Over the past few months I’ve had the unique opportunity to visit over 200 factories in South China. I’ve been to small factories that employ 100 people, and I’ve been to large factories which have over 100,000 employees. These large factories are amazing; they are almost self-sufficient cities, complete with on-site restaurants (yes, multiple restaurants at the same factory) and hotels (some of them are even “4 star”). All of the factories provide housing in the form of employee dorms, which generally aren’t much to speak of (picture available here).

There are vast differences between the large, medium, and small factories. These include things such as productivity, warehouse storage, and cleanliness. I think I have been to only 2 factories that would pass as clean in North America, the rest, well, you probably wouldn’t step foot on the premises.

But this isn’t about the differences in factories or the advances of technology in the factories. Instead, I’d like to share some observations about two small factories I have visited.

The first factory is a small factory, employing somewhere between 400-600 employees (which would technically be a medium size business in the West). When I showed up at this factory, there were farm animals (chickens, a goat, and some dogs) running around the grounds and in and out of the factory. I started walking around the factory, and went to the two on site warehouses. There was only one shipment ready at this factory. Finished products, packaged in master cartons (which is a fancy way of saying brown cardboard boxex) were stacked on empty paint cans with a few 2×4’s added for support. The boxes were stacked 9 boxes high, which was about 12 feet in the air. The product was a children’s toy, so the rows of product were obviously not the sturdiest structures ever created, yet the factory employees climbed up a shaky ladder and walked around on top of the boxes – amazingly no one fell off or got injured. The warehouses were not big enough to hold all of the boxes (approx. 9000), so the factory had to resort to storing the rest of the items in the actual factory.

I ventured into the factory, which was a 6 story building, with each floor approximately 4000 square feet. I went to each of the floors to look at more products – the factory had utilized a majority of the factory for production, so there was very little storage space on each floor.

On the first floor I found myself walking through lanes of plastic moulding machines. Beside each machine was a rickety wooden stool, and on each stool was a factory worker. These machines were very loud, but none of the workers wore any type of face, eye, or ear protection (a certain requirement in the West).

I then took an elevator up to the fifth floor, which was a treat in itself as the elevator was in dire need of repair. Upon arriving at my destination, I walked through the doors and was struck by a very strong smell. I had arrived at the paint floor, which is where the product was painted. All of the windows were closed, and there was little to no ventilation – a room of paint fumes. There were probably 75 people on this floor, yet only 20% were wearing any type of protection – the SARS type masks, which probably aren’t adequate to stop an individual from inhaling paint fumes for 10-12 hours/day. As I walked through the rows of painters, I noticed that everyone was sitting on the same wooden stools. Half of the people were using spray guns to paint the toys, while the other half were using a combination of paint brushes and a cardboard cut-out to ensure only selected regions received paint. I also saw three people who were paintings with bags, in an eerily similar resemblance to shake’n’bake. The process was as follows: Find a bag, dump some paint into the bag, throw some plastic into the bag, and shake until coated. I saw a huge pile of used bags in the corner, with wet paint dripping out all over the place.

The second factory probably employed somewhere around 100 people, and was about 6000 square feet in total (including land). This factory also had chickens and dogs running around. There were no multi-story buildings here, just a few barn-type structures. There was no paint room, instead the items were strung up on a wire outside, and spray painted the desired colour – the ground was covered in paint, and I wouldn’t be surprised to find many other chemicals spilled there as well.

What is unique about the second factory is that it was surrounded by farm land (albeit very small), with live crops growing. There was a small stream that ran throughout the farm land and around the factory – it was obvious that the plants obtained hydration from this stream. As I left the factory, I looked at the stream, and the water did not look that clean. I saw three five foot long sections of water, one bright red, one bright green, and one bright blue – paint had been dumped into the stream, and lots of it! Keep in mind, this same stream was used to hydrate the crops in the nearby farm – in fact portions of the crops had their roots positioned directly into the water.

As you can see, some of the things in the countryside are not that glamouress. There is little to no education for many people who live here, the wages are very low (less than $100/month), public health is unheard of, and health and safety is non-existent. When most people think of China, they think of Shanghai, Beijing, Guangzhou, and even Shenzhen – these are the first class cities, the most prosperous cities. Unfortunately these cities barely make up 1/13th of China’s population – the majority of Chinese people live in second-tier cities, third-tier cities, and the country.

The major retailers in the Western world say they care about where they source their products from; they ensure a “strict code of conduct” at all factories they purchase from in order to make sure that only the best practices of employment and safety are used, but as can see from the above examples, the enforcement of these rules doesn’t always happen. While retailers may make their best efforts to ensure good practices in the factories, most of the time they are unsuccessful – whether it is from a lack of knowledge, a lack of education, or a case of indifference is up to you to decide.

Note: While there are solutions to some of the problems I mentioned above, these are often very complicated to effectively implement. All is not doom and gloom though, as there are a few companies that are enforcing rules and implementing solutions to fix the many issues mentioned above..

If you ask anyone who has a basic understanding of China what a business needs in order to succeed in China, that person will probably tell you that you need the right “connections”. Connections are important in China – they can help you get permits for your business, help you find a location, and can even help keep corrupted individuals away from your office (saving you from paying unforeseen “taxes”). In the past, connections were everything in China – if you had the right connections, you had it made, and the dollars would soon be rolling in. While connections are still important today, the importance of these “connections” are shrinking (this does not mean that connections are irrelevant; having the right “connections” is part of what China is about).

I was recently talking about how culture is important, and how eBay never really understood the culture aspect of China. I then saw this amazing article on why eBay failed in China. The article states that while eBay may have had all of the right connections, it wasn’t enough to guarantee success. In the new China economy, having connections does not produce sales (but it is still required because it helps to create the platform you need to generate sales). Instead, the right business acumen results in sales – you need to be able to market and sell your product to your target audience, setting up a store and putting a clerk inside will not get you sales!

The article goes on to say:

Consumers don’t buy a Motorola mobile phone, Estee Lauder lipstick or a Coach bag because of the political connections the MD of China has – they buy because of the style, price, and distribution. The same reasons consumers in the US buy products. When was the last time you heard someone say that they will buy a flashlight at Target because the owner knows the grandson of General Patton? Any firm that places undue reliance on connections to make money will ultimately lose money in China . Many MNCs entering China hire supposedly well-connected people or engage consulting firms with “connections” and seem to think that is enough.

It is odd that so many smart people lose their heads when it comes to investing in China . Don’t forget the 4 Ps [price, promotion, product and place] from business school!

eBay’s problems in China had more to do with a lack of understanding their customers than in not having political connections.

The eBay situation reminds me of a conversation I recently had. I heard a story about a local Chinese person who saw an opportunity to open a store. The individual opened the store, stocked it with product, and waited for the cash register to start ringing. The owner waited and waited for the customers to come running through the door, but no one ever did. Sure enough, several months and a lot of wasted capital later, the store closed. The reason the store closed was simple, the owner never marketed the product or business – no one knew to come there, and more to the point, there was no differentiation between the product and the competition (there was a ton of competition in the neighbourhood).

In China there is competition wherever you look, whether it is 40 online rivals, or 30 competing stores located within 1 km of your location – businesses have to work hard to figure out how to not only promote their product/service, but also how to differentiate it from the competition. It doesn’t matter if you are a multi-billion dollar company like eBay, or a small store trying to make ends meet – the new Chinese economy is no longer just about connections, you have to be able to sell yourself too.