By David Dayton in "Silk Road International"

This is EXACTLY what I'm talking about. What you see in public you're bound to see at lower levels too-it's just that only the Microsofts of the world get the press.

"China's efforts to stop intellectual property theft have been weak and ineffective—heavy on tough talk but light on implementation," U.S. Congressman Howard Berman of California, who has been visiting Beijing, said in a statement issued by his office."

First, the controlling of the situation in Urumqi in four easy steps. 1, 2, 3, 4.

"During a four-day trip to Urumqi last week, a USA TODAY reporter witnessed the techniques that the Chinese government is using to try to keep an uneasy peace here:

1. Round them up

2. Insist everything is OK

3. Identify a common enemy

4. Show them the money "

I read this article and realized that these are some of the same things that are done in factories to "solve" problems with foreign buyers. So here's my interpretation and some examples from our experience here in China.

1. Round them up.
Anyone that knows about production problems is either removed from the floor or threatened with their job if they talk. It's easy to keep people quite if their job is threatened. We've had people imply that talking to our QC or admitting to problems will result in them losing their job. We've also seen that when line workers innocently tell us the truth about problems they are dealt with harshly. Other times, specific managers are just not available when we come for pre-arranged meetings. This is just how you eliminate any corroborating stories-remove anyone with information from the line when the 3PQ arrives for a visit.

The way to counter this is to just be fair and honest - you don't need anyone to confirm that there are problems. 3PQ is the standard and their reports are directly tied to payments (or should be). If 3PQ doesn't like it, it really doesn't matter if other people in the factory agree or not. This isn't arrogant or obstinate it's just a fact-3PQ reports are directly tied to payments and there isn't really any room for discussion if the product doesn't pass. Just stick to this and never give in and you'll be fine. Give in once and every question from there on out will be a major battle. You've been warned.

2. Insist that everything is OK.
AKA: Denial of any and all problems. The most common forms this takes are "Our other customers don't have a problem with this" and "We always do it like this." I've had people hold product and Pantone color chips and literally tell me that a red color isn't really red but that my color chips must be old or incorrect or even that the colors match perfectly (even if they are totally the wrong color). My friend Mike tells of story of "red" fire trucks that were actually florescent orange and the factory had no problem with the difference. Remember, if no one admits to the problem then it doesn't yet exist (at least in the minds of the factory managers). And that's the goal-to eliminate the idea of a problem rather than solve problems.

What can you do about this attitude? Probably nothing. Just agree with the fact that they do indeed do this for other people. But remember, it doesn't matter what other clients accept or what the factory "typically" does. If it's not what you agreed to (in your written contract) then you don't have to pay for it, regardless of how typical it is.

3. Identify a common enemy.
Once the cat is out of the bag and there is admission that there really is a problem (often a huge first step) then you have to find out both where the problem came from and then how to fix it. My experience is that while I'm interested in getting problems fixed (solutions to meet deadlines) the factory is more often concerned with finding someone to blame—usually a sub-supplier. It's always the sub-suppliers fault.

No matter how many times it happens it's always amazing to me how factories are willing to throw their sub-suppliers under the bus and assume that they have no responsibility for their quality. Of course, they chose the sub-suppliers (often without telling us they were even involved) themselves and they paid them for work-and there in lies the problem. Factories just assume (or hope in vain) that blaming someone else will end the problem. It's like they expect me to say: "Oh, it's the sub-supplier's fault? Well then, we'll just let it go. Sorry for bringing it up." Once something has been paid for it doesn't matter who the buyer is, a foreigner or a local factory, no supplier is going to fix stuff that is "finished" and already paid for and shipped out. Bad quality components most often have to be replaced at the factory's expense since they can't get their sub-suppliers to pay for them once they've taken delivery.

While it may seem antithetical to what you've been taught in business school, sometimes letting the factory place blame on someone is not always a bad thing. Regardless of what (or when) the outcome is, someone will pay for the mistake and so getting the blame game over with as soon as possible is often the best way to move on to what the resolution options are. While I never like seeing one person get nailed to the wall (as it's never comfortable and almost never only one person's fault) if you can't avoid it, minimize it by moving on to the solution as quickly as possible.

4. Show them the money.
This is what happens next. You find a problem, they deny it, then finally admit it, blame the sub-supplier and offer you a discount for the next order. Notice, fixing the problem, resolving the concern, changing processes, or giving you a discount for the current (incorrect) product are almost never options. The key is to get you to take as much of the current crap for the fixed price as possible and then spend money (future discounts) on other projects to pacify you. If they can get current product moved at the agreed upon price, the next goal is the reorder - if that means promising discounts now, so be it. There is always time to increase the costs later.

Second piece of news is the on going Rio Tinto saga; it just gets less and less important as a legal case as the accusations become less and less serious and the Chinese government continues to back off from the original claims of espionage and damage to "State Interests." It's now a bribery case-and while that's serious and illegal in both China and Australia, it's not espionage.

But as a lesson in Chinese negotiations this case is destine to become a classic. Young whippersnappers will be reading about this case in college for years to come.

1. Business everywhere else is the same as business in China.
This is NOT the same as saying "business in China is the same as business everywhere else." Business in China is conducted in a very amoral (not immoral) and very "loose" structure. There is very limited amount of public trust, very lax enforcement of rules, a high level of competition, extensive hierarchy and a very small percentage of winners verses a huge number of losers-because of these environmental factors the business mindset it much different here than in the strict legalistic, fruited-plains of the West. Like westerners coming to China with too much trust, Chinese go abroad with carrying their own cultural baggage and working under assumptions based on a Chinese reality.

About the complete lack of trust in China (and a scary article about food and here) (h/t China Law Blog).

"Terry Yu, who owns Lohao City and three organic farms around Beijing, was quoted in the Los Angeles Times as saying: "The biggest problem in the Chinese food industry, is that customers don't trust the chain, and the chain doesn't trust its supplier - no one trusts anyone.""

2. A big scare is as good as a good as a solution.
This happened to the Rio Tino employees and it happened to me when we tried to protest development in Shenzhen. It is really just one of many versions of the bluff-make the problem so big that there really isn't a solution and shazam! you have the solution, accept the status quo.

One of the common responses to problems that we find in production is the exaggeration of the extent of the problem ("everything is like this") and/or costs and time needed to fix it. We've seen this enough times for me to believe that this is a conscious tactic-make the problem seem too big to fix so it's either an all or nothing proposition for the buyer.

But we've also found that as we continue to push the issue, the numbers become clearer and the % of rejected project usually drops. And drop dramatically. Of course the factory still has more to fix than they'd like, but it's ALWAYS less than they first claimed.

The key here is don't freak out. Call the bluff and take the time (usually less than a 1/2 to count enough pieces to make a point) to find out really what the situation is and then make a case (with numbers) to get things corrected. More often than not, if you do a little research you can have more information than anyone else involved in the negotiations-remember the people that have the authority to make the decisions are typically not the people that caused (and are covering up) the problems. So get the right people some info and you'll be that much further down the road to real solutions.

In Chinese this also known as "Killing the chicken to scare the monkey." This idiom is referenced regularly as a common tactic in local government dealings.

Another example of how we've seen it used is this. A problem arises, the factory sits us down (or usually we sit them down to ask for answers) and we are usually told horror stories about "bad" factories and how "they" mistreat clients in similar situations. Then there is this long pause as I wait for the punch-line... waiting... waiting... So I ask what the story has to do with them and our current problem since they are not a "bad" factory. They of course expect me to read between the lines—and everyone that is native-fluent in Chinese gets it. I'll admit I honestly don't always get the implied point, but I almost always know when the game is being played-and usually that's just as good as understanding the point. One advantage of being a foreigner here is that you don’t have to play the Chinese games. Everyone in the room knows the point of the story, but because I'm foreign, I can play stupid. Factory managers are typically not going to make obvious threats, so they have to either say it again (and again) or change their story.

5. Delay no matter what.
The factory will win unless they get called on it and even then they're further ahead (or at least farther down the road) then they were when they began. Whether it's denying problems, downplaying concerns, making cosmetic changes or just wasting time in meetings to "solve" the problem a bluff or a delay is often as good as an answer. I was directly told by a factory manager who was trying to win my confidence for help with a problem with another client/project that when "small problems" arise in production they actively try to delay implementing or even offering solutions so that the deadlines are too tight to make any significant changes. Suppliers know that most Western buyers are committed to specific timelines with box stores and DC's back home. If they can force buyers to choose between living with "small problems" and missing their deadlines they know they'll win out and the problems will be accepted 9 times out of ten.

6. Tie smaller issues to larger ones to increase their impact.
Reading the news about interactions between the Chinese and Australian governments brings this out clearly - The Chinese want to tie all individual issues (trade, HR, T!bet, etc.) to the Rio Case to "put the relationship into proper perspective."

In manufacturing, once a problem is both admitted to and the solution is identified you might think that you're good to go. But you're not. You've still got to get the work actually done. One of the ways that we see factories stalling on actually doing anything is by claiming that this project is going to affect another. For example, they have a limited labor pool to draw from and repairs require personnel from other projects thus causing delays elsewhere. This isn't always a game-often it's true and so, to keep in good with a supplier you need to work with them to come up with the best possible option. Remember, you're not their only client and they have commitments elsewhere that are just as significant (or more so) than they have with you.

But sometimes, this is consciously malicious. Some times a rework request on a large project gets tied, albeit indirectly, to a much larger and more expensive project. For example, when we were packaging Christmas ribbon for a box store order a couple years ago we wanted to have them reprint the spools - the registration was off and it made all the logos look "fuzzy." To do so would require a completely new print fun for millions of spool stickers. It was fairly expensive, but certainly necessary to meet established standards. We were at the same time and at the same factory packaging another order of bags for a different client. The bags had printed insert cards and master cartons - both much larger and more expensive than the spool stickers. We were told, indirectly, that the total amount of the two orders including the requested sticker reprinting could not go over a specific amount. Basically, re-printing stickers for a completely unrelated project would mean we'd have to accept cheaper materials for the bag project.

This is a maddening situation to be put into. It's not fair and it's hard to get out of. Resolution required hours of negotiations and usually we have to spend a significant amount of additional hours in on-site QC to make sure that we get the correct materials (in our printing).

I've said it many times, sometimes you spend more money to get the same standard product that you originally contracted for and you're genuinely happy about it.

David Dayton is the owner of Silk Road International and currently lives full-time in Shenzhen, China. He speaks English, Thai and Mandarin and has worked in Asia for more than 15 years. You can contact him at david@silkroadintl.net or at www.silkroadintl.net.