Doing Business in The Wild Wild East
“Jesse call me“ – The message came in from my man in Shenzhen, Mr. Americanos, a 30-something former Marine, who travelled Asia for five years on a motorcycle, and eventually set up shop in South China sourcing products for clients across the Pacific.
“Give me 15 min ok?” – I reply, quickly downing my double espresso in Cafe Trieste and jogging back through North Beach to my car.
“The factory is saying if we don’t pay 100% today they will sell the order off…There is no chance of this happening so I told them good luck. It is either a bluff or we are screwed anyways…”
The factory in question recently finished producing 100 custom roll-on suitcases for a venture-backed business I co-founded called Idea Machine. We had done three rounds of prototypes with them, getting the design exactly right before starting production. Now the factory has a container full of our merchandise that they’re threatening to sell to the highest bidder if they don’t get paid in full today.
I jump on Skype with Americanos and we skip the usual small talk about his latest exploits on the nightlife scene in the “dirty ‘zhen”,
“Dude, I told you, this factory is full of some hillbillies, they are going crazy right now…”
“Hold on, let’s take a step back here, have you told them that we wired the money last week and it just hasn’t arrived cause of some BS with the Chinese intermediary bank?”
“Yeah, they don’t care about all that, they want the money like yesterday”
And how did I get caught in the middle of this?
In one of my business identities, I am COO of Idea Machine Inc., a business my partner Dak and I started last year. Dak was a student in Lifestyle Entrepreneurs Academy in Montreal last year, he approached me after the first day and was insistant that we start a business together. I said ‘let’s talk after the program’, and sure enough, moments after we wrapped-up he cornered me and said “good time to talk now?”
We set up Idea Machine as an umbrella company and our first consumer brand is Intelligent Travel Products – “Luxurious travel, even in economy“. Dak is a go-getter with an entrepreneurial spirit and a Rolodex full of connections from his time at Stanford where he got a masters in aeronautical engineering.
Within two months he raised us some start-up capital from Rothenberg Ventures to build out our first consumer brand and we set to work designing a roll-on suitcase that fits seamlessly under an airplane seat. This allows you to bring two carry-on bags, save money by not checking-in and get priority boarding on most airlines for not using overhead bin space.
My roll as COO is to oversee production and fulfillment based on my business history in the Middle Kingdom.
Doing business with Chinese manufacturers and sourcing agents allows for a virtual business structure, whereby you as the business owner can have a portfolio of factories produce goods you design, then either
1.) fulfill them directly to the end customer for products like promotional goods and wholesale orders, or
2.) produce inventory and send it to a fulfillment house, which inventories your goods and fulfills them to the end customer on a per-order basis.
In either case, you, as the entrepreneur, can manage the business from anywhere in the world from a laptop since no goods are sent or received by you directly.
Well, that’s the theory at least…
In practice there are often a few bumps in the road and growing pains before the whole virtual business structure gets streamlined and automated.
And having a factory that I’ve never worked with before, and who we’ve already paid a few thousand dollars as a deposit, is threatening to unload our product on the black market, well, that usually gets filed in the ‘growing pains‘ category.
Add to that, my partner Dak is on safari in South Africa (like a true lifestyle entrepreneur!), which would be awesome if I was a signatory on the corporate bank account and he wasn’t out of a wi-fi zone for the next four days…
But all is not lost. Even though it seems like some pretty strong posturing on their part, I agree with Americanos that there is practically no chance they can sell off our product, at least not in a few days, let alone weeks.
In the meantime, the issue at hand is that we sent a wire for around $4,000USD to their bank that has been held up somewhere. I never understood exactly how an electronic wire transfer could be “held-up”. I mean, is it just hovering over the South China Sea waiting for the right time to make landfall?
Generally, factories in South China that do a lot of business with overseas customers will have a dollar-denominated bank account in Hong Kong. This makes payments a breeze as there is no currency exchange and no intermediary banks.
If you are wiring money to a bank located in mainland China, however, the funds often have to clear through an intermediary bank and the factory has to produce documentation to document inflows and outflows of RMB (ren min bi, China’s currency, also called the yuan).
Hong Kong is technically part of China, but maintains a “one country, two systems” approach since the British handed control back to the Chinese.
Despite being “one country” these “two systems” make a world of difference. Hong Kong is consistently neck-and-neck with Singapore for the #1 most economically free country (according to Heritage Foundations’ Index of Economic Freedom), while China ranks #136.
When sourcing factories for producing your products, limit your search to those who have a bank account in Hong Kong.
Despite knowing all this, I had become comfortable working with Americanos on sourcing and dealing with factories, and this issue is definitely an anomaly in an otherwise smooth relationship.
So as we talked on Skype as I wove my car back through the Marina and towards the Golden Gate Bridge, I just wanted to find a solution to this issue and then sort out which factory to place our next order with later.
“What’s the chance you can pay the balance to the factory today and we’ll get this wire situation sorted out as soon as possible?” I asked hopefully.
“Not so hot, we have a lot of open balances with customers now and a lot of receivables coming in next week…which doesn’t help”
“Well even if I paid the balance out of my personal account, we’re in the same situation, the money wouldn’t arrive there till early next week with 4th of July and all”
“I know, it’s not pretty.”
“Ok, time for plan D…who do you know on the ground in Shenzhen that could front the money?”
Americanos rattled off a few names, thinking through the implications of asking for around $4,000 right away from each.
“Ah ha! I know who…” he said, beginning enthusiastically and quickly trailing off to dismay, “let me work the phones for a minute.”
And we hung up as I crossed the Golden Gate Bridge, looking back to admire beautiful San Francisco at sunset, even in the midst of an international currency crisis.
Then a few minutes later the solution came through, and I understood the dismay in his voice.
Is it for real?
Or, just like the factory, is this a mixture of posturing and embellishment to drive a point home?
Either way, crisis averted…and I owe My Man in Shenzhen a couple shots of bai jiu next time I’m in China!