Archive for Operations Management

The Meeting Dynamic.

Posted in Business Culture in China, Cultural Observations., Doing Business with tags , , , , , , , on December 13, 2013 by Ben Brown

There is an interesting phenomenon in Chinese business meetings that always ruffles the feathers of my background in operations management, specifically as it relates to efficiency.

China has more of one thing than anywhere else in the world: People. It has always been a large country.

China likes to show off its people. Over the years I’ve been party to many meetings in China.

In the West, a high-level business meeting between two parties will include, generally, people who need to be there. Maybe there will be one person who is there to learn, but everyone else has some sort of role.

Chinese meetings are different. There will often be five, six or more people representing each company at a meeting where really, only three or at most four people will do any talking. Some of the others at the meeting may be there to advise the leaders afterwards. Generally though, there are a lot of people there who are really just ‘filler’. Sometimes I’ve gotten to be there as an adviser. Occasionally I’ve been one of the guys doing the talking. Most of the time, I take notes nobody will ever ask me about and discreetly look up the occasional Chinese word or phrase I didn’t understand. It’s a good opportunity to write down tasks I might need to take care of by the end of the day.

It’s important to show a lot of people at these meetings to either display that you are powerful, or to show respect to a government organization that might be unhappy to be greeted with only two or three people representing the business.

It’s just another example of how many cultural differences there are between doing business here and conducting the same transaction in the west.

In North America specifically, we strive to eliminate cultural aspects of doing business and make everything about the agreement on the table. People can say any crazy thing they want in a meeting, as long as it ends with a clearly-stated contract that delineates every last item of business loophole free.

In China, I get many compliments on how much I’ve learned about Chinese culture and how well I handle situations. Still, I make about two cultural mistakes during a good week. I’m usually given a bit of leeway because I’m a foreigner, which I appreciate greatly. This culture is very complex. I’ve seen locals that make more mistakes than I do. Sea Turtles returning from ten or more years abroad bring a refreshing sense of openness to a lot of meetings, but many also find themselves stumbling to re-balance after being gone for so long. There are simply a lot of rules to remember.

Awhile back, at a previous company, I had the privilege of attending a meeting between a Chinese company and an American company. They had formed a joint venture. The Americans were visiting Chongqing. One of them noted to me that when the Chinese had come to the US, they brought six people over. The Americans on this trip consisted of the Managing Director and the project manager.

The Chinese side had 10 people.

But the real difference was the power dynamic. On the Chinese side, the guy that did 99% of the talking was the leader. Everyone else sat quietly for the most part. The organization on a whole was obviously very top-down. On the US side, there were lots of side-bar discussions going on between the two lonely guys sitting there and they would interrupt each other as they tried to clarify points to the Chinese counterparts.

This reflects a difference not just in presentation but in cultural approach, collective vs. individual decision-making processes, and separation of authority. I’m an American. Personally, I prefer the collective approach to doing business. I like to be able to make my input in meetings. I like to speak up without being asked to. It takes a great deal of restraint for me to remain silent as complicated discussions take place. In fact, I’ve made it a habit since arriving in China to make sure I’ve saved up enough free cash from any new job so that I can afford six months of unemployment before I start saying much in meetings. This usually also forces me to get established somewhere so that my comments don’t come off as abrasive. It also takes a lot of effort to not be overbearing. As Americans, one of our favorite pastimes in a business environment is to tell people what we think. Especially if we completely disagree with an approach being taken by leadership. In China, it’s not possible to raise your voice and express opinions without being first asked to do so. It’s even more inappropriate to say something contradictory to the leadership.

The irony, of course, is that western businessmen coming to China to conduct business may think everything is going just fine at first. This is because it’s also generally not considered appropriate to tell anyone that they’re stepping on cultural toes.

A few years ago when I was living in the States, I regularly heard businessmen coming back from some of their first trips to China say “I don’t know why everyone talks about the culture being so different over there. I went over and had no problems. Business is business. Just get the deal done and you’ll be fine.”

When I would bump into them again a year later, the story would be different. It would be a lot of “My Chinese counterpart is destroying our business because he’s not listening to me, he’s not doing what I told him to do, blah blah…” If I’m feeling like having an argument, I tell the person that maybe, just maybe, they should learn to communicate a little better from a culturally-competent perspective so that they can actually move forward instead of simply barking orders and complaining that everything is being done improperly. Most of the time, though, I wait for the other shoe to drop. I ask them how their last trip to China was aside from the meeting. Their responses are usually negative. They complain about a lot of things being different. Basically, they’re starting to notice that the culture is totally different from their own, and they’re trying to change things.

That’s absolutely impossible.

The only thing that can be changed is you. Changing the way you deliver the message can make the message itself more digestible to the guy sitting across form you with nine silent subordinates. When I’m in China, I have the benefit of seeing the differences between the culture I’m in and the culture I came from. I’ve lived here long enough to have my eyes opened a bit. It’s my responsibility to see those differences and adapt my approach to everything so that it fits into my counterpart’s cultural comfort zone.

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Entering China’s Domestic Market.

Posted in Business Culture in China, Doing Business with tags , , , , , , on December 11, 2013 by Ben Brown

Yesterday I posted a section on when to enter China’s market. Today I’m going to post an overview on how to do it.

There are a number of ways one can get into this market. You can form a partnership with someone over here who will help you set up shop and sell your wares, you can find a local PR company to help you display your brand appropriately, you can start your own independent shop and go it alone, you can find a distributor and simply export your product to someone who will put it on shelves for you, you can find an exporter in your home country who has experience sending products similar to yours over to China, or you can even find some people who will start out just selling your stuff on taobao.com (picture the giant child of ebay and amazon).

The steps to market entry in China are similar to what they would be in any other market:

1. Market research. Know what the market looks like. Is there competition locally? Is there competition from abroad already? Is there a demand for your product? What is the potential size of your customer base here? What do the demographics of your customer base look like? (Chengdu is famous for people relaxing with a hot beverage. Starbucks, to a foreigner, looked like an easy slam dunk in this market). Does another product different from yours exist that replaces the need for your product? (Chengdu has a lot of tea houses. It’s famous for it. I’m pretty sure the number of Starbucks drinkers is affected by this). Does the customer have any need for your product? (Nobody in China, except for the few “Sea Turtles” who got their degrees in the west, feels a dire need to start their day with a cup of joe). Will customers need to be taught to use your product? (The only way to increase dairy sales in China is to actually convince people to start eating western food at home from time to time).

2. Market entry vehicle. How are you going to get here? Should you go it alone and open your shop? Should you find a professional retailer? Should you go with a distributor? An exporter from your home territory?

3. Branding strategy. How are you going to present your brand in this market? Should you do things largely the same? (McDonald’s) Or should you completely change around your product design and presentation to meet the needs of your new market demographic? (KFC’s menu is at least 50% different from its menu selections in the States). Are you a luxury item in China where you’re a commodity in the US? (Harley Davidson) How are you going to market yourself? Traditionally? Online? Guerrilla? What will hit your target market most effectively?

4. Pricing. You may be manufacturing your goods in China already. This doesn’t mean you need to pass the savings on to your customer. If you price your goods too low it is possible they will be perceived as “for the lower-income buyer” when you’re targeting your product to a higher, more visible and savvy customer. The customer you’re chasing may not pay $50USD for a pair of shoes if the other shoes targeting your customers are selling for $250USD, even if you could easily make a profit at that level. Ironically, if you hit the luxury market or semi-luxury market here you’ll sell more of your product than you could at a much lower price, because at $50USD per

5. Find the process. How are you going to enter? What steps do you need to take? How much are you willing to risk up front?

6. Find the people. Who are you going to partner with? How will you develop a relationship and monitor progression of your business?

7. Pull the trigger.

Depending on your business, these may not be all of the steps. Different actions needd to be taken for different businesses. I also haven’t gotten into the regulatory side of things, since that varies drastically by what you’re selling and how you’re selling it. But basically, the structure and process are similar to anywhere else. Is there a market? What does it look like? How do I get in? How do I sell? Can I make a profit? Who do I work with? What are the taxes? Are there any major road blocks that will prevent this from happening?

The next post will be on high level business meetings in Private Chinese corporations.

Over leveraging in China.

Posted in Uncategorized with tags , , , , on December 7, 2013 by Ben Brown

This was one of those “Ah-Ha” moments for me.

Many of you who do business in or with China ask the same question on a weekly or even daily basis of your Chinese counterpart: “Why, WHY are they doing THIS?!”

Sometimes the moves a Chinese company will make may strike you as completely without sense. I can now attest that for the great majority, there is a very clear line of reasoning. I can further attest that it is usually pretty solid reasoning.

The difference lies in the structure of the country’s rules of the game.

In the US, if we want to start a business we start it. Next week I plan to register the first of three companies I’m starting. One will export products to China. One will import products to the US, and a third will offer consulting and management services, on the ground in China. The grand total cost of opening all three of these businesses will be less than $1K USD.

In China, in many cases, you need to show $100K RMB in liquid assets before you are allowed to register just one business. That’s around $18,000 USD. It’s not needed for anything, you just have to have it in savings. Other companies (it depends on what you’re hoping to trade or sell) require a much higher input. In some cases over $100K USD in savings just to get a business license.

That’s just to give you an idea of how much more difficult it is to start and operate a business in China, right from the start.

I noticed over the past year of working for a Chinese company that many, many Chinese businesses are heavily over leveraged. Why? Is it because they can?

No. Not really.

Most businesses with the goal of long-term growth and survival will not choose to over encumber themselves with choking levels of debt. In the west we often talk about Chinese companies borrowing money that they either fail to pay back or pay back extremely late. This does happen with a lot of SOEs.

Private companies are different.

First of all, they are not party-controlled or nearly as heavily party-influenced as SOEs. They don’t have a CEO who also holds a government position of authority that can just call up the head of an SOE bank and resolve issues. Their company pays lip service to the idea of bringing technology into the country and spreading it around, but they are still in business to make money rather than to support the motherland.

Secondly, they still have to put up corporate assets as collateral, and they have to find, usually, a local government entity to guarantee their loan to the bank. That local government entity will want the assets as collateral.

Then, after the purchase has been made, things have to go exactly as planned. Usually the plan was drawn up with the most optimistic scenario in mind. In most cases, those scenarios were never meet-able.

So the local entity will start conducting audits and demanding their money back. This often happens mere months after the transaction has closed.

The private company, meanwhile, has been going to another small government entity in the neighboring town (or eventually in a neighboring province) and offering different assets as collateral. They can then try to use their new pull with a slightly higher-ranking government official to coerce the guarantor of the earlier transaction into sitting tight while the company struggles to turn a profit. If they need to make some payments, some of the loan money from the second transaction can be used to satisfy the parties involved in the first.

The result is a company that has expanded rapidly through lending aimed at reaching profit margins that were probably never attainable. The hope is that eventually they will start turning a profit and become competitive enough to expand further, creating JV agreements with foreign entities and possibly even buying western companies.

Once a private firm has gone international, it’s a lot tougher for some local government guarantor to try to tear them down by demanding assets as collateral for failed investments at a lower level. The company could very well still not be profitable enough to pay off all of its debt obligations.

I regularly see things I don’t understand in my current working environment. To my amazement, I’ve found that if I dig long enough and find the right person, and convince them to share, I get an answer that makes some level of sense. Of course, the biggest question is why get into private business in China in the first place. People here are brave beyond belief, and risk aversion is nearly nonexistent by western standards.

What does that last sentence mean for the future? It means look out western markets, because if China ever creates a safer, easier environment in which private citizens can freely open their own entrepreneurial endeavors, we’re going to be competing with people willing to risk it all on much lower odds than we would.

The Cultural Revolution and Operations Management.

Posted in Uncategorized with tags , , , , , on December 6, 2013 by Ben Brown

I try to keep these posts fairly brief. People have limited attention spans. I read the news and a bunch of online magazines on a daily basis, but rarely get to the end of an article unless it’s really interesting. There is a lot of filler in stories these days.

Since I’m writing today about Operations Management I’m going to take a stab at being concise and efficient.

Those of you who worked in or with Chinese companies will attest to the fact that there is little in the way of operational efficiency at locally-owned companies compared to the cost-cutting, LEAN-focused environments more commonly found in the West.

Why is this?

I have a theory.

In 1949 China started its great Planned Economic System experiment. Money was a thing of the past. The people would work for the benefit of the country and everyone would be able to eat their fill while enjoying the fruits of everybody’s labor equally.

This didn’t work. But it DID cause some long-lasting, and unfortunate, management changes.

The largest impact in my opinion was on operations management.

Let’s use a factory as an example. Chinese companies generally start greenfield operations. This means they buy the newest equipment and install it in the newest factories built on newly-developed land with new utilities and wide, state-of-the-art roads.

So why do they have trouble competing with western manufacturing operations? Some people think it has to do with the education and technical skill of the employees.

I strongly disagree. The company I work for has highly-skilled technical guys who know metallurgy and know casting. They can break a casting down to its barest elements and tell you what molecules can be reduced to make a stronger, better product. The efficiency problem lies in two main areas: Culture and Process Control proficiency. The efficiency problem is exacerbated by two other things: Protection from Competition and the Cultural Revolution.

Since China opened up in 1979, it has experienced largely uninterrupted, recession-free explosive growth. So why reduce costs? A lot of raw materials and natural resources are subsidized by the government. Manufacturing operations open to fast-growing growth rates inside their country and production costs that until recently undercut the rest of the world.

Now that competition is beginning to tighten a little, Chinese companies are (or will soon be) starting to realize they need to improve their operational efficiency and process control systems in order to increase quality and maintain competitive advantage. But it’s tough to do. Across the board at my company, I see management practices with roots in the planned economy days. What are those practices?

1. Set extremely meet-able quotas.

2. Hire more people than you need.

3. Create a bloated budget.

4. Overload your subordinates with paperwork so they can’t siphon off what you’ve padded into your operating budget. 

This resulted in the lazy, high-cost, low-quality labor forces that existed in the 1960s.

China is not nearly as bad today, but I still see a management structure unconcerned about employees spending 20% of their time completing administrative work to prevent fraud because they assume that if more work is needed, people can work overtime. Multiple approval signatures are required to get reimbursed for company expenses. The amount of time required to submit and process reimbursement forms in many cases out-paces the cost to be reimbursed from a quantitative time-to-money conversion. Employees are monitored by a special department that simply does monitoring. Managers are overworked and their subordinates in some cases sit for weeks with no projects because the departments don’t plan operations from an efficiency perspective.

In the coming years, China will start reducing subsidization of natural resources and utilities. When this happens, people with fluency in Chinese and experience in Six Sigma, LEAN, and DMAIC will be highly employable.

Culturally, challenges exist because process control requires low-level employees to have a say in how the factory operates. In China the leaders are considered decision-makers. Companies are structured much more like the military. You do what your superior says because he says you should do it. No questions are to be asked.
The whole idea of process control programs like Six Sigma is that people at every level will be able to give input to how the factory operates in the interest of reducing waste and improving quality by knowing what caused any and every defect.

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