14 October 2008
Top ten reasons why your China side supplier may be clueless about the economy.
Supplier rings me today – complainingÂ I have not picked up my goods / nor paid for, goods we previously ordered back in the first quarter (nor placed any new orders recently). Now, normally I would have given him an earful – after all, these were goods which were not only a) delivered late, but b) had to be returned at least twice having failed quality control on not one but multiple points. (By the time the items were fixed, the customer had already replaced them with similar items from a different supplier.) For some reason – maybe stress, maybe the weather, I simply blurted out “Do you have any clue whats happening around the world at the moment?” A long conversation later, I realized that, no – he honestly had no idea of what was occurring in the global markets. However, this is not an isolated trend and this is not (by far) the first time I have bumped into this recently. Some of the common mindsets are:
1) This years delays / downturns / slowdowns were Olympics related.
Many businessmen, factory owners and suppliers genuinely believed any downturns in their respective industries we somehow the result of the then upcoming Beijing Olympics. More dangerous was the belief that once the Olympics was past, business would resume as normal. Meanwhile, growing problems in housing, credit markets, banking and consumer confidence were taking place around the world. Consequently, byÂ focusing exclusivelyÂ on this one single aspect while almost completely ignoring the effects of higher fuel costs, RMB appreciation, rising materials costs, inflation etc aÂ year of major global changes in the market was essentially lost on the Olympics.Â It was if the entire country was focused on one thing only. The one thing they were not focused on, was takingÂ care of business. Ironically there are some businesses which are still waiting for “business to return after the Olympics.”
2) The average person (still) doesn’t follow the news.
Before you start correcting me, let me point out that the few highly educated office dwellers living in places like Beijing, Shanghai or Guangzhou, do not constitute the majority of the population.Â Rather I amÂ referring specifically to the working man, whose back the country runs on. This working may spans the range from the garbage man to the materials salesman all the way up to the factory owner.
“Why bother to read the news, if it has no effect on you,” is a common mindset. A banking crisis on one side of the globe cannot possibly has no relationship to a supplier far off in the east. A second idea is that if news does effect you, there is nothing you can do about it anyways. If you are stuck on a boat drifting in the middle of the ocean, is it productive to pay close attention to the endless waves around you or attempt to control their crests? Therefore, news is seen as irrelevant to the common man (such as the China supplier you may be presently placing orders with. And no, owning and operating a factory employing several hundred workers does not necessarily make an individual enlightened.)
When or if they do access news, more often then not, its presented as politically laced, upbeat communist utopia versions of reality. Its no secret that media is given up to the minute directives on what news can and cannot be published. Stories are presented in the proper light in accordance with the boundaries set forth by the propaganda department. Even online forums, blog discussions and BBBs are (cleverly) monitored and opinions expressed are influenced by employees hired specifically for the purpose of “adjusting” online conversations in directions favorable to the current party line. Adding to the confusion, is the governments public relations efforts to present two faces; internationally presenting itself as improving quality and safety standards, while domestically brushing over the issues.
During the “tainted pet food” crisis, it was widely reported that consumers should avoid purchasing imported pet food as overseas suppliers were having quality issues. Yet what wasn’t reported was the key detail that the harmful ingredient which might harm your pet, was melamine from China. Many people I talked with at the time, were completely ignorant of this fact and the role which China played. The combined result is that all news domestically reported in China is systematically skewed and diluted in a manner which often removes the practical value of the information. The combined effect of this has massive implications for businesses particularly during downturns when small cracks become quickly evident as gaping holes.
3) No experience with downturns.
During the disastrous economic period of famine in the late 1960′ies known as the Great Leap Forward, Jasper Beckerâ€™s book Hungry Ghosts talks about a Chinese expression â€œswap the child to make foodâ€ which referred to the practice of swapping your child for a neighborsâ€™ and eating it (with the idea that it was much easier then eating your own child). Talk about tough times! But this was yesterday and today, thirty years of raging growth has imparted many ChineseÂ with a sense of imperiousness, invincibility, denial and disbelief. While the older generation remembers hard times, this doesn’t apply to anyone under 45.
Many people feel the sky is the limit. While on an academic level they may be able to rationalize that there is a downturn, evident by their stocks losing more then half their value overnight, but on a gut level the simpy do not feel it. Its the difference between information and knowledge. Knowledge is information combined with experience. Its the “knowing.” Information however is just imparted on you – that doesn’t mean you understand it. The gambler mentality has been cited as a factor for the sub-primeÂ morgageÂ crisis, yet the reality is you haven’t seen real gambling mentality (often gambling with public funds) until you hitÂ Macao.Â Even the Chinese government is worried about this given theÂ gaming haven’s stunning growth.
4)The domestic market is the answer to everything.
Its no secret that the China domestic market has expanded from the iron rice bowl to Hagen Daz and fast food for the masses. But this if I can sell a tired to each of the 1.3 billion potential customers in China, has been packaged and repackaged over and over again for almost 20 years now (and is starting to sound tired).Â For the last twenty years, China has been the factory to the world – do weÂ realisticallyÂ think that suddenly overnight it will suddenly be the worlds largest domestic consumer shopping mall?
If I had a nickle for every exporting supplier who recently told me they were instead planning on focusing on the domestic market, I would be a rich man. This argument fails to take into consideration inflation, the rising cost of raw materials and fuel price increases to name just a few.
5) Eating off of crumbs
The modern Walmart factories seen on CNN constitute a pretty small part of the China supply chain. The reality is most factories are significantly smaller and even the larger ones will get materials, product or services from these smaller ones. A typical China supply chain will contain dozens or more small to medium sized operators and middle men who have practically no overhead and will each take their small cut. They may live in their factory, their management team might also be their wife and other family members and their main expense will be their mobile phone or gas. They may have only just one or two customers which often enough will be all they need to continue. Not only is it quite difficult to compete with this, it also means these guys will not be making changes to their business model any time soon.
Next up: How to deal with your supplier when they are completely clueless about the global economy.
Update: A few interesting links, posts and other opinions from around the web on this topic:
- If The US Economy Goes Down, So Does Chinaâ€™s
- What’s happening in China’s economy?
- China Still Vulnerable to Slowdown, Despite Domestic Market ‘Buffer
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