5 Things You Need To Know To Successfully Do Business In China, With Mikhail “Misha” Shvartsman

“I want to inspire a movement of civil service and other charitable contributions. Although many people may have never experienced poverty, unless they descend from royalty, at one point or another their ancestors had little to nothing. All people, of every race, nationality, color, income, and creed may be born equal, but the opportunities available to them are not. As an immigrant that came from poverty, I believe in giving back. Sure, no one helped my family, and we did fine. But, there was a degree of luck in the fact that we came to America during the economic boom of the 90’s. The most significant change would require people who have skills and finances to start giving back more. Many executives, lawyers, doctors, and other highly paid professionals have skills and access to funds that the general public does not. A $100 donation in India or Africa could help save an entire family from starvation for months. More so, an executive creating a non-profit to help feed these people could save even more lives. But, you don’t even need to do anything that extreme to help. Simply taking on an indigent client for free or for a nominal rate is a great start!”

I had the pleasure of interviewing Mikhail “Misha” Shvartsman. Currently, Misha serves as General Counsel for USB Memory Direct, a leader in the promotional flash drive industry. However, in addition to being an attorney, Misha is a computer programmer and an online marketing expert. Over the years, Misha has lived and worked in New York, Philadelphia, and now Miami. Without question, Misha’s varied and multi-faceted background allows him to approach challenges with a unique perspective.

Thank you so much for doing this with us! What is your “backstory”?

You could say that my family’s story is the same as that of countless other immigrant families’ stories — the classic, but now perhaps cliché, immigrant rags to riches story. Many years ago, the Soviet Union collapsed and my parents, moved into a tiny, cramped apartment in Brooklyn, New York, with only $500 in their pockets and ten mouths to feed. What my parents lacked in resources, they certainly made up for in determination, perseverance, and a strong work ethic. Within just a few years of arriving in America, my parents were conversational in English and wasted no time finding work in well-respected fields. My mom worked as a programmer for Merrill Lynch, and my dad worked as an engineer for Hoke, a valve and pipe manufacturer.

Looking back on things, I can say with certainty that having hard-working and intelligent parents was a privilege. However, I can also remember many times as I was growing up when having such parents proved harsher than the average upbringing. For example, I started messing with computers when I was 10 years old. Out of childish curiosity, I thought it would be a good idea to take apart my mom’s home office computer. Needless to say, my mom reacted in the way that only a Soviet-Jewish mother would, and she told me to either fix it or figure out how to earn $2,000 to replace it. Because my ten-year-old self was not yet ready for the harsh lessons in capitalism, I fixed it.

At the same time, my curiosity for computers only continued to grow. The following year, at 11 years old, I can remember becoming increasingly frustrated with a particular PC game and its pre-set “guidelines.” So I did what I imagined most 11 years old would do, and I successfully coded my first script using C and Assembly. My mom took notice of my interest in computers, and she put me in college-level math courses with her friend at Rutgers University in 5th grade. So, it should come as no surprise to anyone that by the time I turned 18, I began working for Best Buy’s Geek Squad. And, by the time I was 19, I was working for USB Memory Direct. Perhaps my parents had started to rub off on me.

As you can see, my history with USB Memory Direct is much longer than just the past year I have spent working as General Counsel. I actually began working for USB Memory Direct as a web developer and online marketing strategist, over ten years ago. Eventually, I left the company to become an attorney. After passing the Florida bar exam and after taking on a couple of cases, I started a law firm. As fate would have it, one year later, USB Memory Direct became my largest client. Shortly thereafter USB Memory Direct’s owner and visionary — Alex Mikulinsky — presented me with the opportunity to become a full-time in-house attorney at the coolest USB company ever.

We know that it is not always easy for a foreigner to do business in China. Can you share an interesting story about a challenge that you faced, and how you overcame it?

If you want to talk about interesting and China, you need to look no further than Chinese New Years, or as it’s called in China “Spring Festival.” The celebrations related to Chinese New Years last for 23 days! In fact, many factory-based employees even quit their jobs during this celebratory period. Spring Festival places our company in a difficult situation because we can’t afford to give all 23 days off to the employees at our factory in Shenzhen, China to avoid having them quit. While we do provide 14 days of time off during this holiday period, there is no avoiding having employees quit on you.

You must understand, the majority of the factory workers in industrial towns like Shenzhen are actually engineers from small and impoverished rural farming towns. Many of them studied engineering at their local university, while also helping their family run their farm. After they graduate, these people take their degrees and move to industrial cities like Shenzhen where they can earn higher wages. Understandably, each year for a couple of weeks, Spring Festival provides these employees with an opportunity to visit the families they left behind. The problem, as I said, is that many of these employees never return to work following their Spring Festival break/vacation. It’s merely part of the culture, economy, and geographic landscape of China. In fact, many of these employees could take one or two years’ worth the salaries they earn working in these industrial cities and live luxuriously back in their small villages for many, many years. Often, many of these people purchase land rights in their towns and hold them with hopes that their village becomes the next industrial city, like Shenzhen or Wenzhou.

In response to the fickle labor market in these areas, many factories in Shenzhen started withholding half a year’s worth of their employees’ salaries until the migrant workers return from their Spring Festival break. Unfortunately, that practice has not done much to deter some employees from not returning to their work assignments. The reality of the situation is that, even with forfeiting six months’ worth of pay, these employees can still lead a good, simple life for several years back in their villages due to the big difference in the costs of living. Moreover, even though we implemented programs that aim to treat employees better than our competitors, we too are not immune to this issue. For example, just this year, after five years of working with us, our primary 3D engineer never returned from his Spring Festival break. Unfortunately for us, this very skilled and knowledgeable engineer knew our manufacturing process better than anyone else.

The following may help you understand how problematic it was for our company to have this engineer not return to work. For the past decade at USB Memory Direct, we have offered a free basic 3D render to every customer requesting a custom-shaped USB drive. Our custom-shaped drives are not like other custom flash drives out there. Our custom drives are available for clients that want their own unique style of USB drive. We make them out of almost any material you can think of, including various metals, hard plastic, and PVC rubber. Whenever a client wanted advanced engineering parameters, this engineer was the guy who would figure out how to make it happen. Whether the issue involved needing to know the limitations of our casing molds or the thickness requirements of different polymers we use, this guy always knew precisely what to do. So what did we do after our efforts to motivate this engineer to return to work failed? We decided to upgrade our entire 3D system — textures and all.

As this story highlights, sometimes an issue becomes an opportunity. We hired engineers and 3D designers from five different countries. First, we started by having one group reverse-engineer our old textures. Then, we had the remaining groups compete against our old textures and render techniques. Meanwhile, our senior engineer flew to China to train a new prospect to replace the engineer who never returned. By the time their training was complete, we had a new and improved 3D system that looked even closer to our end-product than the former renders. On top of that, the new employee has worked out great so far.

Are you working on any new or exciting projects now?

We are working on an awesome new project that originated from our new 3D systems. We have been looking for ways to make our drives stand apart from the competition by researching new and different potential building materials. I can’t give away too much information pre-release, but I can say that the material is far superior to our former products, as well as those of our competitors. Today, the only thing left is to implement a uniform quality control process for the new material. Basically, this means we’re only about one month away from making these new unique materials available to our customers for custom USB orders.

We also have a big treat coming to regular consumers. We are working on projects involves licensing deals with huge gaming companies. Tucked away in the footer of our company’s website is our new web-store, where we plan to sell individual units of licensed products. Some products are being offered there already, but we don’t plan on moving the web-store from our site’s footer until more styles of USB drives are available for individual sale. We’ve always felt bad about the overpriced, yet low quality, flash drives flooding the consumer markets. There are only a handful of really well-manufactured consumer USB drives, so we finally did something about it.

I can’t discuss all the cool styles we will produce when we team up with different media and gaming companies. However, I can tell you we have been testing our new material’s coloring and mold systems by using emoji flash drives. We plan to offer our Emoji flash drives in our web-store by early September. To date apart from a handful of USB enthusiasts from Reddit, who found out that we provide our misprinted flash drives for free, no one knows about our consumer store. Don’t get me wrong, B2B is still our main agenda. However, there’s no reason individual consumers shouldn’t benefit from all the research and development we do.

What advice would you give to other business owners who do business in China, to help their employees to thrive?

The most important thing you can do to help your foreign employees interact with Chinese employees is to establish a suitable method of communication. As they say, communication is the foundation of any good functional relationship. This is equally as true for business relationships as it does for personal ones. When dealing with different companies, often manufacturers have miscommunications that lead to severe design or utility flaws. This is doubly true when you manufacture fully custom products like ours.

While we do employ translators and proxies in China that have a strong command of both Chinese and English, that doesn’t always do the trick. The best advice we can give is to use supplementary information that objectively expounds discussions. Though that may sound complicated, it’s often quite simple. They say a picture is worth a thousand words. Well in a Chinese-American manufacturing relationship, sometimes it’s worth hundreds of thousands of dollars. Also, let’s not forget, there is one universal language that all engineers know — math. So, as long you are looking at a calculation, percentage, or some other quantitative measurement there is no language barrier.

While specific procedures, pictures, and equations will work best in one situation, for other scenarios these same methods may not work at all. For very specific scenarios we employ a translator interfaced in a chat client that was coded by USB Memory Direct’s CTO, Nicholas Moller. With this software, a translator receives messages from Chinese employees and sends it translated in English to the American employees, and vice versa. In the end, the Chinese employee and American employee only see the chat in their native language. Both the originals and translations are indexed and saved for future reference in our software.

None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?

My hero isn’t a famous leader, nor some silver-tongued lawyer, but simply my mother. My family came to America from the Soviet Union with as close to nothing as possible. In the USSR, my mom was a math theorist. She really wanted to be a doctor, but the city she lived in had already met its “unspoken quota” of Jewish doctors. When she came to America, she saw computer programming as a chance to do mathematics for a living and work in a field that garnered respect.

Her first and last programming job was with Merrill Lynch. Unfortunately, after working at Merrill Lynch for a few years, she was diagnosed with Meniere’s disease. For those who may not know, Meniere’s disease causes vertigo — spinning and dizziness — and tinnitus — ringing in the ears. At one point, her vertigo and tinnitus got so bad that she couldn’t even get up from bed. She continued to struggle for years, most of the time bedridden, with intense tinnitus and vertigo. In the meantime, she subjected herself to every available treatment, from middle ear injections to numerous expensive otic surgeries.

When nothing was working, one day my mom simply decided to get up and fight through it. Anyone who suffers from Meniere’s or has had a loved one suffer through it will understand the kind of feat it is to “just get up.” Since then she has started and ran three successful businesses. Fortunately, eventually a steroid-hormone treatment came out which helped her get rid of her vertigo almost entirely. However, her tinnitus continued to get worse. Meaning that while she was building and running successful businesses, she was hearing loud ringing in both ears.

Living through those experiences with my mom has taught me the most important life lessons. First, never give up. Life has dark sides, but if you get stuck in them you can either sit there complaining or “get up” and do something about it. Second, expect no help. Even though my entire family tried helping mom, there was only so much we could do. For some things in life you can get help from your significant other, your parents, your children, or even your friends. But, if all you do is wait for help or for things to fall on your lap your life becomes a matter of luck. You must take matters into your own hands and you become the author of your own destiny.

To this day, when to comes to matters of important business decisions, and when attorney-client privilege allows, I call my mom for a consultation before I do anything else.

What do you think are the new untapped markets in China that may become the next “big thing”?

The biggest untapped market in China is the average Chinese consumer. People are used to the fact that nearly all their products come from China. However, people are not aware of how much the economic climate has changed for the average person in China. Unlike in America, where we allow our constituents the freedom to drive up credit card debt and go into financial slavery, China’s authoritative government has active control over its peoples’ personal finances. People who travel are likely aware of this. Last time I was in France, the luxury boutiques, museums, and high-end restaurants had more Chinese tourists than French nationals. There were even special lines for Chinese speaking individuals at the malls.

XiaoMi is the best case study for using the Chinese consumer to establish a brand. Growing into the 4th largest smartphone company in such a short time was no easy feat. Prior to XiaoMi going public, they sold their tech — cell phones, smart home technology, robot vacuums, and more — at wholesale prices in regular consumer markets. This allowed them to establish a significant market share. They went public this year. It comes as no surprise that their IPO came in below their valuation. Before becoming public, the company was selling at wholesale prices with small margins. Now, they need to focus on profits. Regardless, they used the Chinese consumer to leverage their brand. They have grown so large that they have managed to disrupt Apple, Samsung, and Huawei market shares in Europe and Asia. I think they will soon be doing the same in the United States.

We keep hearing about the “Trade War.” What are your thoughts about it? Given the unknowns, how do you plan to pivot?

The memory and semiconductor market is unique. For our company, there are three major points we analyzed. First, we looked at the tariffs that President Trump is threatening China with, as well as the then-existing proposed tariffs list that was published after his directive was enacted. Since the new import tariff list has come out, Trump has threatened to instill even more tariffs on China. Second, we looked at what China is doing in retaliation. Chinese courts are self-interested and do not put much weight into the legal principle of “conflict of interest.” In fact, the judge overseeing the Micron case in China quite literally has a financial interest adverse to Micron. Which leads me to the last point our company had to analyze: Micron. Micron is a massive player in the NAND industry.

Let’s start with the tariffs. 10% is not an issue for us, but 25% may be an issue. Our customers already know that the memory market constantly fluctuates in price. Every year, months before their new phones are released, Apple and Samsung buy out every grade-A 64 GB chip available on the market. For everyone else that requires these chips, that means acquiring them becomes very hard and expensive; sometimes even impossible. Of course, other factors affect the memory market as well. Fortunately, the trade war has not changed our market (yet).

The next points are China’s retaliation and Micron. Trump stopped Micron from sending 26 types of chips into China, but none of them are NAND. It’s also important to note that all those 26 types of chips, combined, make up less than 1% of Micron’s business. Recently, Chinese courts granted a temporary injunction against Micron in an effort to stop Micron from “over-charging” for DRAM — which is also not our product. However, 80% of all semiconductor factory profits come from DRAM. This means that the price at which NAND is offered is dependent on the profit-margins existing in the DRAM market. All these factors work to make the semiconductor side of the trade war much different than the other industries in the trade war.

The world demand for Chinese products gives them the advantage in this “war.” Yet, that advantage only applies to exports. China cannot produce NAND, DRAM, and many other types of chips yet. Thus, the current demand cannot risk a drop in the market’s supply. Any problem in China’s supply chain would hurt every electronic market in which China is a major player, both domestically and internationally. Micron, on the other hand, has stated that restrictions China plans to implement would be a zero-sum game for them. Though Micron would ultimately sell fewer chips, other nations are willing to pay and would pay much more than China. This means China will most likely back down, or suffer drastic economic losses until they can manufacture these chips.

What is interesting, however, is that the Chinese court that ruled against Micron did so without giving Micron a chance to represent themselves. This may have happened due to the conflict of interests that exist in Chinese courts. The positive here is that these courts are regional. The overarching central government has yet to make a move. Hopefully, this means that this issue will be corrected once they do.

As for the tariffs, we are already indirectly paying China a “fee.” Currently, every exporter and manufacturer of USB drives in China must pay a fee to the current holder of the Chinese “patent” for USB flash drive. This is a result of a series of rulings in the Chinese courts, which many disagree with. So if the tariff will be 10%, it will still not make it more convenient to manufacture in America. That’s just another cost of doing business.

However, a 25% import tax will change things. We would have to move production of more of our flash drives to our main importing countries like the United States. We already produce certain orders in America. Rush orders, specifically, are always done in the United States. The issue is not the end-stage production, but the chip sourcing. In practice, China acts as the clearinghouse for almost every chip related transaction in the global marketplace. Establishing new connections to source memory chips post-restrictions may prove difficult and time-consuming.

Additionally, the tariffs would raise our costs and hurt our margins. Even though the value of our products is higher than the price we charge for them, the low-quality chips others use requires us to sell our products at lower margins in order to be competitive. At the same time, our products represent one of the more expensive luxury marketing tools available to potential clients. Unlike most wholesale USB companies, we have an extensive QC process for our wholesale flash drives. Regardless, we still have to price at low-profit margins to compete with companies that are selling lower quality chips for much less. Thus, a 25% import tax would hurt us more as it concerns the particular chips that we pay more for, than the cheaper quality chips some of our competitors are purchasing.

What are your “5 Things You Need To Know To Successfully Do Business In China.” (Please share a story or example for each.)

1. Understand that you’re not in Kansas anymore.

Much like Dorothy and Toto in the Wizard of Oz, when you go to China you may feel a bit displaced. Whether it involves keeping yourself up-to-date with regulations in your industry or understanding the culture, if you want to work in China you need to know the lay of the land. Before modern history, China was one of the largest empires. As a result of factors ranging from their conflicts with Japanese invaders to modern industrialization, the atmosphere has changed. But, this also means so have China’s laws, cultures, and consumers.

2. Hire employees in China.

Like with any business, the more you grow, the more you need to rely on others. No matter how much you want to control the process in China, you will need someone on the ground to manage daily operational tasks. Assuming you don’t own your factory, if you produce products in China, you must hire a QC specialist that will visit factories to check your products before they ship internationally. Though shipping with UPS has become efficient in China, the costs and processes involved in receiving, returning, and replacing nonconforming goods could cause you to lose more business than you’d imagine.

3. Be patient and ask questions.

When researching the Chinese consumer, or even manufacturing in China, you must be patient. The differences in our cultures make particular proposed actions seem like mistakes to us, while at the same time be praised by the Chinese. This is most true when it comes to issues concerning QC processes. Doing things faster and cheaper is the motto in Chinese industrial towns. Though this is changing rapidly in larger Chinese cities, the price of a product is still the main competitive advantage in rural areas. You need to patiently explain and motivate your Chinese workers to understand that a product’s manufacturing cost is not the only consideration when analyzing value.

Further, you need to understand that what the words “not possible” means to you, is not the same for them. Many times they are just trying to say this is not possible without incurring additional costs. Other times, they mean that the production rates will drop. Rarely does it mean that it cannot physically be done. If you show patience, ask questions, and work closely with these employees they will come to understand your goals and vision.

4. When it comes to factories, you should judge a book by its cover.

There are as many factories in some Chinese cities as there are books in a library. When you start selling a commonly manufactured Chinese product, you start getting the bottom feeder factories contacting your company asking you to use them as a supplier. Everyone working at USB Memory Direct, and most likely everyone in the custom USB drive industry for that matter, gets at least one email a day that includes price quotes from Chinese factories that they have never worked with or even heard of.

So, what do we mean by judge the book by its cover? When we visit China and research different shell companies — the companies that make the casing that goes around our flash drives — one of the first things we look at is how clean the factory is. Dust is an issue in China. When you work with printing or molding colored products, dust can affect how your materials or inks cure. Dust can also change the texture and consistency of products. A factory that isn’t clean can have residue of other materials on their equipment that can work to ruin your product.

5. China is still changing.

Chinese citizens are finally starting to better appreciate the damage their industrial rise has done to their environment. Mercury deposits in soils, unmanaged waste, industrial smog, and gutter oil is as common in China as hot dog stands in New York or Chicago. This has caused the Chinese government to take a second look at the effectiveness of their current scheme of laws aimed at protecting the environment and their lax stance on industry-wide production and manufacturing-related protocols.

There are also many changes in the realm of Chinese employment strategies. While this area is changing very slowly, it is changing. Instead of training someone unqualified for their position at a quarter of the cost, or less, many Chinese companies are now making hiring decisions based on the qualifications and experience of the candidate. Chinese companies are also beginning to understand the main advantage of adhering to scrutinous QC processes, like those involved in the production of many U.S. products, as opposed to their former “laid-back” standards. Certain consumer and industrial products, like solar panels for example, don’t differ much, if at all, in terms of quality when you compare the high-end Chinese manufacturers to their competing manufacturers around the world.

Brand recognition and customer experience have become a more common concern for Chinese manufacturers. U.S. companies see this as a no-brainer in any industry that requires customer retention. It makes sense that China is different in that regard. They were able to produce sub-par products at heavily discounted rates and were able to sell consumers on price over quality. Today, companies like XiaoMi and TaoTronics are starting to create quality-built electronics that rival U.S. and European products that sell for more than twice as much.

Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?

“Let him that would move the world first move himself.”

Many times we, as people, get stuck in grandiose plans. We talk about how we would do a better job than so-and-so. It’s even easier to talk about how the world is unfair and if it were different you’d be in a different spot. Regardless of how true that may be, so long as you are alive, you can advance. With effort and persistence, you will persevere. The trick is to understand that advancements often come in small steps.

Socrates wasn’t the only one to say this. Ernest Hemingway, though no Socrates, undeniably had a way with words. He said, “there is nothing noble in being superior to your fellow man; true nobility is being superior to your former self.” Complacency during youth is a common issue for many intellectuals. Classwork is easier for them, they are smarter than most other students, and thus they become lazy. Comparing yourself to others will often deter you from advancing.

Every day I can, I try to educate myself, to expand my knowledge. At each turn, I try to be the best me I can be. Since there is only one of each of us, we owe it to our future selves to keep advancing. That is why I have learned graphic design, online marketing, computer programming, became a licensed attorney, and studied business.

You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)

I would inspire a movement of civil service and other charitable contributions. Although many people may have never experienced poverty, unless they descend from royalty, at one point or another their ancestors had little to nothing. All people, of every race, nationality, color, income, and creed may be born equal, but the opportunities available to them are not. As an immigrant that came from poverty, I believe in giving back. Sure, no one helped my family, and we did fine. But, there was a degree of luck in the fact that we came to America during the economic boom of the 90's.

The most significant change would require people who have skills and finances to start giving back more. Many executives, lawyers, doctors, and other highly paid professionals have skills and access to funds that the general public does not. A $100 donation in India or Africa could help save an entire family from starvation for months. More so, an executive creating a non-profit to help feed these people could save even more lives. But, you don’t even need to do anything that extreme to help. Simply taking on an indigent client for free or for a nominal rate is a great start!