How To Profit In China

The following is a translation of an uncopyrighted instructional manual on Hong Kong small- and medium-sized enterprise owners on what to watch out for among their local managers.  This came as an email that the recipient was encouraged to forward (see, for example, the Kong Chan blog; backup copy at ESWN).

Corrupt practice by Hong Kong people in mainland China: A Must-Read for small- and medium-sized entrepreneurs setting up factories in mainland China.

The author is a Hong Kong department manager assigned to work in mainland China and is a second-line manager in the electronics production industry for more than 10 years.  During this time, the author has seen or heard about many repugnant behavior by managers from Hong Kong in mainland China and wishes to share those experiences.  The electronics production industry, especially the smaller factories, do not have adequate internal controls and the owners seldom visit their factories.

Based upon the author's experience, the best way to swipe a lot of money is to install one's own trusted lieutenants.  Ideally, the personnel manager should be one's wife.  The engineering department, the production department and the warehouse should be manned by one's own people.  In order to hide the secret dealings, it will be necessary to pay people off.  Most people in these situations only want to swipe as much as money as possible within a couple of years, without worrying about being fired anytime.  What they can make with the illegal and improper moves is ten times, or even a hundred times, more than their regular pay.  The following 15 points serve to remind the Hong Kong entrepreneurs who set up small- and medium-sized factories in mainland China that they have to be wary about the ugly Hong Kong managers.

I know a Hong Kong manager named Chen.  Two years ago, he was still living in a public housing estate.  Today, he has bought houses in Hong Kong and China; he has BMW's in Hong Kong and China; he has a mistress.  His salary is HK$450,000 per annum, but his under-the-table income is HK$7 million per annum.

1. Wages

(a) Invisible wages

At peak season, the factory employs 4,000 people; during the off season, the factory employs 1,000.  But there can be many invisible workers.  For example, only 1,000 people show up to work, but the accounts (including the worker cards and personnel records) shows 1,500 people.  All it takes is forging 500 worker cards.  This is easiest with a company that pays with cash.  As long as the personnel department and the electronic production department go along, it is easy to forge the worker cards and punch them in and out with a card puncher at a hidden location.

(b) Workers who resigned or leave before the probation period

Their worker cards are collected and then entered in full at the end of the month with the full pay going to oneself.

(c) Deposit

When new employees enter the factory, they have to put down a 30 yuan deposit.  For various reasons, many people do not get the deposits back when they leave.  This may add up to tens of thousands of yuan at the end of the year.  These numbers do not appear in the accounting books, and one can therefore pocket the money at the end of the year.

(d) Fines

Fines when employees make mistakes can amount to tens of thousands of yuan at the end of the year.  These number do not appear in the accounting books, and one can therefore pocket the money at the end of the year.

(e) Dismissals

When workers are dismissed for serious problems (such as theft), their wages are often withheld.  One can forge their signatures and keep their wages.

(f) Hiring

When it is necessary to hire many people to expand production, one looks for an employment agency.  For each new hire, 300 yuan is paid to the agency but one can receive a kickback of 100 yuan per head for more than 10,000 yuan per month.

(g) Uniforms

One speaks to the manufacturer's sales person and get a 5 yuan kickback for each uniform.  If there are 20,000 persons at a factory, and each person orders two, this amounts to 20,000 yuan.

2. Equipment purchase

There are many methods of mischief.  In one method, one finds a friend to set up a shell company called A.  When the factory wishes to purchase 20 communications machine, one asks companies A, B and C for quotes.  Actually, companies A, B and C are all fakes.  The contract is then awarded to company A.  So company A goes to Guangzhou to buy the equipment and then sells it to the factory at twice the price.  At delivery time, there are more tricks such as receiving 10 machines while signing for 20; at inventory time at year's end, one can buy some second-hand used equipment in place.  One can easily make 100,000 to 200,000 yuan.  Good equipment can be reported as broken, irreparable or even stolen, and then sold to used equipment dealers.  There are many more such tricks.

3. Outsourcing

One looks for other factories to outsource the work while asking for kickbacks.  For example, one cent per item paid in cash.  The small amounts accumulate over time as long as the boss does not find out.  One applies pressure on the Quality Control and Supplier Quality Engineer departments to ignore the quality of these outsourced products.

4. Raw materials

(a) One gets the Production Material Control person to check on the computer to see if there is anything in excess in inventory and sell it immediately.  I had once seen that the BOM list was incorrect and there was more than one million triodes in excess.  Of course, that was sold off.  The production department asks for the more expensive materials than needed and also use them frugally.  Also, the computer is rigged to reflect a figure that is more than the actual amount used.  This will yield 30,000 to 40,000 yuan per month.

(b) Using inferior material: for example, the client specifies that the aluminum lines must use Alpha metal, but one can use inferior local aluminum at half the cost with a faked invoice from the supplier and cooperation from the Incoming Quality Control (IQC) person.  When the client conducts an audit, one switches back to Alpha metal just in time.  This will yield 30,000 to 40,000 yuan per month.

5. Decoration

One must find one's own company to do the work, so that there is room for negotiation.  Ideally, the work should be exaggerated and the price inflated, so that it is neither cheap nor good.

6. Large equipment

On one occasion, a large piece of equipment was sent from Hong Kong to mainland China.  During the unloading, it was damaged.  So a friend was brought in to fix the equipment and the insurance company paid for the maintenance.  This is a minor issue, but several days later, the machine came back as a piece of used equipment that is only half new.  This was good enough to make more than 100,000 yuan.

7. Cafeteria

One must find one's own people to manage the place.  The food does not have to be too good; it is enough that no worker dies from starvation.  From buying rice and salt to selling the leftovers, there are chances for kickbacks everywhere.  A factory of 1,000 people can yield 70,000 to 80,000 yuan per month.

8. Residence

One rents from a friend or else one buys one's own apartment and then leases it back to the company at a high price.

9. Maintenance

(a) Car maintenance.  One sets up an arrangement with an outside auto repair shop owner and sends all the factory sedans, trucks and forklifts there every month for maintenance.  There is obviously a kickback that is no less than 10,000 yuan per month.

(b) Equipment maintenance.  Exaggerate the cost of maintenance, increase the number of maintenance visits and inflate the total amount as much as possible.

(c) Accessories.  I know that there was an AI(auto-insertion)/SMT (surface mount) accessory company that offers a monthly kickback of 10% to Hong Kong managers.  At the time, the factory needed AI/SMT equipment accessories worth more than 200,000 yuan per month.

10. Fuel sources.

(a) Diesel oil (for the electric generator): go out with the diesel oil supplier for dinner and see if there is any room for discussion.

(b) One then gets an agreement on padding the delivery quantity in return for a kickback.  When the diesel oil is delivered, the quantity is padded up.  At some factories, it is necessary to get the cooperation of the incoming material inspector to fudge the forms.  This will yield 20,000 to 30,000 yuan per month.

(c) Another trick is to have the diesel truck deliver the correct quantity during the day.  But in the middle of the night, a diesel truck comes to the factory to pump the diesel oil back out from the fuel storage tank.

(d) Automobile fuel:  One sets up an arrangement with an outside petrol station, so that all the sedans, trucks and forklifts must go to that station to re-fuel.  The kickback may be worth at least 10,000 to 20,000 yuan per month.

(e) Electricity and water are supplied to the food and convenience stores in front of the factory.  Obviously, the big boss has no idea that the stores have to pay for these services.

11. Waste materials

(a) One assigns one's trusted aide to deal with the garbage recycler, so that 100 pounds is written in as 50 pounds and so on.  One can make more than 10,000 yuan per month.

(b) One can sell off perfectly good materials as waste.  Certain items are re-usable, but the savings would benefit only the big boss.  But if sold off, it will benefit oneself.

12. Car rental

One finds a friend or else one buys one's own car and then leases it back to the company.  The price is obviously set very high.

13. Fixed assets

Each time that the factory moves or re-decorates, there is the opportunity to sell off a lot of old and even new assets.

14. Side business

One can run one's own business.  For example, one can get projects from other factories to run during the night when the boss is sleeping.  One uses the boss's equipment and electricity, and the workers are paid for outside work.  At my factory, the Hong Kong factory manager receives rinted circuit boards from outside to do surface mounts between 0:00 and 5:00am.  By 6:00am, everything is cleared away and all materials and products are trucked away.  This went on for two years without the big boss knowing, earning several million yuan for the manager.  The worst thing that he was using the boss's solder paste, which is quite expensive material.

15. Be one's own boss

One sets up one's own factory outside to supply simple things (such as screws, iron sheets, A4 paper) to this factory.  One makes up the invoice and does one's own incoming quality control.  Obviously, the quality is dubious and the prices are inflated.