Managing in China During Tough Economic Times

With revenues up over thirty percent in past year and record low steel prices boosting its bottom line, Thermos, the manufacturer of vacuum flasks, faces an unusual situation in the industrial city of Kunshan, just on the outskirts of Shanghai.

According to a recent report in the Financial Times, the company has been asked hand over part of its profits to help soften the impact of the global economic crisis on others. Lin Chao Min, deputy chairman of Thermos (China) Housewares, is quoted as saying, “We were approached for a sum of Rmb5m [$740,000] to Rmb8m.”

This is just one of many new challenges multinationals operating in China are facing these days. A global economic slowdown coupled with a new labor law which has made it more expensive to hire and get rid of excess workers has created painful combination for firms both foreign and domestic. Local governments, which for years depended on booming exports to drive growth, are now scrambling for financial aid to pay off thousands of laid-off workers. Sad stories similar to Taiwanese forklift maker Hei Mengniu are becoming more frequent. The founder of this company, the Times notes, which has a factory near Thermos, closed its gates and disappeared in October, leaving several thousand employees behind, their wages unpaid.

For years, surveys of foreign firms in a country of 1.3 billion showed recruiting talent was their biggest operational problem—more than the number who cited regulatory concerns, a lack of transparency, bureaucracy, or the infringement of intellectual-property rights. Just as the global downturn started to bite, new government rules pushed up the cost of hiring workers and have made the HR’s job a legal nightmare.

Even before it went into effect in January of last year, China’s new labor contract law was creating controversy. As Dan Harris, partner at the Seattle-based Harris & Moure law firm, wrote on his popular China Law Blog more than a year ago, the law is a “huge deal.” Wrote Harris:

We have heard from Chinese lawyers who already have plaintiffs all lined up and ready to sue various foreign companies for when those foreign companies fail to comply. I kid you not.

Today saving jobs is the new game in town. At Danwei, a popular English website for China news, Peter Ford, the Christian Science Monitor's Beijing bureau chief, is quoted as saying:

I have heard, though not been able to confirm, that provincial governments have been quietly telling employers for several months that if they do not abide by the provisions of the Labor Contract Law they need not worry, and this seems perfectly plausible.

The economic downturn seems to have intensified the fight over the new law. Earlier this month, a group of people claiming to be marketing department staff of Sony Ericsson gathered on a cold day outside the company’s headquarters in Beijing, asking for compensation after their labor contracts were terminated, according to local media reports.

Under the current circumstances, Jack Perkowski at the Managing the Dragon Blog recently offered several useful suggestions for foreign investors in China:

• If you are in a joint venture, now is not the time to be pressing for those labor-saving measures to increase its efficiency. (…)
• If you have a wholly-owned company in China, be careful in how you implement any layoffs. In the face of uncertain economic prospects, Western companies will instinctively seek to adjust employment levels, which is understandable. (…)
• Make the most of any expansion plans your business may have in China by publicly or privately announcing them. China has a long memory and remembers companies and individuals who come forth in difficult times.