9
Jan

“Where the Value Surpasses the Price”

[Guest blogger Becky Eisen is an MBA Candidate, class of 2012. This post's title is taken from a huge sign above the main entrance to the Silk Street Market.]  

At the Dirt Market, noted for its "antiques," the author (foreground) helps MBA Candidates Isabel Caruana and Tony Liu negotiate for a necklace. In China, where even this photograph is counterfeit, bargaining rules the day.

“Hey-you, you wanna Tory Burch?  We have for you! Cheap special New Year price!”  The stall is crowded with designer knockoff shoes.  Not very impressive, and when I point to a pair in the corner they ask for a fortune.  “OK, but where are the real Tory Burch?  You have better ones?”  Her eyes glitter. “Sure, one minute. We grab from back.”  She glances up and down the aisle, and says something quickly in to her cell phone.  A minute later another lady shows up with a box of shoes that she spreads out on the floor.  These are the higher quality knockoffs—they can’t keep them in the stall because recently the police have been “cracking down” on flagrant infringements of intellectual property (IP).  A large banner at the front of the Silk Street Market proclaims, “Protect Intellectual Property Rights, Be Law Abiding Vendors.”  I find this to be particularly amusing. The entire market (all six floors of it) is brimming with designer knockoffs.  I zone in on what I really want: a pair of Tory Burch Reva flats.  And this is where my MBA starts to pay off. 

First of all, what is your BATNA (Best Alternative to a Negotiated Agreement)?  It’s important to remember that if you have time, then you have many BATNAs because a lot of the stalls sell the exact same goods.  I had to go to four different stalls before I found a vendor who was willing to sell me the shoes at a price I thought was reasonable, and at each stall the vendor claimed they were giving me the absolute lowest price and I could not do better anywhere else. 

If you don’t have time, it’s probably not a good idea to bargain in China.  You need a lot of time and patience to engage in the necessary negotiations to get what you want. If you are not willing to walk away, they will sense it, and they’ll gouge you on the price.  Once I found a vendor that had the quality I wanted and seemed open to negotiating, I spent about 20 minutes working with her to reach a price that I felt was reasonable.     

But how did I arrive at this ‘reasonable price?”  To do this, you need to conduct market research and develop a reference point.  A reasonable price is partially what you are willing to pay, but also what the market is willing to pay.  Going to a number of stalls to determine their asking prices and quietly watching other negotiations are useful tactics in this situation.  Whenever possible, set your own reference point.  If you don’t set your own reference point, the vendors will do it for you, and it will be to their advantage.  For instance, most of the stalls had two types of Tory Burch knockoffs: ones that were higher quality and ones that were obviously lower quality.  When you offered a low price the merchant would grab the lower quality knockoffs and shout, “80 yuan?! For 80 you can have these—not leather, low quality.”  It made the asking price of the higher quality knockoffs seem more reasonable.  I decided that my reference point would be a pair of unbranded flats at Payless. These Tory Burch knockoffs would probably be about the same quality.  I wouldn’t pay more than $25 for shoes from Payless, so why would I pay more than that for shoes in China?

Negotiating in Asia involves a great deal of symbolic gestures and relationship building.  Displaying anger is frowned upon as it signals that you have lost control of yourself.  In this sense, the Silk Market is not representative of the negotiations process in Asia because the vendors are used to being very aggressive with foreigners and because they are not looking to build a relationship with you—they know you are here for a few days and won’t be coming back for repeat purchases.  They will frown, “you so stupid, you not get that price anywhere.”  Then they will grab the shoes, purse or whatever from your hand and turn away.  In these situations, I find that being persistent, playing dumb and smiling a lot is a very useful position to take in the bargaining process.  Big smile, “Oh, I think 100 is a good price and I would be so happy to do business with you—maybe we can make a better price together?”  Then they will turn back around, “OK, what you think good price?”  If you smile and laugh nicely (with them, not at them) then they smile and laugh with you and ultimately in a small way, it helps them to save face when they finally offer you the lower price.  As in any negotiation, it is up to you to control the tone of the discourse.

Finally, the Chinese are experts in “first degree” price discrimination.  They want you to pay exactly what you are willing to pay or what they believe you are able to pay, rather than a set price.  Many Americans believe this is unfair—they would rather pay the same price as others, or pay for the true “value” of the object.  The lesson here is that if you are negotiating in China, it might be a good idea not to let the person on the other side of the table know how deep your pockets are, or how badly you want the item.  Additionally, when bargaining remember that you do not have to meet in the middle.

There is always a great deal of posturing in negotiations and in the Silk Street Market in particular, the vendors will ask you for an absolutely outrageous price in the hopes that you will end up paying half of that price (when in reality you should probably be paying ¼ to 1/10 of the price). 

In the case of the Tory Burch knockoffs, the original asking price was 700 yuan.  I ended up paying 150Y (USD$24). Our guide told me I got a good price. As a native Beijinger she probably would have paid 10 or 20Y less.  However, I saw a girl in another stall paying 250Y for the same shoes. She obviously didn’t do her research. If I had not thought about my BATNA and thus been willing to walk away, I might have ended up paying far more.

8
Jan

Sightseeing with the Entrepreneurs

MBA Candidate Frankie Abralind (this blogs intrepid author) conquers his first wonder of the ancient world.

We’re taking a brief interlude from the explicit business focus of the trip for some China sightseeing. Entrepreneurship, however, is still front and center. Any visit to any sight in China involves rejecting hundreds of pleas to buy panda hats, warrior statues and Chairman Mao watches (well, I actually couldn’t turn down the Mao watch). Stay tuned for a guest blog post about the ubiquitity of salesmanship.

 
We started the day with a visit to the incredible Great Wall of China. The Mutianyu section was originally established in the 6th century, but the wall we saw was built about 450 years ago. It’s a staggering feat to imagine the quarrying and transport of so much stone in such difficult terrain. The Mongol threat was a powerful motivator. It’s inspiring to think of what can be accomplished with the right vision and a little military organization.
 
Next we traveled to the Summer Palace. The royal vacation home, greatly expanded by a cruel empress dowager 200 years ago, has been rebuilt several times after being destroyed by Anglo-French and Italian forces. It boasts many beautiful buildings, along with a vast hand-dug artificial lake. Also, hundreds of China’s most persistent micro-entrepreneurs selling Panda hats, warrior statues and Chairman Mao watches.
 

The Smith MBA group poses in front of the lake at the Summer Palace. In the background, an island temple overlooks the lake and guards the palace from evil spirits.

 At dinner we wrapped up the day listening to the amazing and inspiring Gwo-Ing Lee, founder and CEO of the women-focused iXi media company. She told stories of overcoming the confusing business world of China, where contracts are not necessarily contracts and deals are hard to nail down. Her husband, a reporter who serves a sort of Matt Lauer role in China, also explained a bit about journalism in a tightly-controlled media environment. I’m curious to see if this post will make it through the censors if I mention his forbidden Three T’s and an F: Tibet, Tianamen Square, Taiwan and Falun Gong. As a lifelong U.S. resident, there are a lot of things about China that are strange to comprehend!
6
Jan

Every Problem is a Golden Nugget

This is the leading edge of a Boeing 737 wing. Doug Wilkersson showed off the strong, lightweight composite his factory produces with the help of MBA candidate Perry Hepworth. "Why is this factory in Tianjin, if you can make the parts in the U.S.?" one of the students asked Doug. "Because China is buying several billion $USD worth of our airplanes. This isn't taking away jobs, it's creating them, through sales."

Smith MBA students James Kurek and Chris Caldwell enjoy fresh Chinese Pepsi.

We broke the Tianjin Pepsi factory.

There we were, hours from our Beijing hotel, walking through the huge factory where 1,400 Chinese workers make Pepsi from scratch 24/7/365. Production Manager Amy was giving us a great tour via her interpreter. From the observation corridor, we’d already seen several rooms full of gleaming stainless steel machinery, and now we stood outside the giant plate glass window of the room in which half-liter bottles were rinsed, filled with Pepsi and capped.

One lone operator stood on the floor. His job fascinated us, mostly because there’s no chance it fascinated him. He stood next to a long stainless steel table as plastic bottles full of Pepsi marched nonstop past his station and through a hole in the wall to another room. Bottle, bottle, bottle. 36,000 bottles per hour. Occasionally, a bottle would tip over and start rolling, and that’s where he came in: he stood it back up. Wow, huh?

As we last few stragglers started to walk back down the hallway,  the lonely operator cast his gaze up at the observation window. We smiled and waved enthusiastically, trying to offer him a little human connection to spice up his day. This broke his concentration. While he was waving back at us, one mishievous bottle up the line from him tipped and fell. He didn’t see it in time, and it rolled into another and tipped it, too. Suddenly every bottle was knocking over another bottle. He sprang into action, sweeping dozens of bottles at a time into an emergency chute, but it was too late. Bottles were crashing up the line by this point, and he ran to pull the shut-down cord. Another worker joined the fray, pushing piled-up bottles off the line and into big tubs on the floor. Meanwhile, the shutdown rippled into the canning room next door. The rate of empty cans (still lidless) had somehow been affected, causing several of them to turn sideways on the conveyor belt. The system was designed to kick sideways cans in to a special diversion funnel, but the funnel overloaded. Empty cans began clattering to the floor 20 feet below. We picked up the pace and sheepishly hustled back down the hallway to end the tour.

Despite our disruptive influence on the previously harmonious factory, Amy met us at the bus with a gift of two cases of fresh-brewed Chinese Pepsi. In case you’re wondering, made-in-China Pepsi tastes terrific.

Otis Elevators Tony Wang gives us a tour of the showroom at their Tianjin factory. Its too bad photos were prohibited on the factory floor, because the place was amazing. Every five days, Otis elevators carry the equivalent of the worlds population. 20,000+ parts for those elevators are made here in Tianjin under big banners with Six Sigma slogans like "Movement is Waste."

 

This is the leading edge of a Boeing 737 wing. Doug Wilkersson showed off the strong, lightweight composite his factory produces with the help of MBA candidate Perry Hepworth. "Why is this factory in Tianjin, if you can make the parts in the U.S.?" one of the students asked Doug. "Because China is buying several billion $USD worth of our airplanes. This isn't taking away jobs, it's creating them, through sales."

 

The countryside along the rail line from Beijing to Tianjin is covered with towering apartment complexes like these. The buildings are so big, and the architecture so uninspired, and the landscape so devoid of parks or cultural gestures, that it's hard not to think the goverment is just "storing" people in them. Tianjin being rapidly developed (note the cranes on top of the towers in the distance). Sometimes the development outpaces the need, as evidenced by numerous empty or half-constructed buildings we saw.

5
Jan

Can It Help Get Us Through the Smog?

Though enveloped in an unusually thick fog of classic Beijing air pollution whenever we entered or excited the building, today was an exciting day at the Guanghua School of Business. Located on the beautiful campus of Peking University, the China Business Plan Competition finals were packed with energy and good conversation.

Congratulations to “Tenacity,” this year’s first place winner. The team of Chinese undergraduate students traveled from near Shanghai to win, presenting their idea for an innovative new cane for the blind.  The students proposed a “smart walking stick” that used radars to precisely identify obstacles in the path of a blind person.

Marvin Yueh delivers his pitch for Live-a-Betes, the diabetes lifestyle education service that won 2nd place in todays finals.

Second place went to Smith first-year MBA Marvin Yueh. Along with his partner, first-year MBA Angela Suthrave (not present on the China trip), Marvin has been working on Live-a-Betes, a program of lifestyle education for people who have diabetes.

Smith E-MBA team “Integrata” also placed, winning with their  comprehensive personal executive security system. Honorable mentions went to Smith teams Comrade Brewing, Avatravel and Spark Computing.

The Chinese students presented many fascinating ideas that showed clear recognition of unmet needs in the market. Lunch and breaks brought diverse conversations and impressive cross-language networking. Many two-handed offerings of business cards and warm promises to converse further over email transpired, and once again, the future of entrepreneurship shined brightly.

4
Jan

Is This Hot Pot Secure?

We started the day today at the US Embassy office. Kevin and Sally, two state department employees, gave a fascinating overview of the business climate in China. It’s a wondrous, fast changing place, they said. There is a lot of money to be made… 

…as long as you are very, very careful.

IPR (Intellectual Property Rights) is ephemeral! Enforcement of law is more political than judicial! This room you’re sitting in is bugged, and if you brought a computer on this trip, know that the government has already hacked into it! We heard stories of Chinese-U.S. business partnerships going sour for all sorts of reasons. “Do heavy due diligence on your Chinese partners before you make deals,” they told us. “You don’t want to hear the phone calls we get every day.” More than one head was spinning as we headed back to the bus for our next stop.

Ivan, at the law firm Jones Day, was our next host. He and his colleagues explained their work as being “more exciting than developed countries: here the laws are constantly changing, whereas there the business laws were often established hundreds of years ago.”

What a country! We took a break for the 1,000 mind-blowing flavors of a complicated (and delicious!) hot pot lunch, then went right back into the briefing room.

The hot pot meal has everyone cooking their own meats and vegetables in two boiling central vats of broth (one spicy, the other not). Shrimp sausage was a favorite. Here MBA Candidates Chris Eastman and Parth Vaidya model the bright red aprons that protect diners from the juices that splash from every angle.

 

Queenie, an associate from the venture capital firm CVCA, explained the ravenous fight for investment deals in China. It seems that VC firms compete with private equity firms for the same deals. This has lead to an inflation in valuations, causing a problem for everyone and leading to intense scrutiny when Chinese firms try to go public in the U.S.

Wrapping up the agenda was Drew Bernstein, an accountant with Bernstein Pinchuk. Drew got his MBA from Smith (then called the Maryland Business School) in 1978 and formed his own accounting firm soon after. He gave some perspective on how Chinese culture affects the business world, and explained the temptations and threats of corruption in a land of “guanxi” (loosely “networking”).

Tonight we were joined at dinner by students from the four other universities that are part of the competition. One of the students, an undergraduate named Kevin, told me he had traveled 13 hours by train to be here for the event. Tomorrow we compete. Throughout the hotel, teams now sit crosslegged on their beds getting their final run-throughs down. Good luck to all!

Teammates Steven Liu and Becky Eisen practice their pitch.

3
Jan

Ariel, our tourguide, speaks perfect British. Note David Lin (of Comrade Brewing fame!) behind her on the left.

“Oh, just here doing some welding work on a nuclear plant,” said the guy next to me in the airport’s massive line for customs. “Daia Bay. I live in Maryland, but I’m a site superintendent, and China is where the work is.”

Today began the official program for the Smith School of Business’s seventh annual trip to the China Business Plan Competition. Though we’re mostly still familiarizing ourselves with the group, the hotel, the group and the mundane details of international travel (jetlag), we’re starting to get sense of the dynamic superpower we’ve come to visit.

The Dingman Center’s Jenn Hankin handed out 24-page briefing books this evening on the way to dinner, detailing the exciting week she’s crafted for us. As we alternated flipping through them and peeking out the bus’s curtained windows, we got our first Beijing road adventure: at a 2mph crawl through traffic, the driver turned left to follow the road under a too-short bridge and– we got stuck! Some brief consternation ensued. After hopping out to assess the damage, the driver got back in, adjusted the dial that lets air out of the something-or-other, then backed us up and we were on our way again. Whew.

Smith Finance Professor Gurdip Bakshi and MBA Candidate Perry Hepworth ponder the tiger grouper from the opposite side of the lazy susan. Yes, forks are available for those who ask.

Dinner was traditional Cantonese, and quite tasty. We’ll do a whole entry on food later this week, but here are two details from tonight. First: though pickled jellyfish feels like a flexible plastic keychain in your mouth, it’s pretty good (according to me). Second: Chinese broccoli does not taste familiar.

2
Jan

China Business Plan Competition Oh Twelve!

Everything in my Washington, D.C. apartment has been to China but me. The Rogue acoustic guitar I’m learning to play rock ‘n’ roll songs on? Chinese. The University of Maryland sunglasses I’m packing for the trip? From China.  The “Japanese” Toshiba laptop I’m typing this on was actually made in China. I remember once buying frozen organic broccoli at Whole Foods Market. I honestly assumed I was doing my part in reducing my carbon footprint, but printed in unmistakable 6-point font on the edge of the bag: Product of China.

Now it’s time for the 2012 edition of the Smith MBA China Business Plan Competition trip. We’re all super excited to see how entrepreneurs fit into the “harmonious society.” After the busy fall semester of preparation, we’ll have our competition finals at Beida (Peking University, the so-called “Harvard of China”) on Thursday the 5th, then spend the next four days zipping around Beijing in all manner of transportation. By bullet train, rickshaw and toboggan (!), we’ll visit Otis Elevator in Tianjin, then tour the Great Wall, Summer Palace, Forbidden City, and Tianamen Square. We’ll talk to Pepsi, Tencent and Danfoss, and spend some time with former China Business Plan competition winners CreditEase.

From reading and talking to folks who’ve been there, we know that the business landscape will be like nothing we have ever experienced. Perhaps somehow a Made-in-China American lifestyle has tempered us against the shock? At least the broccoli will taste familiar…

28
Jan

Sustainable Industry Leaders in China

Today we met with two industry leaders and toured their facilities: Danfoss (Demark based and family owned company with 26,000 employees globally that produces 250,000 items per day at 93 factories in 25 countries) and LM Wind Power (Also headquartered in Denmark and is the world’s leading component supplier to the wind turbine industry with over 4,676 employees worldwide.)

We took a high-speed train to visit their factories in Wuging. Danfoss’s works in refrigeration and air conditioning, heating, VLT drives, industrial automation, water controls, high-pressure systems, BAUER geared motors, solar energy and silicon power modules. But their focus today is on energy optimization and green technology in order to have the least possible impact on their surroundings and the most efficient use of resources. As Danfoss experiences growth in China, they’re constantly learning and adapting to what it means to compete in the Chinese market. Some of the challenges of competing in China lie in attracting labor verses their competitors and IPR. Oh and for MBA’s excited about international business and sustainable energy solutions, Danfoss has a postgraduate 2-year rotating program.

LM Wind Power handles blade manufacturing, brake manufacturing and service and logistics.  They’ve produced more than 130,300 blades in the course of more than 30 years (approximately 43 GW installed wind power capacity which can each year effectively replace approximately 74 million tons of CO2.) Did you know each blade undergoes a full year wind tunnel quality test?

21
Jan

Why is the Forbidden City Forbidden?

Today we ventured through Tiananmen Square, the largest public square in the world, known for political protests throughout history including the pro-democracy protests on June 4 1989.

To enter, we walked through security stations and noticed officers throughout the square. Any sign of protest would not be tolerated, which was especially clear when a guard even asked our guide, Peter, to keep his Robert H. Smith Business School sign held low. We all took pictures of Mao over the entrance to the Forbidden City and learned that one painter is responsible for re-painting Mao’s portrait each year.

Then we passed over a bridge into the Forbidden City. While it’s clearly not forbidden today, during the Ming Dynasty and to the end of the Qing Dynasty, an unauthorized visitor would be killed immediately. The city served as a luxurious home to these emperors and servants, an isolation that led to their downfall. Today the palace is the largest collection of imperial treasures including the emperors’ Dragon throne and Buddha’s studded with precious gems.

*The last picture is our group next to a dragon turtle– Go Terps!

19
Jan

Quack Quack Quack

By Stephen Loych (MBA Student)

After a full day of learning thousands of years of Beijing history, our team participated in a different type of cultural experience—a Chinese Basketball Association game to cheer on the Beijing Ducks. Since a few team members were exhausted and didn’t attend the game, we had a smaller group, which seemingly elevated the anticipation and excitement. We undertook another adventure within the city’s overwhelming traffic system and arrived at the Chinese National Stadium.

It only took a few steps towards the stadium before the group remembered the legend that is Emilio Estevez and began chanting “Quack, Quack, Quack.” With thoughts of knucklepucks in our head, we stood outside the entrance when someone wondered out loud if we could scalp our unused tickets. I trembled at the thought, standing on the knife’s edge of destiny. To successfully sell these unused tickets to local Chinese—on their own turf—was definitely a level of greatness that I hitherto could only have dreamed. I jumped at this suggestion, my trembling hands grabbing the tickets while asking what the Chinese word for “ticket” was. I actually don’t remember what the word is, but I began shouting it to everyone I saw. In only a few minutes a gruff man approached me shouting a ridiculous price at me. I wasn’t nearly as ready for the exchange as I previously thought and ended up with him ripping the tickets out of my hand and dumping a pitiful few Yuan in my hand.

Ultimately, the game was a lot of fun: rowdy Chinese fans, athletes who compensated lack of finesse with overt aggression and an awesome halftime show, which included crowd participation. Sadly, I was not chosen to participate and will probably forever regret not walking out on the court to protest, but life moves on. We left the game early, made our way to Beijing’s night market, and finished the evening triple dog daring each other to eat exotic bugs and scorpions. Julie and Martin were the champion adventurous eaters.