Adding Up Corporate Costs of 'The China Price'

Author Alexandra Harney Spills the Dirt on Offshore Factory Operations and What It Means for Your Company

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If your company sources from factories in China that it doesn't own and imposes a code of conduct on them, chances are, someone is lying to you.

In the two years I spent investigating Chinese factories for my book, "The China Price: The True Cost of Chinese Competitive Advantage," I learned that Chinese factories use an impressive arsenal of tools to fool Western buyers into thinking they aren't buying from a sweatshop.

More than half of factories in southern China are falsifying payroll documents. Many even create Potemkin factories, also known as "five star factories" because they are as fancy as five-star hotels. Around the corner is a "shadow factory" that produces the same goods under much less wholesome conditions.

There is even a cottage industry of "falsification engineers" in China -- consultants who specialize in doctoring payroll records and coaching workers to create a fiction of compliance with a Western buyer's code of conduct.

Not only does this chicanery make a mockery of your company's corporate social-responsibility efforts, it also exposes you to a potential public relations problem, because it means you're sourcing from factories that don't actually comply with your code or the local law. If your suppliers are lying to you about their hours and wages, they're probably also lying to you about other things -- the quality of the materials they're using, for example.

Clearly, the best way to eliminate these practices would be for the Chinese government to enforce its laws more consistently. Yet I believe a large part of the solution lies not in Beijing, but in the headquarters of Western multinationals.

As supply chains have gotten longer and more complex, companies have lost touch with the people who make their products. That disconnect is coming back to haunt us in the form of costly product recalls, falsified payroll documents and worsening environmental pollution.

The crucial first step is for senior management to acknowledge that understanding what's happening in the company's supply chain is not simply a matter of risk management or good corporate citizenship; it is a core business issue and a valuable competitive advantage.

Many corporate social responsibility executives at big Western brands I speak to tell me their e-mails are ignored and their department is considered an irritant, an obstacle other executives must navigate around to get their jobs done.

That's a wasted opportunity. Until Western companies integrate their buying and social responsibility functions, until more buying teams realize that simultaneous demands for better working conditions and lower prices are contradictory and counterproductive, Chinese factories will keep lying.

Another strategy is to build frank, long-term partnerships with Chinese factories, rather than moving orders quickly from one plant to another. A factory manager who knows that your company will take its business elsewhere next month in pursuit of a few pennies has little incentive to improve in response to your demands.

But someone with whom you have worked for years, who understands that you are in it for the long haul and that your success is linked to his, is more likely to deal honestly with you.

The daily connection between your management and suppliers is your local staff on the ground in China. Whether they do social compliance or quality assurance, these employees should be trained not only in how to inspect a factory for their particular area of expertise, but also in basic manufacturing techniques.

They should be able to look at an assembly line to determine whether it is capable of producing the 2 million widgets your company has ordered, or whether, as is often the case, many of those widgets are being made elsewhere, in a factory over which you have no control.

Perhaps the most valuable thing a Western executive can do is take a field trip. At least once or twice a year, consider spending time in and around Chinese factories, talking to the workers and managers who produce your product.

Schedule a visit to one of your suppliers, but arrive quietly the night before your appointment, perhaps with a Chinese colleague. Instead of having dinner at the hotel restaurant, eat near your factory and spend time with the locals. Ask them: What's the average monthly wage in this area? Are wages going up or down? What time do most people get off work? What is considered the best factory to work for, and why? Have there been any problems in any of the factories recently, fights or disagreements?

Ask motorcycle drivers that work near your supplier about the hours your factory keeps its lights on, and whether they see a lot of traffic between your supplier and others in the neighborhood.

When you meet the factory manager the next day, ask him the same questions and compare his answers to what you learned the night before. In China as elsewhere, the cliché holds true: trust, but verify.

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Alexandra Harney is the author of "The China Price: The True Cost of Chinese Competitive Advantage" (Penguin Press, 2008). An American, she has spent nine years as a reporter and editor at the Financial Times, covering China, Japan, and the U.K. Her work has appeared in other international titles including the Wall Street Journal, the Washington Post, Slate, Marie Claire, and The Far Eastern Economic Review.
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