Manufacturing trouble

Unrest among Chinese factory workers combined with the demographic time bomb created by the one-child policy could make foreign investors rethink doing business in China over the coming decade.

Recent labour unrest in China has spread to Japanese-owned Toyota Motor Corporation. About 60 workers staged a brief strike June 15, the day before a national holiday, demanding a wage increase in affiliate Toyota Gosei Co.’s plant in the north-eastern city of Tianjin. The company agreed to review the wage structure on June 17. On the same day, US fast-food chain KFC signed the company’s first collective labour contract in China, agreeing to raise workers’ wages by 200 yuan (about $US30) per month in Shenyang, Liaoning province. A growing number of labour strikes and creeping wage inflation are among the internal pressures confronting China as it tries to reshape its economy.

The Chinese government is responding to the recent increase in labour unrest by upgrading its mechanism for addressing labour disputes – the All China Federation of Trade Unions (ACFTU) – and gaining better control over emerging grassroots movements.

In China, all trade unions are controlled by the Communist Party-dominated ACFTU, which is deeply influenced by the government and does little to truly represent workers’ interests. The purpose of the ACFTU so far has not been to advocate for more worker rights and benefits, but to keep tabs on workers and assist the central government in managing social problems arising from labour issues. In 2006, in the midst of a global economic boom that saw rising prices and more vocal cries from China’s workers for higher wages, the ACFTU began to take a more active role in pressuring foreign enterprises to let their workers unionise. Most of these firms had hitherto avoided it, and Beijing saw the need both to use the unions as leverage against the companies and to gather more information about foreign firms through closer cooperation between unions and management. This process ground to a halt during the global financial crisis and recession. When wages froze, workers were laid off and the central government shifted its focus to mitigating the risks of unemployment.

In 2010, however, China has returned to blistering growth rates and rising prices, and so have workers’ demands for higher wages. On the night of June 4, according to Xinhua news agency, the ACFTU issued an emergency notice calling for a strengthening of ACFTU authority and that of affiliated local trade unions. The notice urged trade unions to promote the establishment of unions in foreign-owned and private domestic enterprises, including companies owned by investors in Hong Kong, Macao and Taiwan. It also called for expanding union representation for migrant workers.

These ideas are not entirely new. Beijing has called several times for requiring a trade union presence in many private and foreign businesses, with the most notable move occurring in 2006, when Beijing called for at least 60 per cent of foreign-owned enterprises operating in China to have trade unions by the end of the year. Beijing also has called for enhancing ACFTU’s legitimacy by including migrant workers in its ranks. But the June 4 notice came on the heels of highly publicised strikes by migrant workers at foreign-owned manufacturing facilities demanding wage increases and a spate of suicides at a Foxconn plant in Shenzhen, Guangdong province.

In the recent strikes, the absence of trade unions or their use as intermediaries between management and labour has inspired employees to carry out spontaneous strikes on their own. These actions have been planned and executed outside the authority of the official trade unions, which has sidelined the ACFTU and could undermine Beijing’s control.

Beijing has little objection to wage increases for Chinese workers, since part of its economic restructuring plan is to promote domestic consumption and since it is already encouraging local governments to increase minimum wages. But Beijing does not want unauthorised strikes by self-motivated (and often young) workers to spread beyond its control and become a nationwide movement that could eventually challenge its authority.

And it is becoming clear that Beijing’s concerns are not unfounded. Workers’ recent successes in getting wage increases and better working conditions have encouraged others to follow suit – even the ACFTU, whose June 4 notice reflects the federation’s attempt to strengthen its power over foreign-owned businesses in China, nearly half of which have no trade unions, despite the ACFTU’s attempt in 2006 to pressure foreign-owned businesses to let their workers unionise.

This will never be an easy task, however. Many foreign companies in China resist trade unions because they fear they will lead to excessive government control of business operations. The connections between businesses and local governments based on tax revenues can cause the latter to turn a blind eye to the absence of trade unions and be less willing to follow the dictates of the central government. Establishing trade unions in all foreign-owned and private domestic companies will be a tough sell, especially if trade unions are given more power. These pending policies will certainly factor into the calculations that anyone will make to determine the costs and benefits of investing in China.

Moreover, the June 4 ACFTU notice does not imply that the federation is trying to represent workers more effectively; it only suggests that the Communist Party is reasserting leadership of the ACFTU, and it even repeats a call for union leaders to be selected by the company rather than by the workers themselves. This means that the conditions driving workers to carry out spontaneous and unauthorised strikes will not go away.

On the surface, China’s move to increase ACFTU control over workers as their demands grow is both necessary and desirable. Beijing not only wants to relieve social dissatisfaction and provide higher wages to workers to spur domestic consumption, it also wants foreign companies, which benefit from China’s abundant cheap labour, to shoulder the burden of the wage increases first. And Beijing is happy to have a tool like the ACFTU with which to exert this pressure.

In the long run, however, these trends threaten to reduce China’s attractiveness to foreign firms. Foreigners invest in China to take advantage of cheap labour. As labour costs rise, this advantage will erode, and the disadvantages of working in China (including heavy state influence and arbitrary political and regulatory practices) will become more obtrusive.

But there is an even deeper problem: China’s demographics are shifting. Since the notorious "one child policy” was enacted in 1978, each subsequent generation has gotten smaller (with the brief exception of a small baby boom beginning in 1990). This means that, in the coming years, fewer people will be entering the Chinese workforce, which will contribute to labour shortages in some sectors (notably medium- and highly-skilled manufacturing positions) and further increase labour costs. The combination of growing expectations for higher wages and a gradually shifting demographic that will diminish the labour supply will heavily influence foreign investors as they consider whether to put money into China over the coming decade.

Stratfor provides intelligence services for individuals, global corporations, and divisions of the US and foreign governments around the world.

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