This article is about the experiences of a tiny company (Fluxeon® [1]) in dealing with Chinese suppliers. It illustrates why and how the Chinese are winning the world economic battle of the 21st century. Unless we (the USA) change out ways, China will be the world economic superpower in a few years.
Now I’m going to do a blogger’s no-no. I’m going to send you off my site to read two articles, both from The Atlantic magazine. I want you to read these articles because they set the stage for understanding what exists today.
The first is this article [2] which explains how in the past few decades the US has turned from a republican form of government to an oligarchy [3]. The second article [4] is an in-depth look at high tech manufacturing in one of China’s “Special Economic Zones”, areas set up by the government as free enterprise zones with practically no interference from the government.
I’ll wait right here while you read those articles……
Dumdedumdum…..
While you’re reading I’ll note that I’m have no involvement in partisan politics, don’t read newspapers or other Big Media sources, don’t own a TV and could care less about whatever the fabricated and hysterically reported issue of the day is. So don’t try to read between the lines to figure out of I’m a republican or democrat shill. I’m neither. After you read the first article you’ll understand why it wouldn’t matter anyway.
OK, you’re back.
I know that you didn’t take the time to read all of both of those articles :-) so I’ll summarize. The first article explains how the country, greatly accelerated by Clinton’s signing of the banking deregulation bill, has quietly turned into an oligarchy run by a cabal of Wall Street and Washington insiders. The reason that I included that article is that it sets the stage for understanding the horrific anti-small-business climate that exists in this country today.
The second article explains how in a scant 20 years China has gone from a backwards dirt poor third world economy to the world’s manufacturing leader. In a nutshell, the ruling party decided to copy the good parts of the US. They set up special economic zones where free enterprise thrives and Laissez– [5]fair economics rule – in other words, what the US has traditionally claimed to be its forte’.
To try to understand how China is winning, first consider what one has to do to set up a small manufacturing business in the US. Let’s assume that one has the necessary capital so that finance isn’t an issue. What does he have to do?
Well, first there is finding a location and arranging to buy or lease the facility. Then there’s the planning and zoning nazis to deal with. The tax authorities. The Business License office. The fire Marshall. The insurance inspectors. The state wage and hour people. If he uses any chemical more exotic than water, he has the EPA and the state environmental people to deal with. He has OSHA cocked and ready to nit-pick him to death. He has unemployment and workman’s comp insurance to pay.
If there is a drainage ditch that runs through his property, he has to worry about the Corp of Engineers declaring it a wetlands and preventing him from doing anything to it. If he paves a parking lot he has to built a government mandated retention pond. If parked vehicles leak too much oil, he has to install an oil skimmer on the pond. Then there are the taxes. I don’t even want to go there because I get nauseated thinking about them. And the paperwork.
That ANY entrepreneur can start out, much less succeed in this environment is a miracle. Kinda makes you want to remain a wage slave, doesn’t it? That’s what the oligarchy really wants, after all.
In China’s Special Economic Zones, in contrast, someone wanting to start manufacturing something, to borrow a phrase from Nike, “just does it”. Land ownership is still not permitted in China but the government will give the entrepreneur land and perhaps a building for the proverbial dollar a year lease. Employees crowd the zones because the pay is so high and the working conditions are so good compared to where they came from. Many operations that in the US would require costly automation to avoid having to have employees and all the accompanying hassles are done by hand simply because there are so many competent people available.
There are hardly any taxes, minimal environmental regulations and no import/export restrictions. (Yeah, I know that they have pollution problems. I bet they figure out when enough is enough without crippling their new economy.) The Chinese entrepreneur can set up shop, perhaps announce his presence on alibaba.com and go to work.
Now consider Fluxeon [1]. It’s what the pundits are now calling a Virtual Company. There’s Garett Churchill, the CEO, chief cook and bottle washer. That’s it. I’m his friend and part time engineer. My health situation prevents me from working most of the time so I treat it as a hobby. So there you have it, a 1.25 man company. Any more than that and he’d enter the nightmare zone described above. Everything else is contracted out, mostly to Chinese companies.
Yet this company has brought a revolutionary new product to the market, a small and affordable induction heater. That would not have been possible without “China Inc”. Interestingly enough, we were driven to China by US suppliers who more often than not either totally ignored us or swatted us away with a “go away, pest” message.
We actually had one company whom I will refer to as “M” accidentally send us an internal email (probably hit “reply all”) in which the guy said that he was going to send us samples along with a high price quote so that we’d go away. Well, we did go away – straight to a Chinese company who made the several hundred pieces that we needed for a tiny fraction of M’s quoted price.
In contrast to American companies, Chinese companies that we’ve dealt with have invariably been:
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Open – ready to talk to us in good English. More importantly, wanting to talk.
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Eager – no matter the size of the order.
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Reliable – They’ve done what they said they would (with one small exception)
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Breathtakingly cheap
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Superb quality
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Willing to tackle something new without NRE fees.
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Logistics specialists. More on that later.
A key resource in making connections with Chinese manufacturers is Alibaba [6]. This is a web site that brings foreign and US manufacturers together. It’s a search engine for manufacturers.
Search for, say “Extruded aluminum enclosure” and scads of suppliers will pop up. Pick a few, send your inquiries and you’re off to the races. Each company has a blurb page where it outlines its capabilities, MOQ (minimum order quantities) and so on. The MOQ spec is mostly fiction – they may want you to order 10,000 pieces but they’ll usually make you a hundred.
Uniformly the respondent has been someone who speaks perfect English. Probably US-educated. They price in dollars (highly negotiable) and know how to get the goods out of the country and into the US with minimal customs hassles.
Speaking of customs, there are two vital things that one must see to. One is to make sure that the component or device is sent DDP. That means that the shipper takes care of all the customs and other paperwork. We learned that lesson the hard way. We bought something FOB China and ended up paying more shipping and duties than the device itself cost!
The second thing that you must have is a good customs broker. Many items get shipped to a port on the west coast. It is the buyer’s responsibility to get the item through US customs and to a state-side shipper. We learned about not doing that ourselves the hard way too. A good customs broker is like manna sent from heaven!
One of the more difficult concepts to get used to in dealing with Chinese is paying up front. This is practically universal, at least for us small guys. That method would seem rife for rip-offs but so far we’ve had no problem in that area.
Another thing that requires some getting used to is that they require cash. No putting it on a credit card. The most usual method of payment is the wire transfer. US banks make that a painful process.
After many excruciating trips to the bank to send money abroad, Garett decided that there must be a better way. A quick Google search led him to Xe.com. While Xe is actually more concerned with currency trading, one of it’s lesser abilities is to send money. So long as you are exchanging the currency on the way (i.e., from USD to EUR or CYN), you only pay $22. On average it takes about 4 days to reach it’s destination–about the same as a bank wire. And you don’t have to leave your chair!
Many suppliers really don’t know much about what they’re supplying. This especially holds true for electronic components. Therefore one has to specify every tiny detail, stuff that is common knowledge to the trade in the US.
With a business environment like that, I almost want to go over there and set up shop. If I were 20 years younger and could learn the language I certainly would. Speaking of language….
Parents of young kids, you should insist that your child be taught Mandarin. That is the language used by business in China. By the time your child is an adult, being fluent in Chinese will be a necessity.
Q: How to you tell an entrepreneur?
A: All the rooms of his house are piled with inventory
Q: How do you tell a virtual manufacturer?
A: All the boxes have Chinese hen scratchings on them.
Solutions
Unlike most writers, I’m not going to pretend to have the answer book to this test. I’m too far down the pecking order and besides, my thing is technology and not politics and economics. But I do think that some engineering principles can be applied to the problem.
The first thing I do when I come to diagnose a problem or failure is to recreate the history leading up to that failure. That will usually lead me to the failure-inducing event. I think that the same thing may be applied to this country’s economic and political situation.
We can go back to Eisenhower who warned us of the looming “military-industrial complex”, his term for oligarchy. WWII, where all of industry teamed up with the government to win the war is the real start. Government started spending and taxing like there was no tomorrow and much of the money initially went to the Cold War, an event that we learn from 20-20 hindsight was mostly fabricated by both sides to sustain large militaries. Then there was Johnson and his Great Society that kicked off the social spending free-for-all. And of course, Viet Nam. All this served to transfer both wealth and employment to the public sector.
But as best as I can tell, the real debacle stated with the bank deregulation act that Clinton pushed through. That took any vestige of control off the money men who then did what money men always do – make more and more money to the exclusion of anything else.
Tax law changes, NAFTA and other laws and the rise of the Nanny State made it advantageous to to move manufacturing off-shore. First to Mexico and then to China. The advantageous treatment continues.
If I were King for the Day, here’s what I’d do.
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Tax foreign income just like domestic income, removing most of the incentive to go overseas.
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Install a modest import tariff (NO, not Smoot-Hawley, just a modest one) on all goods from overseas. I would make one exception and that would be for manufacturing machinery being moved back INTO this country. Yeah, I know that details would have to be worked out to protect the (remaining) domestic machine tools manufacturers but those are implementation details.
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Figure out how to reign in the financial sector that now runs things.
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Figure out how, probably with the aid of an advisory board, to reign in the most onerous regulations, particularly those that are use to “get” someone or some company. This primarily involves environmental and employment law.
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Get rid of all tax deductions for interest. Yeah, I know that’s a “third rail” that must not be touched but in my opinion, individual debt of any type is bad and should be discouraged. (we now pause for the home building lobby to howl.)
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Get the federal government out of the education business. I can’t think of an area where federal meddling has had a worse effect.
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Figure out how to dramatically cut the military budget without materially weakening the country. My thinking centers around COTS. That is, Commercially Off The Shelf hardware. Buy standard off the shelf goods when they’ll do the job. Build weapons systems using COTS stuff when it’s available. The Pentagon is dabbling its toe in the COTS water right now but that military-industrial complex will never be broken up absent action from Congress.
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(I know that this one will be controversial) Put a cap on personal wealth. Make it high enough that one can get “dirty rich” before the cap hits but then make it air-tight. (100% taxation on wealth over some large figure such as say, $20 million.) The goal is to pry loose the political influence that concentrations of obscene wealth currently buy. I don’t have a thing against the rich. In fact, I hope to be one one day. But wealth=power and there simply MUST be a cap on how much power a single individual can wield.
The one thing that totally and completely ineffective is this notion of “Buy America”. Individuals simply can’t influence national trade policy. All he will do with his “Buy America” is disadvantage himself and in many cases, do without. One of the few powers explicitly delegated to the federal government by the Constitution is regulation of international relationships and that includes trade. As usual, it is failing at its Constitutionally-chartered responsibilities while it meddles in everything else.
Boy, I can see the wheels spinning now. “Is he a Republicrat or a Demopublican”? I’m neither. I’m just an old engineer who’s scared to death at what is happening to this country. There aren’t enough McDonalds to employ all the babies now being born when they grow up. If the trend continues, that’s about all the employment opportunities that will be left.