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05/27/2010

Book Review: Poorly Made in China


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Poorly Made in ChinaThere’s trouble in wonderland. China is increasingly the go-to spot for world global production, promising cheap fabrication, short lead times, large profit potential, and an enormous domestic target market. It’s virtually impossible not to make use of a product manufactured in China in the course of any given day. But major quality problems, such as the 2007 recall of toys containing lead paint, occur with alarming frequency. Poorly Made in China not only lifts the curtain to reveal the games behind Chinese production, it provides an acute analysis of the factors behind China’s manufacturing woes—cultural, ethical, political.

After earning his MBA from Wharton, Paul Midler moved to China and worked as an independent local partner for companies involved with manufacturing in South China. His account of that experience explores the multifaceted problems faced by manufacturers and borne by global consumers. He illustrates the stages of the business relationships between importers and Chinese manufacturers, and demonstrates how the frictions are exacerbated by cultural differences. For example, many Chinese manufacturers hold that the struggle to catch up in a harshly competitive industrial age makes any ends justify the means—a view not shared by a good number of their customers, who come from economies circumscribed by rules and standards.

Companies that build long-term relationships with Chinese manufacturers and that gain familiarity with Chinese priorities and cultural tropes still find that their partnerships continue to be fractious. But breaking up is hard to do. China makes it easy for importers to get started, with low barriers to entry into the production game, low labor costs, and rapid turnover in filling orders. All the manufacturers really require to get rolling is a sample product. That certainly helps manufacturers and agents win foreign business. So do lavish displays of samples or of whole production lines—even though many may simply be staged.

Midler thinks importers rush into these relationships, often impelled by lengthy cost production overruns in their home markets. They skimp on background checks for the industry as a whole and their trading partners in particular, failing to learn key information about manufacturers’ production capabilities, histories, and ownership. They never seem to learn the meaning of the phrase “too good to be true.”

Midler describes how the apparently inevitable game often begins as soon as manufacturers obtain their first orders. The resolutely short-term view of factory owners embattled by fierce competition kicks in immediately, as they focus blindly on savings, cut corners to squeeze profit, and trample on intellectual property rights. At the same time, importers begin to feel the effects in their own pockets, as their brands erode and their product quality withers. King Chemical, for example, despite an initially satisfying relationship with the importer, gradually degraded the quality of their plastic shampoo bottles, reduced the size of labels, and changed the shampoo formulation.

Importers are saddled with financial and reputational costs when low-quality products are shipped to their home countries, but they also face another peril in dealing with Chinese manufacturers: their samples are often counterfeited and sold to other markets. Despite these serious downsides, importers lack a real production alternative. What’s more, switching manufacturers can cost a bundle. Low barriers to entry turn into high barriers to exit.

Poorly Made in China will fascinate a wide audience—corporate decision makers, analysts, consumers, and students. Midler’s detailed anecdotes about actual cases are captivating, and his frustration with these cat-and-mouse games is sharply evident. But he offers few arguments as to how to actually craft successful, long-term business relationships with Chinese partners, a question he’s more than qualified to tackle. Perhaps his answer to that will require a book of its own.

–Antje Seiffert-Murphy, CFA, is a trade credit and political risk senior underwriter at Atradius Trade Credit Insurance.

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