China’s infrastructure is all set up, right down to a larger number of agents on the ground. In many cases these middle-men are the guys who make the decisions about where the product is to be made. They are the real deflationary heroes, more than the factory owner who makes the product or the retailer who sells it. It’s he who keeps prices down, who threatens to move to another factory when things don’t go well…
But that never happens…
They say it all the time: it’s just a Western habit to bang on the table and threaten to walk away, but they never do. And the factories know this: they’re aware of American negotiating tactics. It never happens.
Also, in the past 10-15 years, there’s been a lot of disintermediation. The customer who was importing $50 million worth of products from China is now competing with five different customers who are importing products for $10 million each. That’s a proliferation of importers, and in such a situation your buying power shrinks, and your prices go up. All these importers were made to think that things are so easy in China that they can bypass the intermediary and come out ahead. A lot of people who go to China directly realise it’s too late because they’ve already burnt their bridges with the intermediary.
Why haven’t US consumer protection agencies been able to filter out low-quality goods from China?
One, these agencies are resource-constrained. The US Consumer Product Safety Commission just doesn’t have enough people. But even if it had, it can’t inspect everything that comes into the US: the volume is too large. Most industries are self-regulated…
The other problem is that when it comes to poor quality, you have to know what you’re looking for. In China, you’re dealing with a partner who is not straightforward with you. A lot of counterfeiting goes on. With hindsight, everybody says, ‘Why weren’t we looking for melamine in milk?’ But a year ago, nobody even knew what melamine was. When you send, say, a shampoo sample to the lab for testing, you can’t just tell the lab to make sure there’s no bad stuff in it. Labs charge by the screen, and want to know what screens to run. You have to tell them what you’re looking for. And each of those tests adds to the cost.
You also make the point that at some stage, some importers don’t want to know about quality problems.
Factories have their ways of making things cheap, and they don’t always disclose their production secrets. Sometimes we don’t want to ask. That way, we don’t know what they’re doing, so if something bad happens, we can say,
‘We didn’t know.’ But if we ask and we find out they’re using some chemical that’s not legal, we have a problem: now we know.
You were on the ground in China (on behalf of importers). You speak Chinese. You had access to factories. Why could you not prevent these manufacturing tricks?
In matters like this, there has to be trust; there’s no other way to do it. For me to guarantee what’s in a shampoo, I shouldn’t have to stand in the factory on the days that they were mixing the shampoo, test every ingredient, ask them what they were putting in… There has to be a level of trust…
And you can’t trust Chinese manufactures?
I won’t say you can’t trust all manufactures. But in China, it’s not just the number of quality failures that’s worrisome, it’s also the kind of quality failures. It goes beyond just accidents in the factory or negligence; it also goes beyond worker ‘laziness’ or a factory owner ‘cutting corners’. ‘Cutting corners’ is too benign an expression to describe some of the things that go on in China, where some people are going out of their way to ‘slip one past the inspectors’, as the melamine-in-milk scandal showed. Not all the quality failures are alike: some of them are more unethical than others; but it doesn’t get any worse than the melamine case. Dozens of companies were involved, which means potentially hundreds of people knew about it. Children were dying. So why didn’t people talk? Why aren’t there whistle-blowers in China? It’s because employees don’t want their factory or China to lose face, so they think it’s better to sweep it under the rug.
You claim that the most bullish China analysts are the ones who don’t want to live in mainland China. What does the lived-in, grassroots experience of mainland China tell you that faraway analysts don’t see?
Right now, we’re in the middle of an economic crisis. When the book was being written, there was a much bigger gap between my understanding of the problems in China and the outside-in view of China as this paradise of investment or opportunity.
How do you have Wall Street analysts being so bullish on China when they’ve never seen what goes on over there and the problems there are in China? One of my friends is a Hong Kong-based analyst. Like a lot of analysts, he talks about how he will move to Beijing (or Shanghai), but like a lot of analysts, he’s waiting for the “right time”. They never do it because in mainland China, the education system, the health system, pollution… it’s bad. It’s a huge irony; analysts are very happy to write about this fantastic phenomenon called China, but they just don’t want to be there…
A great example is (US investor) Jim Rogers. He famously sold his Manhattan home and announced he was moving his family to China because that’s where the global economic focus was shifting. Yet, after considering many Chinese cities, including Shanghai, Dalian and Qingdao, the ‘China bull’ finally settled in Singapore! There wasn’t a place in all of China that he would live in: imagine that! That’s the problem: there’s been a lot of bluster and a lot of boasting. You have to be a little frank with what you have here…
Hasn’t the Made-in-China story been a force for good in any way at all?
People talk about the good that China does… But I have a difficult time saying big positive things about China. People say China kept costs down for a lot of countries. But you go to Cambodia or Laos, and you can’t find anything that’s not made in China today. From a trade balance perspective, I don’t know if those countries are well off…
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