China Business: A First Person Account

Eons ago, a veteran China hand responded to one of our blog posts by writing me with his own story of China problems. I found his story both typical and fascinating and sought his permission to run it. He gave me permission and then I promptly lost it in the shuffle until now.

This story provides two great takeaways for doing business in China.  First, get everything in writing, in Chinese and in clear and excruciating detail. Two, figure that your relationship between you and your Chinese partner will change and that your great relationship now could easily become sour later.  Which gets us back to why the first takeaway is so important. The below is his story.

I started coming to China from Australia in late 2006 to find a company or companies to process wood flooring products I had been marketing in Japan for over ten years. My going to China was driven by rising costs and my firm’s view that the Australian dollar would strengthen as the mining boom accelerated.

I quickly found that it was not a matter of negotiating a deal, putting it in writing and heading off over the horizon to market my competitive advantage.  I was soon pinned down in various factories making sure that my material was not turned into boiler fuel.  Timber is a not a complicated business, but it does require systems and a great degree of care, but here there was a great void in most cases between the tea drinkers in the office and the ordinary workers who were generally farmers with no idea how a factory should work.  Systems, management and QC were no more than marketing slogans (along with win-win).  Even when the Chinese company appeared to be modern and prosperous, a few days on site quickly left one disillusioned — yet another lemon.

After a year or so, and half a dozen or more factories, I decided that, in spite of the obvious challenges, I would be better off doing this on my own in my own factory. No doubt I did everything wrong in terms of how I went about finding information and setting up a WOFE, but with the help of the local government I managed it without major hassles and even after almost five years there have been no significant problems associated with this.  I figured that if I had the support of the local government I would not be kicked out and having learnt a little of how things work I also thought that problems could be ironed out one way or another and would probably cost me no more than had I enlisted expert help.  I can hear Dan grinding his teeth from here, but small-time entrepreneurs have a different view of risk and opportunity. With more to lose I would certainly have gone about things in a more orthodox way.

My big problem had nothing to do with this. It started the day in December 2008 when I found my bank account frozen.  There was no notification and no immediate explanation from the bank in response to our phone calls.  After a couple of days in limbo we received a letter from the local city court advising that we were being sued for failure to pay a debt.  The lights came on.

I had been doing business with a local company and was on good terms with the owner until a few months earlier. When I was setting up in mid-2008, I asked his advice on some second hand equipment that I was intending to buy.  He was about to leave for Vietnam and so suggested he look at it when he got back, which was fine with me, but on his return he offered to help me to purchase and install an entire production line because a factory had gone belly up in Shanghai.  This seemed to be a good idea, provided the equipment was what I needed. He claimed to have seen the equipment and said that it was only six months old.  He would talk to the factory and get a price when he was next in Shanghai.  I said that I would not buy anything that I had not seen, but he responded that if I were to turn up with him the price would undoubtedly be higher.  I would not have agreed to this except that he assured me that if I did not want it he would take it himself.  All he needed was a returnable deposit of 30% from me and I would get the choice.  I did not think that he would renege on this as we had been friends for over a year and a half and had conducted regular business, worth about $25,000 per month, and he had always kept his side of the bargain until that point.

We put everything in writing and I was intending to get it drawn up into a formal contract. I did it up as a quasi-legal document based on my limited legal knowledge from a previous life.  I was very clear about the deposit being returnable without conditions.  We both signed this document (which was in Chinese) and I had my translation as well as a detailed appendix of the equipment with a break down showing the value ascribed to each item. (Hold this last thought).

The deal was good and the equipment, if as described, would have served my purposes well, but when it was delivered, there had been a few changes. He explained to me that the Taiwanese sander on the list was not as good as he had thought and so he had substituted a better one.  I was beginning to feel that things were going pear shaped.  If he had seen the equipment, why was it no longer good?  (I learned later that the “bad” sander had been delivered to his factory and he had given me his Chinese one worth about 20% of the price.)

I went to check the machinery the next day, but it was difficult to see in the unlit storage area and it was covered in dust.  Half the equipment was absent and it turned out that there was a second truck that went to another location, which in retrospect was to drop off some bits of equipment that my friend thought were superfluous to my humble requirements.  The next day more equipment was delivered, but a major component, the dust extraction system, was not among them.  I was told it was big and awkward and would be brought over later when we did the installation and set up.

There was a two month delay in installing the equipment because the local authorities in the industrial park had run out of money and could not afford to connect the power.  Hmmn.  In the meantime, while I patiently watched several revised deadlines float by, Lehman Brothers collapsed.  That was of course before my troubles started and, although worrying, did not seem to be a show stopper.  Perhaps it should have been, but it was too late anyway.  I had contracted with the factory and had all this equipment ready to go in.

Finally in October we got power on in the factory and could now install the equipment.  At this point my benefactor explained that the dust extraction system would not be good enough for my factory, which was in an industrial park with relatively high environmental standards.  He deducted a trivial amount from the contract, equivalent to one eighth of the amount noted in the annex.  The explanation for this was that it was a “package price” and the individual prices were just rough numbers.

I was shocked and realized that I had been stitched up.  The equipment, now that it was in the light and cleaned up, was not six months old, but four years old.  I immediately went to see my former friend to get an explanation and to ask him either to reduce the price drastically to reflect what I had received or to take it all away. He was calm in the face of my obvious anger and anxiety. He explained to me that it would all be fine and that everything would work.  It was like a car, the outside might not look so flash, but it would still get me from point A to point B.  I countered that I had paid for a six months old Mercury and had received a four year old Volkswagen Santana and I did not want a Santana.  My customers would not want a Santana either. They would expect to see good quality equipment with very fine tolerances, not a bunch of old crap.  I said I wanted my money back, to which he responded that I should have done this in July when the equipment arrived.  But there was no such condition. The equipment was to be delivered and installed and I had the option not to accept it.  It was unequivocal.  He then said that he would finish the installation and I could see how it all functioned.  I said that was not going to change anything.

Incidentally, concerning the age of the equipment, the English version of the contract said it was six months old, but the authentic version, the Chinese, said it was used for six months. This should not matter because normally equipment that is six months old is used for six months, but when it is four years old, there is no way to prove that it had only been used for six months.  The clock on one key machine showed that it could indeed have been used for six months if it had been run 24 hours a day for six months with no shutdown.  In reality, the clock showed that it had been operated normally for about three years.  I asked him why he did not tell me it was four years old.   He said it was good enough for my factory and he did not think it was an important fact.

To install the line, I now needed to buy a dust extraction system and so I contracted with a company to provide a new one with a high specification that would do the job whatever equipment I finally ended up with.  The line was duly installed and we did some test runs. There were various problems, but he had people come in and patch these up.  I was not happy, but believed at this stage that the best solution was to negotiate a new price, use what was acceptable and buy replacement machines where necessary.  So we started operating, using equipment that got me from point A to point B, but that was not a long-term answer.  I let him know that I would not pay another cent and that he could come anytime and take the line out. It was a gamble, but I figured he knew he had done the dirty on me and he would just opt for what he could get.

Over the next month or so we had a few meetings but it was a stalemate.  I had the equipment and he had my deposit and it was in my view a reasonable deal, so I had no intention of budging.

In November things got ugly.  He sent me a message through one of his staff asking me when I would pay the balance.  I was astounded that he still expected payment in full, less about RMB10,000 for the dust extraction system that was supposedly valued at 80,000.  He simply pretended that all the other issues were irrelevant and that the contract amount was still owed. Given that I was still doing other business with him, I decided that it would be better to settle provided the amount was not too silly.  I went back and made an offer to him that I thought was far more than fair.  I wanted a three month warranty in return for this additional cash. I was prepared to put this new offer in writing and to pay it at the end of the three month warranty period.

Soon afterwards the proverbial shit really did hit the fan.  The last container that I had purchased from him had just arrived in Japan and I had paid the balance, but now he refused to release the container.  This was a real shock.  Talk about dirty tactics.  The companies involved were unrelated to this dispute and the true victim was my Japanese client, who was an innocent bystander.  I could not draw him into this so I had to get an immediate release.  I sat down with my lawyer and hurriedly finalized the new draft contract.  At this point my good will and desire to resolve this in good faith had completely evaporated.  I explained to my lawyer that I needed an out.  I wanted the contract to say that I would pay in full once the conditions of the contract had been fulfilled, knowing that they could not possibly be fulfilled.

We signed this, I smiled and shook hands politely and he duly released my container.  I knew full well that the shit would really hit the fan now because he would be utterly incensed when the time came and I refused to pay.  But to involve my Japanese client in this dispute would have been a cardinal sin.  He accounted for about one-third of my business at that point and if he were to discover the mess I was in it would have been a disaster.  If he had walked, we may as well have shut up shop.  He never did find out and we survived to fight another day.

Roll forward now to December and my frozen bank account. He sued us for failure to pay up. We sued him for breach of contract. The senior judge was an old mate of his, but the guy handling the case was straight.  He made quite an effort. He came out to see the equipment and took pictures of all the manufactures’ plates.  He seemed to be very fair and sympathetic. I had enlisted help from an old colleague who headed an Australian Government agency in China.  His appearance on the scene seemed to up the ante a bit and there was a lot of rushing about between offices and then a delay in the hearing.  A new date was set and we duly appeared, but our adversary did not.  He sent a young lawyer who struggled with the details of the case.  He simply did not know, but that was no matter.  The deal had been done before the hearing.  The judge had a quiet word with my lawyer and advised us to withdraw our suit and to settle out of court.  A very modest amount of RMB40,000 was put forward and I immediately agreed.  This was far less than I had offered in my earlier proposal before the container release problem came up.  The costs in the case would be split, but I would not get a bill.  (That sounded good.)  However, if I insisted on pursuing the case, I would win, but only temporarily.

The judge explained to my Chinese lawyer that his boss was the senior judge who would get to hear any appeal.  He was the guy I got introduced to when my old colleague came up to support me.  He avoided eye contact with me and I knew where he stood. The best thing to do was to pay this small amount and put it down to experience.  I paid immediately and my bank account was soon unfrozen.

It was a salutary experience.  It was also exhausting at a time when I was not in a position to be taking my eye off the main game.  It was also surreal.  I had a morbid fascination with what was happening to me and a sense that I was seeing behind the curtain to the workings of the system, if it is a system.  If there is anything that I take away from the experience it is that playing a straight bat here is not necessarily going to do you any good.  At the same time I still think that one needs to go into things sincerely, but be aware that this attitude is unlikely to be reciprocated.  A lot of small time entrepreneurs here got to where they are by being street smart.

In an apparent paradox, I still believe that my erstwhile friend did not set out to screw me. There were communication issues and I admit that I should have been a lot tougher from the outset, but I think that what happened was what always happens here.  Circumstances change, good intentions are forgotten and greed prevails.  Rationalization ensues. There is no paradox, because here a deal is never a deal. I believe that when he saw the equipment some of it was very good, indeed it was too good and I was getting too good a deal, and he really could use that sander and a few other bits and pieces.  I was rich and I could afford to pay anyway. Swapping them with his was not cheating me because I had not seen it. His equipment would do the job and I would get over it.

So good luck fellow travelers.  I wish you luck!  Keep your wits about you.

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