Business-to-business (B2B) is still a relatively novel concept in sourcing from China, as most payments are still made via more conventional methods, i.e. bank transfers and Letters of Credit. As Bill Dodson writes at This is China! Blog,

For most companies in China, the websites are little more than brochures for brick-and-mortar operations that provide a service or product that is paid for in ways other than the internet. B2B in the form of e-commerce has been more difficult to monetize - especially in China - because the products on offer have to go through a manufacturing process that may or may not involve design, testing and quality checks.

In addition, international transactions are further complicated by currency conversion issues:

A company cannot simply wire money to a Chinese bank if the supplier does not have a foreign currency account at the bank. The supplier also requires permission to convert the payment into RMB that the bank will hold in the company's RMB account. Such complexity and sophistication are beyond the reach of most suppliers, which are miles away from banks that likely do not support such services in the countryside anyway.

Alibaba's Alipay, originally created to support online auctions at Alibaba Group asset Taobao, however, is China's first attempt at an online payment system, and portals like Alibaba and Made-in-China are increasingly inserting themselves in online transactions between buyers and sellers. Alibaba this week also announced plans for a partnership with Intel to launch a special B2B computer to meet the e-commerce demand of small and medium enterprises in China. The computer will be embedded into Alibaba's e-commerce platform for SMEs, and is expected to be released within the year.

Yet as China's B2B industry grows rapidly and as China expands domestically and internationally, certainly there is room for more than one Alibaba? So concludes Seeking Alpha, while profiling e-Future, a player that is growing at an exponential pace in the B2B industry. In less than one month, e-Future has launched two new websites to go along with its www.99114.com.cn, and as Seeking Alpha reported in March, for the duration of last year e-Future grew by 79%, making it a veritable cash cow due to the fees the company obtains for software contracts provided to customers.

See also Source Juice: Importing over the Internet? Challenges, opportunities, and hedging your bets!

It is now well known that the famous - and hitherto unanimously considered cheap - China price is inexorably inching upwards. In fact, everything in China is going up, from yesterday's estimated earthquake death toll to manufacturing costs to wedding costs and of course, inflation. As China gradually moves up the value chain, however, despite the odd snow storm and earthquake, the inevitably rising China price is detrimental to China's status as the best country for low cost sourcing, compared to emerging opportunities offered by countries such as Vietnam, Turkey, India and others in Central and Eastern Europe.

In a survey for the American Chamber of Commerce's annual white paper, more than two-thirds of member companies agreed last month that China was losing its competitive advantage in global markets due to rising costs, Industry Week reported. The top five business challenges in China were listed as human resources constraints, inconsistent regulatory interpretation, unclear regulation, lack of transparency and bureaucracy. Industry Week earlier this month reported on a recent study of foreign manufacturers in China conducted jointly by the American Chamber of Commerce Shanghai and management consulting firm Booz Allen Hamilton, which found that 54% of companies manufacturing products in China agreed that China is losing its competitive edge to other low-cost nations like India and Vietnam, yet 83% intended to maintain their current operations in China despite the rising costs of manufacturing.

While China is supposedly struggling to hold on to its prime position for cheap low cost country sourcing, new importers often do not realize the full impact of hidden costs of customs and shipping until the first order from China is complete. At Smart China Sourcing, Dylan Blankenship outlined what items need to be included to calculate total landed costs, and how to minimize these. A quote from a factory in China is only the beginning of the calculation, and it is important to clarify the exact terms of sale and what charges are the responsibility of each party, factory and buyer. Smaller importers can often pay less by negotiating to ship containers under a bigger importer's existing contract, helping them to meet their shipping quota. Additional costs may accrue, however, from relevant duty costs, courier/postage of original documentation, customs broker coordination fees, and 'last mile' providers that deliver to the final destination.   

Note: The following is a guest posting by Bradley A. Feuling, CEO, and Yi Kong, Vice President, Supply Chain Operations, Kong and Allan.

Procurement from China is growing. The $1.7 trillion USD or 12.33 trillion RMB produced in 2007 for export provides strong evidence. With increasing manufacturing for foreign and local consumption, new companies are sprouting up. In many regions, we find companies that are untraditional to the historic capabilities of the area. This is just one factor to take into account.

Example: Suzhou
Consider Suzhou in Jiangsu province. Historically, Jiangsu, Zhejiang and Anhui were known for light industry manufacturing such as fabrics and textiles. Automotive manufacturers are now entering what was once silk alley. The difference in local capabilities impacts skill development and material handling processes. Chery automotive in Anhui represents one exception.

Other regions in China
Traditionally, the northeast region focused and still does on heavy industry manufacturing. For automotive, steel, and oil buyers, strong sourcing partners are located here. Currently, the region has experienced slower economic growth, although First Automotive Group provides a developed supplier network.

Shandong province, between Beijing and Jiangsu province, was agriculture based. Many smaller companies have developed in Shangdong, yet the larger supplier bases are linked today to the electronics industry with Haier and Hisense.

Moving south, are Guangdong, Hunan, Yunnan, and Guizhou. Guizhou and Yunnan are known for liquor production, Mao Tai being a famous manufacturer. Guangdong, with its proximity to Hong Kong, became the first area for export-focused manufacturing. Many foundational industries required low-skilled labor such as furniture and textiles.

In Central China, there are Shanxi and Sichuan. Sichuan was a military equipment manufacturing center, also serving the wine and liquor industries. Today, electronics suppliers are developing with the growth of Changhong.

Lastly, we look to Inner Mongolia and in the west, Shaanxi, Gansu and Xinjiang. Inner Mongolia was a livestock -based economy. Today, the province is best known for dairy manufacturing. Western China was and still is the raw material resource base of China: iron ore and crude oil. Currently, the Central Government is influencing the movement of manufacturing to the west. Although investment has been high, a developed society mentality has yet to take hold.

Offsetting risks
The risks are numerous to manufacturing products in an area historically not known for specific production. Knowledge and education of product specifics must be understood therefore training costs will be higher. Material management and handling procedures must be analyzed. For example, automotive logistics capabilities in northwest China will be stronger compared to Shanxi, although suppliers may exist. Also, understandings of western sense of service and practices in dealing with foreign companies will reduce certain risks. Regions along the east of China will offer a greater number of sourcing partners who have experience working with foreign buyers.

Bradley A. Feuling is the CEO of Kong and Allan, LLC, based in Shanghai, China. Kong and Allan is a consulting firm specializing in supply chain operations and global expansion. Yi Kong is vice president, Supply Chain Operations.

Asia News Network recently profiled Zheng Xiaoqiong, an acclaimed poet and rural migrant worker whose works strongly feature images of iron. Life, she says, feels just like a piece of iron; working iron machines in Guangdong 'left physical and mental scars on her and her co-workers', and Zheng now utilizes iron's sense of 'shrillness and toughness' in her poetry. A former clinic assistant from Sichuan, Zheng made the trek to Guangdong and after a few months of 'hideous experiences' finally settled in a factory making metal tools. Writing her first poem while recovering from losing a fingernail on the assembly line, Zheng subsequently published volumes depicting the hardships of migrant workers. While being criticized by some for 'coarse language, naïve devices and disorderly arrangement',  Zheng says she draws inspiration from the 'rhythm of her heart' and from a force none other than rock 'n' roll, paying 'close attention to the beats.'

Iron and metals are quintessential images of how China's landscape has been made to dance to the tune of industrialization. In its recent investigative series on China entitled Choking on Growth, the New York Times outlined how China, intending to re-create the West's industrial revolution, has not only become the world's factory but also its smokestack, absorbing

most of the major industries that once made the West dirty. Spurred by strong state support, Chinese companies have become the dominant makers of steel, coke, aluminum, cement, chemicals, leather, paper and other goods that faced high costs, including tougher environmental rules, in other parts of the world.

Yet while the mass shift of industrial production has brought environmental and public health concerns to the fore in China, its factories produce and export many of the goods once made in the West, enabling many wealthy countries to decrease their carbon emissions. Emphasizing the unsustainale nature of conventional models of development in China, Dale Wen at China Dialogue this month drew attention to the way China's desire to attract industries has resulted in highly-polluting Western companies receiving special treatment in China, while the environment is played off against maintaining cost advantage. This situation, she says,

has directly led to the environmental crisis that we now see in China. It also enables developed countries to plunder these late-developers [i.e. China]... (R)esource-intensive, highly-polluting manufacturing industries have been transferred to China by developed countries, China is not just the workshop of the world - it has become its kitchen, sewer and rubbish tip.

The countries of the west, according to Wen, are the real 'bad guys', as are large corporations damaging China's environment in their pursuit for wealth.

And with high demand there's a lot of wealth to be had in China's mining sector. In the words of The Economist,

In recent years, thanks to China's rapid industrialisation and its voracious appetite for metals, mining companies have also produced mammoth profits, boasted gigantic valuations and undergone a series of outsized mergers and acquisitions.

The mining sector has recently been drastically altered, however, with the emergence of a major Chinese player, the state-owned Chinalco, which bought a stake in leading Anglo-Australian mining company Rio Tinto. In the estimation of Reuters, the new Chinese upstart is likely to do business very differently from the established companies, 'increasing supply by rushing through riskier projects to feed China's voracious appetite for raw materials.'  One of these is copper, of which China is the world's largest consumer, using an estimated 4.5 million tonnes of the metal a year, or about a quarter of global production. During China's pre-Olympic building boom, high demand has led to organised gangs in Australia stealing copper cabling worth millions of dollars and selling it to China, resulting in train delays and pilfered power cables and phone lines. A large part of copper in China is used domestically as China develops its power infrastructure, yet a lot of it is also exported in products like power cables and air-conditioners. China's copper imports fell 5% in February, however, and on the back of the slowdown in U.S. export orders, Chinese metal fabricators face a lackluster outlook for the second half of 2008.

As China ultimately faces the prospect of being the world's factory, its smokestack, its kitchen, sewer AND its rubbish tip, it resembles Zheng Xiaoqiong's estimation of life as no more exciting than a piece of iron. And while reciting her lines over some rock 'n' roll beats (always a light in dark times), Zheng might well have come across this song by Chinese rock band Second Hand Rose (二手玫瑰),

They've driven me to be a model worker
They've driven me to be a businessman
They've driven me to be a poet
They've driven be to be a worthless man

Let the farmers be the first to strike it rich
Let my pretty people be the next in line
Let my servants be the first to strike it rich
Let my artists be the next in line

A crowd of pigs take to the sky
A mob of pirates drown on a beach
They've turned my son into cold hard cash
Flowers bloom, then wither on the river bank

(Thanks to paper-republic.org).

[For continued coverage on the mining sector see the Metal Miner blog]

In what could have been a regrettable case of unintended double meaning, or 双关 (shuang guan), Chinese officials last week delivered news of how suspicious, inflammable liquids in an aircraft toilet nearly facilitated a terrorist attack. I would not be so presumptuous to assume that the toilets on China Southern Airlines are unusually unpleasant places (see for instance Mutant Palm's expose of the airline, blocked on mainland), but in my experience toilets on public transport in China are generally places to enter with extreme caution (except perhaps on the all-new 300 k/m per hour bullet train between Tianjin and Beijing. As a resident of Tianjin, kudos to the Ministry of Railways for making my journey to Beijing soon only 30 minutes, short enough likely not to need to go).

The suspicious liquid on the China Southern Airlines flight from Urumqi to Beijing, however, turned out to be gasoline (a particularly suspicious liquid indeed), which, the story goes, someone had been carrying around with ulterior motives. Yet one would think China Southern Airlines were happy in the end to pocket two cans of gas, as the consumption tax on imported fuel was raised by more than four fold on March 5 as part of efforts to limit energy use.

This is not the first incident involving suspicious liquids (especially the flammable types). When a British Airways Boeing jet crash-landed in London in January this year, and it turned out it had departed from China, quality fade expert Paul Midler smelled a rat. With suspicions of contaminated fuel and the possible presence of water in the tanks raised by the crash investigators, Midler thought somebody on the ground could easily have replaced 1% fuel with water, which could be a tidy saving of $2,000. So that's quality fade applied to gasoline: a very suspicious liquid.

With its commercial aviation market booming, China doesn't need a lot of water-tinged gasoline. The country's leading manufacturer of helicopters declared early this year it will be focusing more on developing civilian aircraft to cash in on growing demand, and China is also developing its first passenger jet, the ARJ-21, produced by the country's biggest plane maker, the China Aviation Industry Corporation I. Attempting to break into a very competitive aviation market (forecast to need as many as 3,400 new planes globally in the next 20 years) the 70-90-seater aircraft was showcased in December and delivery to the first customer is expected later in 2009. (The plane's chief designer, Wu Guanghui, sounded a hopeful note in the People's Daily last week, saying a total of 171 ARJ-21 jets had received internal orders, and talks were underway with foreign customers).

Its uncertain, however, whether ARJ-21 is going to keep pace with Great Wall Motor Company, the largest producer of pick-up trucks in China. Great Wall is clearly extending its boundaries and told People's Daily on Wednesday it expects to sell 55.7% more pick-up trucks abroad this year, especially in North America and Europe, exporting a total of about 80,000 units. In December it was reported that China's motorcycle exports reached 7.27 million in the first eleven months of 2007, up 22% over the same period in 2006.

Some of these have really rocked the world of a few villagers in Laos, where (the New York Times reported in December) fruit farmers in the steep hills above the Mekong Delta have been able to purchase cheap Chinese models to transport their produce to the market at the local city of Luang Prabang. And where before improvised bamboo stretchers were the quickest way to get to hospital, the Chinese motorcycle has literally meant the difference between life and death for some. Until, that is, your Chinese bike starts developing maintenance problems, which (as the article put it) was a commonly heard complaint affecting the enthusiasm for Chinese goods. People with money, one local mechanic explained, buy Japanese motorcycles, but at least the influx of Chinese motorcycles (which usually need an overhaul within three to four years) has been good for mechanic shops in Luang Prabang, increasing from only a few a decade ago to more than 20 today.

The motorcycle mechanics in Bangladesh, where Chinese motorcycles are set to enter the market from this month, must be looking forward to the prospect.          

For a fare twenty time more expensive than the ordinary fee, a five-star hotel on wheels will from September this year offer the most luxurious train in the world for the journey between Beijing and Lhasa, complete with a sightseeing car to take in the view on the 'roof of the world.' A few more affluent visitors might well be useful, because according to an evaluation of comprehensive economic competitiveness among China's 31 provincial-level administrative regions in 2006 (released this week by China's Overall Economic Competitiveness Research Center), Tibet finds itself at the bottom of the list, along with other western provinces like Xinjiang, Yunnan and Gansu. Topping the list is highflier Shanghai (with the bad luck that it might find itself inundated by ocean water by 2050 when global temperatures are expected to rise by 2 degrees), where residents have recently been competing very effectively to induce the local government to delay construction of an electromagnetic train line until next year. FT.com reports on mass protests by residents whose flats are situated near the planned track as becoming an important test of the potential for political activism among the new middle class, especially residents of the wealthier cities who have acquired their own property. For all their efforts, the people of Shanghai may soon be able to indulge in Asia's third Disneyland as the city's mayor this week announced plans to build the theme park right in Pudong - the cradle of China's reform-era industrial leap.

The arrival of the full Disney cast in Pudong forms a poignant juxtaposition with Nanjie village in Henan, China's so-called utopian communist village (where workers supposedly go to the factories as equals every morning to the tune of "The East is Red"), and Dazhai village in Shanxi, home of the famous 'Dazhai spirit' of self-reliance and selfless devotion, later renounced during the Cultural Revolution and now a renowned patriotic tourist destination with its own brand name and newly-built Buddhist Temple. No such luch for Nanjie, though. Global Voices Online translates a review by Chinese blogger Xiong Peiyun, declaring the 'Nanjie myth' to the 'broken' and the model village utterly bankrupt. When village director Wang Jinzhing died in 2003, according to Xiong, a full 20 million Yuan was found tucked away in his office.

The obvious gap in access to wealth and instances of corruption have made inequality a serious topic in China. While not supposed to make important decisions, China's National People's Congress (currently in the midst of its annual session) can illustrate the government's two main policy concerns for 2008 which, according to FT.com, consists of taming inflation (which hit a 12-year high of 8.7% in February) and improving the workings of the central government to better facilitate protecting the environment (see Washington Post's article on supposedly green solar energy firms leaving waste behind in China, where the push to get into the solar energy market is having unexpected consequences) and reducing inequality. Thus in order to bypass provincial leaders able to flout the will of the center, plans are afoot to establish a number of 'super-ministries' with increased powers, despite the fierce rivalries anticipated in the streamlining process.

In addressing inequality in China there is clearly (as the President of China Merchant Bank told the People's Daily last week there to be for rural financing in China) "large room for improvement". A World Bank report released this year entitled Migrant Opportunity and the Educational Attainment of Youth in Rural China illustrated the entrenched challenges affecting the social mobility of migrant laborers, an important cog in China's economic transition.

While the opportunity to migrate has raised living standards in many rural areas of China, access to migrant employment appears to create a disincentive for continued increases in educational attainment levels among rural youth... For most individuals in rural areas, the decision not to attend high school is irreversible. When large numbers of families opt out of educational investments in favor of the relatively attractive migrant wage available to middle school graduates, the effectively resign themselves to the long-term prospect of earning considerably less than urban youth, nearly all of whom graduate from high school and who are enrolling in college in greater numbers. The decision not to enroll in further schooling increases the likely gap in the lifetime earning ability of a rural child relative to an urban child, and may therefore contribute to increases in inequality, at least for one generation, within urban areas after migration occurs.

For the 324 Chinese companies listed on China's two stock exchanges who have filed their annual reports for 2007, however, profits have nearly doubled compared with that of 2006. And as an indication of future prospects for Chinese industrial growth and profit, a survey of 2,000 U.S. consumers conducted in 2007 by market research firm GfK Roper found that Chinese products are regarded as being inferior only to American goods, and in terms of prestige products from China are held in higher regard than those of Canada, South Korea and any other developing country.

As yesteryear's model villages Nanjie and Dazhai make way for the dream world of Disneyland in Pudong, its obvious that many in China will happily go relish the arrival of Mickey and Goofy - and many others will never make it there.

Yet with people like Liu Xiufang around, an 80-year-old woman from a village in Fujian province who (the Shanghai Daily recounts) lives on 10 Yuan a day and has donated more than four million yuan to charity and public welfare over the past 20 years, it is interesting to think whether China's growing affluent class can learn something from her, as she probably did from Dazhai.

 

       

The start of the year of the rat was a rather miserable experience for some in China this year, especially for a few of the 210 million migrant workers who were deprived of their only holiday when the transportation system clogged up under heavy snowfall (I watched it all from sunny South Africa).

The real culprit for it all was hot air.  Like the U.S.-based Pew Center explained to China Dialogue this week (after first pointing out that science cannot in fact determine whether any single weather event is directly connected to global warming), when warmer conditions evaporate water from the ocean, moist air is formed and when this meets cold air over land the moisture freezes and falls. Asked why this process happened to such an extreme degree in China this year, Pew Center explained (after first pointing out that they are in fact not a meteorological society) that

the unusual severe snow storm in China certainly fits a broader trend of increasing severe weather events that is well documented and it could well be a consequence of global warming...The most important lesson China can take from this event is that climate change has real and potentially severe costs.

China's energy security, moreover, is intimately linked to climate security. China still relies on coal for about 80% of its electricity generation, and as most of the coal is mined in the northern and western provinces and then transported to China's booming coastal provinces, the recent storms have illustrated how easy road and rail networks can be disrupted.

Ministry of Railways spokesman Wang Yongping also had some hot air to deal with recently. Involved in a controversial exchange with the Guangzhou CPPCC deputy secretary on February 20th, Mr Wang has had his head called for and the Ministry of Railways exhorted to adopt an attitude of submission, earnestly studying the problems exposed by the recent disaster, as one columnist put it. As David Bandurski outlined at the China Media Project, exchanges like these have formed part of the Chinese media anticipating a green light on 'reflection,' or fansi 反思 (emanating from favourable whispers of Wen Jia Bao's report for the upcoming session of the National People's Congress), and hence their providing bolder coverage of the storms and what they reveal about government and society in China.

Thus for example the Economic Observer this week highlighted the plight of Chenzhou in Hunan, which was isolated for ten days during the Spring Festival after three successive snowstorms and freezing rain decimated its power grid, shut down public transportation and limited water supplies. And it was bad, as local resident Li Ronghua explained,

There are floods and droughts here every year, so we are used to natural disasters. But this time many of us panicked. The city was so close to coldness and death.

Relief work in Chenzhou has just begun, the city's secretary general said - 70% of the city still has no power - and would last until May. Chinese banks have kindly lent more than RMB102 billion to help rebuild areas damaged by the storms, aimed at restoring farms, transportation, power and other infrastructure. China's 'big four' top state-owned banks accounted for RMB59 billion of the disaster loans, and no doubt China Minsheng Banking Corp, China's first private bank that saw its net profits jump 68% in 2007, would also have been asked for a contribution.

Shanghai has luckily shown the way forward in dealing with global warming. While an explosion at a sewage plant in eastern Beijing this week caused the death of four people and poisoned 20 on-site workers, advertisements on Shanghai's new subway stations now have themes related to global warming, and the city's Waste Management Department recently announced they have found new ways of classifying waste, utilizing a four-category classification pattern referring to four different bins for glass, harmful waste, recycled waste and other waste. Clearly, what Beijing's new subway lines need are the right kind of message.     

China's future path is a stark choice between four options, or trajectories as they call them, as laid out by The Foundation for Law, Justice and Society (FLJS) at the University of Oxford in a report (link from Asiabizblog.com) considering whether China's transition is 'stalled'. These four, under the strangely familiar banner of One Country, Four Perspectives, are so descriptive they require little further explanation:

• Liberal evolution
  
• Authoritarian resilience
  
• Imminent collapse, and
  
• Authoritarian stagnation
  

The report bulges with talk of calculating ruling elites, a political monopoly overriding the culmination of full market reform and ominous indications of the development of a predatory state and systemic risks. Ultimately, what's going on in China right now is called (deceptively harmonious-sounding)

...Partial Reform Equilibrium.

And basically, the choice from here onwards ranges between

• Evolving, like China's two-tiered household registration system which is set to be reformed to allow freer migration between cities and the countryside;
  
• Persisting, like the stinky smell from 10 branches of the Liaohe River, for which reason 200 small paper-making plants will be shut down in Liaoning this year; 
• Collapsing, like the roof of a slag pit in Liaoning; or
  
• Stagnating, like China's manufacturing competitiveness in some industries, at least according to more than half of the 66 foreign-invested firms surveyed by the Shanghai Chamber of Commerce.

Let's not throw out China's new lively intellectual class, however, whose influence (writes Mark Leonard in the March edition of Prospect magazine) is actualy amplified by China's repressive political system that can use intellectual debate as a surrogate for politics. In the long term China's one-party state may well collapse, yet although China is not as yet a fully open intellectual society,

it is so big, so pragmatic and so desperate to succeed that its leaders are constantly experimenting with new ways of doing things. They used special economic zones to test out a market philosophy. Now they are testing a thousand other ideas - from deliberative democracy to regional alliances. From this laboratory of social experiments, a new world-view is emerging that may in time crystallise into a recognisable Chinese model...

(For another encouraging political outlook for China in 2008, see Economic Observer's views on why this year will be a key point in Chinese history).

All of this cuts no ice for FLJS at Oxford University though. Which of the four 'trajectories' does their report consider, on balance, the more likely outcome in China? You guessed it:

Option number four!, with a gradual dissipation of vigour and momentum projected to set in. Ouch!  

Less enthusiastic job-hunters turned up at Guangzhou, capital of Guangdong, for the city's first labor fair after the beginning of the lunar year. From China Daily,

...the job-seekers gathered there appeared not be as enthusiastic as their counterparts of years past. For the first time, the number of job-hunters fell far short of the number of vacancies advertised at the fair: 4,000 versus 7,000...

- which really disappointed employers who could only raise their salary standards 13% (on average to 1,160 yuan or $155 a month) compared to previous years. (Come to think of it, this is almost exactly how much I receive as monthly stipend as a scholarship student in China).

Yet trade unions and government officials in Guangdong have pointed out that wages in Guangzhou have failed to keep up with inflation and the overall growth rate of industrial output, and need to be increased further. Does this mean, the China Labour Bulletin wonders,

that Guangdong's trade union and labour officials are now determined to take their responsibilities seriously, and defend the rights and interests of workers in the province? Crucially, Guangdong union officials have now acknowledged that the most effective way to protect wage levels and ensure regular payment is through direct negotiations between labour and management.

Yet only time will tell, they conclude, as the actions of trade unions over the coming years will indicate whether developing collective bargaining at the grassroots level will make enterprise-level unions genuine representatives of workers' rights.

Some workers in Guangzhou, however, are wondering whether their jobs are even worth it. From Tim Johnson at China Rises (blocked on mainland China), three U.S. researchers who spent time querying 634 factory workers outside Guangzhou railway station before the spring festival found underlying concerns not only about low wages and poor working conditions but also about whether it was worth the effort at all. Suppliers desperately need to improve job satisfaction in China, the researchers concluded (I noticed though seemingly universally disparaging comments on the China Rises site to the research mentioned in the posting).

A recent article from AP (via Herald Tribune, see also China Law Blog's downplaying response) suggests that, due to pressures of regulation and rising costs for energy, materials and labor, China's economy is set to lose its claim on cheapness. Similar echoes from Frank Langfitt at NPR outlining the pressures faced by shoe, furniture and other manufacturers and smaller factories generally in China, and FT.com about the plight of Changdeng Shoe Company in Guangdong, whose company compound recently became a ghost town as the company folded in the face of

...a survival-of-the-fittest struggle affecting primarily smaller factories in relatively low-tech, labour-intensive industries...

Lastly, some hyperbole from the China Economics Blog (blocked on mainland) who quotes an article from the Peterson Institute claiming  that, without anyone noticing, the capitalists have upended the People's Republic by effecting a significant redistribution of income away from workers. This might be, they say, the mother of all redistributions. According to a few Berkeley economists, between 2002 and 2005 the share of economic output going to workers decreased by about 8 percentage points, from about 50% of GDP to 42%.

It is clear that capitalism, the CEB posting infers,

now has China in its icy grip.

I myself am overjoyed that it seems we might be in for a nice mild spring in the north of China this year round.

THE issue of 2007 must have been Quality Fade. A huge proportion of last year's China-related media coverage and all the consequent spats and convulsions flowed from some lead-painted toy, toxic pet food or other faulty products that had the label Made in China on them.

And the random reduction in quality of some Chinese products, which the whole world uses...(except probably soon for Martin Richenhangen, whose leading tractor-making company has been consistently prevented by Beijing from attaining a majority stake in a Chinese state-controlled company. From FT.com, Richenhangen slammed Chinese manufacturing for, among other things, its obsessive copying of other companies and for not working hard enough) ...fosters a sense of foreboding about the quality of future supplies, which could at any time fall prey to short-term planning by Chinese factories.

What makes the phenomenon of Quality Fade so interesting is the seeming deliberate malfeasance inherent in the process, and how this illuminates the interplay of economic conditions in China. The term was coined last year in the wake of a host of product quality issues by Paul Midler (audio interview at China Talk Radio here) who described it as the deliberate and secret habit of widening profit margins through a reduction in the quality of materials...(W)ith each successive production run, a but more of the necessary inputs are missing. Seeking cost savings, suppliers push the limits until they are caught, or until disaster strikes. As manufacturers in China are subject to a government able to act without restraint or controversy, factories operate with a sense of urgency, hence they have become excellent at the 'short game' to compete at the lowest prices in order to ensure profitability over the short term.

Midler's views elicited a host of responses. While acknowledging quality fade as a problem in China (telling his customers that the fade usually sets in with the fourth shipment), Dan Harris at the China Law Blog saw a less gloomy outlook as the product situation in China is slowly improving and will continue to do so as China's economy evolves. Quality fade is driven by economics, he argued, and occurs in order for Chinese manufacturers simply to survive for a few more months in the face of currency re-evaluation, competition, tax reform and the end of VAT rebates. In addition, much of what is described as Quality Fade Harris sees as inevitable odd mistakes resulting from the increase in products produced in China, and instances of bad products are by no means confined only to China, despite that the media have created a frenzy about faulty products sourced from China.

At Smart China Sourcing, David Dayton recently outlined two types of Quality Fade, the willfully dishonest variety described by Midler, and a more common 'natural' quality fade over time, the result of an inadvertent slide in various aspects of the manufacturing process, such as standards, production equipment, testing procedures and instruments, and so forth. Yet ultimate responsibility for ensuring product quality, Dayton argued, lies with the buyer to remain diligent in maintaining quality control. Importers are often hypnotized by the opportunity and hospitality offered by China, and under the China sourcing spell, we too often check our good sense at the door.

Quality Fade starts with the supplier, Dayton posits, but ultimately has to stop with the buyer, who holds the final responsibility. A straightforward solution to either type of Quality Fade is to hire third-party inspectors, who should catch many of the problems. Another solution is to build your own production facility and hire and train your own staff, although this could take years and a lot of money. Yet the bottom line is, according to Dayton, at some point you must have a degree of trust with your supplier... Trust but verify is excellent advice, but verification will never be 100 percent. Some element of your QC is necessarily left to trust in the relationship.

The People's Daily on Tuesday proclaimed that China and the E.U. were leading the 'Third Industrial Revolution,' a view espoused by Jeremy (or Jereny as horrendously misspelt in the article) Rifkin, an economist and author of 17 books on environmental, energy and economic issues. The E.U. and China, Rifkin posited, have made binding commitments to renewable energy. For its part the Chinese government pledged to have renewable energy rise to 15% of all energy consumption by 2020, which would supposedly make it a leading light in the so-called Third Industrial Revolution.

Facing menacing environmental concerns and eager to present itself as a progressive nation in sync (or harmony if you will) with the environment, China has invested in more environmentally-friendly policy initiatives (such as tax breaks for makers of greener products) and in providing technological support for developing efficient and sustainable energy from renewable sources (see description of report on China energy industry). Yet the impact of global supply chains on economic, social and environmental conditions in sourcing countries remains a battleground in the debate on corporate social responsibility.

In China, a slew of recent unsettling instances ranging from product quality and safety issues to cases of slave labour have, however, intensified pressure for ethical and sustainable sourcing. Ethically-sourced products, moreover, are moving into the mainstream, and market research has indicated that customers are increasingly seeking out greener products. A survey (see also summary here) conducted in 2007 of shoppers in 15 countries found that more than half of global consumers prefer to purchase products and services from a company with a strong environmental reputation. Shoppers in China, by the way, reported the greatest interest in environmentally responsible purchasing, with 67% preferring greener brands.

So if the customers want it, then surely they must be given it? Starbucks (and more recently Wal-Mart) famously put their best foot forward when the company implemented a scheme to pay farmers handsome prices for their crops, forging long-term relationships with them, offering technical support and contributing to social development programmes (see Food Production Daily article). There is undoubtedly a toll to pay for companies treading the path of sustainable righteousness, yet as added costs and the maintaining of ethical standards and codes of conduct are swallowed up in the unassailable trend of sustainable sourcing, we will advance further down the road of the imperative.

In a publication entitled Beyond Monitoring: A New Vision for Sustainable Supply Chains, the organization Business for Social Responsibility recently put forward a new organizing framework for companies to ensure ethical supply chains. Seeking to integrate labour and environmental considerations more fully into companies' procurement efforts and to re-emphasize the role of workers and governments, the framework rests on four pillars:

• Buyer internal alignment of purchasing practices with social and environmental objectives
• Supplier ownership of good working and environmental conditions in their workplaces
• Empowerment of workers who take a stronger role in asserting and protecting their own rights, and
  
• Public policy frameworks that ensure wider and more even application of relevant laws
  

So while we may think of the immeasurable ways the first two industrial revolutions changed our world and our planet, bringing great advances in our standard of life as well as damage to our environment, all I'll say is BRING ON NUMBER THREE!  

China's strength lies in its workers. Millions of migrants leave their homes and villages to work in factories and cities at low wages, for long hours, making the products that are snapped up and sent to every part of the globe. It is an unbeatable process that has been instrumental in catapulting China to the verge of superpower status as the 21st century unfolds. Most of these workers can expect to see their families only once a year, when they have to brave the spring break rush, which FT.com depicted on Thursday as the world's largest human migration (bigger even than the Islamic Hajj pilgrimage). Yet the worst snow and ice storms in 50 years have played havoc with China's power grid and transportation network, meaning that millions of migrant workers in southern Guangdong province greeted the start of the year of the rat still away from their homes. Desperate to relieve the strain on the country's rail network, the Chinese government attempted to entice workers to cash in their tickets and return to their factories for the holiday. Overworked, underpaid, and now even deprived of their holiday, China's migrants can take a bow.

In the face of such challenging conditions Chinese labor organization is politically weak and largely unorganized; the most explosive labour grievance in China, however, is simply not getting paid. Workers will endure very demanding conditions and the lack of independent unions, as long as they get paid, yet rampant problems of nonpayment of pensions and wages have led to persistent unrest among migrant workers. In its 2007 report on the Workers' Movement in China for 2005-2006, The China Labour Bulletin concluded that

China's workers' movement in 2005-2006 was characterized by continued disputes and protests by urban workers laid off from privatized former SOEs and also predominantly by migrant workers in the private sector... [T]he inability of the government and unions to enforce the law or effectively implement their own policies meant that the lives and working conditions of workers across the country for the most part failed to improve; indeed for many workers, the situation worsened... For migrant workers employed in the private sector, disputes and protests arose largely from specific and blatant violations of their rights. The single most important cause of labour disputes in this period was the failure of management to pay wages on time. Often an entire factory could go for months on end without being paid, and this led to widespread strikes, protests and street blockades.

Interestingly, Ching Kwan Lee* contended that although Chinese workers are aware of their common predicament and aspire to legal rights as citizens, they find the public identity of the "unprivileged masses" the most empowering and effective:

[T]he mode and logic of worker activism in China deviate from what are conventionally conceptualized as class citizenship struggles. Chinese workers' cellular activism is predicated not on horizontal social solidarity or the idea of a judicial, rights-bearing, individual subject, but on the moral and economic entitlements of the subordinate masses in a hierarchical political community led by the central state authority. As disadvantaged masses, workers want more, not less, state intervention and regulation to restrain the market.

Eventually China's seemingly endless supply of migrant labourers willing to work for long hours and low pay (and without even Spring break holidays) will recede. In fact, China Success Stories has listed rising labour costs as a major reason why souring from China will be more expensive in 2008, and FT.com on Tuesday quoted the chief financial officer of Hasbro (the world's second largest toymaker) saying the company expected a 14-15% increase in the costs of made-in-China products in 2008 due to higher labour-, commodity- and currency costs.

So at least China's migrants are getting a bit more pay, IF they get paid at all.  


* Ching Kwan Lee, "Made in China": Politics of Labor, Law and Legitimacy, Woodrow Wilson International Center for Scholars, Asia Program Special Report, No. 124, September 2004. (link)