The Truth about Trading with China
Working
with the Chinese, I found to be one of the most difficult transactions
of my career in international business. In 1970, President Nixon went to
China to open up the PRC to international trade. More importantly,
China was seen as a huge market for US Made products, and an incredible
source for cheap labor to benefit US companies. However, instead of
traditional bargaining the PRC turned into a giant juggernaut utilizing
one-way trading for its own benefit. The PRC does want to trade, but
only on their terms. The PRC government bought US products and allowed
foreign manufacturing, but only if the PRC maintained controlling
interest in any joint-venture. They also took foreign products and
placed governmental priority and money in replicating those foreign
products. Sometimes resorting to hacking as in the case of Boeing or
allowing copyright infringements without any penalties until some
foreign company complained.
Just a little background. In my career in international business, I
have had the privilege of working with some great people. Working for
several companies, I gave thousands of quotes for US manufactured
products and negotiated with many foreign nationals. In the USA, when we
speak of purchasing or selling negotiations there is usually one
representative from each company, two people, but no more than four
people, sitting at a conference room table, with thoughts about
products, price, quantities, delivery, freight and insurance from
warehouse to warehouse. An amicable agreement is met with possibilities
of an ongoing relationship.
For that reason a win-win compromise is reached and
sometimes an exclusive contract is forged. Both sides benefit, business
cards are exchanged, a verbal or written contract is reached.
South Americans are much the same, but less formal. It is also
helpful to know their language, customs and culture, but there is
forgiveness if you do not. I was exporting automobile radiators to
Argentina. I met the the importing company’s representative in
Houston. I was President of the Houston World Trade Association Young
Executive Group at the time and there was a private restaurant/bar at
the top of the building.
We made a deal over dinner. It was simply automobile radiators, a
verbal agreement, freight forwarding documentation settled, payment by
sight draft.
Again a win-win agreement that satisfied both parties. Although, I no longer send products to Jose’s, company we remain friends.
Europeans are more formal, usually there are four or five people at
the conference table, followed by dinner. It is also helpful to
understand their business laws, language, customs and culture. Often
business practices may be regulated by the government as in Germany.
Europe, because of the higher population density, has more environmental
laws than in the USA. An importer for North American made automobile
parts and I met to discuss a written contract. This was in Frankfurt, he
was interested supplying parts for new and aging US built
mustangs, corvettes, jeeps, and a sundry of motorcycle parts. This time
five of us discuss products, quantities, pricing, currency exchange
rates and delivery Cost Insurance and Freight (CIF) from warehouse or
manufacturing plant to their appropriate warehouse. We have a
multi-million dollar contract and a win-win agreement was negotiated and
understood for future business on both sides. Our payment will be by
Letter of Credit, later changed to bank wire, An appreciation is shared,
telephone numbers are exchanged for future reference. This type of
negotiation can last several days, usually three to five (3-5)
days. Shorter if everyone understands the deal in advance.
It is a always a win-win agreement.
Japanese businessmen are super cordial and very hospitable if you
go to Japan. They make every effort to make you feel welcome. However,
business is business and negotiations, though friendly, are always about
the best deal. It is good if you have someone on your side from your
company that speaks, reads and writes Japanese. At the table there may
be two executives from the US and seven to eight Japanese, an executive,
an accountant, an engineer, a production manager, a marketer, an
interpreter and maybe others. All of them may speak English, but much
info all is spoken through the interpreter. The negotiations, for the
Japanese, often revert to speaking in Japanese in discussing the content
of the deal amongst themselves and how this deal can best work for
them. There is no malice, however, it may leave you looking for more
information on what they are discussing. Our negotiation for Oil Field
equipment lasted six days, they had some labor issues, we had some
delivery issues. We finally decided on FOB Port of Los Angeles and sight
draft payment.
Negotiations were tough, but it was a win-win, profitable for all.
I usually like to open s conversation with a compliment. The
Japanese will politely smile, bow and shake your hand (shaking hands is a
western custom). The Chinese don’t seem to be on the same
wavelength. They are generally looking for a one-time deal (This would
be similar with the Russians, although Russians have a sense of
humor). The Chinese are always looking for the advantage, they will
bring twenty-six (26) to thirty (30) people to your conference
table. They will also go to your competitors and play one against the
other for the lowest possible bid price.
The Chinese operate from the “I win” principle always.
As an example, when I was a junior executive, the Chinese
approached Hydril, a manufacturer of a unique, highly engineered
mechanical product called a Blowout Preventer. This is to prevent oil,
under extremely high pressure from escaping out of the ground. These
blowout preventers may be used on land or in the ocean. In this case the
Chinese were looking to build and complete three oil rigs in the South
China Sea.
Besides Hydril in Houston, the Chinese also visited Cameron in Houston and Shaffer, in New Orleans.
The only three manufacturers of blowout preventers in the world. The
specification for six 10,000 psi blowout preventers and additional oil
field equipment piping was made. Hydril’s bid was accepted. Then I went
back to check the numbers. Hydril was actually losing money on this
deal. I renegotiated with our piping supplier to lower his cost by five
(5%) percent. That was it. Hydril could possibly break even. It was
still up to the transport cost FOB port of Houston. Yet, it was the
largest international deal that Hydril had ever made at that
time: $3,000,000.
Today, if you check Alibaba, the Chinese manufacturer's internet
product showcasing website (think Amazon), you will find blowout
preventers for sale.
Ten (10) Chinese suppliers have copied the Hydril designs for
American engineered blowout preventers. And yes, they have good steel
and can sell the blowout preventers at a considerably lower cost.
China, Russia, North Korea all want to use the “I win” strategy of global trade. The
end goal for the Chinese government is to economically dominate the
world, so that they can globally control their interests. The US balance
of trade is already $300,000,000,000. or more in favor of the Chinese.
The USA currently (March 2019) owes the Chinese $419,000,000,000. or more plus interest.
This is like a limitless credit card, where you keep on charging. It is
in their favor because the Chinese government supports this imbalance
and Americans are captive to their pricing. The Chinese can afford to
peddle their influence, building highways, an electrical and
communications systems for African nations in exchange for their
minerals and oil. They can afford to buy property and hotels, anywhere
they want. They can afford to build military islands on top of coral
reefs, with airstrips and missiles in the South China Sea capable of
threatening Taiwan and the Philippines.
By 2022 you will be able to buy Chinese cars in the USA. They will
be employing the same strategy as Toyota, Honda and Nissan from Japan in
the 1960s and South Korean Hyundai in the 1990s, to storm across the
Pacific to our shores. #Geely Motors owns Volvo, however, Geely is a
private company.
There are 20 government supported car companies like
Zotye with their T600 compact car that we will soon see in the US. The
“Big Six” (which have government backing): SAIC, Beijing First Auto,
Dongfeng, Guangzhou, Changan (and Zotye) currently have 66% of Chinese
sales, and are waiting in the wings.
On 1 July 1997, Hong Kong was handed over to the People's Republic
of China by the United Kingdom. Hong Kong was always a frenzy of western
and British influence. One could find all items of clothing and much
more readily available for import. Free enterprise was at it best in
Hong Kong. However, in 2016, the Chinese government reversed its
direction on free enterprise in favor of state controlled business and
industry. Today if anyone in Hong Kong boos as the Chinese national
anthem is played, they can receive three (3) years in prison.
In 1970 President Nixon opened China as a trading partner and gave
the a “Most Favored Nation” status. Giving the US and China advantages
such as no trade tariffs or duties on imported goods from the other
country. China is still insisting on these terms, but now the balance of
trade has totally tilted in their favor. If both sides create new
tarrifs, that will mean additional hardship, not only on Midwestern
farmers, but it will increase prices for all citizens increasing our
cost of living. In addition this will contribute to added inflation and
national debt, which is now risen almost $3 trillion dolaars in the last
two years to a staggering $22,000,000,000,000. That is $22 trillion in
the red, from a positive balance of of several billion dollars in the
black in 1998.
This has become a trade war, not with competing industries, but with competing ideologies. Communism
vs. Capitalism, a government controlled state economy vs. a
people/citizen directed free enterprise economy. Should a western
corporation wish to establish a plant in China, the Chinese government
insists on at least fifty-one percent (51%) ownership more majority
stake, with all engineering, R & D, and management shared with the
Chinese management loyal to their government administrators. Also
remember, China is a country armed with Russian nuclear weapon
technology. Not that a nuclear conflict could be immenent, but China is
THE nuclear power in the region and can defend its territorial
interests. Hopefully, we are not heading for a showdown and can mutually
negotiate our differences.
Personally, I would prefer to work with countries that need our
business to build their infrastructure like Vietnam, Malaysia,
Singapore, India, Pakistan, Indonesia, South East Asia and South America
when ever possible.
The key to building a relationship with factories, industries, governments and regional economies is mutual respect. To
counter cheap Chinese labor, the USA should use its regional advantage
to build economic relationships, factories in Mexico, Central and South
America. The USA should also be strongly supporting democratic countries
that believe in free enterprise throughout our the world.
