Leadership change continued

If your coaching has gotten you nowhere with your Chinese General Manager, there’s really only one answer: fire him. Making sure you understand what constitutes effective coaching (vs. just yelling at him to improve his metrics) is important, but assuming you you did that part right, it’s the only move left. Check out China Law Blog’s comments here.

I’m assuming we’re talking about a WOFE and the GM is Chinese (in general a desirable goal). If you’re dealing with an expat you may have other options. If you’re in a JV the tactics and approach would be quite different.

What happened to my constant conciliatory tone? The problem is you can’t circumvent him and any change of significance will be undermining at best.

You’re going to need various board resolutions to dismiss, change/pass on titles, and so forth, but before you make any move you must be crystal clear on a few things:

– Who is the legal rep, and what degree of authority does the GM have? If your legal rep is the GM you’re trying to dismiss or one of his cronies, you’re in for a rough time.
– Where are the company seals and registration papers? Is the same legal rep/seal listed on everything?
– Who has access to the bank accounts, both in person and online? Again, is the same seal/rep listed on everything? Who has the relationship with the bank?
– Whose side is the head accountant/lawyer on?

Business License. Find it.

More on changing the legal rep here.

Unfortunately if you don’t already know the answers, learning them may tip your hand. However, you still need to get there. Under the guise of some sort of internal audit or other housekeeping is your best shot.

In general, a massive severance with a face-saving narrative should get you most of the way there, but if she senses you don’t have the slightest clue what you’re doing, you have an even heftier payout best case, and at worst, total destruction. I’m serious; I’ve seen companies destroyed at lower than the GM level.

So you need to be as prepared as possible and have mapped out most contingencies before you even start visible moves, never mind have the initial conversation. Riding the balance of a mutually amicable breakup while appearing strong enough to not get steam rolled can be tough. To remind you of how important face is to the GM, let’s take a look at a typical GM’s office:

Huge desk, huge space. More reception than work area.

How do you buy her out? Minimize damage to your accounts, operation, reputation, and morale? What’s the succession plan?

You need a team and/or a ringer even if you have a trusted local #2 who can take over relatively seamlessly. More on that later, but for now, clear the calendar of your legal rep.

 

Divided loyalties and the complex nature of guanxi

Understand where you stand to account for all the information and action you’re missing.

So you’ve read about guanxi 关系, the network of connections and obligations people in Chinese society have to one another.

Besides the colossal mistake of taking an agent at his word, I find the most common error is in overestimating the strength of your relations. A basic milestone is if you’ve met their family and been to their house as the sole guest. If you haven’t got there, don’t expect much that calls for any real sacrifice.

As an outsider we’ll almost never make it to the true inner circle and even if there, it means different things than what we expect. You may have helped their kids get into Harvard, made them millions of dollars, ask Niel Heywood how that turned out.

You have to remember that 90% of your relations are the economic benefits and validity of the business deal.

Since I have a few people asking about leadership change, I’ll frame it in the context of running an operation in China where you know you have to change something, but not entirely sure what.

Probably the most frustrating thing is how no one gives you information on what’s really going on, whether that’s theft, sleeping on the job, making critical errors, or worse. Further, not all of what they ‘know’ is even factual; mix in a healthy dose of rumour and bias, and you may begin to recognize a certain kind of pity in their eyes at your ignorance.

First of all, you can’t take it personally. Part of it is habit; they’re not actively hiding everything so much as exercising the default mode of prudence. Also recall the penchant for accepting shared consequences unless it’s too grievous too absorb.

Secondly, they may have more obligation (guanxi) to the bad seeds than the guy who signs the checks. Until you’ve demonstrated the future is better, they may waffle on compliance to some pretty big directives. If you have to fire some people, expect them to continue to know everything that’s going on, perhaps with continued access to certain resources, with influence gradually tapering off. To get some perspective on this, think about how much information you could get from a former colleague yourself. It’s the foreignness that amplifies the sense of urgency or paranoia.

Managing this, especially if you’re only in country part-time, is a huge undertaking. You’ll need help. (contact me here)

The most important thing to do (after checking your accounts and inventory) is to identify who you can trust and for what. This is a key distinction: there are many honest employees who may eventually tell you what you need when you’re one on one but still don’t have the wherewithal to take any sort of influencer role in the office. So you not only have to identify who’s fundamentally on your side, but who can accomplish what, and how to protect them.

It’s not that different from a highly political domestic office, except you can’t communicate with 90% of the staff and no one tells the truth.

Now you must accelerate developing your relationship with these people, and that means going out with them to dinner/tea/what-have-you one on one. Don’t publicize it, which means not using company resources such as the driver (great source of intel by the way).

You will hopefully start getting information you suspected was true, but also be surprised at the circus going on behind the scenes. Don’t scare them with anger or exasperation; just listen and digest. It’s been going on this whole time and it’s not rubble yet. Ask them for advice. The trick here is to get maximum benefit, let them know you trust them, but keep them from the temptation of sliding into a role of unwarranted influence. It’s for their own protection as well as yours.

An aside here: there may be staff that you eventually need to let go, but are either critical for now, or you want to give them an honest shot at turning around but will ultimately fall short. Unless they hold critical IP, I recommend working as if you implicitly trust them, off balance them by showing what you know now and again, and just seeing how it plays out. You’ll never win them over if you wall them off, so in that case it’s better to just let them go early.

You not only need to figure out what you can fix and how, but strategize how to stay productive while accommodating for some medium-term deficiencies. If you’ve read this far, you probably already know the truth: you need new leadership. More on this later.

China’s retirement crunch and what that can mean for site selection

I was asked by my wife to write about China’s coming retirement issues, and realized it would roll nicely into a comment on factory site selection.

First the NPR and a related story.

In the simplest analysis, China’s one-child policy means that one couple is responsible for eight grandparents. Chinese rightly place no faith in social security, so it’s up to individual savings and grandchildren to bear the brunt. This explains some of the incredible savings rates of older Chinese.

The fatalistic penchant for younger generations to spend all their earnings, combined with the fact that over half now live in different cities from their grandparents means that the calculus has changed dramatically. The government has taken notice, but it will likely be too little too late.

There was some buzz around legislation ordering people to spend time and support grandparents, but by and large, it has no teeth or specifics, at least at this time. I don’t think it would be practical to enforce anyway.

The government currently provisions for under 2% of senior care needs but has indicated they will ramp this to 10%. However when the demographics say by 2025 there will be over 60 retirees per 100 workers (compare to the 33 projected for the US, which is already to be a strain) it’s clear that filial piety even with government support is not going to be enough.

I know you must be asking yourself what you can do to help by now, so I’ll tell you. If you’re doing anything other than high value-add manufacturing/services, consider locating in Tier 2/3 (or Tier 4) cities. This is already a fairly popular trend with many on the Fortune 500. I’ll list some of the benefits and challenges below, but the salient point is this: managed properly you may be able to sustain a happier workforce with lower turnover at lower wages than in other areas of the country.

• Locating in China rather than Thailand or the Philippines means you still have access to the world’s largest market.
• While local governments have less experience dealing with foreign companies, it gives you both more leverage and a chance to influence the rules.
• Wages perhaps 40% lower than in Tier 1 cities such as Beijing
• Employees who can live with at least one set of extended family lowers their requirements for income, personal leave, and no risk of moving home
• A stronger network for talent acquisition, sales, and just getting things done
• Lower taxes and expenses

  

  Changchun, a Tier 3 city with over 3 million people.

• Inferior infrastructure, although in development across the country. You could probably still pick an ideal spot in many lower tier cities. Beware as this can include electricity and water, à la India.
• Less skilled talent pool. Both for your own staff as well as contractors doing your plumbing, painting, and IT. More supervision and training is required, but they should be grateful for it if done well.
• Less motivated talent pool. Don’t sell this one short–you have to adjust expectations. More than one company has been blindsided by putting a factory in Sichuan and realizing you can’t squeeze overtime or even diligence out of your staff like you can in Guangdong.
• Fewer comforts of home, less cosmopolitan. When I look at why some companies are located where they are, I believe they are mainly addressing this factor, which for many people can be a deal breaker, especially if you own a SME and feel that you or a trusted family member will be stuck out East forever. There are ways of dealing with this, which I’ll gradually write about.

I visited a VW plant in Changchun once. The quality of the workers surprised me quite frankly, and a colleague pointed this out to me: “They pay the highest local wage for unskilled labour, and offer the nicest environment. You can’t go home and tell your spouse you got canned from this job, so you just do what you’re told.” Meanwhile, some of their German overlords were frustrated to tears, a classic cultural clash, but at the end of the day, they got the job done.

For those in China for the long haul, Jack Perkowski writing for Forbes put it very well way back in 2012, “… names like Mianyang will soon become household words, just like Chicago, Minneapolis and Atlanta are today.” Don’t you wish you had bought up some of the Magnificent Mile back in the day?

Decreasing import tariffs on branded and luxury goods

http://www.reuters.com/article/2015/05/25/china-imports-consumers-idUSL3N0YG1D020150525

It’s no secret that part of the government agenda for virtually all classes of products is the development of domestic brands. The further reduction of import duties on foreign lifestyle brands has no hint of promoting a level playing field for legitimate domestic players，and has everything to do with increasing domestic sales of said goods, which are typically lost to a combination of foreign shopping sprees, purchasing agents, and smuggling.

Between corruption reduction and other conflicting forces, I find this move in line with the story that China is looking for those few points of growth anywhere it can. We’re not exactly heralding a return to conspicuous consumption, but a few remarks:

Chinese media indicates that many are not aware of the policy shift, so this is a pragmatic apolitical move. There are reports that the premium stores are still overcrowded at new product launch, but I think anyone who has spent some time in the big cities will acknowledge that the over density of empty Gucci stores tell a different story.

Colleagues or partners acting as a daigou, or purchasing agent, is still a relatively safe way to build some basic guanxi. I’ve never been looked at hauling in small quantities of gifts given that even during the main rush they don’t really man the stations. Further, it’s a relatively easy favor to pass on to friends of friends that they won’t be too shy to ask for. Why show up with another bottle of Johnnie Blue they’ll just store on their mantle when you can get them something they want?

China news

You’ve likely seen this link: http://www.businessinsider.com/china-has-a-new-priority-1-2015-5

It’s been cited quite a lot by now, but I’m surprised about the lack of analysis or editorial content that has followed. What does this tell us?

It confirms to me that most of the analysis of significance is performed by a very small group of experts, and if they haven’t weighed in, some media outlets that have a China desk don’t have anything to add. I’m in no way slamming any of them; I’d just like to point out that our information comes from a much smaller set of sources than is immediately apparent, and in the tangled knot that is China, useful to keep in mind.

While I’m generally not focused on macro issues, I’ll at least add some primary research, albeit uncited internet-based. (Oh, here’s a couple recent news posts: http://news.163.com/15/0524/12/AQCNI56900014SEH.html http://fs.house.sina.com.cn/news/2015-05-26/08156008757014459895216.shtml)

Despite a continued tightening up of consumer/commercial lending, rates have fallen and continue to fall. There is still a drive to attract more business loans as opposed to mortgage lending, but as the Business Insider article pointed out, it hasn’t materialized at any loan size.

What does this mean for a foreign operation running in China? I’ll only make two comments:

I’m not convinced infrastructure projects drive middle-class income (read consumer spending) in China. However, local incentives can drive a wide array of investment that continues the middle-class growth trend. Read this though: http://www.chinalawblog.com/2015/03/foreign-investment-in-china-beware-of-local-governments-bearing-gifts.html

Stable high-paying jobs may be much more attractive to otherwise entrepreneurial talent. Further, if they can get locked in to a home loan at a better rate from having a stable employer behind them, you buy loyalty that salary doesn’t.