China Cheap

There is cheap.  And then there is China cheap.

And by cheap I am not referring to the pejorative poor quality for which that particular adjective is normally used.  While poor quality can be part of the equation, even at comparable levels of quality China cheap is still cheaper – by a lot.

If you are or want to be a foreign company doing business in China there is no market for whatever widget or service your company makes or sells.  There are two markets.

There is a market in which foreign companies can compete and it can be quite large.  This is the market that puts value on brand, quality, design, functionality, etc.

But then there is a second market, usually larger than the first, sometimes by a lot, in which only the domestic companies stand any chance of making any money.  The foreign companies – without exception – cannot be successful here, even if you produce it here.  In this market price is all that matters.  And I guarantee that if you price your product or service on the basis of cost, yours will be higher.

Why?

There are many reasons, some of which involve business practices that lay outside the boundaries of acceptable business practices as either self-defined by the company itself or imposed upon it by the government of its home country.  This, however, is but one difference and may not even be material, depending on the industry.

The real difference between the costs of Chinese companies and the costs of foreign companies doing business here is much more fundamental and much more difficult to overcome.

The Chinese have a knack for cheap that the rest of the world, in my experience, just doesn’t have.  Part of it flows from decades of doing without; part of it flows from the related knack for making do; and part of it, I think, flows from the Chinese worldview and the personal nature of all relationships.  While the Chinese now acquire some ridiculous percent of all of the luxury goods consumed in the world each year I have a hunch that of all the cultures in the world they would be the least bothered if they lost it all tomorrow.

They like stuff; but they aren’t defined by stuff.  They use it to define themselves socially but not to define who they are.  It defines what they’ve earned, but not what they’ve achieved.  Wealth and luck, in fact, are often used in the same sentence.

If this man lost his prized car something tells me that he would simply shrug his shoulders and move on to build his next fortune.
If this man lost his prized car something tells me that he would simply shrug his shoulders and move on to build his next fortune.

To the Chinese luxury is an adjective, not a noun.  They love to flout it, but they don’t internalize it.  If you took a treasured Porsche away from a Western man he might be despondent.  If you took one away from a Chinese man I suspect he would simply shrug his shoulders and move on to acquire his next fortune.

For that reason, while the Chinese are as consumed with legacy as everyone else, they aren’t consumed with building or acquiring things that last, except to the extent that such longevity represents real value.  Because things like cars and buildings are not internalized longevity is more of a price metric than an inherent measure of quality.

Remember that we, as Westerners, like things that are strong and built to last, in part, because of our deductive fascination with process.  Built to last means built with sound materials and a sound process, and that, by itself, gives us satisfaction because it aligns with our desire to live in an ordered universe, where rationality and deductive logic prevail.

The Chinese are obviously capable of building things that last.  While Westerners tend to view 'built-to-last' as a value in itself, however, the Chinese take a more holistic view to value.
The Chinese are obviously capable of building things that last. While Westerners tend to view ‘built-to-last’ as a value in itself, however, the Chinese take a more holistic view to value.

In their inductive and holistic worldview longevity is more a function of sustained balance and harmony than a reflection of sound process.   The quality of things like building construction, therefore, is an economic variable rather than a reflection of personal values.

When the Chinese build anything, therefore, they generally don’t build it to last for decades, much less centuries.  In the housing compound where I live the houses are considered to be of superior quality but they literally gut them every 6 or 7 years and start over.  (And I mean gut – the electrical, plumbing, and HVAC systems are all stripped out in their entirety.)  And I’ve literally seen them build a commercial building and tear it down six months later to build something completely different

The same goes for the equipment that goes into the factories.  Good enough is good enough.  As long as it produces a product or service that meets market demand no one is going to care too much if it’s going to last into the next century.

And then, of course, there is the infrastructure behind whatever goods or services your company provides.  American companies will install energy-efficient boilers to minimize the cost of providing hot water to the washrooms.  The Chinese won’t provide hot water to the washrooms.  In few public bathrooms, in fact, will you even find toilet paper.  People are expected to carry their own and, in fact, it’s not that much of a hardship once you get used to it.  (Make a note to self if you’re going to be visiting here.  I’m serious.)

You know the cost advantages of e-tailing.  What about no-tailing?  This broom vendor has to add little markup to his price to cover overhead.
You know the cost advantages of e-tailing. What about no-tailing? This broom vendor has to add little markup to his price to cover overhead.

HVAC is becoming more popular in office buildings and public spaces but the systems are not built to re-heat lasagna in the middle of winter or make snow cones in the heat of summer.  In northern China office workers still wear coats at their desks in the wintertime and you’ll never see a sweater in a Chinese office in the summer time.  By far the most common complaint I get from visiting American colleagues is that the air conditioning in their 5-star hotel room doesn’t chill the room to their satisfaction.  (The Chinese, in general, don’t like air conditioning for health reasons, and it’s my sense that Western science is starting to support their thinking on the topic.)

Then, of course, there are the input costs that every company must incur in order to make their product or provide their service.  And, invariably, these are all much lower for Chinese companies, particularly private ones, than they are for their foreign counterparts.

Let’s start with labor.  It is true that Chinese companies do not uniformly follow the statutes that their own government has on the books.  But to say they cheat is to misrepresent the reality.

The Chinese just have a knack for making do.  This farmer found the perfect place to dry his corn crop on the public street outside of a modern factory.
The Chinese just have a knack for making do. This farmer found the perfect place to dry his corn crop on the public street outside of a modern factory.

As I’ve noted before the government is pragmatic and its number one priority at the end of the day is to keep everyone employed.  It has to be.   Imagine that you’re trying to manage a country with more than 4 times as many people to employ as the U.S. and your economy is 55% of the size.  (The U.S. and China have the world’s two largest economies.)

So, yes, there are Chinese companies that openly flout the labor laws and appear to get away with it.  And if one of those companies is your competitor you are likely to feel more than a little cheated and to assume that the company is doing so by making under-the-table payments to the people who are supposed to be enforcing the rules.

And that may be true.  But it may not be.  In many cases, I’m convinced, the government allows them to do it simply because the government recognizes that the company can’t be competitive if it doesn’t.  And if it can’t be competitive then the local government has that many more people that it has to find jobs for.

That’s not to justify the practice or to in any way suggest that the Chinese people should feel lucky that they have an employer who doesn’t follow China’s own labor laws.  It is to say, however, that the issue is not as black or white as many Westerners would have you believe.  To us it’s a two-dimensional process failure.  To the Chinese it is a more holistic issue with multiple dimensions, all secondary to ultimate success – and employment.

And then there are the input costs beyond labor that goes into every product or service.  Remember that the Chinese economy operates under the rules of caveat emptor – ‘buyer beware.’   What’s ‘fair’ to the Chinese shopkeeper or OEM supplier is getting the most money he or she can get out of you for the product or service they are offering.  If that’s 5 times the real market price, good for them.

There is, as a result, a ‘foreigner price’ and a Chinese price for everything, built on the reasonable assumption, of course, that if a foreigner has found his or her way to China for business or pleasure they probably have the money to pay more than a local Chinese customer.

When foreign visitors come to China, therefore, and invariably ask about doing some personal shopping, my advice is always the same.  “Enjoy the experience.  Buy only buy what you want and need.  And know that you aren’t going to put any shopkeeper out of business with your negotiating skills, however well-honed.”  If you think you got a good price, mission accomplished.  Rest assured, however, that you didn’t get the best price.

Foreigners flock to the markets of Beijing.  Do they get a good deal?  Sure.  Do they get the best deal?  Probably not.
Foreigners flock to the markets of Beijing. Do they get a good deal? Sure. Do they get the best deal? Probably not.

To foreigners this seems a bit unscrupulous.  To the totally pragmatic Chinese, however, it’s just smart business.

And while you may overcome this input cost disadvantage through the use of your latest production technology (Contrary to what many foreign companies do, I recommend you always bring your latest technology to China.  Otherwise you won’t get in the game.), that advantage will probably be fleeting.  The Chinese you compete with will figure out how you’re doing it and do it faster and cheaper.  That’s just the reality.

The question, of course, is whether or not Chinese business can continue to set the global standard for costs once wage rates rise to the level necessary to support a consumption-based economy, one of the stated goals of the current government.

As usual, I’m not betting against them.

In the meantime, if you come to China on business or pleasure – and I strongly encourage you to do so – and you want to do a little shopping, either for your nephew or your business, take a Chinese colleague with you.  And let them do all the talking.  It’s their game.  They understand what things are worth.  They understand China cheap.

Are you the low cost producer or service provider in your industry?  Are you China cheap?
Are you the low cost producer or service provider in your industry? Are you China cheap?