"In China you’re a fool to do business with somebody you don’t know.
Westerners put too much store in their ‘protections" in the contract. Chinese meetings take a long time to get to know one another Westerners like to get to the point much more quickly. Westerners want all the details spelled out. Overview of the project. They want to act now cause they know what they’re headed for. Chinese are linear. One thing at a time. Westerners have schedules. They have timelines. Spontaneous meetings meetings and dinners etc. planned long ahead. Chinese go to work to see what shows up for the day. Westerners have it all mapped out in advance."

                    ~ Duncan Otis

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OAI Shanghai reports March 23-April 20, 2005

March 25th AM met with the Commercial Attache at the consulate, Ira Kasoff. Also another senior commercial officer, Jim Golson who is very familiar with the Medical markets here and will be posted to Bangkok in about a year. Good meeting with Ira. His second posting to China. And he’s been studying Chinese for over 20 years. Jim too, but not so long, at the Foreign Service Language School. Net net answer to why I came to China in the first place:  "The toothpaste of China’s growth isn’t going back into the tube." This is no "Nova". It's real and permanent. I’d heard that at this rate of growth, China will absorb ALL the Earth’s resources in a couple of decades. So of course the growth will taper off some. But we’re seeing flickers of things to come in rising oil prices and gas at the pumps in the USA. There will be some changes in the world. Of that I’m pretty sure.

On proprietary IP, intellectual property, the Euros are known here to send their older technologies so they are less vulnerable to reverse engineering. The Americans plunge in with state-of-the-art everything and, for that, the Chinese are extremely grateful. And it makes us a bit more vulnerable. You absolutely have to register all proprietary information and file for Chinese patents. Without this you are totally vulnerable and there’s no recourse. With it, you can go to the courts. Litigation and arbitration are becoming more and more common and accepted here. Chinese are beginning to initiate such against us, sometimes, so that’s evidence of it’s becoming part of the new economic landscape.

I met in separate sessions with Jim and the Chinese-Thai woman, Lynn Jiang, after the formal talks with Ira. And after that I dropped in on Peter Neumann who heads up Faegre and Benson here. I’d talked to my old friend, Mike Murphy who is recently retired from Faegre and Benson who put me in touch with George Martin who heads up the China practice from Minneapolis. Peter knew I was coming but the email being down, his messages just bounced back to him. So I wasn’t unexpected but my dropping in was. Happily he was in the office, a relative rarity, and we had a very nice talk. He’s going to Switzerland to ski Monday and then has business trips planned out until April 7th, at which time we’ll meet again.

I told him that my impression was that unlike the US, Japan, and Europe, China was still in its infancy in rule of law governing contracts and IP protection so “Guanxi” or personal relationships were more important here. And thus my desire to be here to make contacts that would be useful in the future. He said historically maybe that was so. And to a degree it still is. But don’t count on it because “everybody” has contacts. They don’t always add up to much. Aren’t always the kinds of contacts you really want. I was told before my trip by somebody who does a lot of business in China, that a key distributor who had had him, the guy, and his family, to his house in China and the guy had had the distributor, and his family, to his house in Minneapolis, and the guy was led to feel they had a tight and “special” relationship with the distributor, found that the distributor was selling competitors’ products “out the back door.” A legal violation of their agreement of exclusivity and a breach of personal trust. Very sad. The guy sacked the distributor ... and, of course, the loss of money was less hurtful than the betrayal of trust. Of course it happens everywhere from time to time. States too. But it always hurts. And it underscored Peter’s admonition to cross your “t”s and dot your “i”s legally from the outset and don’t count overly or unrealistically much on the sweetness and light of “close personal relationships” here. As my sister’s first husband said, “Love many. Trust few. Learn to paddle your own canoe.” And when you do find trust so far away, hold it close and earn it daily.

Back to yesterday a little. In the afternoon, after setting up meeting times with: (1) Paul Swensen from Wisconsin who’s been here forever and is a fountain of information (St. Olaf grad), (2) Fu Ming (last name first, except when it isn’t) an eminent Chinese Lawyer here, (3) Iain McDaniels, (former student of Roy Grow whom I’d had to dinner about a month ago and who was chair of the Poly Sci department at Carleton and who’s been coming to teach here for years and who has written some very good books on China,) who is now the head of the US-Business Council in Shanghai, a very big job, (4) the Denver Rep in China whom I met while at the consulate cause his office is there ... along with Michigan and some others .

Met with Iain (said like “eye” in) McDaniels, a very smart, youngish, very knowledgable, former student of Roy Grow’s who (Iain) has been in China for nine years and is the Deputy Director of the US-China Business Council and chief for Shanghai. USCBC has headquarters in DC with 20 people and offices in Bejing with nine and Shanghai with four. Relatively small but they have 250 members in Shanghai at $2,500 to $7,500 annual membership fees so they are obviously bringing a lot of value to a lot of companies.

Their mission is basically to help any member with any problem or goal they have in China. And the world is proprietary. That is to say, at the AmCham, which is strong here like it was in Tokyo, things can get watered down to the lowest, or safest common denominator because you may be sitting next to your competition. So you come out publicly with strong endorsements for health for everybody and happiness for anyone who wants that and beauty and serenity ... and tough issues like that. I get the feeling that if XYZ member company at USCBC gets its corporate ass in a wringer and is bleeding from the ears (to horribly mix a pretty nasty image), then the USCBC team will hop right on it and fix it ... or get it fixed. These are very good friends to have. Iain is a pistol. Smart as a whip. I so wished I’d brought my tape recorder, my magnetic memory. Some of what I think I remember him possibly saying, but wouldn’t swear to it in court, is (It’s possible he didn’t say ANY of this and I’m making it all up and none of it is even remotely true... let the court be advised):

Bejing:. The Gobi desert is only about 200 miles to the West and every year it gets closer to Bejing. They have sand storms there that rival what our little Empire’s legions are experiencing in Iraq. And with the Olympics coming to Bejing in 2015 (I think), they need to clean stuff up STAT. Desert sand storms just don’t make it when you’re trying to break a world poll-vault record. So they’re planing a lot of trees and grasses and trying to build a “green break” between the Gobi and everything East of it.

Under Mao, there really was some sort of unity. When they tried to kill off some birds that were wreaking havoc with the farmers, Mao asked all citizens to scare these birds away so they couldn’t land so they’d die of fatigue. That's exactly what happened. That wouldn’t happen today.

When Mao asked everybody to build a steel mill, a mini mill, in their backyard, they did it. Stupid economics but strong show of a nation over a billion marching in step to the Chairman’s will. (Mao was a poet. Not an economist). That wouldn’t happen today.

For example,if Bejing told somebody to shut down a certain factory in, say, Zudong. The manager would say, “Oooooo--k, then. And what you going to do with the 600 people that you’re putting out of work, dude?” And Bejing would say, “Hummmm. Didn’t think of that. “Well”, (and here is where Rozanna Zanna Danna comes into the picture), “Never mind.”

And if they tell some guy in Shanghai to go increase the number of print dresses being made to fill a big order in Kansas, the guy says, “Aaaaaalrightie! But I really should be back at my command post at the semiconductor plant that’s putting out $4 billion of product a year and paying your daughter’s way through Stanford through the taxes I’m paying you.” “Good point.” (RRD now, all together) “Never mind.”

China is now in a state of what we call in Japan, “Bara Bara.” Sort of all a jumble and mixed up and nobody really at the controls in any meaningful way and, in a nice, British sort of sounding way, “Sorting itself out.”

On Quanxi and corruption, two different things, he echoed what Ira and Peter had told me. Essentially, there are some very serious crack downs on corruption. I mean people get hung. Killed. Offed. Senior party officials, even. I asked if the implication of that was that there were a lot of people who were NOT corrupt? He allowed as to how that was so ... and getting so-er. Maybe especially in Shanghai. Shanghai is getting mature, growing up, very fast. People are taking to the rule of law to govern contracts. And they’re suing --- Americans sometimes! --- to amend real wrongs. That’s very good news. And arbitrating. Not in Geneva where you can ski on the weekends but here in China where you have to pay attention. Shanghai’s becoming a player. Like New York and London and Paris and Milan and Sao Paulo, (no. not like Sao Paulo ... but, on second thought, maybe a lot like Sao Paulo where taxes are ACTUALLY being used for public goods and services, I’m told), Frankfurt, Madrid, Tokyo, Osaka, Taipei ... you know. The usual suspects.

But the Western part of China remains a big headache for Bejing. They really are afraid of flare-ups. Rebellion. “Ganitcha. Uramayashii. Envy.” When everybody’s poor, they’re cool. When everybody’s rich, they’re cool. When some are rich and some are poor, hey! Like in America! NOT cool. Envy can bring down empires. So Iain told me if they have to close a factory and had promised to pay severance of 3,000 quai to each worker, that’s about $360 US, then it’s cool. But if they pay, like, 600 quai, about $65 bucks and the plant manager is seen by the rooked workers driving away in a new Mercedes, you’ve got trouble. So the government or whoever, usually “buys them off”, i.e., pays them what they were promised under these circumstances.

Don’t rock the boat. You see, most of the soldiers are poor peasant boys from the countryside. I guess from the West. That’s where the poverty is and where the big tsunami of Quai and Dollars and Euros and Yen isn’t seen much, if at all. But now they have TV and internet and better transportation. A guy in his Yurt in the Gobi can pick up his email and find his cousin’s sister, Ying Ying, has just bought a new BMW and is planning a trip to London to go shopping. Well this guy in the Yurt has just had to put down his last Yak because (a) it had been a bad winter for both him and the Yak and both were getting thinner and (b) the deal was that either he’d eat the Yak or the Yak would eat him and in the scheme of things he decided to just take the initiative, assert his “human prerogative”, and kill the damned Yak ... and eat him. The Yak’s name was Zak. Yup. Zak the Yak. The guy got a kick out of that and the Yak had been like a good friend. But he had to kill him, skinny though he was, because he needed to eat him. And then he hears that Shanghai Sally, Ying Ying, is zipping around in a new Beamer and has plans to go to London ..... to SHOP. Well I’m getting myself in quite a lather just making this story up. Think what the Yurt/Yak guy must feel. Pissed. “Uramashii. Ganitchaa. Envy.” It’s a problem here and I’ve only been here a few days.

Iain gave me a copy of last year’s membership directory which is like being given the Holy grail. I have all the names of all the major players here. Now I can make meetings with the more indulgent and generous ones and ride up their learning curves a little. Of course it’s all blind men and the elephant. You know. One thought it was a tree cause he felt a leg. Anther a palm cause he felt an ear. Another a sword cause he felt a tusk. Another his job cause he stumbled on a 50 lb. pile of excrement. Point is you only know your OWN experience which is never the whole story. With luck I’ll get enough to describe a woolly mammoth with a horn coming out of it’s forehead like a unicorn.

Transport’s a mess. You put stuff on a train, your product, right? And the government sidetracks it, literally, cause they needed the car for a higher priority. Truckers are subject to special legal and illegal “tariffs” and fees when going from one province to another. Stuff can get hijacked. So sometimes it’s better to ship it by ship or boat up or down a river. If you can’t fly it. Three major rivers run parallel to each other East and West. So that doesn’t help North and South. All of this will be hashed out over time but right now transportation is a hassle. You don’t have a factory in, say, Shanghai (just for a far out example), and expect to distribute all over China. North, South, Central, and West. You need manufacturing in North, South, Central, and West at least.

On relationships: As Peter and Ira before him, Iain said they are getting less and less important here. Maybe for really huge contracts where Bejing, the government, has to be involved, then maybe it helps to know, like, the president or premier. In Shanghai, however, you do your homework, homework, homework (how sick I am of hearing that .... but I guess it must be key cause everybody talks about it .... oh! my whole career is based on doing other peoples’ homework FOR them! So, Good.; HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK. I just wish there were another name for what they’re talking about. Due diligence makes me barf. It’s so prissy. Homework is like having to eat all your vegetables before you can have any pie. “Checklist” is a little better. Like “do your checklist” and then check off all the stuff you have to do to be successful here. Or “feeling the pulse and hearing the buzz” but that’s too “cool” and might miss the very important detail stuff you have to do to protect yourself and do this right.

I had a 30 minute (long) ride through the famous tunnel under the river to a meeting at the China Development Bank in Pudong. With Dr. Fu Ming and his wonderful assistant, a very smart, British educated, peppy young woman with a wonderful sense of humor. Dr. Fu is a senior partner in the law firm, which has nothing to do with the Bank; it’s just an absolutely beautiful building. The firm, “Hao Li Wen” has 40 lawyers and they all have doctorates in jurisprudence. They consider themselves “medium” sized but their client list is impressive, the likes of duPont, Kodak, Best Buy (ya, our Best Buy), and like that. I got the feeling they were not only very engaging personally, but that they were very good lawyers. I’d prepared 15 questions for them. We spent 45 minutes on the first one about patent and copyright protection and IP (intellectual property) protection. Liya Yao, the woman, interpreted for Dr. Fu but I think his English was pretty good. It was a little “set piece”, i.e., “formal”, as in Japan, always, but formality with a twinkle in its eye. Liya was hired by Dr. Fu and yet she operated on an easy, almost equal footing with him. In Japan, she’d have been MUCH more deferential. Of course she was the one doing the translating. But she wouldn’t just say what he was saying. She’d challenge him and make him explain it more clearly until she “got” it. So she could give it to me. Which worked pretty well but some things were still a little vague. What I got is that Shanghai is ahead of the legal curve in China just as economic development in Shanghai is ahead of the curve for China overall. He said at the outset that the laws were equally applicable throughout the country. I had to cut him off there, diplomatically, and said, “Yes. In THEORY.” He smiled, (before translation) and said in English, “Ya. I was going to get to that later.” So we talked turkey. I asked if they place was bugged. They laughed and said it wasn’t. I told him the medical equipment boys (and girls) were hesitant to come to China for fear they’d get reverse engineered and see knockoffs showing up in their home markets. Yes, it could happen but not so much in Shanghai now. A lot of patents are being filed worldwide by smart, inventive, creative, entrepreneurial Chinese these days and THEY don’t want US to reverse engineer them. So now that the shoes are going onto the other feet, especially in Shanghai, respect for the rule of law in contracts is growing. Like Iain yesterday, he stressed the importance of registration of your products here. Without that, you are naked. He said you can make a contract with your importer, (if you’re an exporter) and tell them to protect your IP rights. However, if a third party gets your specs, the importer can not (necessarily) be sued. He differentiated between “technology” which was pretty much in the public domain, and “know how” which was the real secrets you want to protect. The difference escaped me but I didn’t want to get too legal through an interpreter. Or at all.

If you’re having your stuff built here, you enter into a 10~15 year license agreement where your licensee is immanently sue able if they leak your technology or know how.

But what my new friend from Starbucks, who worked as a 6 Sigma engineer for GE for 30 years said, was repeated by Dr. Fu. ANTICIPATE problems before they come up. Really really work hard to predict what could go wrong and address if from the outset. Fu said it was wonderful to have people like me, knowledgeable consultants, to help people get off to a strong start. AND, of course, you needed good legal council from the get-go to draw up contracts that really made sense. Then he burst into an enthusiastic chorus from a revised Oklahoma, “Oh, the lawyer and the consultant should be friends, friends, friends! Oh the lawyer and the consultant should be friends. Oh, my, how I do agree.

I told Fu about Faegre and Benson and how I was related to them through Mike Murphy, now retired, and how I’d met Peter Neumann here and how great I thought it would be if he met Peter and maybe built a relationship. You see, American lawyers and Chinese nationals working for American law firms can not litigate in Chinese courts. So these alliances are critical. I really liked Fu and Yao and I think a partnership with Faegre might be a very productive coupling. But Peter Neuman has been in China for 9 years and might dismiss the idea out of hand. Or maybe not. In any case I’m looking out for Minnesota interests.

Back to Fu. I also made him and Liya Yao aware of that dimension of my interests, coaching. They agreed it could have a monumental effect on the bottom line. They were going to consider who among their clients might be interested. Fu asked if I’d be willing to represent Chinese interests in the US. I said that was priority question #15 on my list and yes, I’d be very interested in doing for Chinese clients in America what I’ve been doing for American clients in Asia, i.e., market studies, JV development, key partner dispute resolution, key management executive search, and the like. So they’ll noodle that too.

At the US Consulate in Shanghai I met the senior Economic officer, Mary Tarnowka. She’ll be here another three years. Probably late 40s, very professional but rumpled enough in a smart way to be very credible, smart as a whip, very nice. Some of what I remember them saying: (Oh. They confiscated my phone and my iBook. I asked if they were afraid of bombs. They said not really but all this electronic stuff can be sending and receiving. [And we were having a really hush hush meeting]).

1) Don’t think the middle class here is anything close to 200m. True, average annual income in places like Shanghai is $3,000 three times more than in the country side, but if there is a middle class, they aren’t buying a lot of Toro lawn mowers, my definition of a middle class person. Not that they DO but that they CAN and have a reason to.

2) Yes yes yes. Intellectual property issues are sorting themselves out here but there’s a long way to go. But it’s better. DO REGISTER YOUR PATENTS AND TRADEMARKS. OK. We know. Right?

3) High-end tech products are safer. Low end, easy to copy stuff isn’t. Check.

4) Don’t be so paranoid about it that you don’t at least try to sell in China. Anyway, if they want to get your product, they can get in the US, near your front door, put it in their suitcase and bring it back for reverse engineering. You don’t need to be in China to get copied.

5) Shanghai really is a farm team for the big leagues of politics in Beijing. So they want to “keep their noses clean” here so they have a shot at the big time. As a result, they really do clamp down on corruption and try hard to bring IP infractions to light and deliver restitution to the aggrieved. Maybe peanuts and a beer and a heartfelt “sorry.” It’s coming here. Note: More than one mayor of Shanghai has become premier of the country.

6) My $3000:$1,000 split, urban vs. rural may be inflated. Just saw a note of mine that said Mary said people in the sticks make closer to $350 a year.

There is grumbling to the West. I asked if they were WORSE off than under Poet Mao and Mary said not at all. Actually they are a bit better off now. But they are jealous. Everybody is better off now but some are a hell of a lot better off than others.

The government really is afraid of grumbling in the West. If it led to UPRISING it could get ugly. Iain had said if a plant goes on strike, the government deals with it. Usually pays people off. But if two or more labor groups collude to protest something, then the tanks roll in. He didn’t say the tanks roll in but indicated that Beijing deals with any sort of organized protest swiftly and resolutely.

Banking is a problem. They don’t use the credit analysis approach that I personally know so well. Too much quanxie in lending. And if something gets mucked up, the government comes in and covers the losses. It’s not a good situation. Mary felt if there were ever a bank collapse, or a buckling of the banking system, or even a sharp fall off in growth (it’s been 9% per year forever), things could get very dicey indeed. But she foresaw no such eventuality. As in many other things, they are taking some steps to remedy. Like joint ventures with Western Banks; Western as in US and Europe and maybe Japan, although Japan’s banks are in pretty shaky shape themselves. They are also trying to get listed on overseas exchanges. By doing stuff like this, they have to adhere to certain international standards of lending and accounting. It forces them to clean up their act. It’s a very good thing. And for the first time it’s not just Communist functionaries on the boards of directors of banks but they’re bringing in independent directors. Even some foreign directors, she said.

Two surprising things she said were:

1) We have a services balance of trade SURPLUS with China. Of course it’s a drop in the bucket compared with out “goods” deficit of $161 billion.

2) Japan actually has a balance of trade surplus against China. Surprise surprise.

She went on to say that the actual balance of trade deficit we suffer with China isn’t really as bad as it looks when you consider that A LOT of Malaysian, Japanese, Thai, Indonesian, Taiwanese, and other Asian countries are also setting up shop in China and this swells the volume of exports to the US ostensibly from China but in reality from a whole bunch of Asian countries just building in and shipping from here. Interesting.

On specific stuff we can sell China, they said big airplanes, high end computers (which our export controls forbid, so it’s sort of academic), SERVICES, like education and training, and, yes, medical equipment.

My teacher told me something that I’ve seen over and over again. The Chinese are not confrontational. They really do live by the well-known Confucian concepts that we all hold so dear: CHEN SHU, HE XIA, and DENG JI. Which everybody knows is “Modesty, Harmony, and Hierarchy.” So if you win the Olympic diving competition, you bend over backward to say how lousy you are and could have and should have done a better job ... for CHINA. And if you have a problem with somebody, you work it out. And you respect your parents and teachers and stuff. They live this way. And they aren’t very aggressive, like the Euros or the Japanese. “Or the Americans”, I added. “Or the Americans”, he said. Sometimes they’re very surprised to think that China will be America’s “counterweight” in world affairs soon. They still see us as the big dog on the block. No opposition. They seem like a big, clumsy teenager who has no idea of his own strength. A car flips on their friend in an accident and they find they can flip it off their friend ... with one arm. And they think, “Wow. How’d that happen?” BIG PAWS.

Interesting little back and forth with Ms. Yao at the law office. I said it seemed sort of funny that we were talking about the maturation of contract law in China which has been an orderly society, more or less, for 5,000 years. She said that history didn’t count. The Emperors WERE the law and the Communists ARE the law. Commercial law, using international standards, is maybe 10 years old in China. THAT take was interesting.

Bush came up. I just said you (Chinese) have to be a little patient. You’re known for it. Ms. Yao said “Ya. We’ve been patient for a hundred years.” She didn’t say “5,000” years which would have been a whole different reference. I think in a very oblique way, she may have been referencing by implication indignities of the Western, and Japanese Imperialist thrusts into China beginning with the Opium war, maybe about 100 years ago. The puppy has big paws and a looooooooooooooong memory. Better hope the Confucian ethic is strong enough to temper the very normal feeling of “payback time!”

Paul Swenson is Chief Representative of the Council of Great Lakes Governors. But Minnesota isn’t a member because of MONEY. Paul used to work as Jim Golson does now at the Consulate and he knew Kitty well when she was commercial attachÈ.. Many years here, very very knowledgeable, married to a Chinese woman, and really seems to know his crackers. We in Minnesota would do well to know him if not join his organization.

Same old same old about registering your trademarks and patents. Talked of the process of busting evildoers who were making stuff and selling it under the Este Lauder or other well know brand name. You, the aggrieved, have to know about it, find out who’s doing it, get probably cause for the police to execute a raid, post a bond of some size, and hope they got the right warehouse or whatever. You never get all your bond back because they nick you for demurrage (warehousing charges) and destruction of the knock off products and brands. A lot of companies destroy these things themselves because if they don’t sometimes they mysteriously show up on the street again. I hear it isn’t much better in the USA. But you can’t just sit there while they rape you.

And there’s a formula for how long the perps serve jail sentences. Can’t remember what it was but it was something like the amount of merchandise found plus unused labels times something divided by something = days, weeks, months, years in the slammer. So if you hire the stadium, buy the uniforms, train the team, get a football, hold it in place, the authorities will kick it. Hey. That’s something! It can win games.

Building materials are hot. They build all these high rises and everybody is cutting costs. So the windows aren't tight and the doors leak beneath because there are no sills. Two Wisconsin manufacturers of windows are doing pretty well here. More significantly, there are building material superstores here and Menards will soon set one up here. Thing is that you can’t just sell it and forget it because they don’t think in terms of home improvement as we do. You need to hire and train teams to do this. They’ll pay for it but have to install .... like my Dad used to have electricians install new light bulbs when the old ones burned out. It wasn’t his thing.

They need gas fireplaces. And wiring and good piping. Garage doors and double paneled screen windows. McQuay, an outfit out of Winona, Minnesota, is doing very well with air conditioners. Hard to imagine because I’m ALWAYS cold in Shanghai, but it gets Houston hot and muggy here.

Oh. Also flat pack kitchen cabinets. The new ones here fall apart. Poor (cheap) materials poorly built. Minards can serve as a conduit for a lot of good stuff sold here.

A lot of high rises are built near water, rivers and oceans and lakes, oh my. Rivers and oceans and lakes, oh my. I say it that way because the toxicity of the water here is dangerous, some say. But they swim in it and water-ski and play. Look, Mom. No skin. Anyway there’s a market for those horrible noisemakers, Jet skis, and power boats and other boaty stuff.

Also for paint. Good paint. The stuff they too often use is full of lead and peels off after a short time. Welcome to China, Valspar. My friend Rolf Eng of Valspar has been coming here for quite some time... for cause, apparently.

People hide their wealth because the government has a history of separating obviously rich people from at least some of their money. So even owners of major factories here will go around looking like bumpkins in public, and then go back and make decisions effecting thousands of employees and millions of dollars. And quietly send their children to Harvard and Stanford with a few million tucked in their luggage to buy apartment buildings and houses and drive up the prices in Palo Alto and Cambridge, for example.

Paul said it took him months of begging to pay for employee taxes here. The authorities weren’t interested. Later, a man in an elevator told me that’s because the government gets so MUCH in tax income, that unless and until you’re here for the long term, and are beginning to pay serious taxes, they don’t want to bother. Can you imagine?

A lot of companies keep three or more sets of books. One for taxes. One for American and other joint venture partners. And one, buried deep in the ground, with the real numbers in it. Of course Americans never do things like that. Oh, Milkin (a hero here) and Lay and a few bad apples. I’m told that more don’t pay taxes here than do. But my later lunch mate said you better. He always does. In time they’ll get you and the fines are big.

Exterior cladding for high rise buildings. Sometimes the contractor will sell off the whole building long before it’s actually built and just run off without finishing. So there are a bunch of high rises here, I’m told, that are, well, naked. Hello Harmon!

Paul felt that most banks are insolvent here and cruising for a fall. While growth of GDP is at 9% as it’s been forever, the government and the banks are awash in money. Bad loans can be handled. But if growth flags, as it must, sledding in the banking world could get sticky.

He also felt that there would be an environmental crisis, or crises, that would trigger massive investments in clean up. Opportunity. Later Svika, my new Israeli friend, said they’re already pouring millions if not billions in to environmental clean up. There were a spate of serious mining accidents recently that precipitated big investments in mine safety.

On IP, a lot of companies have different components made by different suppliers and then harvest all the parts in a secure assembly area. That way nobody can easily reverse-engineer or “knock off” their stuff. But all you have to do is buy one, anywhere, and work on it until you can figure out how to build it. There are efforts to slow piracy more than to prevent it.

People come to different parts of China for different things. Shanghai is good for manufacture of plastics, electronics, medical stuff, for example. For furniture you want to go to Vietnam or Guanzhou.

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An Israeli friend who has lived in Shanghai for 9 years made these ponts:

1. 2-3 years ago China decided on pretty strict ennvironmental standards and reforms.

2. Bejing closed all coal-fired plants 3 years ago and the air there, and here, is immeasurablly better than it was.

3. China is getting very proactive in its foreign policy lining up countries that don’t like the US very much. Even Israel has a tight relationship with China ... but, of course, their heart belongs to Daddy Sam. France, Germany, Russia ... all are now ignoring America’s boycott on certain sensitive exports to China. Many are giving the finger to an arrogant and insensitive administration in Washington. Thanks, George. Nice play.

4. Torture doesn’t work. Physical pain just gets you whatever they want you to say. More subtle methods will make them want to tell you everything. Abu Grab was a breakdown in leadership. Totally stupid. Thanks, Rummy.

5. China isn’t so much into “Payback” from the age of Western imperialism here, as recognition for building itself into a great state. Thus the otherwise pretty money-down-a-rat-hole space program. They want to show the world they CAN do a lot of pretty impressive stuff. They want to conquor no territory. That was Gengis’s thing. (ed)

6. Taiwan will come to heel without fisticuffs. China is patient. There are 500,000 Taiwanese living in Shanghai today.

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April 6, 9AM met with James Green of the American Chamber of Commerce in Shanghai in advance of meeting his boss, Charlie Merchant in Beijing tomorrow , also at 9A. By coinkidinki.

James is a late 30s early 40s very knowledgeable, engaging, and helpful fellow who was a foreign service officer. He first came to Hunan in the center of China as an English teacher. He’s from New Jersey and is fluent in Chinese, very fast, with a wonderful command of English... I mean extraordinary, and of the business climate not only here but all over China. I could have listened to him for days. Fascinating and comfortable with a broad range of subjects. Another real find in China. My comments will reflect only a fraction of what he said. A palsied attempt at some points:

1. OK to show a little more anger in the North than here. For effect. But never a very good idea. Shanghai and Guangzhou is more practical. “We got your order wrong? Sorry. Let’s work it out and move on.”

2. The cultural revolution really did take something of a bite out of the strict hierarchy of “pure” Confusiousism.” Thus the “showing of personality” of the junior woman with the very senior partner at the law office in Pudong the other day. Shanghai women are smart and not afraid of showing it. Contrasts with Japan as I knew it. No lights hidden under bushels here.

3. Two kinds of industrial parks where foreign (and Chinese?) companies can set up shop. One kind is private and costs maybe 20% less but services are much more reliable ... as is the firmness of the commitments made at the outset. All the serious American firms, the big ones, choose the government-run industrial parks. Of course most come to the coast cities like Guanzhou, Shanghai, Beijing and near coast like Zuchou 45 min from Shanghai. But the government has a policy of moving industry further inland, further West. Thus the diminution of smog in places like Shanhai. “Night and day from 10 hears ago.”

4. Savvy municipalities offer real incentives like no taxes for first three years. Many inland places aren’t so smart. James was on a delegation that took potential investors to Hunan and the city he taught English in before. The governor showed up for a “face” visit and spent only 2 minutes with James. They offered no incentives and didn’t really understand how the economic development game is played. West of the Gobi there are towns whose names I forget who are very savvy who are netting investors. He says there are places in “West Jesus”, my term, where you happen upon modern amenities and Holiday Inns. Other thumpingly big cities where there is little if any foreign investment. So look around carefully if you’re gong inland. In some places you can get very enticing proposals. Good deals.

5. The government tried to dampen growth in Shanghai. It was at 14% vs. the national rate of only 9%. The government chose 10 sectors of the Shanghai economy and loans to companies in these sectors dried up over night. In America they’d be in court howling like crazed dogs at a full moon. Here it stuck but I don’t know what effect it had. Welcome to Communist China. Land of double-digit growth.

6. Not all is sweetness and light. There have been public revelations of large-scale corruption in real estate in Shanghai lately. One big wig went to jail for a year. A slap on the wrist. The government has no incentive to clamp down since such big money passes hands from private to public sector officials in the land boom here. Apartment costs have skyrocketed. Worse, in the “dampening” effort, the government has made a 30-50% down payment requirement on buying a new apartment. Tough for most despite the fact the per capital GNP income in Shanghai is up to $5,000 vs. $17,000 in America. A huge number for China. And new high rise apartments spring up like mushrooms all over Shanghai and the surrounding areas.

7. Of course the main reason for government corruption is that civil servants and below, i.e., people who just work in more minor capacities for the government, are paid so little. They are below the “take line.” But the government gives them great benefits often to keep them. Some pay as little as 10% of the market value for an apartment. And they get lots of other goodies as well. helps keep people employed in the the government sector, and at all, but adds to the cumbersomeness of the bureaucracy.

8. Most banking is done by the big four government banks here. Foreign banks are coming in but its hard to compete for a number of reasons.

9. In some important ways, the government has a true market economy approach to the survival of the fittest. Used to be everything was government. Then came Dung and the beginnings of privatization. The government now, apparently, leaves it up to market forces to decide who lives and who dies. If a government company can’t compete effectively, they will not do a Chrysler on it, a very un-American “save.” Now which one was the Commie country and which the Mecca of free enterprise again? Government firms that have allied early with strong American (foreign) partners, as used to be the law, often not only survive but prosper. If ineffencies exist in others that are just operating as always and can’t compete that way, are left to die. Ann Ryand would be SO proud of many aspects of the New China.

10. Business does NOT have the same reach and intelligence as the government’s security forces which know how many cavities you have and how often you shine your shoes. Last night my Israeli friend, Svika, said that in advance of some bigwig meeting here, maybe Bush came too, Chinese security (police) visited both the homes and work places of EVERY Arabic or Israeli (Middle Eastern) person living in China ... ANYWHERE in China. A reminder that “We know where you live.”

He said the reason there is no terrorism here is that if, Alkaida or Hezbulah, for example, tried to blow something up, the Chinese government would deport all Arabs, all Middle Easterners. They keep careful track of who comes here and what they do and where they live. Step out of line, thud. You’re gone. I can’t know how accurate this is but nobody is afraid of terrorists here.

11. I asked James about intellectual property protection. A standard question because Americans worry about it so much. For cause. He said this: Hey. It doesn’t matter whether you come here to sell your wares or not. You’re pretty much equally exposed. They can order samples and reverse engineer and sell under your name or their name or another name. Or they can buy your stuff in the US and other places you sell and do the same. By “hiding” and grasping firmly to your coveted technology, your better mouse trap, the only practical effect is to yield this whole market to the pirates and gain nothing for yourself here. So come. But REGISTER your patents and trademarks and copyrights. You’ve heard THAT before, eh? Once you do that, you do have recourse in the courts. So hire a law firm, Faegre is here and Dorsey is here and many other “foreign” law firms are here. They all have Chinese associate firms. Or, if you want it a little cheaper, but aren’t quite sure what’s happening (my assumption... not necessarily true at ALL), hire a Chinese law firm here directly. Do the damned paperwork. Then you have a little protection. You have recourse in the courts.

12. I make this a separate point for emphasis. A lot of American (and other) companies think that because they have patents or patents pending in the USA (France, Germany, England, Lapland) that they’re safe everywhere. Not true, grasshoppers. You have to bite the bullet here as a separate and distinct filing. One size does not fit all in that business. And remember, I heard, no hard evidence but I heard, the foreigner wins 80% of the time in Chinese courts. The bad news is that the courts are subject to delays due to staff limits and the inherent inefficiencies in a big bureaucracy of the state. We have the same problem but it’s worse here. Ironically they have a person-power shortage in civil law enforcement, or whatever you call it.

13. A lot of operational problems can be mitigated or eclipsed by getting know your distributor, manufacturer, i.e., Chinese key partners by GETTING TO KNOW THEM. So you have dinner and really try to know the person you rely on... and have him or her get to know you. It’s a clichÈ but very important. Then when the shipment of high tech flantdwars all have round pegs and won’t fit into your universally square holed belittles, you call up “Jack”, (many Chinese have Western names they got from somewhere to spare them the indignity of hearing their names mispronounced all the time... I’m sure that’s the reason), and tell him it was “SQUARE” pegs you wanted and you’re sure it was YOUR fault for not making that more clear but could you please get us the square holed ones STAT because you have a shipment due at IBM on Tuesday by CPM latest. And stuff gets worked out. If you pitch a fit or, as the Ozzies say, “spit the dummy” (a dummy is a “nook” that babies use), not much will happen ... and that will probably happen very slowly. People all over want to do a good job and the Chinese are no exception. Treat them with respect and empathy, walk in their shoes a little, and get to know and like them and things will work a lot better.

12. The big BUYERS here are sort of a pain in the ass. The Walmart syndrome. They come in here and demand this and that and treat the sellers like a bunch of serfs, too often. “Well if you won’t sell it to us for X amount per unit, we’ll go down the street. Gordon might do it for less than we’re asking.” And, of course, they’re right but it sours things a little. Remember, we’d still be a colony of England if they’d just shown us a little respect. They could still have ripped us off but left us with face. They didn’t. The stupid, arrogant Brits. Anyway, for the long term, I’d suggest we not be stupid nor arrogant.

13. And what goes around comes around. When it’s time for US to sell stuff to THEM, i.e., the buyer’s shoes go onto the sellers feet, they can hold those sellers’ feet to the fire without feeling too bad about it. So you American (and Euro and other) BUYERS, lighten up a little. You’ll still get good prices but show some

respect and don’t screw it up for the foreign SELLERS.

15. On stuff we can sell here, James didn’t add much to what I’ve heard before. He did say places like Shanghai (and there’s only really ONE Shanghai), plastic surgery is getting popular. And then he threw in agricultural equipment, Industrial controls, and some other stuff. I don’t think he wanted to give me a list because (a) he didn’t want to exclude any of the stuff his members make or do and (b) it would have taken more time than we had. Also I really believe that if gone about intelligently, you could actually sell rice or tea here so why exclude anybody. I was just after the lower hanging fruit.

16. He did say that if you’re #1 at home, they like that. They want the Gucci bag of valves, catheters, etc.. and are smart enough to know the difference. So if you sell schlock in America, don’t think you can sell schlock here ... easily. “Returns” are very cumbersome here so people check the quality carefully. No taking stuff back to target in 10 minutes of de-transaction.

17. On losing employees or having them learn all about you and then competing with you, again, do the paperwork part well with non-compete clauses in employment contracts and treat them well. And PAY them well so they don’t have a lot of reason to jump from your ship.

---

Cross Cultural Training Session:

David on Cross Cultural China on April 5, 2005

Note: This is pathetically abbreviated and simplified. But I take my hat off to David for diving in and giving it a whirl. For you serious students of Chinese history, please accept my apologies and know this wasn’t the thrust of the seminar.

Business in China Seminar: He wouldn’t give me notes. He said they were copyrighted and made in conjuncction with some woman, I think a Canadian. For $150 bucks I wanted a handout. Nor would he let me tape it. Said there were things he wanted to say freely and openly. Fair enough. But I wanted my damned handout.

He read part of the thing which had been written by this woman. Not always words he’d use and she put things differently from how he’d put it. But we struggled through until I told him would be easier for both of us if he’d just stick to a few points and express them in his own words. His English is good enough. Big relief. He opened with the following, which can be applied to life in general .... even if you’re to the manor born with a silver service stuck down your throat.

Nothing is easy and everything is possible.

Brief relevant history: with my after-the-fact comments once in a while.

Began 4000-5000 BC. [ I liked that. Give or take a thousand years. Gives you a sense of scale. Remember the song from the movie “Nashville”? “We must be do’in something right to lasssssst 200 years.” Well David gave China’s history give or take a mellinium. Like five (5) 200 years. Errors and omissions. China been around a while. ].

500BC waring states periiod. And the time of Confucious. 100 streams of philosophy and Confucioius was one of the most important. Born in Shandum province in the North. he travelled around what would become China to preach his ideas.

221-210 BC was the first Chinese emperor. Name was Qin Shi Huang. (“q” has a “Cha” sound.) He unified China and brought peace to the warring states.

This was Nortnern China. he had a big army and unified the country, language, written language, currency, etc.

206 BC -8AD

[Here he started talking about “AC” for “After Christ” and I told him we say “AD” but I thought AC made a hell of a lot more sense. I think “AD” was “After David” but who the hell was David? It’s like putting some piss-ant piece of pork on an otherwise good bill in Congress. Can somebody tell me WHY we don’t just say “AC?” Whoever “D” was, he didn’t have the throw weight of “C”.But of course I didn’t say these things to David. Just that it’s “AD.” By the way, NICE of the world to measure time by the birth of Christ instead of having stuff like BM and AM and BC and AC and so forth. What if the religeous right and everybody else had to measure TIME, for Christ’s sake, in terms of when Mohammad was born? They’d have fits. ]

The Han dynasty. Beginning of Confucian ideas integrated into the government. 206--8 the silk road was developed and China traded with Rome. they took horses to the Gobi and then used camels. 80% of Chinese today are “Han”

[Iwant to study this silk road thing when I get back]

After 8 AD, China closed to the outside world. As she would often in her history.

618-9- Tan Dyunasty and china was very strong. Book: Journey to the West. The “Monkey King.” is another name for it. [Really want to read this]

Tan dynasty had a monk go to Japan. another monk went to India and anohter to Burma. to spread Buddhism.

1368-1644 AD

Zhenghe - was a leader with the big navy and made many connectins with the western world. [See PBS documentary called “1441” about the possible discovery of America by this incredible explorer Admiral and his 30,000 troops. Fascinating. Or get the book. He was a eunich, apparently. So much for our assumption that it takes balls to take massive risks. Of course Gloria has been tellling us that for years.]

Except for these times, most of china’s historical development was pretty closed.

LANZHOU IS THE MOST CENTRAL PART OF CHINA AND DAVID COMES FROM THERE. Rightr in the middle.

IS THE MOST CENTRAL PART OF CHINA AND DAVID COMES FROM THERE. Rightr in the middle.

1839 - 1842 time of the opium war. England tried to dominate China by makikng them hooked on opiim . Finally some governors of China got pissed and one governor, Lincerxu (Ling Za Shu) of Guandong , burned a lot of opium and that started the opium war. He confiscated and burned opium. He fought with the British army. The weak Chinese Doinger Empress, in the treaty with England ending the war, gave up some colonial areas and leased Hong Kong to England for 99 years.

The Chin dynasty was overthrown as a result of the opium wars. As the west was developing new technology while China slept, the opium war brought the end of the Chin dynasty.

1920s-1940s. Japanese invasion and occupation of China. and the civil war between Mao and Chang Kai Shek.

Mao’s father was a farmer but not poor. Mao was educated in a Chinese traditional school. He was a great writer. great historian. great military tactician. Chang was corrupt and repressive. Mao’s army had rice and rifles and he promised everybody would have land equally.

[As Mao ran Chang off to Taiwan in about 1948, I asked David why Mao, if he was such a brilliant military tactician, didn’t go kill Chang and take Taiwan while his star was up and the iron was hot. He couldn’t really answer. Might have been war weariness. Although I thought I remembered that Mao and his forces, amassed in the Western part of China, had waited out the war, let Chang expend his strength on the Japanese, and rather in tact, attacked a weakened Chang and his forces. David said no. Mao and his armies had many battles with the Japanese and were instrumental in their expulsion from China. I need to study this.]

Shanghai was pretty advanced and there were colonial elements to it like the French concession. [That part of town stood out in 1995 when I came here for Bemis. Now with all the building and demolition it’s hard to see. At least for me. Before it was like walking into a chunk of Europe. The waning symbol of the Sinoization of those old vestiges of Western imperialism are a delight to see plowed under. It was nice, though.]

1949 was the founding of New China.

1949-1956. In 1956 there was the time of letting 100 flowers bloom. Totally free expression.

1958-1961 this was a period of natural disaster in the form of a drought which seriously affected China’s resources and her ability to compete with America and Russia in the production of steel. A great leap backwards (as it turned out) was put into effect which involved "a steel mill in 'every' backyard."  Didn't work. China has learned much, MUCH, since those sorry days.

1966 ~ 1976. The cultural revolution. Part of the objective was to upset Confucian ideas , like hierarchy, that were at odds with communism.

He talked about files the government has on every firm and every individual in China. “Dang wei” I think is organizations that the government has files on and

“Dang an” are personal files on. everyone in China.. David’s is held by the shanghai government.

In 1976 mao died.

in 1978 Dung Xio Peng was chosen (kicked out an interim fellow) and launched a new program of economic reform. He wanted to start it little by little starting in the Southeast and came up the coast. --- started with four special economic zones and over time that number grew.

Now the government has a policy to grow the new economy WEST. to help equalize wealth.

David makes the point that China had no templates or models. so they went step by step. “A journey of 1,000 miles begins with one (1) step, grasshoppers.” Mao’s journey was South to North in the West, building his power base before he turned it East to the coast. Of course our Republicans can’t do that because of California. So they gut the middle and wallow in the South].

In the 1980s there were few laws about business. Then, most companies were owned by the government. In 1980 the government started to farm work out to individuals and private firms. A few people on the coast started getting rich. The government didn’t help them , particularly, but these were people who saw the new way and freedoms of the marketplace early and took advantage of it.

2001 China joined the WTO, a big deal, and became a global economic power. Officially.

Under the cultural revolution, interpersonal trust hardly existed. And, to a degree, it’s had an impact even today. Since 1978 many rural people have come to the cities looking for work and prosperity. China began opening up after 1972 with Nixon’s trip -- thanks, Dick -- and especially after 1976 with China’s formal opening under Dung. The USA was, and is, used as the model for development.

David talked about rampant cronyism.

Family is prototype of all all government and business organizations.

Dignity is a big thing. Save face. Give face. Pay respects. emphasis on the “golden medium.”. [You don’t want to show any extremes of emotion here. They don’t seem to. Maybe they’re just tired.]

China-Western differences. [This part was poorly structured because he started with this first big difference, i.e., group vs. individual and then just talked about China most of the rest of the time. If it’s format messed up in transmission, I’m sorry.]

China West

Family and friends. Ec and social support Individualism, rights, enshrined in

in exchange for obedience. Everybody Constitution. Personal property

follows once agreement is made. rights are core.

Self control

cooperation and harmony. loyalty.

Hard work, save face, ignorant of

time and accuracy, Obey but may not

agree. Self control but suspicious.

Self control. Younger people are more

influenced by the west.

Regional: South people are said to

South people are said to

be shrewd. Tactical. Detailed.

Northern, are generous, rude,

cronyism, direct, tradition. People

in the west are very generous.

Very hospitable to foreigners.

Face: If you lose face, you don’t

If you lose face, you don’t

get angry but you get even. No

time limit, could be many years

later. Personal affront to personal

dignity. Don’t criticize people in

public. don’t contradict. can’t de-

cline an invitation unless you have

a very good reason. they want to

feel comfortable with you before

they do business with you. Every

thing happens after dinner. After

we know each other.

Saying no to a request can be

taken as a loss of face.

Failure to accord respect

that somebody is worthy of.

Anger, emotion in public, is

also a loss of face.

Organizations have face as well

as individuals.

Look for ways to give others

face.

Humble yourself.

Give face by attending something

you’ve been invited to for your

stature.

Doing a favor for a stranger

introduced by a friend.

Respect the boss.

Renqing (people’s feelings)

Quangchi (relationships)

Greases the wheels of business in china.

Quanchi wang is relationship network.

Get to know people who know people

in China.

Don’t accept favors from somebody In the west maybe illegal

you don’t know esp if you don't want

to do business. No distinction between

personal and business connection.

Yes means no.

Yes, I can’t No I can’t.

Listen carefully and ask for

clarification.

Sometimes its a face issue.

Don’t want to appear stupid.

Don’t want to show their

English is so poor.

Loyalty is sometimes more

important than actually getting

job done.

Boss may have big but unrealistic

plans. You wait until you are alone

with him to say it’s all bullshit.

Make sure instructions are clear

ask staff to repeat back to you.

check daily that staff understands

what they should be doing.

communication clear and open.

never criticize staff in public.

encourage questions. ----

Six intersections on road to success in China

In China you’re a fool to do business with

somebody you don’t know. Westerners put too much store in their ‘protections”

in the contract.

Chinese meetings take a long time to

get to know one another Westerners like to get to the

point much more quickly.

Westerners want all the details

spelled out.

Overview of the project.

They want to act now cause

they know what they’re headed

for.

Chinese are linear. One thing at a time.

Westerners have schedules.

They have timelines.

Spontaneous meetings meetings and dinners etc.

planned long ahead.

Chinese go to work to see what shows

up for the day. Westerners have it all mapped

out in advance.

Flexibility No surprises

Westerners flat hierarchy.

Very hierarchal.

Only the one at the top makes the

final decision. Committee or group

may negotiate but the decision

maker might not even be there. Several people can make

decisions.

Indirect. Face is always paramount. Press the point. Not afraid

to argue. No loss of face in

direct confrontation.

If they say it’s being discussed, don’t push

it. Legal system is developing. Chinese want Show Chinese how new ideas

to participate on the world stage. Monumental will improve efficiency or cut

changes and they will take time. costs.

Present your idea as options and let them

choose. Never tell Chinese that they are wrong.

First negotiate and decide on guiding principles.

6 basic changes:

Language.

Prep your interpreter.

Learn to speak a little Chinese.

Practical stuff:

Etiquette

Introductions:

Hold card with both hands and study the name card.

Zhon jing li = General manager. rise/fall mid rise/fall

Fu-zhonjinli = vice general manager falling rise/fall mid rise/fall

David Chen --- chen-zhong mid rise/fall

Use “zhong” with person’s last name. be they general manager or vice general manager.

Dong Shi Zhang = chairman of the board.

Chen-Dong (dong is rise/fall) -

Bu zhang = minister

ju zhang = director of a bureau rising and rise/fall/rise

put name cards on table and not in your pocket.

Gift giving:

Give gifts as token of esteem.

When? First meeting. Special dinners. Ceremonies.

To the most important person.

Be careful of bribes.

When not to accept. Someone you don’t know. or somebody you don’t want to do business with.

Higher the rank, the more expensive.

If they refuse you three times, you insist three times.

Tipping

Generally no tipping. (Do it privately if you feel you have to)

Good gifts Bad gifts

clock (means death)

kettles

rose flowers

money

envelopes

weird gifts

green hats

art

books relevant to field

desk set

wine

things that have stories

writing paper

event tickets

something specific from home country

promotional bags

Don’t complement stuff the other has or he’ll maybe feel compelled to give it to you.

---

- I’d sent letters to various Williams graduates in “China.” Most of them are in Hong Kong. Which is China. Sort of. Two answered which is about 20% which is amazing. Most “mailings” never get more than 2%. One was from the Asian Editor of Time Magazine. The other was from C.Y. Ying who is Chief Operating Officer of the Citic kawa Bank. Not Citibank. Couldn’t have been nicer to a purple stranger. Set me up with a very nice meeting with the head of Citic’s major branch in Pudong, just across the river from Shanghai proper. Big shiny building. 44th floor. View of very much of what God and the Chinese have created. He was about my age and couldn’t have been nicer. Can’t remember much of what we talked about. My notes are at the bottom of my mega-duffle bag which is in the storage tombs of the Hengshen Hotel. I’m basically waiting for the train time to Beijing. Thus, Starbucks are my offices.

Ng talked about some things from personal experience. He said in China they have a lot of stuff we have but it isn’t all quite just right. Like the little things. You pull a top off a pull-top can and it doesn’t tear very well. How come? We seem to have worked it all out in America. This much pressure and no more. Has to do with the mixing of alloys and a lot of engineering expertise in things so taken for granted that we don’t notice. He talked about a number of packaging-related things like that.

One thing I noticed with him, as with David, both predisposed to treat me very well, was their aversion to talking about politics. So easy to forget this is basically a totalitarian, Communist state. And they don’t recoil, exactly. They’d just like to talk about other things. AND there’s a strong feeling of patriotism among the Chinese. It’s a fascinating balance between going hell-for-leather into the 21st century, and doing it in the shadow of a very powerful monolithic authority. My feeling is, and always has been, anybody that can feed, clothe, house, educate, and employ 1,300,000,000 people has my heartfelt congratulations. These people do not seem oppressed or angry to me. Everybody wants to make a buck. The government wants them to. They’re doing it. At least in Shanghai. And the government is trying hard to spread the wealth all over China. You want to make a big stink about human rights and democracy, take it to your priest or rabbi. Or just stay home. China is what it is and it ain’t going to change very soon. Where weaker countries, the kind the US likes to pick on, apparently, respond “How High?” when told to “Jump”, the Chinese would politely tell you to piss off and mind your own business. Something we should do a lot more of, to my way of thinking, cause we have a lot more important business to mind than bringing universal suffrage to the world. And, yes. For the record I am very pro-democracy and think it’s groovy, when it works, when the voting machines work, or exist, etc. ... and maybe some day, some decade or century or millennium, China might decide to give it a go. It wont be because the United States told them to.

This afternoon I met with a youngish “team” from CAMDI, China Association for Medical Devices Industry.

I met with Ms. Yujuan, the business chief in the information Department. She looked early 30s and brought a fellow mid-20s. He was very serious. turned out he’d only been working there two days. And then a little later a young fireball, with decidedly better English, Ms. Chen Li-Jun joined us.

Apparently CAMDI is a nonprofit, the only such in medical sanctioned by the government, with 4,000 members out of a population of 10,000 medical device makers (Chinese and foreign), and live off dues. They are an interface to the Chinese government, do research (at reasonable rates) for their members, and can help companies through the ordeal of certifying their products and getting them approved by the SFDA. A VERY handy outfit if they can really do all that they say they can do. It was a nice meeting. They were all a little dismayed at the cost of MEDICAL INSURANCE in China. But said if they got sick, the insurance covered 85% of getting better. Bergers aren’t all China has borrowed from us. Obviously.

---

9:30 I met with Patrick Power head of the US-China Business Council in Beijing.

1. When you negotiate with the Chinese, pretend you’re talking to “Vinny” from New York City. It’s like that. They have no interest in “Win-Win”. They are interested in Win-Lose where you lose and they win. Clear enough?

2. Whereas you HAD to have a Chinese partner to manufacture here, that’s now only true in areas that are felt to be strategic to infrastructure by the Chinese government. So if you can avoid it, do. Your negotiations with your partner will be ongoing and endless and it sucks a lot of management time away. You want to spend your time making stuff and selling stuff and not wrangling with your Vinney-type partners. Exceptions exist, of course.

3. It’s a clichÈ that the Chinese will “trade market share for technology.” You bring in technology that they can use and really want, and they’ll throw you a bone of market share.

4. They want steel and scrap steel is very big. You got scrap steel, China will buy everything you have.

5. Call Mark Spitelnick on medical in China: 861 13501 086 128. He’s a former lawyer and works with David Wood. He knows a lot about medical in China.

6. Medical is highly regulated and there’s a lot of corruption in this patch. Be careful. Good news is that the hospitals want the imported stuff. The stuff that really does what it says it’s going to do and doesn’t break in the middle of an operation or whatever.

7. People, Americans, do dumb things here in business. Why? Because they think their Chinese partner or customer or vendor or whatever is a “nice guy.” One story he know of, an American shipped without L/C with the deal that he gets 30% in advance of whole shipment, 30% upon delivery, and 40% on consignment, i.e., after it’s sold by the Chinese distributor or whatever he was. The Chinese customer paid the 30% in advance of shipment, got the shipment, and completely disappeared. Not such a “nice guy” after all. He got high quality, American-built stuff at an effective 70% discount. Not a nice guy but probably a pretty rich guy. Probably has a place in Phuket and sends his kids to Ivy League schools in the US. “But, Patrick. Isn’t that a violation of the Confucian ethic?” “Not at all. You get to take care of yourself and those of your ‘tribe’, ‘kind’, whatnot first. The dumb foreigner is just a means to that higher end. Patrick asked some of these hapless American businessmen and women if they’d operate that way, for example, in a sale to a customer in Alabama. “Hell no. I’d get D&B info on them and talk to other customers and ask for their financial statements and get as much info as I could first. ”Well, dumb ass, why didn’t you do that with your Chinese customer???” (My words, not Patrick’s). “Cause he was, well, ummmm, you see.....” “A nice guy?” “Ya. Like that.” Nice guys finish first in China. Well, guys who seem to be nice.

There is a lot of window dressing here, as elsewhere. Nice office, beautiful receptionist, deep carpet, and the buyer or lawyer or seller or distributor or whatever may be weak, dumb, crooked, bad news. Same anywhere. So you don’t judge the chopstick by the paper wrapper. This is mostly for small and medium companies. The United Technologies and General Electric's and such have huge legal teams and lots of money and time and they can slowly smother those who wrong them ... .no matter how long it takes. And here a lot of things take a long time.

8. If you’re exporting, use an irrevocable letter of credit and have all your paperwork tight and right. Then you[‘ll be OK. NEVER sell on consignment. No control. You’re screwed before you start.

9. Remember the 1880s in the USA? The time of the “robber barons?” That’s now in China. It will settle down but now, everybody calls it the “Wild West.” ‘Cept here it’s the Wild East. THEIR Wild West is really wild. In a lot of places. But it will settle down. I probably won’t live to see it but my children will, God willing.

10. On US-Chinese Joint Ventures generally: “Same bed. Different dreams.”

---

Met with Marilyn Taylor at the Embassy’s commercial section in the Kerry Center in Beijing.

Marylyn is forty something, black, and a Ph.D. Could only spend about 20 minutes with me but she’s most impressive. Said that ANY high tech, cutting edge product could be sold in China. 100% chance of it being copied. Some firms, if they can, have a “black box” that can’t be copied. More sophisticated equipment might just be to hard or costly to copy. But most will be copied and sold in China, Japan, elsewhere in Asia, and around the world. If you manufacture it here, there will be a “shadow company” that makes the same thing, if they can. So sometimes most of the US product made here is made here but a critical part of the technology is added in the US. Without that, the thing doesn’t work.

Here you sell medical equipment and supplies to the government and not directly to the government. See notes on talk with Patrick Power.

China is selling heavily into ALL world markets with money, not just he USA, of course. And they are equal opportunity copycats. They’ll steal from anybody with a good product. And Marilyn said they didn’t know what to do about it. “So,, Marilyn, why come.” “To sell stuff. Come but be careful. And know you’re stuff will be copied. For sure.”

It’s the wild west. A phase. In time things may get better. Especially when protections are sought by innovative Chinese. But for now the world is China’s smorgasbord and she has a seemingly insatiable appetite.

Marilyn said there were a lot of bogus pharms made and sold here. They run the course in quality and it’s hard to know what works and what works a little and what doesn’t work and what can kill you. So powder to be mixed with water or milk for babies was toxic and killed a slew of Chinese babies. That got the government’s attention.... and it’s still a problem.

She said that after a woman has a baby, she is encouraged, but not told, apparently, to be sterilized. So if you lose your one and only baby to bad pharms, it’s devastating. She also said that only girls are permitted to be adopted in China. Not boys.

She had the government web site on her card and encouraged me to refer to that for the latest in IP or IPP issues. It’s www.usembassy-china.org.cn.

---

I’d been trying to get a meeting with Jerry Oliver who heads up Bechtel in Shanghai and parts of Bechtel in other parts of China. He’s very busy. But he did call me this morning. Wonderful fellow. No time to meet this time but we visited on the phone maybe half an hour. He’s been here with his American wife for five years. They like it but miss their grandchildren in Houston. I said, “Houston? You’ve lost your drawl completely.” He said he’s from everywhere. A lot of Americans are like that, I guess. Army kids or IBM kids or lots of other kids. We’re a modern Bedouin tribe. Modern Mongols of North America.

He said they do mostly turnkey plant construction for American clients here. They charge more because they build quality. They have a lot of “value added” stuff the Chinese firms don’t have. And experience and reputation and all that stuff. They have 8-10 major projects going at any one time.

He said the Chinese construction companies, the plant-builders and hotel builders and others are just interested in cost cost cost. So three-year old buildings look old and rust breaks out way too soon and cheap paint peels off almost right away and it really is a shame. When you get beyond the “Gee Whiz” facade of Shanghai, and look carefully inside a lot of these buildings, it’s clear this is still a third world country ... even here in showplace Shanghai.

---

Meeting with Charlie Martin, Head of the AmCham Bejing Office.

He says the IP picture here is “dreary”, or some such bleak adjective. There’s really no protection from it. Unlike his Shanghai counterpart, James Green, he felt if you had something useful to the Chinese, medical devices for example, you had a 20~50% chance of having it undiscovered, and thus uncopied, if you did NOT bring it to China. Otherwise they let you build a market, knock it off, and sell until somebody makes them stop. Still, he thought if they came with their eyes wide open, American medical device and other companies should definitely take a look at the Chinese market. He said regulation and certification of medical equipment and supplies were pretty stringent and clients needed to be patient about it.

If there are knockoffs, piracy, stealing of patented products, reverse-engineering, as surely there would be, it’s time consuming and expensive to seek redress. Not that you don’t do it, you just have to calibrate it so you don’t think it will take any less time or money than it actually does.

Interestingly he was definitive on what way to go lawyer-wise. Definitely get an American firm that has in-house Chinese lawyers and associations with good Chinese firms. It costs a little more but the Americans are a lot more up to speed on patents, copyrights, and intellectual property issues generally than their Chinese counterparts.

Besides the risk of having your stuff ripped off, and then the expense and time involved in going after the pirates in the Chinese courts, (where, remember, the aggrieved wins about 80% of the time ... so there can be some light at the end of that tunnel), Charlie mentioned:

1. Impediments to entry.

2. Regulation hurdles.

3. SFDA (State Food and Drug Administration) approval.

4. Knowledge of and use of marketing channels.

5. Stiff local and other international competition.

and probably some other things. “So”, I asked, “Charlie. Is it really even worth their coming here?” “Sure. That’s why everybody’s here. It’s a huge market. It’s just hard to crack.

On the subject of the Chamber itself, he said it was a lot like ACCJ in Tokyo. They have about 700 members, mostly American but some European, Japanese, and other members including Chinese representing American interests in Bejing. They have different committees on this and that. And the Chamber acts as one of the “foreign voices” to the Chinese government about foreign economic interests in China. Charlie knew almost everybody I’d met in Shanghai. The American community must be pretty tight throughout China.

He said maybe the greatest benefit of membership in the Chamber was for networking. People sharing each other’s learning curves with each other. It’s not so much a Buber “I-Thou” thing, “us agin them”. More like, “Hey. Tom. READ the guy’s business card next time. Don’t just throw it on the table.” “Oh. Ya. Forgot.” or “Tom, I sold Chin Li Quan some of our filters last month. He was telling me how the German grills over his engines suck. Maybe you should give him a call. You DID win the American Grillmasters Award for endurance and general excellence last year in Miami, didn’t you? I have his card. Give me a call. I’d be happy to introduce you either with a VM or an email message.” “Thanks, Ray. I’m on it. I’ll call you tomorrow.” Type thing.

----

I was asking him about negotiating with the Chinese and remembered his customers were American, Japanese, and Europeans mostly. But he said it was harder negotiating with the Americans and some other foreigners here because they didn’t understand some of the gruesome givens of building in China. So the first third of the talks had to be educational. You’re not in Kansas anymore, guys. There’s this and that and the other thing you have to do to get the quality you want here in China. You can get it but it costs. Bechtel won’t build crap so they limit their customers to those who want quality.

-----

I had lunch in Pudong with Jeffrey Wilson of Baker & Mackenzie who’s offices are in the Jin Mao Tower, the tallest building in Shanghai ... for now. A bigger one is going up pretty close by.

Jeff told me the word on the street is that tomorrow morning there’s going to be mass demonstrations against Japan in the major cities of China, including Shanghai. He said this puts the Chinese government in a bad position because they can’t really object to demonstrations against Japan, the grievances are real and supported by Beijing, but the government is very much afraid that the demonstrations may bleed into issues other than just Japan, like inequity of wealth in China; the “East-West” disparity. Also, one of the reasons that Shanghai and other coastal cities’ air is so (relatively) clean these days, is because Beijing dictated that many of the smokestack industries move inland, ostensibly to help share the wealth and clean up the coast at the same time. But what’s happened is that the dirty industries moved inland have created so much pollution on what used to be good farm land that it’s ruined the soil and the farmers can’t grow anything in certain places any more. And they’re angry. So demonstrations may bleed into those sorts of issues. And Beijing is scared. And when they get scared they get repressive. Further, it’s rumored that the demonstrators may decide to make a move on Tiennamen square (sp?) and that’s a very sore subject for the government.

I observed a little of the “demonstration.”

The “rioters” were about as well dressed, down-cheeked, and young and innocent as anybody you’d see at a Dick Clark dance. Some demonstration. Every once in a while everybody would clap or whoop. I figured this was a nothing demonstration and started to go. I passed this very cute young girl, maybe late high school or early university, who was holding an 8-1/2 by 11 inch page of paper with big block letters that said, “FUCK THE JAPANESE” and two pictures of Koizumi, the Japanese Prime Minister with simulated bullets through his forehead and blood coming out.

The inconsistency between the way the demonstration was going, a yawner, and the violence on this young girl’s paper, was almost alarming. I was tempted to take a picture of it but, again, showed a little horse sense and didn’t. Later Isabella, and others, were a little aghast that I’d slipped into the throng of demonstrators at all. They told me that sometimes a Chinese crowd can get very ugly, give vent to a lot of pent-up frustrations about a lot of stuff, and take it out on ANY foreigner, not just Japanese. You’d never know it day-to-day, but we’re not the most loved --- the most imitated but not the most loved --- foreigners in China. So maybe I got lucky.

Hong Yang, remember him? The head of the China Center at the U of M? He’s in town and had asked me to join what I thought he said was a largish contingent of U of M graduates here and the Chancellor of the U of M. Well it turned out to be Sam Schuman, Chancellor of the the U of M in Morris, Minnesota, his wife, a very nice Chinese consultant who’s studied at the U of M, and a very full figured young woman called Jessica who had lived in Bosnia, spoke pretty good Serbian, and was in charge of Sam’s international programs. Sam’s in town to drum up students who want to spend a year in Morris, population 5,000, 2,000 of whom are students at the U. Right. Well he and Jessica had been beating the academic bushes all day and candidates were dropping out of the bushes like overripe apples from a late autumn apple tree. He was delighted. I gave him my speech about how what he was doing was some of the most important work BEING done, bridging the gaps of ignorance -- them for us and us for them. He was visibly pleased to hear my mercifully short speech.

---

Dinner with my teacher during which he spoke of cultural aspects he hadn’t gotten to in formal session because he ran out of time. This isn’t business but it’s not unrelated to business.

Dining Etiquette:

1. Host sits in the middle facing the door. Senior guest usually sits opposite and rank of rest plays down from the center on both left and right. The person on the host’s right is very important.

2. You wait for the host to start eating. Then everybody can eat.

3. The host will sometimes serve you food. That’s OK. Don’t freak. Just take it.

4. If you don’t like the food, just eat a little. OK to leave most on your plate. You can give an excuse like you’re allergic to turtle guts or chicken beaks.

5. There will be several courses and you’re not expected to eat ALL of any course. In fact it’s best to leave a little on your plate, even if you really like a certain course. Leave room for more courses. And eat slowly. With your mouth shut when you chew.

6. If more than one course is set up, eat slowly but surely bits from each course in parallel. Don’t think sequentially here.

7. With chop sticks, don’t wave them, jam them into food, tap them on the table, or try to cut with them.

8. Don’t put your sticks anywhere but on the little stand they have for them.

On toasts:

1. If there’s only a small cup of liquor, you toast with that. If there’s wine too, you still have to toast with the liquor.

2. If you’re lower in status than the person you’ll be tapping glasses with, you tap the top of your glass about halfway down his. If you’re equal in status, or THINK you are, you can clink normally as we do in our classless society.

3. Sometimes after the toast, you can tap your glass lightly on the table before you drink. Or not.

4. If they make a toast to you, you get to drink too. Actually, you have to.

5. If you can’t or don’t want to drink liquor, best to tell the host that ahead of time so they don’t put you in a bad position by mistake. This is not a “torture the foreigner” exercise.

6. If you really don’t want to drink, and you haven’t wired the deal ahead of time, you can tell them you’re a mormon, a muslim, an alcoholic, or you’re taking medicine and are forbidden for health purposes from drinking. I’ve chosen to just tell them, I’m an alcoholic Mormon on prescription drugs incompatible with alcohol. If there are no follow-up questions, I’ll pretty much sure they either didn’t understand what I just said or are totally clueless about the inconsistencies of it.

7. Unlike Japan, a lot of business is done over meals in China. And a lot more in the Karaoke bars. In Japan anything that’s said under such conditions don’t count the next morning. In China it does.

8. Don’t talk about politics, sex, or ask very private questions.

9. You can talk about hobbies, food, drinks, history, philosophy, sports, save stuff.

10. If they ask you how much you make, you can lie on the high side. Don’t get mad. Just make a joke about it.

Note:A man who'd been to the islands became more and more linguistically agitated because he'd heard them called both Hawaii and Havaii. Next visit he asked around, "What's the right pronunciation?" Nobody could tell him for sure but one elder sort said he could go to Kawaii and there, in a cave someplace remote, he'd find an old, pure-blooded Hawaiian man of great wisdom who could answer all questions about matters concerning the islands. He found the old man and approached with great respect. "Oh, wise one. This has bothered me sorely for some time: Do you say "Hawaii" or is it "Havaiii?" The wise, old, elder smiled and said "Havaii." Much relieved the man thanked him profusely.The old man smiled again and said "You're Velcome."

When Chinese and foreign teams go out to eat and drink and Karaoke, there are always a couple of the Chinese who stay cold sober and take notes on what was said, no matter the state of the speaker when he said it. They have that for the next morning’s negotiations .... and they’re fresh, not hung over. So it would do well for the foreign team to also have a “designated alcoholic/Muslim/prescription drug-taker” who can duct-tape shut the mouths of the guys on his team, in between bouts of singing renditions of songs they don’t really know, who are dangerously in their cups.

8. Reciprocate and do it in kind. If they take you to a five star restaurant, you have to take them to a five star restaurant ... and not MacDonalds.

Note:

If there’s a lot of dining going on, make sure the quid pro quo is maintained. They think we’re all rich and are happy to have you pay all the time. So talk about who’s going to pick up the check ahead of time. They don’t do Dutch.

The home invitation:

1. If you’re invited to somebody’s house for dinner, bring a gift. They don’t care about heartfelt poems or you’re kid’s finger painting, they look at the market value of the thing you’re giving them. The more it cost you, the better they like it.

2. Find out ahead of time if he has a wife and/or kids. Then get something for her or the kid(s) instead of the host. They like that.

3. If you’re invited to a child’s birthday party, you are expected to bring a little envelope with some money in it. Not 100 Quai ($12) either. They want some serious money. I’d say 200 Quai would do it but that’s just me. Depending, it could be a lot more.

4. In getting into a taxi, the guest always gets in first, even though it’s not fair because then HE or SHE has to be the one to skootch over.

Meetings:

1. The biggest shot comes to the first meeting and its all about introductions and the history of the company and all that happy h-------t. No details. Nothing of real use gets done. They talk about China and the industry and the development of their company and on and on and on. You sit. You listen. You smile. You take your prozac.

2. After the first meeting you go to a big lunch or dinner. See above.

3, Wives are normally not invited to business meals.

4. Meetings are very long. Lucky wives.

5. It’s not uncommon to have to wait until maybe the fourth meeting until you really get down to the business you came to do. Could be earlier.

6. You can always ask for a break to caucus in private with your team. Don’t hesitate to do this. Just make sure they don’t leave some little note taker behind in the room.

7. Trust comes over a long time of doing business. Best not to trust anybody until they prove trustworthy. Or maybe not even then. Just protect yourself always.

Monday I had a second meeting with Jim Golson who handles medical and automotive for the commercial office at the American consulate.

On the whole subject of Medical devices, he said, sure, it’s hard to get it in and get it approved and keep it from theft. If, when you see piracy is occurring, you do the following:

1. Contact your Chinese-based American law firm.

2. He contacts his (relevant) Chinese allied firm. For example, Peter Neuman of Faegre would contact Fu Ming in Punong and he, Fu, would begin the process.

3. You contact Jim Golson or his successor at the consulate if the violation is in Shanghai.

4. The consulate writes a letter to the mayor. If the mayor is on the take from the offending party, you’re out of luck.

5. If you’re getting nothing from the mayor, you can write the governor of the province.

6. Finally you can appeal to the Beijing government but they’ll almost never do anything.

He repeated that spreading components of your product’s production out to various Chinese provinces and having final assembly either in a secure site in China or in the US is one way of protecting yourself. Or, if you have “black box” capability, i.e., all the “other” stuff is made and assembled in China but the heart of it, a critical secret part of it that makes the whole useful, can be added in the US. OR, he said, if it’s just too damn sophisticated to be copied and sold successfully, they won’t bother.

I said that if it were only losing out on X% of the Chinese market, then American companies wouldn’t be so frightened of coming here but they worry about counterfeits being sold into their critical and home markets. Golson said in that case you have customs nail them on the way in. That happens and is effective.

He mentioned also to study the “IPR” toolkit.

Asked about how an American company that wants to manufacture here gets started, he said only about 7% “out source” within China. Fully 93% set up their own manufacturing facilities here. I said that could get expensive for the smaller companies. He said that it’s become a common practice for such companies to lease space from established (American or other foreign) firms that have excess space. Good for everybody.

The company wishing to set up here would check out, or have checked out by somebody like me, the 5~6 “investment zones” here in Shanghai or any of the many others in various provinces and cities all over China. Probably where they can “piggy back” on established firms.

There’s another problem concerning medical equipment specifically that he brought up. Seems some time back, the Shanghai government had begun a system of “tendering” or setting ceiling prices on medical goods. Sometimes the prices were unrealistically low and gave vendors no incentive to be in business here. Medtronic in Pudong, apparently, was one of the prime movers in getting the policy reversed. I told Jim about meeting the former head of Medtronic’s Brazilian operation in Sao Paulo who, because the Brazilian market could not conform to Medtronic’s ethical standards of doing business, had to dismantle their operations in Brazil. Medtronic abandoned the Brazilian market. If the government here makes it unprofitable to do business here, companies like Medtronic, that hire a lot of Chinese, will just leave. That was a sobering enough thought to change policy in Shanghai.

However, strangely, there is a new initiative by Beijing, the central government, to impose tendering again in eight different provinces. It’s a major threat to every medical equipment and supply company and seems doomed to fail. It’s massive foot shooting on the part of the government. While the old and only partially dusted off banner, “From each according to his ability to each according to his need” may sound good to the masses, (in that case, Czarist Russia), it just doesn’t play in a modern free-enterprise economy. Wish it did. It don’t.

He also made the point that while Shanghai is host to a variety of good medical equipment makers, if a company is playing big league medical here it needs an office in Beijing to guide the company through all the regulatory and other hoops the government presents, most quite justifiably, for products that affect the human body.

I asked if my instinct to come here was good. He said Shanghai was ahead of the curve in China. It has a very skilled workforce, good transportation, better air than some places, and a sophisticated government that often looks out for the foreign investors. Coming here was a good idea. It’s not really China but a symbol of what China could become.

James Duncan Otis

Principal

Otis Associates, Inc.

International Business Advisors

612 308 7246

duncan@otisintl.com

May 3, 2005

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