Global Supply Chain News: When Outsourcing to China, Assuming Western Style Business Practices Can Lead to Failure

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- May 13, 2008 -

Global Supply Chain News: When Outsourcing to China, Assuming Western Style Business Practices Can Lead to Failure

One Company Finds Loss of One Individual Totally Changed Relationship for the Worse; Who Pays the $400,000 in Quality Problems?

SCDigest Editorial Staff

SCDigest Says:

A Western company entering into a sourcing agreement with a Chinese supplier that does not understand these and other differences in cultural and business practices risks disappointment or outright failure.

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Despite the huge flow of manufacturing work into China by Western companies, many fail to understand key differences in how relationships work there.

That’s the message in a recent article for the Wall Street Journal by the University of Akron’s Andrew Thomas, and Jon Hawes and Timothy Wilkinson from the College of Business at Montana State University, Billings.

“Americans tend to view a business relationship as a win/win proposition -- a contract between two corporate entities designed for their mutual benefit in long-term profitability and growth,” they write.

But Chinese companies and executives often view things much differently.

“In China, personal relationships among business partners are far more important, and the benefits foreseen in entering a partnership often are broader and focused more on the near term -- and not necessarily evenly balanced,” they say.

Case Study Shows the Peril

In the mid-1990s, a US distributor entered into an agreement with a Chinese manufacturer to produce a line of motorcycles to sell into the Latin American and African markets.

According to the authors, there were big differences in goals and objectives from the start. The US company assumed the Chinese manufacturer was interested in a long-term, win-win relationship that would include building a quality brand image.

The Chinese company, however, viewed the relationship more as a way to get needed US currency from the exports, and to learn about penetrating foreign markets – an opportunity they could never find on their own.

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The US company had some concerns about product quality, and insisted, for key components, that the Chinese supplier use parts from specific Japanese producers. To ensure this went as planned, the US company installed an “observer” on contract compliance – a Chinese-American who had recently returned to China.

For nearly five years the relationship went well – until the observer took a new job. The US company, after many years of success and good quality, didn’t think the observer position needed to be refilled.

That turned out to be a mistake.

Within months, customer complaints about quality began to surge. And yes, the Chinese company had started to substitute some lower quality Chinese parts for the Japanese ones. To the US company, this was an amazing decision for its partner to make.

“From the Chinese perspective, however, the removal of the observer was where the problems started, because it signaled a major change in the relationship between the two companies,” the authors state. “While the Americans had viewed this person simply as a quality-control monitor in an overseas factory, the Chinese looked upon him as the personal representative of the U.S. company within the Chinese operation. The disappearance of this person, with no explanation and no replacement, was seen as a breach in the relationship. No longer strictly bound by the terms of that relationship in their minds, the Chinese partners acted in their own self-interest, cutting costs to maximize their profits.”

It was subsequently determined that there was $400,000 in warranty and repair work that needed to be performed. Again, the US company assumed its Chinese supplier would pick up that cost, in the form of a credit, for choosing to use faulty parts.

The Chinese supplier viewed it differently, believing the US company was half at fault for “allowing it’’ to use the poor components. The negotiations went on for months and, at several points, the relationship was nearly severed, though finally salvaged at the end.

“With a better understanding of Chinese thinking and with close monitoring, American companies in ventures with Chinese suppliers can keep those inevitable fires from spreading out of control,” the authors conclude.

Two kinds of controls should be put in place, they say.

External controls, set up and executed with the cooperation of both parties.
Internal controls, undertaken by the U.S. company without the explicit knowledge of the Chinese partner.

Do you have any similar experiences with major differences in cultural understanding and business practices in dealing with Chinese suppliers? What are the keys to bridging this gap? Let us know your thoughts at the Feedback button below.