New Chinese labor law could mean big changes for Wal-Mart suppliers

Wal-Mart is infamous for sourcing its low-cost goods from factories with lax labor standards. Despite outcries from human rights activists, the company has done little to enforce its own supplier code of conduct overseas. Wal-Mart does an incredible amount of business with China, where many of these labor infractions occur.

But a new Chinese labor law has the potential to change all that. Written in response to workers’ complaints about “companies that would stop at nothing to wring out profits,” the law aims to give laborers more power against sweatshop managers. If the law is fairly enforced, it could mean disaster for Wal-Mart, which depends on a steady supply of cheap, disposable labor in its supply chain.

New Law Gives Chinese Workers Power, Gives Businesses Nightmares [Washington Post]

DONGGUAN, China—Wei Hoqiang used to work in a toy factory that forced him to sign a contract it did not let him read. It paid him 30 cents an hour, made him work 100 days without a day off, and kept him in a room that was ice cold in winter and suffocating in summer. He said he knew he was being taken advantage of, but he was so afraid of his boss’s ire that he stayed for two years.

Wei, 31, said he knew he could do better and in early March walked out on his employer. He immediately got three job offers.

Armed with a landmark new labor contract law that went into effect Jan. 1, employees like Wei are turning the tables on employers in China.

The law—designed to combat forced labor, withholding of pay, unwarranted dismissals and other abuses—represents a major victory for Chinese workers who for decades have complained of companies that would stop at nothing to wring out profits. It has prompted legions of workers in recent months to become bolder about quitting and about staging strikes to demand improvements in work conditions and wages.

For companies already struggling with inflation, high energy costs, the falling dollar and an environmental crackdown, however, the new law has been devastating.

It has added to the rising cost of doing business in China—contributing to an exodus of what is estimated to be thousands of factories from places like the Pearl River Delta in southern China, for 20 years synonymous with cheap and abundant labor and the engine behind China’s rapid growth.

The shift in power has far-reaching consequences for the Chinese economy, raising questions about whether this is the beginning of the end of China’s role as the world’s factory floor.

“You shouldn’t see China anymore as a sweatshop,” said Ronald R. Haddock, a vice president at Booz Allen Hamilton in Shanghai. “The guys and gals with spreadsheets on where the next incremental investments should go are saying there are lower-cost destinations to set up manufacturing.”

Factory owners critical of the law argue that China is going backward and is bringing back the “iron rice bowl”—a nickname for the Communist system in which jobs were assigned and guaranteed for life by the government. “The new labor law is to protect the lazy,” said Huang Chuangji, the deputy director of the Dongguan Private Enterprises Association.

The new law, which company owners and industry associations said can add 10 to 25 percent to manufacturing budgets, has been so painful that some foreign factory owners have snuck away in the middle of the night to avoid confronting—and paying—angry workers.

While official government figures show that only a small number of ventures have closed so far, surveys by industry associations run by foreign investors indicate that broad swaths of factories may be gone by year’s end.

A survey released in March by the American Chamber of Commerce in Shanghai and Booz Allen Hamilton found that a fifth of companies with foreign ownership or investment have concrete plans to move some or all operations out of China. In the Pearl River Delta, which produces about a third of the country’s exports, an estimated 10,000 companies are planning to scale back or shut down, according to a survey by the Federation of Hong Kong Industries.

Not all of these companies are leaving the country, however. Many say they are moving to less developed parts of China that offer tax breaks and other incentives to offset the increasing costs associated with the new labor law.

The law requires firms to provide contracts that include pension and insurance contributions. It also requires companies to pay workers who are fired a month’s wages for every year worked.

Another costly component of the new law regards overtime. For extra hours on a weekday, companies need to pay workers 1.5 times the normal rate. On weekends, it’s double time. On official holidays, it’s triple time.

“Margins are small in the Pearl River Delta,” said Shen Minggao, a Citigroup economist in Beijing. “If they have to raise wages, their profits would be squeezed and they would have to go out of business.”

Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, said the law requires too much of companies too soon. “With the new labor-contract law, all the principals of the factories will have big problems. Their burden is getting heavier and heavier,” he said.

Nicholas Kwan, regional head of research for Standard Chartered Asia, is less concerned. He said some companies are already finding ways to get around the new law. “They will lay off the existing workers and rehire afterwards. Or employ someone else with less pension burden. There are a lot of techniques that companies are using.”

Dongguan, one of six major cities in the Pearl River Delta, is known for its ubiquitous shoe, toy and paper-product factories filled with migrant laborers. Disney, Nike, Mattel, Wal-Mart and a slew of other American companies have made products here.

To the more than 200 million Chinese workers who have left the countryside to find jobs in factories or at construction sites, Dongguan is known for its two faces: It is revered as a place where fortunes can be made, but it has a reputation tainted by several high-profile cases in which factories were accused of employing child labor, cheating workers out of wages and bullying employees who tried to quit.

Until recently, however, factory owners and industry association representatives said labor relations were relatively peaceful.

“There used to be a harmonious and stable relationship between employers and employees, but now we are all at a loss,” said Zhao Weinan, secretary general of the Dongguan Taiwan Business Association. Zhao blamed the new labor law for recent incidents of civil unrest, saying that the law has led to some misunderstandings.

Zhu Weiping, a professor of industrial economics at Jinan University, said there was a lot of discussion within the Chinese government about “whether or not it’s the right time” for the labor law.

“For the long term, it’s a must-happen road. The state cannot let the region’s labor remain concentrated in manufacturing forever,” Zhu said. But in the short term, officials recognized, the law could lead to clashes between workers and employers.

For example, an Aigo electronics factory said it would increase employees’ mandatory contribution for the cafeteria, by about 100 yuan, or about $14, a month, while keeping their salaries the same, leading workers to strike. For several hours on the morning of Nov. 27, thousands of workers who walked off their jobs clashed with riot police. The employees returned to work after their managers agreed not to raise the cafeteria fee.

Dongguan officials emphasize that though some factories are closing, more continue to move in, and they say overall investment to the city will increase this year in dollar terms. They say that despite some initial confusion, many company owners are realizing that the new law is in their best interest.

“Most people consider the new labor law a law that protects only the interest of employees, but not protecting enough the interest of enterprise investors. This is in fact a misunderstanding. The new labor-law articles not only protect the interest and rights of employees, but also regulate their responsibilities,” said Cai Kang, vice director of the Dongguan Bureau of Foreign Trade and Economic Cooperation.

Lately, the factory entrances of some of the larger companies in Dongguan are full of what look like vast unemployment lines. But the nature of the job-seeking crowds is deceptive. Nearly everyone is employed, just looking to upgrade his or her job.

Wei, who quit his job in early March, was in front of a computer company with more than 200 other workers on a recent workday, waiting for an interview. He said he was attracted to the new company because it offers a base salary equivalent to about $140 a month, 25 percent more than he made at his last job, including overtime. “I used to work at a factory that told me lies,” he said. “I don’t need to do that anymore.”

A few blocks down, another crowd was waiting in front of a shoe factory.

Liu Qin was laid off from her job when the shoe factory she was working for went out of business. It didn’t pay her for months of work. She said she thinks it may be the best thing that ever happened to her.

“This time I want to find a new company with a good environment,” said Liu, 34, who has spent more than a decade working in the Pearl River Delta’s factories. “Now it’s not the factories choosing me. It’s me choosing the factory.”

Wang Erhao, 22, who is leaving his job at a small shoe factory to seek work at a larger one with better benefits, said he wasn’t the least bit worried about finding a new job. It’s an employee’s market, he said. “You quit a job one day, and the same day you can have new work.”

Posted by Alex Goldschmidt on Monday, April 14, 2008