He inspects facilities worldwide, including stateside. What he has found through long experience is the problem in China of attempts to cut corners that he has not had the same level of problems elsewhere.
I also worked for a large multinational corporation that considered China - but after a management visit found the quality control abysmal and limited the kinds of things that could be manufactured there severely.
While you and your uncle may have excellent reasons for your impressions about Chinese corner-cutting, the fact is that both Apple and Dell began assembly in China when they were minnows compared to their present sizes, yet have preserved their reputations for reliability that remain better, or at least no worse, than the competition. And well before they began assembling in China, they were using Chinese-made parts. As a consumer, I have sampled the products of various American, Japanese and Korean manufacturers before and after the move to China (with an intermediate period in Taiwan, S Korea, Singapore, Malaysia, Thailand and Indonesia) and I honestly can't tell the difference. Perhaps the difference is the degree of hands-on involvement. Before the era of massive (and reliable) subcontractors like Taiwan's Foxconn (aka Hon Hai), companies used to build their own facilities from scratch. Either way, they had up-and-comers from HQ stationed there, typically on rotation, to make sure the locals kept their noses clean. Simply parachuting an auditor in every few months may not be sufficient.
Sent: Monday, March 02, 2015 2:43 AM
To: Whitney Tilson
Subject: You on TV
Whitney,
I watched the 60 minutes piece. Congrats.
Having done business in China for literally decades, what I found most amazing in the piece is the LL CEO's statement that they trust their manufacturers. If that is true, then the company is guilty of incredible naivete or incompetence.
I have negotiated with factories in China. What happens is that the American buyers drive a hard bargain.....and with multiple factories, as LL has, the factories know that they are in competition with one another. A negotiation always comes down to pennies. It is pretty common for the Chinese factory to do what they have to do to keep the business.....ie, agree to the best price they can get from the buyer, but agree nevertheless. And then, once they have the business, they try to figure out how to make money on it.
But a reasonably savvy buyer knows that, and has approved samples against which actual production is compared. If the actual production does not match the approved sample, then the production is rejected. We did that with just about every production run. If LL didn't do that, then they deserve whatever flak they catch....not because they are deceitful necessarily, but just because they are incompetent.
Of course, if they knew about it, and were complicit either by looking the other way or somehow condoning it, then that is a different story. Either way, however, the company is guilty. And the State of California goes after the seller, not the supplier. So a company like Home Depot, for example, will have a standard clause in their contracts whereby the vendor indemnifies Home Depot against any action that may arise from a product that they sell, made by the vendor.
But a vertically integrated operation like LL, where they are both the retailer and the supplier, has no place to hide if the California DOJ comes a'callin'.
Even with our best inspections, our best efforts to compare product against the approved samples, from time to time, there would be quality problems. We had our standard purchase agreement which we executed with each factory that supplied us, which allowed us to deduct from future payments to them, whatever quality charge-backs we received from our customers. That is unbelievably punative. Here's why:
Suppose a product was sold to us FOB China for $10. By the time it landed in the US, freight and duty etc included, it cost us $13.20. We would then sell it to the retailer for $20 (which would net us about $18 after advertising deductions etc.) And they would sell it for $40. If the consumer returned the product, the store refunded the consumer the $40 she paid. And charged that $40 back to us. We in turn charged the factory $40 for one defective product they had originally sold to us for $10.
The point is that, knowing they stood to risk a 4:1 expense if the quality was poor, was the best quality control tool we had. The factories ultimately found it was much less expensive to give us the correct quality and make a smaller profit, than to cut corners and risk a 4:1 expense. In other words, they way you get quality control out of China is to make it in their economic interest to do what you want them to do.
Now I didn't learn this in business school. It is common sense. If LL doesn't have common sense, then they deserve to lose. As simple as that.
Anyway, I enjoyed watching you on TV.