Posted by Jeremy Goldkorn on Friday, November 28, 2008 at 12:32 PM
Paul French is author of the book Carl Crow, a Tough Old China Hand which recounts the life, times and adventures of the American Renaissance man and ad man in pre-revolutionary Shanghai.
A brief introduction to Carl Crowby Paul French
The shelves are collapsing under the weight of China books — why you should do business in China?; how to do business in China?; how to make a fortune in China?….Their continued publication on an almost weekly basis presumably indicates that people are buying them though whenever a publisher (after a glass of sherry or three) lets slip the sales numbers they're rarely what you might think.
Carl Crow's 1937 400 Million Customers was a genuine bestseller — multiple reprints; translated into numerous languages and sold strongly for the next 12 years. After 1949 it largely became irrelevant as 400 Million Customers were replaced by 400 Million Communists.
But now he's back and more relevant than ever in these recessionary times. Evangelical Christians in America apparently wear wristbands that ask them WWJD — 'What Would Jesus Do?' I'd advocate all China consultants get a wristband asking WWCD — 'What Would Carl Do?'
Carl is the man for all Danweites – clear, to the point and honest – a total absence of the McKinsey-MBA type BS that infests business in China. Carl reminds us that you don't need high priced consultants, just your eyes and a natural curiosity. Humour, lack of condescension, insight – I've said it before and I'll say it again: if you only ever buy one book on business in China then this is the one. Carl basically said it all…and he said it 70 years ago – he's simply matured with age.
Excerpt from Chapter III: Fortunes through profitless salesby Carl Crow
In every town, and in almost every part of every town in China, one will find in operation, on any sunny day, the smallest and most modest retail establishments on earth. The stock is sometimes displayed on a make-shift trestle board counter, but as frequently it will be found on a square of bamboo matting spread on the ground. Rarely does either the trestle board counter or the matting cover more than a single square yard. The pitiful stock invariably consists of what appears to be the most useless collection of articles it is possible to imagine — crooked nails, rusty screws, defective buttons, broken door knobs, cracked saucers, a couple of empty cigarette tins. It is just the sort of a nondescript collection of rubbish that a child might collect in an attempt to 'play shop' on an ambitious scale and that is really all that it is — a playtime store — but the players are old men instead of children. Every fine morning you can see these ancient playboy merchants trudging to their favourite corners carrying their precious cargo with them. There they assemble their stock, carefully separating rusty screws from crooked nails, and there they sit all day in the sun. If it is a rainy day the shops do not open. It is a pleasant life. They see the moving picture of the crowds on the street, pass the time of day with an acquaintance, chatter with competing merchants, and once in a long time they may actually make a sale. Someone may find himself in need of just the piece of rubbish he sees displayed and buy it for a few coppers. But these old merchants do not have to worry about their customers or make any reports on sales volume. A son or a grandson provides them with bed and board and they keep shop for the fun of the thing, just as old gentlemen in other parts of the world play golf or pitch horse shoes or go to offices where they are no longer needed. Perhaps some of them have wanted all their lives to be shopkeepers and are able to gratify their ambition only when in their dotage. If that is the way they want to spend their time, their children see that they are allowed to do so, for in China the whims of babies and of old men are always gratified.
To a great many foreign manufacturers the activities of the regular shopkeepers appear just about as futile and whimsical as this — so far as profits to the shopkeeper are concerned. Whenever any proprietary article becomes popular in China, either because of its merits or because of advertising, though usually because of both, we can be sure that it will be only a question of a few weeks until it will be selling in many retail shops at a price not only below the advertised price, but frequently below the wholesale or replacement cost. These price reductions develop and spread rapidly. There is no secrecy or privacy about the small retail shop in China; the fronts of most of them are open to the street so that a merchant, without leaving his own counter, not only sees all that is going on in his competitor's shop across the way, but can observe almost every individual transaction. If he notices that a standard brand of toilet soap is selling very rapidly, he loses no time about moving his stock of that brand up to the front counter and hanging out a sign offering it at a cent or two below the normal price or the price offered by his competitor.
The competing merchant counters with a further price reduction, and so the competition goes on until they reach a profit sacrificing price below which they dare not venture. News of these price reductions spread up and down the street and into other streets, and soon the whole town is selling the soap below cost.
One would think that this price-slashing would create more sales of soap and therefore be good for the soap business. This is true in so far as it creates a greater aggregate sale of soap, but it doesn't do the price-slashed brand any good. The merchant makes no profit on it, therefore is not interested in selling it. He displays the soap, hangs out signs telling of the cheap price, but when a customer comes into the shop he tries to sell him every other brand rather than the one which he appears to be pushing. He may even go so far as to say that this brand is not so good as it used to be, that he can no longer recommend it, and that that is the reason for the cut price. If the price cutting keeps up, the brand finally acquires a bad name as being one on which no profit can be made. The dealers will stock it, if there is an insistent demand for it, but they do so resentfully and under compulsion and make no attempt to sell it. Advertising has to carry the double burden of creating a demand for the product which is strong enough to counteract the antagonism of the dealer. Merchandising becomes a vicious circle. The more popular a brand becomes the more the price is cut, the more unprofitable it becomes to the dealer and the harder he will attempt to sell other brands.
The cutting of prices to below the wholesale or replacement cost affects only a comparatively few brands in retail shops, but there are a great many wholesale dealers in a number of lines who, as a matter of ordinary business practice, sell goods at exactly the same price they pay for them and, what is more, they have prospered and amassed fortunes by this fantastic comic opera policy. Incredible as it may sound at first, this method of growing wealthy is really very simple and very easily explained. The wholesale cigarette dealer, for example, is given credit for ninety days by the manufacturer and, if he is a big and important dealer, the manufacturer will not be too harsh and unbending with him about payment on the due date. The days of grace which are customarily allowed to creditors all over the world are more flexible in China and often turn out to be weeks or months. The wholesaler extends credit of a month to the more reliable retail dealers, but not more than one month, while he sells for cash to the small dealers and hawkers. It doesn't take very much of a mathematician to see that if he takes three months' credit for himself, gives not more than one month's credit to others, and has a monthly turnover of $5,000, he will at all times be cash in hand to the amount of two months' business, or $10,000.
All Chinese believe, and they are more or less correct in the belief, that anyone who has $10,000 at his command must be either a fool or very unlucky if he does not make a fortune. There are any number of legitimate enterprises he can go into which will enable him to make his capital earn money with a rapidity that is unknown in countries where more capital is available and interest rates lower. If he is conservative, he will become a banker and lend small sums at high rates of interest. Just how high these rates may be is indicated by a recent lawsuit in Shanghai in which the plaintiff claimed the return of his principal, plus compound interest at 10% a month, which he said he could easily have made. The judge considered this claim to be extravagant and did not allow it, but if the creditor had claimed, let us say, 2% a month, compounded monthly, there is little doubt but that the decision would have been in his favour. It is possible to get even higher interest rates on small short term loans at New Year, and the wholesaler could, without taking any dangerous risks, double his money in a few years. If he wanted to go into a more venturesome line of business, but one promising more liberal returns, he might finance a chain of retail shops or one or more wholesale establishments in different lines, thus doubling, trebling and quadrupling his working capital. By purchasing land and erecting small shops, he can secure profitable rentals, possession of the land will give him more credit which will enable him to purchase more land and build more shops, and so on ad infinitum.
The cigarette business is only one of many which enable fortunes to be made through profitless sales. China imports quite a large quantity of fresh fruits from America, principally oranges. An old custom has been established of selling this fruit to local dealers on thirty days' credit which, in practice, means that the importer hopes to get paid for it in thirty days, but usually has to wait very much longer. As soon as the retailer receives a shipment of oranges he sells them out as rapidly as possible, offering them, in his shop, at a price which is a little below cost and often sending hawkers to make office to office calls. As his sales are all for cash, he soon accumulates funds which he will not have to repay until some uncertain time in the future. With this he buys for cash fresh fruit from Northern China, which constitutes the bulk of his business, and if he is lucky and the season and the market are favourable, he may be able to turn the stock over several times and take two or three profits before it is necessary to pay for the original stock of oranges. In the meantime, the American fruit dealers have been financing all the fruit business of Shanghai and unwittingly aiding the sale of all competing fruits.
With a shop like this, where the taxes are infinitesimal, the shopkeeper has not only adequate business quarters, but a shelter for his family, who invariably live on the premises, and all he has to worry about is to make enough profits to provide food and clothing and meet the rent. The question of capital is usually very easily solved, for he can get some goods on consignment; even if he has to put up cash, the entire outlay would not be more than a few hundred dollars. It is remarkable what a brave showing can be made on the shelves for a very small investment through the judicious display of empty cartons. One never sees a shop which does not present the appearance of being crammed with saleable merchandise from floor to ceiling, but if the shelves were inspected it would, in many cases, be found that most of the cartons were empty and that the entire stock was not worth $100.
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