Factories in Taiwan (and China)

I saw this news item about factory closings in Taiwan a few days ago. From the article:

Statistics compiled by the Ministry of Economics Ministry show that in the first 10 months of this year, 2,419 factories closed down — a 60 percent increase over the same period of 2006.

These factories are closing because (1) the businesses they are in are unable to compete with factories in China, Vietnam, Thailand and (2) some of the bosses are closing up shop to move their operations to China.

I don’t know how many of these factories fall into the second category, but I do know that Taiwan’s economy, like the economies of several other developed nations, continues to transform itself from a manufacturing-oriented economy to a high-tech and services oriented economy.

If you’re thinking of sourcing in greater China, my advice is this: Some items are better sourced in Taiwan; some are better sourced in China. You’d do well to check with a consultant before you embark on a sourcing mission to either place. There are several factors to consider, and potential advantages and disadvantages to both places.

Negotiating with the Chinese: Lesson One

You’re sitting across the negotiating table with your Chinese supplier. Your agenda? (1) Lower your cost per unit by 8%, (2) Speed up production time per 40′ container by one week and (3) Get them to accept more favorable payment terms (e.g. 30% down, Net 90 on the balance).

His agenda? To make as much money as possible and (this is very important), to gain as much face as possible. Hence, your request for lower cost per unit, despite quantity increases, isn’t going to go over very well if you ask for it directly. Secondly, your request for increased production speed will reduce his flexibility in scheduling his jobs. Finally, your request for better payment terms means he’s got to pay more in interest on his operating capital.

Note: If you’re Nike, GM, or Wal-mart, none of this applies. If you’re a medium or small enterprise, read on.

If you say something like “We’ve increased our quantity to nearly three times what it was last year, so we’ll need you to cut your costs by 8% per unit,” you’re going to get this response: The boss will furrow his brow, scratch his chin, and say “That will be very difficult” or alternatively, “That is very inconvenient for us.” What that means, in plain English, is…..NO!

The boss will then explain the fact that his own costs have increased over time. Labor, materials, equipment, rent. Everything has gone up. He was thinking about asking you for a price increase! Also, you don’t do things very efficiently. You send POs, then make changes to them. Some of your preferred suppliers are difficult to work with. Etcetera.

Why did you get this response? Perhaps the more cogent question is, how do you get the response you want?

If you’re a typical American, you won’t really like the answer.

You’re going to have to throw yourself at his mercy, and in doing so, appeal to his social obligation to save your face and to his desire to increase his face.

This is why saying to a Chinese supplier “You know, there are several other factories we could work with here?” will only stall and complicate negotiations. You’ll just irritate them by saying this.

So what do you say? You give him the opportunity to help your business as a bona fide partner by saying something like this: “I’m facing serious competitive pressure in my market. You are my partner–without you, I couldn’t get anything done. If I don’t find a way to decrease my costs by 8%, I don’t see how I can stay in business long-term. Please, Mr. Wang, can you take a closer look at your production costs and find a way to lower my cost per unit?” If you can manage to tear up and let your voice shake a bit, even better.

I know it seems counterintuitive for a Westerner to talk like this (it seems like butt-kissing to most of us), but this is what works in China. You aren’t butt-kissing. You are appealing to a very powerful sociological force: The obligation to give face to a customer who has humbled himself before you, and the desire to increase one’s own face by playing the traditional role of the hero. In this case, the damsel in distress is your company.

One of my consulting clients was a company whose boss refused to adapt to local communication styles. He comes from an aristocratic family, and could never understand or countenance the need to humble oneself and ask for help. He treated his Asian suppliers the way he treated his American suppliers: You work for me, so get in line, or else. His Chinese suppliers felt insulted and unappreciated, and after a time, did everything they could to rip him off. I had all ten fingers and all ten toes in the dam, trying to keep the relationship from breaking, but after a few years, it did indeed break. The relationship ended messily, with threats of lawsuits back and forth.

Do you want to do your manufacturing work in China? Then you’d better learn to communicate with the Chinese. You’ll be leaps and bounds ahead of your competition, who are thinking “Culture? Schmulture! A supplier who won’t do what I ask can kiss my red, white, and blue butt!” Meanwhile, you’re getting the unit pricing, delivery schedule, and payment terms you want.

Now, do you want to sell your products in China? I’ll write about that in Lesson Two.

Building Taiwanese Brands and Offshoring to Asia

I’ve got little time to comment on it, but there was in interesting article in Business Week a few weeks ago about Taiwanese firms who are building their brand names.

Yes, guys, that’s exactly what you ought to be doing, since manufacturing has been moving to China for the past ten years. Sure, a large percentage of the really profitable factories in China are owned by Taiwanese companies, but you’re going to have to emulate South Korea, Japan, and Hong Kong in building global brands if you hope to grow the economy in the future. Right now we’ve got what, Acer, BenQ, Giant bicycle, and a few specialty market brands going? As they say in China and Taiwan, Jia You (General cheer, go for it, etc.).

The magazine issue had a little side bar about how US manufacturers aren’t really profitable anymore. I’d hate to be one of those guys, hate to see what’s happened to them, even though I understand the inevitability of it all.

In my experience, the big manufacturers have already relocated to Asia or sold out to Asian companies. The medium-sized companies have either already moved, are investigating a move, or will soon start investigating a move. It is the little manufacturers in the US, with a few hundred employees, who worry me. Here’s what I think:

Let’s say you’re a US manufacturer with 300 employees. You’re getting killed on price due to imports from overseas. Your business is shrinking. You don’t have the money to a build or strengthen your brand or develop a new product line.

You’ve got two choices.

Choice A: Continue to fight it out in the USA and risk the loss of 300 jobs.

Choice B: Move your factory to China, India, Vietnam, or a SE Asian country and keep 120 jobs (i.e. the engineers, accountants, sales and marketing people, management staff).

Don’t get me wrong. I fully support the growth and development of American businesses. I’m also a pragmatist. If your company is dying, you have to find a way to keep it alive, even if it means losing some people you care about. Hell, I cut myself out of a plum job some years back because the company had a financial crisis and I was the highest paid guy there, after the boss. I landed on my feet, and others will too, especially if they get a little help. If you’ve got the resources, you can help those people get some training or into jobs that have some kind of future. I’d do that if I were the boss, even at the expense of my BMW and eight bedroom home.

If you’re thinking about moving some of your manufacturing work to Asia, drop me a note. I’ll give you some guidance that may just save you a lot of headaches (and money).