After reading it:

• I have no interest in ever getting involved in manufacturing in China
• I realize I got off very lightly in my own aborted attempt to have bicycle frames manufactured in Taiwan
• I wonder if design is not Apple’s only competitive brilliance. Apple seems to have better control over their manufacturers than most. (Although, maybe that’s slipping too: in the last three months the suicide epidemic at FoxConn has come to light, and there have been many component photo leaks popping up about the iPhone 4th Generation.)

At 240 pages, the book is adequately brief. The basic points he makes:

Manufacturers get a customer in the door by offering very aggressive pricing (“zero margin!”), then they proceed to do three things:

1) Cheat everywhere along the production process. It is a death of a thousand slices. No single betrayal is enough for a heavily-burdened importer to walk away from the table, but in their totality, the corner-cutting gives a margin to the manufacturer. Examples? Using “BB” class cardboard boxes instead of “BA”, then the packed boxes start collapsing on themselves at the retailers’ warehouses. Invoicing for 1.99 renimbi instead of the agreed-on 1.90 renimbi (which is equivalent to about a tenth of a US penny). Unilaterally changing away from agreed-on product specs.

2) Customers are squeezed by their buyers back in the USA who hold to contracts. The manufacturers know this and squeeze from their side, raising prices and passing on lower quality products. Chinese manufacturers can torment an importer with stalling and delays because the manufacturer pays essentially no cost of capital and gets a deposit from the importer up front, while the importer pays for its money and has contractual demands from its own customers.

3) Counterfeit their customers’ products and sell them direct to other markets and to the customers’ customers.

Midler illustrates American importers totally exasperated by their Chinese manufacturer who risk jeopardizing long-term large-sized orders by pulling small-sized stunts that antagonize the importer.

Midler says the key difference is that the manufacturer thinks in short-term survival and gains. “what will get me the most money in the next two months” while western companies are thinking of long-term strategic victories.

He could have described it more succinctly as a prisoner’s dilemma. The Chinese manufacturer sees it as a one-round prisoner’s dilemma where defecting on the importer gives them the best return. The western importer thinks many rounds, so desires the cooperate/cooperate mode.

But then Midler contradicts his “short term/long term” thesis by bringing up a whole new twist that says China “is thinking chess while the west is thinking checkers.”

He uses the example of soap. China manufacturers massive quantities of soap for an importer who sells to someone like Johnson&Johnson in the west (Midler calls this the ‘first market’). China does it for a tiny margin because the orders give them an understanding of western product demand and design. ‘Second markets’ also want these products and will buy them directly from China. China gets much higher margins on these sales. Midler is saying this is strategic, long-term thinking: give cheap products to the west in exchange for product knowledge and manufacturing reputation and then market to profitable markets not served by the western importers.

His last cautionary tale is that the deepest fucking is for those involved in “Joint Ventures” in China. Eager to get in on the “China Story”, western businesses find a local partner, invest money, and are strung along while the JV (operated by the local) generates no profit, or maybe even small losses. Of course what’s happening is that the finances and operations are totally opaque and the local partner is stealing all the profit.

Reading this book makes me even happier to live in Singapore. Here there is a strong rule of law and accounting. Commercial issues can be resolved officially. As well, it’s a (mostly) English-speaking culture, so there is far less problem of ‘inscrutable culture’ to further confuse the business. If I was going have something manufactured, I’d consider Singapore potentially better on a risk-adjusted basis.

One Last Note: the author also suggests that China’s population is not nearly as large as China claims. This reminds me of Robert Heinlein saying the same thing about the USSR after he went on a trip to Moscow.

GADGET-LOVERS the world over are already salivating at the thought of getting their hands on Apple’s much-hyped tablet computer, which is expected to be revealed on January 27th. Most of them just like the idea of playing with a new high-tech toy. But a few have darker designs. They cannot wait to rip the device apart, analyse its design, identify its parts and calculate how much it costs to make.

These “teardowns”, as they are called, are common practice in the electronics industry, and are usually performed in-house. Now, however, more of this activity is being outsourced to specialised firms such as iSuppli and UBM TechInsights. Their findings provide a glimpse into the inner workings not just of individual devices but also the fast-growing consumer-electronics business itself.

I guess this makes perfect sense, in fact, I bought an expensive messenger bag in Tokyo from Fredrick Packer in order to see how they did their fine embroidery. So it makes sense that this is widely practiced in the manufacturing world.

These firms apparently go into excruciating detail in figuring out not only how the product was built.