Growing Pressure from Chinese Labor Unions: A Human Resources Challenge

An increasing number of our multinational clients are prioritizing “strong knowledge of Chinese labor law” and “experience in negotiating with labor unions” as key qualifications in their searches for human resources talent in China. This current focus on the ability to effectively monitor labor unions is particularly evident among our clients that have manufacturing facilities or operations in areas with labor shortages. We asked these clients why the ability to negotiate with independent labor forces, the Chinese government, and the ACFTU (All-China Federation of Trade Unions) has recently become a key consideration when hiring Human Resources executives. Their collective response is that independently formed Chinese labor groups are beginning to gain influence leading to pressure on companies to increase wages, improve working conditions, and reduce individual work hours. All of these factors have a direct effect on companies’ bottom lines.

Increased industrial action has indeed gained traction by trade union officials linked to the ACFTU, the government-affiliated trade union body and, especially, by factory workers. While the movement to improve working conditions in China is certainly a positive goal for the long-term benefit of Chinese society, the short-term challenge involves disruption in factory production and loss of company profit margins. Strikes at two foreign-owned factories have been widely publicized in the Chinese and global media. At Foxconn, the world’s largest electronics manufacturer and crucial supplier to Apple, Dell, and Nintendo, a number of worker suicides prompted widely televised protests. At a Honda factory, workers went on strike demanding a 50% wage increase.

Management at Foxconn and Honda responded to the industrial actions and the resulting media exposure and international pressure by announcing significant wage increases, limits on overtime, and the provision of support programs for their workers. Shortly before these policy changes were announced, Apple had sent an independent labor group to investigate its suppliers, including Foxconn.

It is anticipated that the recent actions by Foxconn and Honda to improve working conditions will pressure other Chinese employers to do the same. While historically employers in China would dictate terms and conditions to their employees, strikes and protests of the last few years have forced them to the negotiating table. This new development has begun the process of closing the huge gap in social and economic status between workers and management and is enabling independent labor groups to become more prominent. The recent success of independent labor groups at several factories is likely to become a catalyst for other workers around the nation to gain confidence and become bolder in their fight for better working conditions.

Several additional changes in the Chinese labor force are likely to reinforce a growing strength of the labor movement:

1. Worker shortages in some parts of China may be improving workers’ bargaining position. For example, workers from inland China who would previously have migrated to cities to work in factories are now staying home to work on infrastructure projects which are part of the government’s economic stimulus program. China’s system of internal passports may also inhibit worker mobility into areas where there is a shortage of labor. Today, fewer workers are willing to migrate and leave their families when work is available in their own provinces. In areas where there are shortages of labor, the workers may have more power than their employers.
2. A younger generation of migrant workers has emerged as one of the key forces in China‘s worker’s movement. Those born in the 1980s and 90s are generally better educated and more articulate than their parents, have higher expectations and more opportunities to pursue their own goals and ambitions. They also feel more pressure to succeed since they have been provided with more opportunities. Their skills are being honed in modern manufacturing enterprises and they are rapidly becoming the core of China‘s new working class.
3. China’s Labor Contract Law introduced in 2008, which aimed to improve workers’ contractual rights, may also have increased worker expectations. That contract has forced employers to take their responsibilities more seriously as violations of the contract often result in harsh punishments.
4. The Chinese government and AFCTU have supported the initiative of workers at the grass roots level. Following the labor unrest, the government responded with policy statements, minimum wage increases, and moves to promote collective bargaining with respect to wages. This suggests that the Chinese government may want to rebalance the economy via increased wage levels, at least partly as a means to increase consumer spending. The ACFTU also launched a new campaign to promote collective bargaining and is seeking to promote the role of its affiliated trade union officials in workplace relations. For example, all foreign companies with 200 or more employees will be encouraged to have a full-time union representative in the workplace. Although the recent changes in company employment policies have been largely a result of industrial action from independent labor forces, the Chinese government and the AFCTU are providing additional support.
5. The ability of workers to organize is improving. The growing sense of collective identity among factory workers, combined with the use of mobile phones and social networking tools, has made it easier for workers to initiate, organize and sustain protests. Workers have been further assisted in their endeavors by labor rights groups, labor lawyers, and academics who have offered their support and expertise and by the work of journalists which garners public support and spurs more workers into action. The shared interests of workers have facilitated the rapid spread of worker protests within one region or industrial sector. Protests within the automotive sector in Guangdong and foreign-owned manufacturers in Dalian in 2010 are examples. There have also been widespread strikes by bus drivers and workers in the sanitation industry.
6. The older generation of workers in state-owned enterprises (SOEs) is continuing their long struggle for justice after being laid off in the late 1990s and early 2000s. They are frequently joined in their protests by those still employed in SOEs who have seen wages stagnate or who themselves are threatened with layoffs following restructuring or privatization. The two protests in 2009 at the Tonghua and Linzhou steel companies showed just how explosive the issue of SOE restructuring remains.

Despite some of the recent improvements that have been made in working conditions, harsh conditions still prevail in many factories staffed by migrant workers. According to some estimates, migrant workers comprise more than half of the 300-million factory workforce. And, even though independent labor forces are gaining influence, workers in China still do not form a united force. There is no organization that can serve as a functioning trade union to bargain on their behalf or fight for their interests. The labor unions in most factories continue to be part of the official All-China Federation of Trade Unions which is an extension of the government. In the case of the state-owned factories, the unions are typically organized by the employers and so the Chinese employment market still works in favor of the employer. For the foreseeable future, it appears China will remain competitive largely because of its cheap labor and strong cultural work ethic.

Yet, as the economy has stabilized, the Chinese government’s efforts to shift from a high-paced, export-driven growth economy towards a model based on heightened domestic demand are yielding results and,with that change, increasing the demand and dependence on local workers. The labor movement will continue to be propelled by the heightened demand for domestic workers, regular rises in the cost of living, and a growing sense that workers are being denied a fair share of both their own company‘s profits and the benefits accruing to society as a whole.

For now, some companies in China are moving their operations to different locations in China as well as overseas, away from labor shortages and the higher minimum wages of the more affluent Chinese provinces. Increased labor costs, together with higher raw material costs and the appreciation of the Chinese Yuan, will likely force companies in China to change their labor model. Ultimately, companies in China will have to readjust their employee policies to better fit the demands of their workers and consumers globally will face the consequence of higher market prices for these goods.

In the short-term, the post-strike negotiations described above have generally benefited workers. However, if the system is allowed to develop and become more institutionalized in the long-term, there could be additional benefits for employers. By instituting a formal system of negotiations, the need to strike may be avoided, thereby potentially saving companies millions of Yuan in lost production. Moreover, because collective bargaining results in increasing salaries above minimum wage, domestic consumption and demand will ultimately be driven higher, possibly making up for thinner profit margins.

Going forward, Human Resource professionals can be significant agents to drive workplace improvements in a positive manner to minimize disruptions in production and lost profits. Their training and experience can render them in the best position to understand the labor equation from the points of view of both management and worker. Human Resources professionals will need to be trained and competent in negotiating. They will have to value the long-term benefit of improving working conditions while understanding business strategies that help to create a sustainable, profitable labor model in an economy with rising costs of labor and production.