cambodia, Laos, and Vietnam.

CNN in fact just profiled one such factory owner.

Based in Dongguan, a bicycle helmet manufacturer who supplies Wal-Mart and others is feeling the pinch. the recent labor laws have increased his costs, and he is now considering moving half of the lines from his 17 factories around China to Cambodia, Laos, and Vietnam.

What I found most interesting about the report is that it showed the factory owner as a bit of a victim. That because of the new laws, inflation, and a couple of other things that “all came together” he was no longer able to make a profit from China anymore…

For me, this is simply another case of how this situation needs to be reframed, and what I found interesting about this report was that they were more concerned with the conditions of the owner than the workers that the law was supposed to protect.

Now, why is all this relevant?

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Bill Dodson from This is China writes a piece in Euro Biz this month entitled Parts missing that looks at some of the difficulties a few friend are facing when entering China’s interior market of Chongqing.

It is one of those pieces that will surely get a lot of reads, because he is right. Chongqing is missing some hardware, a lot of software, and for many firms it has yet to develop the local market necessary to warrant real interest from a lot of firms.

why this article is interesting is that Bill’s writing reminds me of conversations I had 5 years ago with investors about Nanjing and Chengdu. they were in Shanghai, they were in Beijing, but when I mentioned Nanjing or Chengdu… the response was “where?”

In one case, I was working on a 10 million USD investment for 6 buildings. the development firms had gone bankrupt, creditors were knocking LOUDLY, and we had exclusive right to it. We spent two days going over the sites, mapping the locations, and building the models based on current market conditions and a general understanding that Nanjing was about to see a huge economic jump over the next 5-8 years that would make these properties really really sexy.

The result of our analysis was that without doing anything, investors would make 200% within 6 months (the lock out period) by simply flipping the properties.

200% sounds attractive right?

well… after meeting with 10 investment groups based in Shanghai, and more based internationally, we came to a single conclusion that 15% in Shanghai was better than 200% in Nanjing because investors really did not understand the fundamentals of China. It wasn’t that there weren’t opportunities. It was that these opportunities required some background, a little imagination, and patience.

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well, it really didn’t take any time at all before the next juicy rumor came to my attention, and here it is:

China’s mandate by the government to cease all manufacturing efforts near the large cities of Beijing, Tianjin, and even Shanghai due to serious pollution problems they are facing. Shut down will occur between July 17th though September 20, 2008.

Now, before everyone freaks out, this is still very much speculation and I have been unable to confirm the scope of the shut down.

I have spoken to two sources up north, and found out the following:

1) Coal and raw material exploitation industries are expected to see shut downs (again, not sure of scope).

2) High energy users and heavy polluters are going to be first.

UPDATE: I have put a few different people, from a few different organizations on the case, and here is what I have heard:

1) From a news media source

This is a program that has been talked about internally, but has yet to received full State Council support. At this point, it is only a contingency plan.

The affected areas, are not limited to the three cities above, but are from Shanghai north along the coastal area. The idea being that the winds move from south to north.

I should note that I have not spoken to anyone in Shanghai yet, so I am not sure if the impact really will hit here, but I would not be surprised.

So, that is what I “know”, to the best of my knowledge

and here is what my gut tells me.

1) There is a very high risk that large scale shutdowns will occur in the above time frame. The olympics is kicking off on August 8, and this would provide a month before (to clear out the air) and a month after (tourists will flow to Shanghai afterwards) of clean air

2) The industries most likely to get the knock on the door are those that are dirty, belching black smoke, sucking up a lot of water, and require a lot of energy to accomplish all that. So, if you are a clean enterprise running off the grid and procession your water (like Plantronics in Suzhou), I wouldn’t worry. But anyone else should do a rapid self assessment of where they fall on the green scale and then work out the risk.

and here is what I am telling you to do:

1) Assess your risk - use a napkin approach first - to figure out if you are first in line, or last

2) Get your GR person on the phone and figure out if you will be affected

3) Pull in your production people and “what if” this. If you were shut down, what would be the impact, and what can you do?

4) Book your containers now

and here is my out

Take this for what it is worth, I have not seen a formal government announcement and I have no formal confirmation of the facts. However, this is something I have been expecting for a long time, and I am not surprised to hear that this could potentially be on the horizon. If nothing else, spend 30 minutes with your team to figure out a plan should it be true.

If you do that, they you will be in an advantageous position, just like when I notified everyone about the VAT Rebate… 2 weeks before WSJ or anyone else.

and here is what I need from you

If you in your efforts to assess your risk find out that this is true.. or that this is crap… please post a comment or send me an email. 2 months of down time will be very expensive for a lot of people, so I want to make sure we know the real facts.

I will update as often as possible

Last summer, then Lead pain Barbie and Toxic Tommy the Tank were all the rage, and popular media was focused on the role of governments in trade, I was hammering away at fact that the ultimate responsibility for assuring quality rests solely with companies. sure, government agencies, standards, and advocacy groups play a role, but this summer highlighted that what was really missing from the equation was good old fashioned common sense quality control and assurance leadership.

Now.. I want to take this a bit further, and highlight the fact that through all of this, there is probably no more important person in this equation that the buyer. typically the person that identifies potential suppliers, the person responsible for developing the RFQ, responsible for developing the assessment framework for the program, and the person whose opinion/ expertise will provide the greatest amount of weight when CEOs/ Directors make final decisions, the buyer role carries a huge amount of responsibility.. and it is here that I am afraid that we are a bit lost… and it is here that I think the greatest room for change can occur.

Perhaps I am being naive, or perhaps I am being nostalgic a bit, but the act of buying and the role of the buyers in many industries have changed from works with trusted local partners , to amassing large networks of suppliers overseas and pitting them against each other. It is a system that one can see in various markets: electronic components, toys, textiles, stamping, raw materials, chemicals, furniture, Plastics, Wood Flooring, MDF, and so on…

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While having lunch with a friend recently, we got into a conversation that is pretty frequent in China. Attention to detail, or the lack there of.

It is something that for many westerners, we value highly. It could be as simple as a 5 year old coloring within the lines, to an analyst who is known for amazing Excel skills, to a technician making sure a measurement is exact.

With respect to this conversation though, we were discussing the recent fitout of her apartment and the fact that her husband was miffed at the poor attention to detail that the workers had. That he was constantly having to tell them how something should look, or the “feel” he wanted… and that they still could not get it right.

Where the discussion took a “deep” turn was when she (Chinese) was recalling how she needed to explain to her husband (foreigner) that there was no possible way that they would get this right because they had no context from which to understand what he wanted.

After all, many of the workers were from poorer areas of China, and this had an impact. Their houses may have been poorly built, with the main focus being function… not form… At the same time, instead of using drywall, paint and caulk, their materials may have historically been brick and mortar.

and if those weren’t good enough reasons, she suggested that he remember that they had been sleeping in that apartment for 3 months and she could not remember if they had ever changed their outfit. Point being, that perhaps they were just trying to finish the job so they could (1) get to the next one or (2) get home.

Now, I am not sure that this example can/ should have a larger application (like in the pharmaceutical lab), but in my mind this represents an interesting anecdote/ story that should be shared.

More often than not, sweeping statements about quality are made with little basis of understanding why the quality gap persists, and I would like to think that stories like this offer an opportunity for me/ we/ us to take a step back and break down a situation into its parts and learn.

Anyone else have an interesting annecdote that went a few steps beyond the normal rant?

As you may remember, last summer was a PR nightmare for China’s export industry.  It is a story that has been flogged to death, but for many in China we recognized that it was a problem that would hit our top/ bottom line.

At the time, I began working on two deals -  one food related and one for the construction related - that in the end both fell through because of an internal “China ban”:

Per an email I recieved today:

At this point Retailer X has a corporate directive NOT TO SOURCE from China. If Retailer X can purchase item from another country they are to do that. If there is a unique item only China can supply then Retailer X will accept this item.

This ” China ban ” is due to all the Mattel & other China recalls.

Thanks for your help, maybe in the future.

and my question is.. can I sue Mattel, FTS, and others that played a media game of passing the buck to China?  Of course, I am not really going to because I really view this as part of the game, but given all the laws on slander and libel… I am wondering if there is any legal basis for something like this?

Anyone willing to take this on pro bono?

This morning, I was reading an article published a couple of weeks ago over morning coffee, and I had to have a bit of a laugh to myself. To be honest, there is nothing overly protective or critical in the article As China’s inflation soars, world fears knock-on effects, but for some reason a spark went off in my head.

More than the decoupling conversation, and the snow storms, the effect of rising prices in China has become the topic of conversation. It is a conversation that many are having in and out of China, and what is interesting is that those of us in China have been watching the pieces fall into place for a long time… and those outside of China (in the media at least) seem to have missed it.

Now, before I go any further, I must make it clear that I am only going to address a few of the issues and couldn’t possibly cover all the reasons for China’s inflation in a single post… much less what the ripple effects will be.. However, the author opens the article with

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