Dealing with It
MNCs learn to cope with the Labor Law
By Megan Shank
Shanghai

Last year, several multinational corporations, such as Microsoft and General Electric, fought a clause of the Labor Law that made it difficult to fire workers. The Labor Law, which went into effect January 1 this year, shifts power and rights from the employer to the employee and grants labor unions greater agency. Among several objections from multinational companies was that to a clause stating a worker’s probation period for a one-year contract should not exceed two months. Although MNCs lost the battle–that clause and many contended others stuck–they’ve gained coping strategies that have turned out to be less painful than previously conceived, while smaller companies that can’t adjust are leaving.

Centaline Property Agency human resources manager Jiang Yifan says if the firm has incurred any new costs from the Labor Law it has come from investing money and time in a stronger HR department. “In the past, business managers only had to think about performance. Thinking about human resources was a secondary consideration,” says Jiang, whose HR management costs have increased by 5% in the past six months. “The Law has made them equally important.”

Although some smaller companies have explored the option of firing entire staffs and then rehiring people with new contracts, most MNCs, already plagued with HR issues, don’t have the time or inclination to take this route. Instead, Jiang says in regards to hiring and promotions, the company won’t take old talent for granted or new prospects lightly.

Stephen Maloy, general counsel of Asia-Pacific General Electric, concurs: “The labor law reduces probation periods, which forces management to make an earlier decision. This may make managers more risk averse.”

Some companies are loath to comply whatsoever; in recent months, citing the Law as a major factor, 200 Taiwanese firms left Dongguan, and 5 percent of Korean firms in China were preparing to leave with an additional 25 percent considering it. The Federation of Hong Kong Industries predicted that in the Pearl River Delta alone, as many as 10,000 companies plan to shut down or scale back. An American Chamber of Commerce and Booz Allen Hamilton survey reported one fifth of foreign-owned or foreign-invested companies operating in China plan to move some or all operations out of the country, and more than half of companies surveyed reported believing that China is losing its competitiveness to other low-cost countries.

Good riddance, says Liu Cheng, a law professor at Shanghai Normal University who helped craft the Law. He says there’s still tremendous room for companies to profit, but “some industries here just want to run sweatshops here.”

MNC representatives admit to Newsweek Select that, despite some firms’ claim of as much as a 40% spike in operational expenditures directly due to the Law, in reality, inflation and appreciation of the RMB have been greater factors in rising costs. “We’ve not seen that great of an impact (directly due to the Law),” says Sony vice president of human resources Liu Wushuyun.

General manager of Fayat China Machinery Limited Jania Zhao adds that while smaller companies have traditionally cut corners and saved on “luxuries” like social services and fair wages for employees, most major corporations with long-term commitments to China already had such expenses built into their contracts. Although Zhao says her company has seen a 20 to 30% increase in operational costs this year, “there has been no direct increase due to the Labor Law, and we’ve not had to make great adjustments.”

Indeed, at the time of writing, no significant authoritative evidence has yet revealed a recent MNC flood into surrounding nations or news of any major multi-national corporation’s departure from China in direct response to new costs invoked by Law.

Daniel Harris, founding partner of Harris & Moure, a boutique international law firm, and author of the award-winning website, China Law Blog, says the companies that are shutting down are those based on a model no longer viable in China: “A lot of these businesses seized an opportunity that will never be available again – pollute like hell and pay really cheap prices. They’re shutting down because their businesses essentially operated illegally.”

Dongguan municipal government numbers back that up–as of April, an investigation found that of approximately 6,000 companies inspected, nearly 1,000 hadn’t signed labor contracts with workers. Not only will the departure of such companies from China end this treatment, Liu Cheng says, it won’t hurt the overall market.

Harris says the most important adjustment companies can make to the new law is to do what they should have already done: sign contracts with all workers and create an employee policy manual.

For companies operating at the fringes, severance pay might be a new concept, but Christina Yu, communications and human resources director at Dow Chemical, says it’s old hat to most MNCs who instead must only make minor contractual adjustments. “Our separation process is through performance or job reviews, and we never make a decision to lay off an employee simply because the contract is up. If we do, we pay severance regardless of contract status. ”

Liu Wushuyun of Sony says other necessary housekeeping includes, “going through and making sure all existing contracts without existing end dates are provided with such.”

Big companies must also take the initiative to develop the resources to monitor smaller JVs. In April, the All-China Federation of Trade announced it would advise the labor department and law enforcement department to punish Xiamen Topstar Lighting Co. Ltd., a joint venture of GE and Xiamen, for employee working hours and payment schemes that violated the Law. Local reporters first encountered the story in March via a report by Policy Matters Ohio, an American watchdog NGO, which claimed GE was enforcing gratuitous overtime without compensation. GE sent a team of 11 investigators to the Topstar facility where they spent a week interviewing more than 120 randomly selected employees and inspecting the operations and facilities, says Maloy. They found no infringement, and no legal action has been brought against GE, but such scrutiny will doubtless keep corporations on their toes.

Companies with strong CSR programs may find it easiest to adapt. Nike, one of the few Western companies to resist joining last year’s fray between American lobbyists and Chinese policymakers niggling on Labor Law clauses, has been cited by Chinese labor activists as being a stand-out among Western MNCs. The company’s website provides a comprehensive resource for those seeking to understand the Law. Although it does not own manufacturing plants, Nike discloses the names and addresses of those it uses and provides transparent monitoring. The company began holding educational seminars last June and continues to do so as the situation develops.

“There continues to be a lack of clarity on what exactly the new regulations mean for factories and what the requirements for implementation are. We can help bridge that gap by providing training and other education programs,” says Hannah Jones, Nike’s vice president of corporate responsibility. “As the government further clarifies how the rules should be implemented, we will continue to work with our contract factories to help them comply.”

In addition to the promise of a growing local market, access to China’s developed infrastructure, logistics and supply chain ensures companies will stick around despite the new costs from the Law, inflation and appreciation of the RMB. But as China slowly moves its manufacturing capabilities up the value chain — a trend the Law has not instigated as much as supported — companies must likewise gradually readjust their strategies.

Harris adds that not only do companies need to appreciate this new perception of China, they also need to understand where they fit into the picture.

The American Chamber of Commerce, in cooperation with the U.S. consultant firm Booz Allen Hamilton, released a report in March that prescribes use of such practices as postponing customization on mass-produced goods, tailoring business streams and tightening up sales and operation planning. Moreover, companies must think of their China operations as a fundamental element in their globally integrated whole rather than as merely an emerging market.

To be an essential part of the world — it’s the reality for which China has been striving since opening up nearly three decades ago.

With Sarah Chen (Shanghai)

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Sidebar
Pyramid Scheme
A recent report prescribes a new approach to China’s new business environment

By Megan Shank

The American Chamber of Commerce, in cooperation with the U.S. consultant firm Booz Allen Hamilton, released the China Manufacturing and Competitiveness in 2007-2008 Survey and thus prescribed methods to deal with the changing economical landscape. The results, presented in a pyramid, are as follows:

(base)
Global Integration
China should be viewed as a web of capabilities rather than just as an emerging market. The nation is a core part of global strategy by integrating sourcing and sales-centric models in China.

(next)
Postponement/Late Customization
Companies seeking to make an integrated process should create the ability to produce large volume of products with the correct pause prior to customization in order to meet future customer needs – for example, creating language specific manuals for a product at the last minute.

(next)
Tailored Business Streams and Segmentation
This level takes advantage of Chinese capacity for large-scale, cost-efficient manufacturing yet retains levels of differentiation for various clients – for example, customizing computers for specific orders.

Footprint and Network Modeling
Managers determine plant strategies on this level and identify market risks and client’s needs.

Sales & Operation Planning
Businesses coordinate efforts and communication among departments in order to quickly and fluidly move products whenever such demands arise.

Lean Practices
Companies must take a systematic and global view of their China operations and build up from there, tightening logistics and shop-floor operations as well as communications via the foundation of lower layers.