How to Get Ahead in China
The elevator doors open on the 44th floor, and Mitch Free exits, turning left into the raw office space of a towering Shanghai building. There are cement floors, exposed piping, floor-to-ceiling windows. Just ahead of him, to the east, the gleaming ball of the Oriental Pearl TV tower. To his left, the north, the swooping Shanghai Grand Theatre and the aptly named Tomorrow Square. Commercial buildings radiate in all directions, swallowed by yellowish smog.
"Our CEO, Mitch Free," one of his Chinese employees announces to three real estate agents gathered to show him around new office space he's thinking of renting. They look him over, this bull-chested Atlanta man with gelled blond hair and pale eyes that focus so intently on whoever is speaking that it looks as if he's reading the person's lips. He greets them politely; he always seems to remember that he's only a visitor here.
"This is scary, all this space," Free says a few minutes later. Just over a year after he opened his Shanghai branch of MFG.com, an online parts design and manufacturing exchange, the company has outgrown its current space. Big as this space seems, his general manager warns that MFG.com will outgrow it by the end of the year if its work force in China rises from 52 to 104, as expected.
Free asks whether the floor number, 44, is bad luck. He has learned to ask that, just as he has learned to ask whether the landlord will take care of installing carpeting and a ceiling (in China, it's customary to hand over a totally bare office) and about finding a feng shui consultant to assess the space. The entourage walks around the floor. Outside, far below, a seven-layer highway twists around itself and then spools out in several directions. It looks like a child's Lego fantasy, a concept that shouldn't be able to exist in the real world. Free scans the vast, empty floor. "How much space? From there until where?" he asks. "Actually, everything you see," says the agent.
When Free launched his business, in 2000, China never figured into his plans. MFG.com is an exchange where manufacturers and suppliers meet to do business. Say a manufacturer needs a part for a computer hard drive or a car door. It uploads design specs onto MFG.com, and suppliers bid on the job. The site took off, and Free soon noticed something he hadn't expected: Chinese manufacturers had found their way to the site, asking how they could pay MFG.com's $5,000 a year average annual fee for the right to bid on projects. Intrigued, Free flew to Shanghai, invited some of these manufacturers to dinner, and visited their factories. Meanwhile, U.S. customers were clamoring for greater access to low-cost Asian manufacturers. By mid-2005, says Free, "I really didn't have a choice. I had to open in China."
Not long ago, China was a place where American businessmen stayed in dingy hotels and dutifully chewed chicken feet and deer penis at ceremonial dinners. No more. Free eats blue-cheese burgers, sushi, and rack of lamb in Shanghai. He drinks Tsingtaos and Bombay and tonics and French wine. These days, Shanghai is full of Americans. The flight from Chicago to Shanghai could be a trip to Wal-Mart (NYSE:WMT) headquarters in Bentonville, Arkansas: lots of American men in short-sleeved shirts talking about factories and production. In the basement of the Shanghai building where MFG.com has its current office, there's a Starbucks (NASDAQ:SBUX) and a McDonald's (NYSE:MCD). After a day or two in Shanghai, the place can seem deceptively familiar.
But of course it is different, very different. It may be teeming with Westerners, but China remains a profoundly challenging place for foreigners to do business. It's not just the laws, the accounting system, and the banking regulations. That's the easy stuff. What's really tough is fathoming the business culture, the way workers relate to their employers and even just the way sales get done. And, of course, there's the language barrier. Each interaction has its own nuance, its own way of unrolling. Sure, China's brand of capitalism is raw and full of energy, just as it often is in America. But that's where the similarities stop. And American entrepreneurs risk losing everything if they get China wrong.
When Free first showed up in China, he knew he had a lot to learn. Though he is confident and curious, he knows what he doesn't know. He had never traveled abroad before his mid-20s. A man whose college career lasted six weeks, Free says he has read only 10 books in his life, one of them about China. He approached the place with an open mind. He searched for young Chinese managers who had excellent English skills and could show him the way. He listened carefully and was polite to everyone he met. And his efforts are paying off. China accounted for 11 percent of MFG.com's $22.8 million in sales in 2007. This year China sales are on track to reach $6 million, with overall sales of about $35 million.
But Free, who travels to Shanghai once every two or three months, is still clearly feeling his way in China. Even getting to work can be a challenge. On his way to his office one recent morning, Free gets as far as the elevator bank, then is overtaken by a swarm of people who push him aside and cram into the elevators. He moves and waits and loses his place, missing one elevator car, then another, then a third. He finally stakes out a spot in front of an elevator, and, at last, the doors open to reveal his general manager, James Jin, smiling serenely at the back of the car. (Jin takes the elevator down to the basement level, then rides back up to outwit the hordes.)
When he started looking for a Chinese general manager, Free wasn't sure someone like Jin existed. Free had hired a recruiting firm to send him candidates, and its top picks barely spoke English. "It was starting to scare me," Free says. "Not only were there language issues; there were obvious cultural issues. I was going to abort." But just before he abandoned the idea of opening a Shanghai office, Free threw a dinner for some manufacturing clients, among them a particularly serious and taciturn fellow. The next morning, Free got a call at his hotel room. "He says in perfect English, 'How can we work together?' " It was Jin; the quiet guy from the dinner had tracked him down. Free soon realized Jin would make a great general manager. He is a Beijing native who graduated from the Thunderbird School of Global Management, near Phoenix, and worked in manufacturing in the U.S. before returning to China. He also turned out to have an American-style sense of play. He calls his boss a "crack-ass cracker."
Managers like Jin, who can bridge the two cultures, are hard to find and don't come cheaply. Jin earns $250,000 a year, plus stock options; in Atlanta, Free says, he would pay someone in the same position $175,000, with about 40 percent fewer stock options. "When I started to get into negotiations with James, I was thinking 50K a year, maybe," Free says. "I was taken aback." IT managers and sales and business-development executives can expect as much as $100,000 a year, about what they would make in Atlanta. Below the top tier, though, salaries drop sharply. A sourcing engineer, who reviews design specifications, earns about $15,000 a year here. In the U.S., Free says, the same employee would earn $100,000, and in Europe, $120,000.
Another huge difference is the importance Chinese employees attach to their job titles and their promotions. Frequent promotions often count for more in China than salaries, and it's a full-time job simply managing the process of stepping people up, and down, the ladder. That's why one of Jin's first hires in China was a human resources manager. Salespeople are often eligible for promotion every three to six months. Yet if they don't meet their sales goals for three months in a row, they face demotion, a common practice in many Chinese industries. But what Chinese workers seem to care most about is having an opportunity to hone their skills. "In each interview, the first question is about your training system," says HR manager Karen Huang. "Then, 'Can I have a career path?' Then, salary." On all these criteria, MFG.com scores highly, says Huang, 32, whose career has already spanned stints with Chinese units of American, German, and Taiwanese companies. Even so, she urges Free to offer even more training and more slots for promotion, and he quickly agrees. MFG.com's Atlanta and Geneva offices, Free says, tend to think of the Chinese employees as less sophisticated, even a bit primitive. In fact, some Chinese managers are head and shoulders above their U.S. counterparts. "We've been looking for a year for a person like Karen in the States," he says.
During each of his visits to China, Free meets individually with his managers -- to glean what's happening, ensure that Jin is doing a good job, make sure no one is about to quit, and, mostly, to applaud everyone he sees. To the new sales manager: "You're a rock star. We're very happy to have you." To a new customer service rep: "I'm very proud to see you and to meet you here." To a quality-assurance specialist about whom Free barely knows a thing: "I was hearing how good you are."
Free appears genuine and sincere. But all the backslapping also serves a purpose. Free wants to keep his Chinese employees pumped up, because MFG.com is up against some stiff competition.
First and foremost is the sizzling hot and much larger Alibaba.com. But Alibaba is a more basic matchmaker that puts buyers and sellers together, leaving them to negotiate offline. Free is positioning MFG.com as a full-service provider, both for the mostly American and European manufacturers that use his service and for the contractors, which increasingly are Chinese. Unlike Alibaba.com, for example, MFG.com keeps records of all the online negotiations and design drawings between the various parties and even coaches Chinese and American companies in how best to deal with one another. Alibaba may be bigger, but Free will tell you that MFG.com goes deeper. And plenty of companies are listening. "This is an amazing, amazing market -- you can feel the energy in Shanghai and all over China," he says. "If there's one market in the world that I don't want to screw up, it's China."
Shanghai is a long way from Tyrone, Georgia, where Free grew up. Tyrone is 25 miles southwest of Atlanta on I-85, also known in some parts as the Alan Jackson Highway, for the country singer. Though it's now considered part of the Atlanta metro area, Tyrone was a town of 160 when Free was a boy. As a small-town kid, he helped haul trash for his father's construction company. Free's dad took only one three-day vacation a year, usually taking the family to Florida. While growing up, Free never traveled outside those two states.
By the time he was 20, it was looking as if he never would. He dropped out of college after six weeks. The math courses threw too much homework at him too quickly, he says, and he was embarrassed to be taking remedial English. He enrolled at Griffin Technical College to take a one-year machine shop course, and in 1982, he got a job as a machinist. Three months later, just after his 20th birthday, he married his high school girlfriend. (They later divorced.) His initial job was running a stamping machine that pressed out the metal window lining for Ford Aerostar vans. He pressed a button six to 10 times a minute, 360 to 600 times an hour, 10 hours Monday through Friday and eight hours on Saturday. One day, his boss asked who on the floor knew about computer-aided design and manufacturing, otherwise known as CAD/CAM systems. Free's hand shot up. In fact, he didn't know a thing about them, but he did know he was meant for more than life on the plant floor.
After studying some technical manuals, Free, who has a knack for all things mechanical, started working on digitizing his employer's manufacturing systems. In 1988, Northwest Airlines (NYSE:NWA) poached him to work on its CAD/CAM manufacturing projects. He rose to become a fleet manager there, then the director of technical operations. In 1998, he left the airline to start a company that distributes CAD/CAM systems, 3Datum. He soon noticed all his clients were complaining about how difficult it was to find suppliers. That's when he hit on the idea for MFG.com, which he started in 2000, after selling 3Datum for $1.2 million. He bootstrapped the company, pouring all his energy into it. "When you have everything tied up in the business, you focus like a freaking laser," he says. In 2005, when a publicly traded French software company came sniffing, Free agreed to be acquired for about $25 million.
But three weeks before the deal was set to close, Free received a call from Seattle. Jeff Bezos, the founder of Amazon.com, wanted to meet. Bezos had heard about MFG.com from engineers at his rocket start-up, Blue Origin, which used the service to source components. Free flew to Amazon's headquarters, where Bezos argued that if MFG.com was acquired, it would never live up to its potential. Instead, Bezos offered to become an investor himself. Free backed out of his agreement with the French, and Bezos's personal investment company, Bezos Expeditions, bought a minority stake for about $14 million -- which included $2.1 million in cash for Free. In January of this year, MFG.com's prospects got a boost when a pair of Fidelity VC funds kicked in $25 million. Free sold a big chunk of stock with that round, and his stake dropped from 51.2 percent to about 24 percent. About 20 percent of MFG.com's shares have been awarded to employees in the form of stock options.
Free's a rich guy now. He has a condo in Montreal and a house and a condo in Atlanta. He buys bright Nodus shirts from Paris and just shelled out $140,000 for a 2008 Maserati GranTurismo. He also has a latecomer's enthusiasm for travel. Free had never traveled abroad until 1988, when he visited Germany for a Northwest training seminar, and then with embarrassing results: His Georgia accent was so thick that the German instructor didn't know Free was speaking English. "That trip to Germany was shocking, that my English was that poor," he says. "I think people perceived me coming across dumb." He returned home, hired a linguistics coach, and bought audiotapes to help him soften his accent. When Northwest posted him to Montreal, in 1995, he met his second wife, Debbie, and they started to travel together.
Free encourages a similarly cosmopolitan attitude at his company. When he opened the China office, he held seminars in Atlanta, bringing in Emory University professors to talk about international business, currency, religion, and cultural issues. He also offers $750 and an extra two days' vacation for any Atlanta employee who agrees to vacation outside the United States.
On a tuesday morning in Shanghai, which is 13 hours ahead of Atlanta, Free wakes up at 4:30 a.m. for calls with the Atlanta office, goes to the hotel gym to log some time on the stationary bike, sends a bunch of e-mails, and finally climbs into a van heading west of Shanghai. He's off to visit a supplier MFG.com has recently signed up. The trip is part of Free's effort to build guanxi, a Chinese concept of doing business based on networks and relationships. The windows are fogging from all the quiet talking in the car. Free takes a call from an American applying for the post of chief technology officer back in Atlanta. The three Chinese marketing employees who have arranged this field trip, all women in their 20s and 30s, are exchanging cell-phone photos of their boyfriends and dogs with Lindsay Bradshaw, MFG.com's Atlanta-based PR manager. As the van advances along the six-lane A9 highway toward Hongqiao, sprawling growth is everywhere. Billboards abound for McMansion-type housing developments and "golf estates" on gleaming ponds, advertised in both Mandarin and English. Then the van turns into the Qingpu Industrial Zone, and apartment buildings give way to one factory after another lining both sides of the road. For the next half hour it's an uninterrupted stream of factories with names like Every Joy (Kunshan) Holding, Kunshan Leadlong Knitting, and Kunshan Lily Textile. These are the companies Free wants to sign up as clients. The goal is to have 20,000 onboard by 2011.
Finally, the van arrives at the supplier's factory, Shanghai Maxton Industrial Company. It's a gray two-story building on a side road lined with rubble and old men smoking cigarettes. The van drives in, attracting giggles and stares from workers outside on their break. They are young men and women, in ponytails and Mohawks, wearing jeans and royal-blue jackets, all sipping tea from mugs and plastic cups. Free hops out of the van and is quickly surrounded by a few older men with a managerial air who usher him into a chilly conference room.
When Free first came to China, he wasn't sure how to find, let alone sell to, Chinese suppliers like this one. You can't purchase a directory of small manufacturers, as you can in the States. MFG.com has assembled a team of about 20 interns in Shanghai who collect and screen the names of Chinese suppliers. They find listings through yellow pages, Web searches, and trade show directories. The team is made up of mostly college kids who work part time for 800 renminbi (about $114) a month, plus 1 renminbi (14 cents) per call. The team has identified 58,000 suppliers and aims to have a list of 100,000 by the end of the year.
Shanghai Maxton makes parts for industrial gear. In silence, Free and the Chinese factory managers exchange business cards one at a time and nod firmly at one another. Then everyone sits, sips green tea in paper cups, and watches two long multimedia presentations about the metal stamping and cutting facilities. The language barrier is high here, and everyone remains silent rather than engage in the usual business banter. Finally, the second presentation ends, and the lights go up. "Thank you. Very nice," Free says.
"Have you any questions?" asks a Chinese sales manager. "Not about that," Free says. He's more interested in hearing about how MFG.com stacks up against its competitors. Maxton, he learns, also uses a Chinese competitor called MadeinChina.com. Free begins firing questions at his hosts. Do they get good service from his Shanghai office? ("Yes, sometimes they recommend some customers to us.") Is the stronger Chinese currency and value-added tax making it harder to compete? (Yes, it increases costs 15 percent.) Will they transfer some work to lower-cost countries like Vietnam as a result? (Not yet.) Is MFG.com's website fast enough? (No.) Can they understand drawings written in other languages? (Yes for Japanese and English; no for German.) They will follow up this stilted exchange with an equally stilted lunch, everyone sitting around a lazy Susan in a rundown banquet room at a nearby restaurant, with a waitress in a stained red skirt serving boiled fatty lamb and slippery shrimp. Free will say, in slow English, how delicious the food is and thank the managers for taking the group to lunch and for using MFG.com.
First, though, a factory tour is in order. Though the screams of metal on metal and puffs of machinery drown out most of what the Chinese managers are saying, they are eager to show off their systems. The factory is clean and organized. With Free's staff translating the more intricate explanations, the Shanghai Maxton executives run through their quality controls and workflow charts. The employees, they say, earn a base salary of about 1,200 renminbi (about $171) a month for five eight-hour shifts per week, and they get a housing stipend and two meals a day at the factory. (The factory lunch smells and looks pretty good: fish in sauce, a leafy green vegetable, rice, and sprouts.)
Free pays several compliments about the cleanliness of the factory, then steps away from the tour for a moment. He is diverted by a grim-faced young woman sitting at a boxy, beige machine. If she understands English, she doesn't let it show and ignores the American CEO and the fuss her bosses are making over him. She is on the clock, cutting holes into sheets of metal, six times a minute, 360 times an hour, eight hours a day. Free takes a long look at her. That was once his job, too.