Tuesday, January 22, 2008

Green Screens

You'd think that we've become a trading desk at our China offices what with practically all my staff watching their stocks "plummet" these last few days in China. I say "plummet" because stocks here aren't allowed to drop more than 10% before they are halted until the next day - so it seems on average the markets have dropped about 5% each of the past three trading days. Having lived nearly all my life in North America, it's sort of weird getting the color relationships right - here in China, green is bad/down, and red is good/up (associated with good luck in the Chinese culture).

I'm not sure what other managers doing about the time spent on this, since gambling in stocks seems to be a national past time here. I figure if it doesn't affect their capacity to process work, I don't really care. Don't tell my employees, but not so secretly, I'm kind of happy that they're finally falling. Means they know they need to work harder in the next year. So here's to green screens :)!

Saturday, January 19, 2008

China's IP Problem

The lack of respect of intellectual property rights by Chinese governments particularly at the local level and in many respects of many locals, probably already costs China a lot of money. I can understand where it comes from - being dirt poor as much of the country has been, it's difficult to convince people in China (let alone from any developing country) that something as intangible as intellectual property rights have value. They just want things cheap.

This however is beyond appalling. Completely brazen, the counterfeiting of ABRO adhesives is frightening in how much support the counterfeiter has received from within China and how much success he has had in rallying nationalist sentiment when it seems absolutely clear that what he has done is wrong. What is particularly remarkable is that the fight isn't over a consumer brand. Because of the industrial nature of the product, it surprises me that presumably more sophisticated buyers aren't fighting back against distributors of the fake product (but maybe they are?). Also covered here.

American History as China's Prologue

China's rapid industrialization, while remarkable, is hardly new - and I'm far from the first to realize this. It's sometimes easy to forget that the US was a third world country only a century ago. Check out some of these photos from the US Library of Congress. From Core77 (a design blog I follow):

The Library of Congress is now sharing 1,600 color images from the Farm Security Administration/Office of War Information and about 1,500 images from the George Grantham Bain News Service on Flickr! These particular photos have been extremely popular with visitors of the Library, are available at high resolutions, and have no known restrictions on publication or distribution.

It's nearly impossible not to see at least some similarities in comparing Chinese industrialization to American industrialization.

Tale of Two Factories

While I'm of the view that incentives ought to reinforce goals rather than drive them, either way it doesn't take a genius to realize that incentives can have a significant impact on results. So it is with our manufacturing partners.

The nature of aluminum extrusions is that it's a capital intensive business. Machines require cash, inventory uses a lot of cash (and you won't find any aluminum smelters offering credit), and you tend to need a lot of space if you want to offer finishing services. Companies that are able to manage rapid growth against these capital constraints are as much fascinating as they are unusual. Progressive incentive structures are difficult to come by anywhere in the world but surprisingly I've come across a number of companies in China that reward based on profitability instead of some arbitrary figure (or the traditional 13th month of salary).

As an example, one rapidly growing factory distributes 8% of profits to managers and directors. While the company probably pays below average for its managers, the profit share means that many of them can make as much if not even more than their annual salaries paid just before Chinese New Year's. Of the remaining 92%, 70% gets distributed amongst the partners and the residual is reinvested.

Interestingly, they also have a borrowing mechanism that allows managers, directors and also shareholders to lend funds back to the company where the company pays interest on those "deposits" at a similar cost to what they would get from the bank. I suspect that like microfinance, where voluntary savings are often an indicator of the trust that borrowers have in their institution/borrowing group, "deposits" here can be used as an indicator for senior managers as an indication of the level of trust and optimism that employees feel for the success of the organization over at least the term. Of course this can also be dangerous depending on the liquidity of the company should one day the level of optimism/appearance of security be less so.

Let's call this Factory A. Now let's compare it to Factory B - with a much more of a command and control type structure, Factory B was purchased from the state by a technocrat at rumoured wholesale prices. About 5-6 years ago both companies were the same size with 8-10 extrusion presses. Now Factory A has over 50 presses while Factory B has 14. While there is undoubtedly more to it, there's little doubt in my mind that culture reinforced by incentives have played a large part.

There is one caveat that may be masked by the rapid growth of the company. The number of people employed per machine is nearly double in Company A versus Company B - which is a little counter intuitive. Within the Chinese context, and this is an area I think culture has played a role - managers are given hiring power and often want to hire more people from their own villages which to my mind somewhat ego driven in that I suspect that the profit that they are awarded is disconnected enough that the trade off in lower profitability for them specifically is offset by the increased stature of having more employees.

As a result, Company A is a little more expensive than Company B in pricing but my confidence in Company A being able to produce consistently to our requirements especially when aesthetic finishes are a concern is significantly higher. I am also told that the books are still rather opaque at both institutions. I've yet to hear of any Chinese companies that practice open book management (I suspect in part because of, er, "tax management") - thus Company A requires that its employees and culture has a great deal of trust in order for the incentive structure to work.

I think smart managers/entrepreneurs realize that while incentives are a cost, managed properly they can also become investments in culture that pay for themselves many times over.

Thursday, January 10, 2008

Mind Games

I'm not sure that I'm built to do business with and like your typical homegrown local (and I'm not sure that's a bad thing). Though perhaps not as despairing as "This is China's" experience, the games that are played are somewhat frightening when you step back to think about it.

For the level of ingenuity being used to cheat and fool each other, you would think that China should be one of the most innovative nations in the world. It has been pointed out to me that even in some of China's largest companies, they keep the books numerous sets of books in enclosed rooms that require going through the General Manager's office to reach - such that if the government comes knocking, the computer can be quickly burnt to a crisp. One of the last people you also want to cheat is your accountant because they will simply submit your books to the government (and apparently this is not that uncommon).

That said, not paying your taxes here in China are the rule rather than the exception. Further, 'not paying your taxes is neither unethical nor does it set a bad example for employees'. It has been argued to me that this wasn't "cheating" given how much government officials have been "cheating" the country themselves.

Closer to home, I know of a factory where a trusted employee found all sorts of ways to cash in. From "entertaining" clients/local government officials, buying "official receipts" on the cheap, to pocketing the rent on the factory that was initially comped by the landlord in exchange for signing the lease, to chintzing on the food budgeted for factory workers for meals whenever the owners were not around (which was a lot). Finally, he even held documentation hostage threatening to submit it to the government because of tax evasion. It made me completely rethink the utility of encouraging employees to refer friends and family as most of this was accomplished through the hiring associates who came from his village. Indeed, because of the way the factory was managed different directors/managers attempted to build their own little fiefdoms each with the intention of cooperating to cash as much out of the factory as possible.

Which brings me to my latest adventure. As noted, we are going through the machinations of buying a vendor. One of my associates has taken the lead on the specifics and explained to me what was necessary since we still wanted one of the owners to remain and manage the company. One of our controls will be the hiring of an accountant who will report directly to us. It was like it was straight from the Godfather. He explained the risk that the accountant could eventually conspire with the owner. The associate explained to me that we would hire someone locally (the owner is from a different "village" (of a few million people) entirely) so that we could know where that person's wife, kid(s), brother/sister, grandparents lived so we could "deal with them if anything went wrong." I'm a little worried by what he means by that.

Later during the day, I sat through what I thought was an entirely casual conversation picking up completely different meanings than the associate. The level subtext could require a cultural interpreter. My associate pointed to everything from questioning one of the owner's motivations, to what was being implied. While the specifics are relatively unimportant, in frustration I couldn't help but ask why this guy didn't just come out and say what he meant - to which my associate sighed that I just didn't understand, saying I'm not Chinese and that this is the way things are. Of course going into this, at least I am doing it with eyes (relatively) wide open.

Friday, January 04, 2008


The last two posts reminded me of Seth Godin's recent post on exclusion (that I still haven't decided if I agree with), and my own experience as a co-op student. While I'm sure the idea of avoiding exclusion is generally practical from a general marketing perspective, I wonder what Seth Godin would have to say about hiring co-op students?

Clarification: for most companies that consider hiring students, there is a certain expectation that there can be high turnover and in this light, many professional services firm view the hiring of co-ops and the expense of training them as part of marketing to future buyers of their services. Can the feeling of rejection of those who you don't hire really be avoided?

Hiring Interns

As a follow up to my last post, we hired 11 students and they'll all be working at our vendors and (hopefully) soon to be manufacturing subsidiary. In mid December, I came out of the process of interviewing/hiring them a little shell shocked (and probably breaking every best practice ever taught). My China colleague apparently had maintained very good relations with his profs so we were talked up during classes. We came late to the process but we showed up not being told what to prepare (actually we were even told not to prepare anything) and then we had over 200 people come to our seminar and no forethought of how to sort them!

Imagine this: you're chatting merrily along, taken to an unremarkable door around a corner, you thank the escort and then when you turn around, you have 200+ pairs of eyes staring at you and the room is dead silent. After seeing them, the professor who kindly told you that you need not prepare, asks you - "oh by the way, do you have a power point presentation of your company that you could show"?

After I got over my wave of panic, over my inclination to take a picture of the red clothbound Communist book of Mao sitting on the prof's desk and finally incredulity that even here, in the middle of nowhere (probably a "small town" of a half million at least), Chinese professors are using Powerpoint on computer consoles, my time served in investment banking finally came up useful and I whipped up a presentation in 5 minutes. My colleague ad libbed droning on about what we did (quite impressive, though I guess he did also used to be class president). We ultimately sorted people by having them all speak and say a few sentences about themselves in front of everyone and what their expectations might be while collecting the standardized forms (which I confess we didn't have time to read) making remarkably subjective decisions on our picks. It was somewhat uncomfortable as I still haven't taken those Mandarin lessons yet so my colleague talked on pointing me who inevitably would stand from time to time with a forced smile waving like the Queen.

It's (almost) scandalous how little we need to pay these people. If you thought co-op students are cheap labor in the US/Canada, when we were discussing pay I suggested a number and I was scolded (yes, I get no respect) by my colleague as being crazy and how they were lucky they didn't have to pay us to learn! Given that these students must find placements for 6 months the starting number proposed by his former professor was 250-300 RMB/month plus room and board! (at today's dollars 7.4:1 that means $34-40 USD per month) .

Apparently we can be cheaper than average $400-500 RMB/month because we are foreign and not from Taiwan (apparently managers from China and - or as my China colleague might say quite indignantly - including - Taiwan can be quite the tyrants). I think they're sort of taken advantage of since these "kids" (my colleague in HK gets offended at my calling them this since I'm young enough to be her kid), have to have 6 months of experience before they graduate.

Fortunately, they do have choices. They can work for a larger company like Haier (company that tried to buy Maytag) or Huawei (company that's often referred to in China as "China's Cisco" or is more appropriately company that often "borrows" from Cisco) doing mind numbing but relatively well paid QC jobs (on the production line) for 2000+ RMB/month, or they can work for companies like us for diddles but get more useful experience with greater opportunities. It seems to work the opposite way in the West. For me, it was the choice between smaller companies that had to pay higher to attract talent of snot nosed arrogant kids like myself versus big name professional services firms that paid less but offered great training and a great name when you left (which I still think is somewhat bizarre).

Ultimately, seeing as I have little to no fear that they will be reading this, I decided that we ought to pay average (500 RMB/month) and in addition we will withhold an amount per month that we will give them when they leave (with the malicious intent that they will in fact be quite surprised and tell all their friends and we will have the pick of the litter next year). I have high hopes and am optimistic. Truth be told, I'm actually a little afraid of hiring more senior people in China. Because of things like this. Students, beyond being ridiculously energetic tend to also come uncorrupted. This internship process can be like a 6 month job interview (not fun for them but fun for us).

We also had quite a debate internally about how to properly welcome them. My China colleague, cheap bastard that he is (I say that affectionately of course), thought we shouldn't be too generous and nice to bring up expectations. Even making the decision to pay for the train tickets in sleeper cars no less was a debate since no one does that. (Side note: traveling on trains in China is an interesting experience especially with my colleague continually whispering in my ear not to fall asleep or else you will be robbed of everything. But it's sitting in this cramped room with 40-50 people that rumbles with everyone staring at each other suspiciously for however long the train ride is).

The train ride direct from the school is 18 hours and the cost of a sleeper car is only 15-20 USD (with seats in the hellish room about half that price)! The rationale of other companies is apparently that there's no point in paying for these kids when they haven't done anything yet (no, they wouldn't even pay for seats in that hellish little room). We also paid for them to have a a decent lunch and dinner, and to spend one night in Guangzhou to tour around before taking them to the factories the next day. I also suggested bringing them to go see a movie (and you should have heard the crap I got into for that - "what, you think these things don't cost money?" still echo in my head though I get that a lot). They ended up being too tired from their trip, but I think we will take them to karaoke and maybe an extra day in Guangzhou at the end of their internships.

I've come away from the process fairly excited and I think I will abscond a kid for a few administrative tasks to report directly to me within the next few weeks at our offices in Guangzhou (they're all currently with vendors now). In the future I hope to develop more of a strategy to hiring interns and cultivating a better relationship with that university through things like competitions, developing case studies, scholarships, and hiring over the course of a few days instead of one.

Oh, did I mention that we only need to actually pay for half of those interns and the other half plus the room and board for everyone get paid for by our vendors/subsidiary? Sure we will be spending a bit of money sending our managers over to train and work with them but any way I look at it, this is a definite score that even if it doesn't pan out, it will be a lot cheaper than many of my other mistakes.

The Real Elixir of Youth

Our co-op students started two days ago. I'd have to say that the boundless energy is both energizing and exhausting. I guess I've been procrastinating about this post since we first went just north of Wuhan to visit a colleague's alma matter (actually I've been procrastinating about a great deal many things).

So there are a few questions that I've thought about in the past but never really had much of a resolution - is it better to hire students straight out of school and be the first to inevitably jade their sense of idealism and purpose and who ultimately run away bitter after spending countless hours on training (hey, we all know lots of people who that's happened to), or is it better to hire older mature workers who cost more but who can also be stuck in their ways - or worse, add negatively to culture? Another problem is that I suspect you're probably more likely to get things like this. Maybe it's not an either/or but combination of. This is ever more complicated by China (and even Hong Kong) and the very rapid change that nearly everyone has seen.

I haven't been having much success at hiring younger staff in Hong Kong. By younger I optimistically mean people even my age (at the ripe age of nearly 30). If it isn't the experience, it's the lack of enthusiasm and lack of stability. My colleague in Hong Kong says that it's about "young people today" which I suppose I should act all offended. Fortunately I have now delegated full responsibility for supervision, hiring and firing to her (though it makes sense since I am never there).

I believe culture matters. I believe it matters a lot. It doesn't take much to poison the pool. Younger workers more easily drink the kool-aid but that isn't to say that there aren't those older and more experienced who won't either. We'll see. Personally my initial thoughts are that students just out of uni are fantastic if given the proper guidance and structure while given the liberty to perform (but isn't that the key for all employees?). The thing I think most companies neglect is the resources for the adequate coaching. Hopefully I'll be ebullient (always wanted to use that word) in the future and have much to report.

Thursday, January 03, 2008


Just a forty percent rounding error. China is a little smaller than previously thought. Off by about the size of Japan's economy as previously covered here. More thoughts on American security implications (or lack thereof here).

That doesn't mean that there isn't still a bubble. As a friend notes: "whenever there is too much money in an economy two things happen: inflation and bad capital allocation." As Tom Burnett, a policy analyst notes in his Foreign Policy Wish List for 2008, #1: "What goes up too fast must come down even faster. This is a question of when, not if. The real uncertainty is how locals will handle the setback. If the G-8 doesn't have a plan, it should get one fast."

It's like some sort of weird Vulcan 3D chess. With the political appetite cooling for global trade, the push to pop the bubble through currency revaluation, and the solvency of China's financial institutions still questionable, China prices could get a lot cheaper after they get a bit more expensive if some American policymakers get their wish.

Wednesday, January 02, 2008

Details Matter

Just before New Year's I had lunch with a good friend. He came out of the washroom eyes as wide as saucers (ok maybe that's a bit of an exaggeration) and he said excitedly "they use 3-ply". It was a higher end restaurant in a relatively small city but he seemed genuinely surprised that such places existed outside Toronto.

OK so not everyone reacts that way but for the difference in the cost between 2 and 3 ply toilet paper, (regardless of what others might think), wouldn't it be worth it? Details matter - and it's one of those things that are difficult to communicate with my China colleagues probably because they've never had to value those differences. Every point of interaction with clients says something about you as Seth Godin also recently pointed out. It's been excruciatingly difficult in developing the forms just the way I like them for our new ERP system, but fortunately I think attitudes are changing. Though to be fair, it's a point that not only Chinese people struggle with.