EP 54 - Tim Francis - Why Every Entrepreneur Needs a Great Assistant

Steve Simonson - Poorly Made in China Book Review

Chinese manufacturers have transformed their country into the world's export powerhouse which attracted a lot of foreign businesses.

On this episode, Steve introduces us to the Book of the Week, Poorly Made in China by Paul Midler. Paul has worked in China for close to two decades and has amazing insider revelations about doing business with China. Here are more awesome takeaways on today’s episode:

• How Chinese manufacturers widen profits and margins through “product fade”.

• The “Counterfeit Culture” of factory owners.

• The principle of “Guanxi”.

• And the other things that can go wrong when companies shift production to China.

So, if you do business in China or plan to do so in the future, take time to listen as Steve discusses this book in-depth and get valuable insights that can benefit your business.

2:03 (Steve introduces today’s Book of the Week, Poorly Made in China by the great Paul Midler.)

05:00 (The concept of Product Fade.)

9:32 (Steve talks briefly about one chapter of the book called Price Go Up.)

16:08 (Steve shares a story about a joint venture between North American and Chinese companies.)

20:24 (Steve iterates why Poorly Made in China is a must read.)

Welcome to the Awesomers.com podcast. If you love to learn and if you're motivated to expand your mind and heck if you desire to break through those traditional paradigms and find your own version of success, you are in the right place. Awesomers around the world are on a journey to improve their lives and the lives of those around them. We believe in paying it forward and we fundamentally try to live up to the great Zig Ziglar quote where he said, "You can have everything in your life you want if you help enough other people get what they want." It doesn't matter where you came from. It only matters where you're going. My name is Steve Simonson and I hope you will join me on this Awesomer journey.

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Steve: Hello again Awesomers. It’s Steve Simonson and I'm coming back to you with another Book of the Week episode. Now, this is episode number 53 and so as our tradition has established all you have to do is go to Awesomers.com/53 to get the latest show notes, details, any links and so forth. Sometimes we'll even throw in a bonus or two on that page, so definitely you want to get Awesomers.com and check that out and while you're there don't forget maybe check out the mailing list. We don't spam you with a bunch of stuff to buy. We just send you kind of helpful things, a lot of the things that we've talked about on the show with actual processes and procedures and ways for you to kind of act on these things, so it's all free nothing to worry about and I encourage you to do that straight away.

02:03 (Steve introduces today’s Book of the Week, Poorly Made in China by the great Paul Midler.)

Now, today is again another Book of the Week episode and we're going to talk today about one of my favorite books and it is called Poorly Made in China by the great Paul Midler. Now, Paul is a brilliant author, but he goes far beyond just an author. He's lived  kind of all the stories that he outlines in the book and as someone who's been trading with China since you know way back since maybe 2002 is when I first went there, I probably bought from China directly in the prior you know year or so before that, I could be off by a year or so, but I I've been going. I remember going to China way back, way back in the old days and seeing in Shanghai I stayed in the hotel and every – we were very high up, every perspective showed a new set of cranes and literally there were hundreds of cranes no matter which direction you looked. And I came to know that that was the world's capital of cranes at the time for construction and they were also consuming the most concrete in the world. So, over the last 20 years, let's say China has just exploded and of course the 20 years before that was another explosion of growth and put them on the path to becoming the world's factory.

Now, Paul's book titled Poorly Made in China, it's a really in-depth kind of review of his experiences and I have to say I mentioned a few times in groups I've talked to, it feels a lot like you know a decade and a half of my experiences as well. Some of the stories he tells are eerily familiar. Honestly, some of them are both funny, but tragically funny in so many ways. So, I want to read a couple of the reviews for you just to give me a sense of a kind of what some of the other authors out in the space are saying about it.

“Few books on China and its economy are as lightning as this. This is a fantastic book for anyone who wants to understand how China's export industry really works and indeed how China works.” And that's from Jasper Becker. He's the author of Hungry Ghosts: Mao's Secret Famine. And finally, “Every Walmart needs a warning label and Midler nailing the deceit and dishonesty of Chinese manufacturers provides it. You'll never see another made-in-China label without thinking of this masterpiece.” And that's from Gordon Chang, the author of The Coming Collapse of China.

Now, I'm not sure that I would go so far as to say every factory falls under the same – I don’t know, the same premise of you know they start fairly easy and with a little price and then over time they work up the price and they lower the quality.

05:00 (The concept of Product Fade.)

In fact, Midler within the book talks or he introduces you to this concept called product fade and for anybody who's done business in a long time – for a long time in China you will know quality fade. It is not a mystery. It is not a myth and the way it works is you place an initial order and you get samples and if you're really rigid and you have a good procedure to validate production and use inspectors and so forth, you can even get the first shipment, the second shipment, maybe even the third shipment. It's pretty much on spec and again it can go off of spec faster if you're not good with your inspection process, but let's say you're pretty rigid about it. And then maybe the fourth shipment there's just something a little different about it, just you can't quite put your finger on it and the fifth shipment is different still and the sixth shipment is different still. Until seventh shipment, you're like this doesn't really seem like the same stuff as the third shipment and so you investigate, you start digging into it and you'll find and the example given in the book is the formula was changed within the shampoo bottle, also they made the bottles themselves a little thinner each time just to try to save just a little profit, just maximize their own factory efficiency. And I will say that's an unequivocally accurate depiction of how things can work in China and how I've seen them work many times.

As a parallel to that story, one time we placed some container orders with a factory and again the first container was fine, second container was fine and this was back you know more than 10, 12 years ago and so we weren't quite as rigid and knowledgeable about how to manage factories as I think we are today and so, but we noticed that the third shipment again, it just kind of had this little tweak to it. We couldn't quite put our finger on it. The fourth shipment, different still just by a little bit and finally by the fifth or sixth shipment it was you know not really that similar to the first couple and we finally – we delve into it, we went to China and we had our team in China kind of dig into it and what we figured out at that stage is that they were actually just subcontracting out the production of those containers to another factory down the street who would do them a little cheaper, maybe they were busy and they just decided oh we're just going to subcontract this out and they were not obviously as rigid about the specifications. Perhaps that subcontracted factory didn't even know the specifications that were mandated by us to the original factory.

Now, why would a factory do this? There's a couple reasons. One, factories tend to reward whoever pays the fastest. All right. So if you have terms, you know in other words, you pay the factory over a period of time, maybe after shipment, 60 days or whatever, somebody pays cash is going to have a higher priority than you if you don't manage that relationship well and sometimes even if you do manage it well they still will prioritize cash. The next is whoever is paying the most right. So, if you're paying $1 for something and somebody else is paying a buck 10, even a buck 5, they might get priority in production over you as well. So, now you know and in certain ways that part of it might be fair. You can go well they're making an economic judgment, but from a professional standpoint it's like if they were a long-term relationship that really can build volume they should make a predictable and professional relationship where we just honor our words right. So that would be to solve the problems that I described where you're subcontracting out to another factory that can do it cheaper and again they're still making money. The factory when – the original factory, when they subcontracted it out to the other guys they figured out how to make money on it and no doubt the other guys started investing in quality fade or maybe the proper term would be de-vesting because you know if they could change what's you know the product is made of or reduce the thread count or the weight or the gauge of the metal or the plastic, reduce the mix of the aluminum to a lesser standard, all of these things you can't really tell with your eye and that's the fundamental part and what makes this book so important is the quality fade is not always recognizable to you just visually, physically. Sometimes even the weight of it is the same.

9:32 (Steve talks briefly about one chapter of the book called Price Go Up.)

The factories are really clever about how they do you know quality fade, how they put that in place and over time that part of the message in this book, there's one chapter called Price Go Up and for anybody who's done business with China a long time, that's a common plea from your factory at some point especially when they get comfortable with you, especially when they get I would say to a place where they feel like they've got you over a barrel then price go up and that could be – they'll give you all kinds of really great reasons. Labor is going up and in fairness it probably is. They'll say that the environmental controls are going up and especially over the last you know summer of 2017 to summer of 2018 that's probably true to some extent, but do you have to be the one who pays for all of that on your very next order.

There could be other things that they reference raw material supplies, now tariffs in this modern world have been a part of the discussion, but they never call you and say price go down right. They don't call you and say oh the currency has retreated you know U.S. dollars 10% better than it was last year, our price go down. No, they don't do that because they're in the business of maximizing their own profit. Now, listen I don't actually have a problem in general principle with that premise. The factory is not your partner. They're often your adversary when it comes to you know their objectives are to make money off of you. Your objective is to try to ensure that you get a high quality product and develop a long-term relationship and manage that relationship so that you can get a nice high quality product delivered to your customers. What does this mean? It means sometimes you have to switch factories right. Sometimes the factory let’s say start giving the price go up or the quality fades going you know into your product, which means quality goes down and sometimes you just need to be able to switch. And so you understanding to every degree the specifications is really really important.

You know, I think Paul's book is one of the very best books that I've ever seen about China and I was just turned on to it about last year, I think was around a year ago by a friend of mine and she's been trading out of Hong Kong. She's from Hong Kong and she's been doing this for you know 20+ years probably as well and she's like hey you've got to read this book, it's hilarious and again after the hilarity comes on the face of tragedy for somebody else and it's a crazy thing.

So, one example in the book is a shampoo supplier shows up and says, “Hey, we want you to make this product,” and they're like “Yes, just give us a sample, we’ll copy it, no problem,” so they do. Everything checks out. The bottle is right. The shampoo is right. The amount of shampoo in the bottle is right. And then over time they stop filling the bottles quite as full right, so it's just a little bit less there and then as I said the thickness of the bottle has been reduced somewhat, just barely beyond perception at first and then so much that yes it was measurable quite easily. But then they also started changing the formula and this is to me one of the hilarious parts of the story.

So, here the company that you know deployed this factory and said, “Hey, yes we want you to take our sample and make our shampoo” or whatever it was, some sort of a shampoo type product and the factory says “Yes, we did it, done.” And then you know three, four, six months into it they noticed that definitely the formula is not the same. It's not nearly the same. You could tell in their case there they would just dab a little on their finger, they go “You see that how that looks that there's no way that's high-quality. They wouldn't even sell this in China let alone try to export it to the U.S.” So they go and ask the factory “Hey, we need to see your exact formulation for this shampoo.” And the factories basically says, “No, you can't have it.” And the customer was you know kind of flabbergasted. He’s like “Why can't we have it?” And China basically, the Chinese factory in this particular case said, “You can't have it because it's our own intellectual property,” which is like a mind-blowing concept to say you copied somebody else, this customer’s formula, but now that formula is your intellectual property and at the end of the day what turned out is they had changed the formula and they had changed the ingredients and that's why they didn't want to disclose it, but just that very notion that they would proclaim intellectual property as their defense is hilarious in China if you understand that they really do have quite a significant counterfeit culture. In fact, this book has an entire chapter called Counterfeit Culture to help you kind of understand how things work there.

Now, I want to tell you that I love China. I love the Chinese people. I love the culture there in many respects, but I want people to be armed with how to interface with factories. Knowledge is power as they say and if you really can understand somebody who's so experienced and Paul Midler extraordinarily experienced, his perspectives are not jaded, they're not biased. There's nothing xenophobic about this. This is about facts. If you go to the factories and you observe the same behaviors over and over and over across a series of industry cities and over a long course of time, this is a culture. This is something how they do business and they're really really good at it and that's the point. I hope that everybody will take a few minutes and go order the book Poorly Made in China and you know it's probably I don't know five or maybe even ten years old now, but an extraordinarily insightful book about how it is to do business with China. If you do business in China, you buy products from China, you develop products in China, this is a must-read. There's no choice that you have. You should absolutely read it, so that you could be prepared for what's to come with your experience of China. Now, again, with proper management you can minimize and obviously Paul is a professional, he did everything he could to minimize the you know problems that his customers would face.

16:08 (Steve shares a story about a joint venture between North American and Chinese companies.)

There's another story and I want to just echo this story. He mentions that you know a North American company decided to do a joint venture, I think it was with a recycling company in China and that they never made money. The recycling company never ever made money and the Americans were like “Well, why are we continuing to go on in this venture?” I think it was Americans or probably like Canadians, “But why are we continuing with this venture? We make no money. We put this money in. We get no money out.” And the reality once Paul and the folks investigated it is the Chinese partner would just peel off all the profit so that he didn't have to send anything back to the co-investor, the co-owner. And I will tell you that's a very common ploy used by Chinese factories.

For example in my experience, there's a patent product that we've done business with a lot over the last you know decade and a half and this product has a patent on it, but you can get a right to use the product within certain factories. These factories have a license from the patent holder and then they pass out little stickers to manage the process so that you know that that product has paid the patent holder fee because the patent holder gives these really fancy hologram stickers and so on and so, but what happens is many of these factories try to figure out how they can underreport the amount of throughput and in fact that's why the stickers came out to begin with. At first a factory would say yes we'll take your license and I won't get into the particulars who the licensees and so are, but the factory would say yes we will volunteer to be on your license program for this patented product and the patent holder will come and do their due diligence and see the factory has got reasonable resources and infrastructure and you know trustworthiness, whatever you want to think of it as and so they would say okay you're licensed to do it and then that factory could go say hey I'm authorized by this patent holder to make these products so come and use me. I can ship into the U.S. or Canada, Europe even where this patent is being forced at the border. And by the way, this is a multi-billion dollar patent, so this is a very significant kind of regulatory and enforcement process. And what the patent holder realized over the first few years is you know the factory would make a thousand containers of the product and they would report 400 or 500 of those containers right. They would – their methodology was hey we're just simply not going to report what we made, so we could pay less money to the patent holder. But they collected money from every single one of those containers I assure you certainly the ones that were exported into the countries with the enforcement. Often these patents are not enforced in countries throughout Africa, maybe India, South America to some extent and within China, so you don't know what the patent holders are doing inside of China and that's what made the problem difficult for the patent holder. The patent holder had to say well yes you may have produced 2,000 containers, but if 1,000 of those went to the U.S. or Europe where we are enforcing this patent, you know you're supposed to pay us on every single one not just the export ones but the Chinese ones as well assuming it was a domestic and of course that was a non-starter. The factory go no, no we just used our own patented process, our own IP on that. So, it's a real problem and that's why they developed this label program. The label then was devised by the patent holders and say, “Well, we're going to give you physical rules of labels and you have to stick this label on every carton so that we can see how many meters you're producing or how many cartons are what the production throughput really is.” The point is even in today's climate, you know we're in 2018, the factories are still trying to come up with ways to minimize their exposure to whether it’s pay patents or you know minimize exposure to use the high quality materials you agree to, they're still doing the same stuff and big factories do this all the time. Small factories do it as well, but I just – my point is if you don't know, if you're not knowledgeable about how they do business, it's going to be harder for you to do business in China.

20:24 (Steve iterates why Poorly Made in China is a must read.)

Now, again, I want to reinforce I love going to China, I love the Chinese people. The food is extraordinary. There's so many things about China that I love, but it's the lessons within this book Poorly Made in China are absolutely undeniable. Paul Midler tells the stories in an entertaining way by the way. This book is easy to read, entertaining and I would highly highly recommend it. I can't imagine you know talking to somebody who's excited about doing international and global trade and not mentioning this book. It's almost like I would be conducting you know entrepreneurial malpractice if I didn't tell you about this book. That's how important it is to me.

And so anyway, I love this book. I want you guys to get out there and buy it and don't forget to read it quickly, get it right under your belt, go and leave a review because that's the right thing to do and we're Awesomers and that's what we do. And I want to just remind you this has been episode number 53 of the Awesomers.com podcast and you can just go to Awesomers.com/53 and get all the details and so forth. And I want to remind you that you know we didn't take a lot of time to discuss all the little particulars in this book, but there are so many great stories and little details in here that I think you'll get a ton of insight about China and a ton of insight about how you need to do business in China and be prepared. For all of you at home and we're still listening and you're saying “You know what, that might be true and maybe Steve has got his own opinion maybe this author has got his own opinion, but my Chinese factory, they love me. They're like my brother. They send their kids over here to stay with me. They do all these things.” All of those are manipulation tactics. It doesn't mean you can't be friendly and by the way, I highly believe in relationships no matter with whom and China has this principle called guanxi, which is more or less you know long-term relationships and they will reward you with relationships over time. They'll maybe do a little extra you know fast production when you need it or you can earn your way through relationships to doing good things with the factories. Just remember to you know be strong in that relationship and if you know the tactics and strategies the factories use, you'll be prepared to kind of battle and at least try to keep things even. They're so good. They're so good at it that I want you to be prepared. So Awesomers, we'll be right back after this.

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Well we've done it again everybody. We have another episode of the Awesomers podcast ready for the world. Thank you for joining us and we hope that you've enjoyed our program today. Now is a good time to take a moment to subscribe, like and share this podcast. Heck you can even leave a review if you wanted. Awesomers around you will appreciate your help. It's only with your participation and sharing that we'll be able to achieve our goals. Our success is literally in your hands. Thank you again for joining us. We are at your service. Find out more about me, Steve Simonson, our guest, team and all the other Awesomers involved at Awesomers.com. Thank you again.