Outplaying your partner Poorly Made in China by Paul Midler
Reviewed by Muhammad Cohen
When you buy for US$2 in New York an umbrella that's made in China, you have to
wonder how they do it. After all, the umbrella components have to cost
something, there's shipping, and there's profit for numerous middlemen and the
retailer. Among the economic miracles unfolding in China over the past two
decades, the most mysterious may be how a country that skipped the Industrial
Revolution, substituting the Cultural Revolution, became the low-cost factory
floor to the world.
Poorly Made in China: An Insider's Account of the Tactics Behind China's
Production Game provides fascinating and disturbing answers. Chinese
manufacturers cut corners wherever they can, from product quality to factory
equipment and maintenance. They unilaterally change product and packaging
specifications to trim costs. They raise prices after the deal is signed,
leaving the importer to absorb the added cost. They reproduce their
customers' products for sale at higher margins in other markets. With support
from government, bankers, and networks of fellow manufacturers, they conduct
manufacturing and customer relations as a game, treating the other party as a
patsy not a partner, playing for the short term of making an extra penny at the
risk of product quality but also taking a long-term, multidimensional outlook
that outflanks the hapless customer.
Paul Midler, a self-styled version of Raymond Chandler's detective Philip
Marlowe investigating on behalf of importers, shows readers the dark side of
Chinese manufacturing. A Chinese-speaking American with more than a decade of
experience in China and a Wharton MBA, Midler himself seems to have followed
the relationship curve he describes for Chinese manufacturers and importers. It
begins with infatuation and satisfaction beyond expectation, but turns into a
source of constant frustration at a situation in which the Chinese manufacturer
has the upper hand, taking advantage because the bond is now too difficult to
Poorly Made in China provides ample evidence supporting the Hong Kong
adage that once you sign a contract in China, that's when the real negotiations
To Midler, lead paint in toys and melamine in baby milk formula are not
surprises but predictable outcomes from a manufacturing culture that takes
customers for granted and assumes no responsibility for its outputs.
'All we need is your sample'
Despite that approach, China for nearly a decade has been phenomenally
attractive to importers, particularly Americans. Even though other countries
can undersell it, China remains the top choice for contract manufacturing.
China has better infrastructure and internal stability than low-cost producers
such as Vietnam or India, so shipping channels are more reliable. It has a wide
range of manufacturers, eager to make anything importers want, offering the
equivalent of "no money down" deals, driven by the mantra, "All we need is your
Intangibles also boost the Middle Kingdom's appeal to Westerners. China is
exotic without being bizarre, romantically foreign yet as familiar as the local
Chinatown. People may speak a different language and use that weird writing,
but they wear familiar clothes, not robes or headdresses. Chinese don't pray
five times a day, sacrifice animals, or insist visitors adopt odd gestures such
as bowing. While this 4,000-year-old civilization insists on its cultural
uniqueness, modern China has also made conscious efforts to accommodate Western
business. For example, Midler cites the widespread use of English names, in
sharp contrast to Japan or India, where cultural barriers for foreigners begin
with local names.
As more United States companies turned to China for contract manufacturing and
Chinese goods became ubiquitous in the US, it became trendy to use China for
production (just as Western exporters have felt compelled to have a China
strategy to penetrate its market). Doing business in China is the sign of a
savvy 21st century company.
Midler frames his tale around US importer Johnson Carter, supplying large chain
stores with house-brand shampoo and soaps, run by a sharp salesman called
Bernie. Midler finds it odd to manufacture products that are mostly water in
China and ship them halfway around the world, but that's not his business. The
Chinese manufacturer is King Chemical, located outside Guangzhou, the trading
center once known as Canton, owned by Sister and her husband A-Min. (Names in
the book are altered, according to Midler, but the stories are genuine.)
Who's fooling who?
Bernie first called Midler to examine King Chemical's factory. Midler reported
to Bernie his suspicion that the production line had been arranged for his
benefit and that the factory wasn't actually making anything. Bernie said he
suspected the same thing on his earlier visit. Rather than disqualifying King
Chemicals, the charade made Bernie more anxious to do business with them.
"They're desperate for my business," he observed. Bernie was a Syrian Jew, a
group with a long, proud commercial history, and he thought he knew all the
tricks of the trade. He was about to learn new tricks: even when making soap in
China, one hand doesn't wash the other.
Chinese manufacturers are dismal at marketing their products but are masters at
winning deals then playing their importer customers. King Chemical's initial
ruse illustrates the lengths that Chinese factories go to capture business.
Even Bernie found himself wondering how King Chemicals could make money selling
him a bottle of shampoo for US$0.30, including the pump, label and contents.
One answer emerged when Midler accidentally heard about King's "other factory".
That facility was making Bernie's products but for an Australia importer paying
a higher price than Bernie. The practice was common; factories took on clients
for little or no profit to learn product formulas and designs that they could
recycle into "second markets" such as Africa at higher margins. This model
helps explain why many products cost less in rich countries where people can
afford to pay more, and why Africans find bargains shopping in New York and
For Chinese manufacturers, a deal with an importer can be desirable even if it
doesn't appear profitable. Reasons range from domestic counterfeiting
opportunities to status to customer contacts (for disintermediation - cutting
out the importer to deal direct with retailers) - to cash flow or capital
(secured by an enlarged plant) for other investments. While most small
importers are playing checkers, focusing on profit on each contract, Chinese
manufacturers are playing chess - and playing to win - Midler says.
Midler recounts how manufacturers outplay importers across the board, sometimes
to shave costs, sometimes to save trouble, sometimes for the fun of the game.
One explanation of Mattel's lead paint debacle in 2007 was that the toy giant's
supplier's supplier switched the paint as part of routine gamesmanship.
On Johnson Carter orders, without consulting Midler or Bernie, King Chemical
switched to thinner bottles, flimsier packing cartons, different fragrances
(because Sister said she didn't like one soap's smell), and new product
formulas, one that caused itching and another that clotted at temperatures
below 15 degrees Celsius (60 degrees Fahrenheit). Sister gave away the clotting
problem by asking about the weather in the shipment's destination city,
Chicago, but she wouldn't reveal the ingredients of the altered formula when
Johnson Carter tried to find a way to fix it.
King Chemical also tried to ship improperly filled and mislabeled bottles. In
each instance, the factory suggested the importer take the shipment and deal
with the fallout from customers, King Chemical only offering assurances to do
better next time.
Doesn't wash anymore
Midler points how these games can turn dangerous. At King Chemical, poor
factory oversight and lax employee discipline put people with skin infections
on the production line, risking product contamination. Factories slap on
quality-control stickers but they're meaningless. Midler laughs at "No Animal
Testing" labels on Johnson Carter products - because there's no testing at all.
Laboratories can only check for a specific substance in each costly test, and
there's no limit to the harmful substances that might have been introduced to a
product, either accidentally or by changes to the product formula without the
importer's knowledge, so most importers just cross their fingers. While working
with Johnson Carter, Midler became so paranoid that he stopped using soap.
Manufacturers get away with these stunts, including arbitrary price increases,
because once an importer starts a contract manufacturing relationship with a
supplier, it's usually stuck. As with a marriage, it's often generally better
to try to work things out than break up. The cost and effort of finding another
manufacturer - and networking between manufacturers to discourage poaching
clients - mean that importers have few options, unless they're ready to forego
supply for several months. The longer the relationship, the more the factory
takes the upper hand, according to Midler. Manufacturers expertly play
importers' anxieties, and the customer often winds up begging the factory to
deliver the product.
For the factory, an established relationship becomes a one-way street, not a
partnership. According to Midler, the Chinese side simply looks for all the
advantage it can, using every tool at its disposal. The author sees that as a
cautionary tale beyond the world of manufacturers and importers to the heart of
US diplomacy with China. The prospect of the US being drawn into that kind of a
relationship with a nuclear armed, numerically superior China holding trillions
in US Treasury securities is a lot scarier than questionable body scrub. Midler
has written a fascinating, funny and important book.
Poorly Made in China: An Insider's Account of the Tactics Behind China's
Production Game by Paul Midler. Hoboken, New Jersey, USA, John Wiley
& Sons, April 2009. ISBN: 978-0-470-40558-1. Price: US$24.95, 242 pages.
Former broadcast news producer Muhammad Cohen told Americaís story to the
world as a US diplomat and is author of Hong Kong On Air (www.hongkongonair.com),
a novel set during the 1997 handover about television news, love, betrayal,
financial crisis, and cheap lingerie. Follow
Muhammad Cohenís blog for more on media and Asia, his adopted home.