Sunday, July 30, 2017

China Quality-Good Enough is Not Good Enough

Among the tens of thousands of factories in China, there is a wide variation of quality level, from very good to very bad. Factories who produce for domestic consumption typically have very little concern for quality; export-oriented factories generally need to be more conscious of quality, to meet their customer’s minimum requirement and not have their production rejected at final inspection. It is those factories we will examine here.

On average and in most cases, the customer’s minimum requirement is the sole operative standard; in very rare cases does a China factory have their own internal standard, or even a picture of what they expect their final product to reach. The operative benchmark is: good enough.

Think about it- how many well known China products can you think of that evoke an association in your mind that says, “ Oh yeah-that brand is really good quality.” Very few, and not well known, such as Haier or Huawei. Contrast this with Germany or Japan where most people can easily recite many brands they associate with good quality-and usually a commensurate higher price.

This mindset holds China back from reaching the level of quality that can raise it to a point where prices can be increased to match the higher costs of labour and materials-and be accepted by buyers and consumers for those reasons. A consumer in a store investigating a product finding out it is made in China usually produces eye rolling-what China wants is a smile of recognition. How can China achieve this change of perception?

In fact, the inability to raise quality standards amidst higher costs and market price pressure is having the opposite effect-factories will want to find a way to lower costs so they don’t lose money at lower prices-which usually means quality compromises. This may be conscious, or simply (as is the case most of the time) of rushing the production through the process to deliver on time, without spending time or money to pay attention to the quality standard of the product. Just making it through-sometimes with smoke and mirrors.

What compounds the problem is the cultural peer pressure put on the customer’s staff or representatives, who are almost always Chinese. As quoted before from Jim Mann’s Beijing Jeep, the Chinese are very good at purposely confusing friendship with business, viewing friendship as a relationship where friends “help” each other. Maybe in this case it would be letting them slide on marginal quality. What is more, the race card is often played with these staff- we are Chinese, you are Chinese- the foreigner is the outsider/enemy, even if they pay your salary. They hate me/they like me- very few Chinese can escape this guilt trip and realize that whether your factory likes you or not just does not matter in business. Business is business- not about emotions—just real things you can see.

What needs to happen is:
1.     China factories need to develop their own internal quality standard. This should be a standard that supports the price they are asking for the product, and one they can be proud of.
2.    This standard should not be allowed to vary with the customer’s expectations or the price of the order. By definition, a standard is just that- a set of fixed points that a product should reach.
3.     Customers should clearly communicate their quality standard of excellence in product before any production starts and never, ever compromise for delivery or to be “nice.” Nice is emotion-products are real.
4.    Make it a practice of delighting the customer by exceeding expectations, not just getting by on good enough.  This will go far in getting new orders- and justifying higher prices.
5.     As I have said before, factories must adopt a process-oriented quality system. Each process leading to the final product should have its own internal QC. This will pinpoint process problems early on, and prevent problems from wasting the factory’s money by reaching the final inspection stage.
6.     Factory should perform their own final QC before the customer shows up. Then, problems that do reach the final stage can be rectified before the customer is dissatisfied or rejects the order.
7.     Use the same quality standard for all materials and accessories. Producers cannot expect an excellent final product by addressing  only assembly.
8.    Most important- the antiquated mentality of getting by with what customers will accept-especially foreign customers-has got to change. Mentality that old and entrenched can only be changed if management is convinced it is in their short and long term interest. Good enough is not good enough.

This is not about cost of production. There is no doubt that efficient production costs less than careless muddling. This is about smiles- evoking that smile of recognition that Made in China means quality you can believe in. For China to advance in the world economy as it must, both quality systems and mentality must change. Then perception will also change.

Saturday, July 22, 2017

US Retail Store Closings-A Good Death?

Almost daily, reports of retail store closings, bankruptcies, and shopping malls becoming ghosts of times past is being greeted with alarm or deep concern for the fate of brick and mortar. Ecommerce, and especially Amazon, is almost always blamed.

It is true and logical that the growth of ecommerce has siphoned sales from traditional retail; further, the growth of mobile shopping makes it even easier to buy without the trip. 20% of ecommerce sales today are estimated to originate from mobile devices. Ecommerce is a gift of technology.

That being said, below I will take the position that 1. Ecommerce is only a small part of the reason for the shuttering of thousands of stores and closing of malls; that 2. There were too many malls in the first place and the shakeup is a good and warranted culling of the herd which will be healthy for traditional retail in the long run; and that 3. Some of the stores that have closed entirely either lost their relevance or failed to compete in a changing world-ecommerce is the catalyst for this, not the reason.

Let’s look at a partial list of the casualties:
1.     Traditional department stores- Macy’s, Sears, Kmart, JC Penney- closing stores by the hundreds if not thousands before we are done.
2.     Specialty Stores- Limited, Wet Seal, Aeropostale, Radio Shack (truthfully, I thought they were gone a while ago). They either failed to update or change with the times, to offer an attractive and competitive product to their customers, or just lost their Mojo
3.     Brands sinking into the sunset- Ralph Lauren just closed their flagship store on 5th Avenue in New York. Why? As the fast fashion specialty chains seek more and more locations in good urban locations, Ralph Lauren closes. Can only be the brand has lost its mojo. At one time it was a status symbol to wear a Polo polo; now, it makes you look almost embarrassingly antiquated.

At the same time, fast fashion retailers like Inditex/Zara and Fast Retailing/Uniqlo are both closing and opening stores. They are all closing stores in malls where the anchor store and the mall itself is failing, and opening in urban areas where the traffic and relevance is enhanced and their success depends entirely on their product. During the first quarter of 2017, Inditex opened 71 new stores in 31 markets giving them a total of 7,085 stores for all brands.

Please make a note above of the 31 markets. Sad to say that the retail brands that are becoming ubiquitous in US traditional retail are not American brands: Inditex-Spain; Uniqlo-Japan; H&M-Germany; Aldi- Germany; Primark-UK. What they have in common is a comprehensive knowledge of global retailing and the ability to customize their offerings to many markets. No monolithic product arrogance here. This has been the failure of many a traditional retailer- for example, Marks & Spencer recently closed all their stores in China after many years (wait-China? The fastest growing economy in the world?). The main reason is that their product was not managed to suit the market (just my opinion, but it also looked dated and sometimes just plain ugly). I am sure you would have found most or all of it in their stores in UK. That doesn’t work in global retailing-while some product is relevant to multiple markets, most or all of it will never be.

But what about shopping malls? Once an anchor store in a mall closes, that mall’s days are probably numbered.  And why are so many shopping malls becoming ghosts or discount centers? Certainly all three reasons given above related to the store or product are part of the story, but the main part of the story is that there are too many shopping malls in the first place.

Between 1970 and 2015, the number of shopping malls grew twice as fast as the population. Now the US finds itself with 23.5 square feet of GLA (Gross Leasable Area) per capita! This means you can go into any shopping mall, carve out a 20’x20’ space, and claim it as your share of US Mall Retailing.  And so could the rest of our 321million population.

How did this happen? Can’t prove it, but my answer is that the growth of more and more shopping malls, double what was needed based on the population was based on Gordon Gecko’s virtue-Greed. This was a real estate boom and hugely profitable, with no concern or control over the overabundance and concentration of stores. IF a new mall opened, everyone had to be in there, even if it was a stone’s throw from another shopping area with exactly or virtually the same offerings.

So don’t blame ecommerce for closing these stores- say Thank You. The economy will be better off for this adjustment, and hopefully those displaced will get new jobs downtown.

What about ecommerce? It must be eating so many sales that it is directly causing the retail failures, right? Especially Amazon, right? Wrong. First, if someone is buying clothing on Amazon rather than at Wet Seal (maybe not the same someone), is that Amazon’s fault or Wet Seal’s? You know the answer.

But, in general, while ecommerce is growing strongly and steadily, it is not growing as massively as we generally imagine, nor is it yet making enough of a dent in traditional retail so as to cause economic disruption. Here are the facts, courtesy of the US Department of Commerce : In the first quarter of 2017, Ecommerce total sales were $105.7 billion, a growth rate of  4.1% from the 4th quarter of 2016. Traditional retail sales were $1,250 billion and increased 1% from the previous quarter (a much more mature sector). So the share of total retail for ecommerce is still only 8.5% of adjusted total. Or, conversely, traditional retail still holds 91.5% share of market.

Now here’s the most amazing part. Everyone has a web site these days, but of the $105.7 billion, Amazon’s first quarter 2017 (global) sales were reported at $35.71 billion. Revenue grew from $29.1 billion the previous year. If not for Amazon, ecommerce share of market would be truly wimpy. So ecommerce is not growing handily-Amazon is. So Amazon is the main reason ecommerce is growing so rapidly, but it is not  the main reason traditional retaliers are closing stores.

Retail spending continues to grow steadily. A growing portion is going to dining, entertaining, and resort areas. Apparel is either not growing or declining. So what does that tell you? It tells me clothes just aren’t interesting enough.

As far as I know, nobody is complaining that there are not enough Macy’s or Sears or Kmarts to go to now. This is because-there are still plenty-if not too many-of them left.

I would suggest to these retailers that they start thinking about their store presentation, merchandise assortments, and general relevance to what the public wants (this starts with buyers who are merchants and can find this relevance-not with spreadsheet keepers).

There are about 1250 shopping malls in the US, predicted to shrink to 900. Given the fact that there seem to be twice as many as needed, this culling of the herd is not a sign of apocalypse, but a needed adjustment-a good death.

Friday, July 14, 2017

More Big Problems From Little Ones-The Story Continues

To begin, please know that the examples given here, and in the previous article on this blog entitled "How to Make Big Problems Out of Little Ones," are real events that have taken place very recently.

The story continues-

The trim for a large order in China, made for a huge customer in US, is delivered to factory in China. The players: The company’s Hong Kong office, the Hong Kong-based manufacturer of the trims, and the factory itself. About two weeks later, when packing is started, it is discovered that some portion of the trims are defective. Now, the factory needs to go through all the trims and make sure to cull out the defective ones. It is unknown how many are defective and if there will be enough good ones to complete packing.

How could this have been avoided?
1.     The factory should have checked the trims when received, not when packing is started.
2.     The company’s Hong Kong office, who ordered the trims, should have checked by, say, having a random carton shipped to their office.
3.     The factory that produced the trims should have their own QC to check before shipping.
Three chances to check and none taken. If even one of three was done, the chances of the current problem could have been minimized or even avoided.

Another example is that of printed ties which are found at the final inspection (by the customer) to have some prints out of registration. Think about that…if someone checked the printed fabric carefully, either at the printer or the tie factory when received, the cost of this problem would have been greatly minimized as opposed to discovering it when the ties are manufactured and packed.

So again, a small problem or one for which damage control could have been done earlier, becomes a big problem. Why does this happen and how could it be avoided?

1.     The obvious is that factories and suppliers, while constantly under pressure for delivery, must take the time to do proper quality control, or it will cost them more time later.
2.     Factories must institute a process by process quality control to prevent small problems from becoming big ones later. For example, a socks factory is found to have some items which must be rejected at final inspection, after having been finished and packed, due to knitting problems. Think about how much money is thrown away by spending all the labour cost to put a product which is defective at the first process through the rest of the processes; worse, what will be the cost of replacing the parts and labor of the defective ones?
3.     In the apparel industry, there is a bad paradigm for quality control. It is called AQL. AQL is a US military-originated system which checks final production for pass or fail based on a number sampling scheme. This just doesn’t work anymore. Process control is needed, then final inspection should be a formality.
4.     Factories in China and other countries must change their mentality and their quality standard from doing what they perceive they need to do to get an order shipped to doing the right thing.

Factories are generally very shortsighted-reluctant or unwilling to change anything that might cost them money-even if the change will actually save them money and improve their quality performance. They need their customers to convince them to embrace a new quality paradigm-process by process control. Once they see the result, they will understand.

Oh, and everybody in the supply chain must be compelled to do their job-not just the final producer.

Wednesday, July 5, 2017

Ethnocentrism Cuts Both Ways

A recent article in the New York Times entitled, “Trump Warns China He Is Willing to Pressure North Korea on His Own,” (July 3, 2017) made reference to the miscalculations both Xi Jinping and President Trump made regarding their discussion of the threat of North Korea when they met at Mar-A-Lago earlier this year:

“Mr. Xi, they said, miscalculated what China needed to do to satisfy Mr. Trump, thinking he could buy him off with a few highly visible measures, like banning coal purchases from the North. Mr. Trump overvalued the personal touch by betting that a few hearty handshakes with Mr. Xi would overcome China’s deep-rooted resistance to pressuring North Korea.”

When I read this, my reaction was, I have heard this story before. In the conduct of business between China and the US, this is a familiar story.  As far back as 1966, James Clavell wrote in Tai-Pan, his masterful novel about the founding of Hong Kong, about the arrogance of the Europeans who became the lords of the island, and the disdain of the Chinese about everything from the visitors’ rude manner to their smell.

This clash of cultures continues today, akin to how Clavell wrote it (except maybe not the smell part). Many American businessmen, like President Trump, think that the fact that they are Americans, Presidents or Vice Presidents (of companies), should afford them some reverence which will result in lower prices, one-sided deals, and obedience to processes (particularly compliance), all of which may be of no benefit to their Chinese counterparts. This arrogance may vary between subtle and very overt; in either case, it is clearly perceived and builds a wall between the parties, preventing the true partnership that is needed for a successful, win-win business relationship.

The Chinese, on the other hand, in addition to being put off or even offended by this arrogance, are put on their guard- another brick in the wall.  The foreigner will be classified and stereotyped as lao wai, or guailo, and their reaction to the manner and attitude of their foreign customers may simply be disdain. China is one of the oldest cultures in the world, and deserves respect for that, but, even more, in today’s China, for the unprecedented accomplishments of economic growth, infrastructure building, and just plain success that has taken place over the last 20 plus years.  Definitely a source of national pride, as it should be. So their cultural and emotional reaction is still-disdain, especially when presented with the above arrogant attitude.

That being said, Chinese are very practical. Regarding openness, they are the cultural opposite of Americans. If we look at openness as an iceberg, for Chinese it is mostly below the water. So, like Xi Jinping, the typical business owner or manager will do just what they need to do, and say what they need to say, to be sure they do not miss a business opportunity. What they won’t do, in almost every case, is something stupid that would cause them to lose money. But they will almost never say, “Look-I don’t trust you and your self-important attitude shows me you are not thinking about my business or my success, only your own.” Even Xi Jinping did not say that to President Trump, but dollars to donuts that is what he was thinking.

Can this wall be broken down? Absolutely. And it is up to we Americans who, as visitors, want to do business in China for our own benefit, to learn what to do and what not to do to build a long-term sustainable relationship or, in some cases, prevent disappointment and disaster in the short term. Embarking on a business relationship without a baseline of mutual trust will, and in many, many cases has, left room for unforeseen events and problems.

There is a lot to learn.  And a lot more than can be said in this article to actually accomplish the goal of trust and partnership. A few hints:

1.     Get over yourself. So you are President/Vice President of a big/small American company. That and $1.95 or thereabouts gets you egg roll. Your position gets you an invitation to China, and a courteous reception including some elaborate dinners, but that is it. When it comes to business success, who you are means nothing- it is what you are and what you do.
2.     Hire an expert and allow them to do their magic. Don’t let your ego convince yourself that you are an expert if you are not. There are those of us who have put years and decades into working with China and learning the business and culture who can get through the wall. How? Simply by capitalizing on our understanding of the conduct of business and business relationships, and, most important,
3.     Building Trust. I don’t care who you are and where you try to do business, without that, you have no foundation. Both sides need to believe that the most important thing is not today’s price, or the lowest price, but a mutual understanding of each partner’s requirements and metrics for success. Once you build trust for yourself as a businessperson, then you can take the next step, of
4.     Humanizing one another. If you are successful in the relationship, you and your counterpart, while not necessarily BFFs, will see each other beyond the title and the benefits you can get from each other. You will see each other as people. A good start on that road is,
5.     Shut Up and Eat the Food. If you visit someone’s home anywhere in the world, they will be very sensitive to whether you accept their food. This goes a long way toward accepting their culture, and them. I have seen too many times senior executives who make it painfully obvious that the food is either strange or disgusting to them. China is a highly food-oriented culture, and mealtimes are more than just eating food-they are a mutual bonding experience. The best way is to change your attitude and get a little food curiosity, but if you are a redneck and just can’t, then just shut up and eat.
6.     Don’t Make Promises You Can’t Keep. I have seen too many grandiose, blue-sky speeches by senior executives which fade away like the fog; in each case, this breaks down trust. Tell them your hopes and dreams, but don’t promise. That being said, understand that
7.     A Business Relationship is Quid Pro Quo- You can’t take and not give. This puts another dagger in the heart of the relationship sooner or later.
8.     Read Beijing Jeep: The Short, Unhappy Romance of American Business in China (Jim Mann, 1989). This is a journalist’s true account of a failed joint venture (you can guess who from the title) by a big company in the early years of China’s opening which still rings true today and should be required reading for anyone who hopes to do business in China, even almost 30 years later.

A constant theme in my articles refers to category experts. It applies here as well; the nature of the word “expert” is that there are not too many who can deserve that title. Whether you are President Trump or Mr. Executive, you may be many great things, but expert on China is probably not one of them. What an expert can deliver is what should be the goal of all international business interactions-trust, perfect understanding and an unambiguous result. 

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