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University of Massachusetts Amherst

Family Business Center

Can China Really Compete Effectively With American Manufacturers? FBC Member's Eyewitness Report

by Shel Horowitz

How can American family-owned manufacturers compete with low-wage workers in China? Long-time FBC member Jeff Glaze went to China to find out for himself.

"This year, we lost our biggest customer to China. They said we can get it for half as much, and by the way, we're going to stick you with $80,000 in inventory" for orders already placed - knowing that Glaze couldn't afford up to $300,000 to recoup > the damages in court.

"I stated investigating whether I could source to China. A decent customer for us is $10-20,000 per year. They don't have the volume to go to China directly," but he might broker several company's orders.

So he flew to Shanghai, the world's largest city (20 million residents), visiting two companies per day, for 4-5 hours each. "The typical Chinese company was third world production technology at best; there's no environmental or safety protection, a lot of people are poorly treated. We're in the nameplate business, a very small niche in the printing world. In China, they put the whole niche on one street. All your competitors are lined up next to you. You have the managers and a few long-term employees. When you get orders, you go out into the street and hire hourly temporary workers. You don't have to provide a health plan, there's no OSHA, or EPA. And when you're done with the order, you push the worker out on the street. It's very difficult to maintain quality and long-term commitment."

"The government owns all the land; you lease it for 50 years." Managers are allowed to own their companies - but can't get capital. "There's only one bank in China. It's very difficult to invest, even with a formal JV. The government will also invent barriers if you haven't ingratiated all the right people."

How about intellectual property? "Walk down any street and you can buy Polo shirts with the polo guy riding in the wrong direction - for under $5. They're made in the same factories. There's a different set of standards for business integrity. They don't think they're doing anything wrong. The people running these companies are very nice sincere people. But they are starving for the ability to pick our brains, to get our help to maximize, standardize work on methods and practices." "The Chinese government has absolute control. They turn the farmers into taxi drivers if they need taxi drivers that week. But they try to put a good face on it; they're very sensitive about Tiannamin. Recently they've been admitted into WTO. They've tied their currency to the US dollar; they have stability in their whole economy. Their typical high school-educated worker probably makes 10 cents an hour. The best die-cutter I've ever seen, I met there, and he gets 50 cents an hour. "China is extremely protectionist. They prevent companies from bringing in materials and processes to do a better job. If they need to bring in a material they don't have - for instance, we use an aluminum alloy - the government marks it up 400%. "I traveled to Labeltown. They have little shops with one die press each. There are billboards with pictures of printing presses, which is very different than the product/retail oriented mass advertising here. An entire community has grown up with this area of expertise. You can get the lowest price imaginable and a very free and open economy. Free from all the encumbrances we have.

"I traveled to Suiee, a small city, 750,000. My friend knew the mayor," a former government spy. "We were met by a motorcade of police vehicles. They showed us their industrial park - 500 or 600 acres. The minimum lot is 5 acres. The 50-year commitment is 50 cents a square meter per year. They put in 133 factories last year, and plan 300 this year. So the growth in a rural area 1-1/2 hrs from Shanghai is tremendous. The police chief gave us the tour. What does a police chief know about business? Nobody knows about business in China.

"There's a lot of pressure from the US not to allow them to tie their currency to the dollar and not to charge these high tariffs. None of us know the role of our government in how we're negotiating - but it's extremely scary. For those of us who play by the rules in the US, there's no way to be competitive.

"Larger companies can set up over there - Coke, Pepsi. But you know they have ingratiated an awful lot of people. How that works for the under $50 million company remains to be seen. You cannot predict what's going to happen with government regulation. You can't put together a business plan and predict costs. It's very informal. And then of course you have the language issue. You have to have someone you trust. It's almost an unlearnable language unless you have five years and a gift for linguistics.

"In Nanjing, the former capital (population 3-4 million), we'd be walking down the street and people had never seen Caucasians. I'd give the children my business card, try to be polite - but you are struck that these people can't get out of China. You have an awful lot of hoops to jump through if you want to go to a trade show overseas. And the Communist Party is very much alive."

There are other cultural differences, too. "Chinese food in the US is not at all like Chinese food in China. You'll eat things you've never known existed. Fresh-water lobsters in exotic sauces. There was a large clear glass bowl filled with eels, 8 inches long. They were cold, in a vinegar. I had to pick one up with chopsticks and toss it down.

Despite the frustrations and surprises, the trip did lead to a deal. "I did form a relationship with a gentleman who had an English speaking assistant, and he actually visited. We're going to start a couple of orders with him and see what we can forge."

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