Changing Work Force in China

BUSI 3001 SBLCWeek 14, Fall 2014

Charles Mo & CompanyDecember 1, 2014

Changing Workforce in China The success of the manufacturing model in China is mainly due to its

large pool of cheap and skilled labor. Chinese Workforce in different time periods:

1949-76 1977-1994 1995 1996-2011 Today

Chinese workforce is more aware and conscientious about their rights today than in the past

Labor rights under the new Labor Contract Law Migrant workers are not as available as before Contention in using trainees as workers China faces a glut of graduates Weakness in the workforce China faces more HR issues Solutions to HR issues Turn over rate and salary increases Demographic shift in one child policy as a result from the

Old manufacturing model Foreign investment in manufacturing

Foreign firms invested heavily in plants and equipment in China because: Obedient workforce that can be trained Return on the investment means big profit due to the cheap and skilled labor. Easily exploited by both local and

foreign manufacturers for almost 3 decades Hundreds of thousands migrant workers moved to Shen Zhen, Gungzhou, Shanghai, and Beijing

This successful business model was then copied by the American distributors and wholesalers by-passing the US manufacturing companies.

Easy to duplicate the business model and undercut the US manufacturers by going directly to the producers

The old investment in heavy machinery and plant model is replaced by outsourcing.

Even the manufacturers now embark on toll manufacturing instead of making the products themselves.

1949-1976 Mao’s suit workforce

All jobs and work are assigned by the stateJobs are life time guaranteed , so called “ job like an iron rice bowl” Jobs are categorized: party officials, factory workers, civil servants, teachers, artists, and everyone else lumped into as peasant /farmersJobs are assigned according to political backgroundPolitical background determines if you can attend college

Founded in 1949Chairman Mao forced Chang Kai Shek to Taiwan but was left with an economyIn financial ruinUnder communism, only the state owns the land and properties

1976-1995Xiao Ping’s reform workforce

Purged twice by Mao, but Deng survived and became the ultimate leader in China in 1978 Inherited a country fraught with social and institutional woesReformed the closed socialistic economy into a modified Socialist market economyOpened to foreign investmentOpened up gradually to private industries and private ownershipChanges in workforce are gradual – color, majority of the jobs were still assigned, low wages, little social safety netEventually the reform lead the country to become the second largest economy in the world

1995 – workforce conditions

Living quarters Average 4 sq m/person

Compensation Professor – 800 RMB/monthCashier – 800 RMB/month

Housing Government subsidized, 50 RMB/m

Work subsidy Uniform, shoes, shower, newspaper, summer cooling subsidy, lunch provided, dinner provided with O/T

Nap Lunchtime

Office setup No cubicles, open space

House allocation Union determines who gets the houses which were purchased by the company

Workers behavior Heavy smokers, occasional heavy drinkers, obedient

Form of foreign investment

JV or Coop – partners fought over non essential arguments. WOFE became popular later

Today’s workforce – 1995 to present

All jobs are filled by supply and demandMajority of the State owned enterprises are privatizedMore sophisticated and more demanding workforceWorker rights are protected by the new Labor Contract LawLarge pool of workforce increasingly presents opportunities and competitionAt almost 100% literacy rate, the workforce is easy to trainCreation of the INPATS

Chinese workforce is more aware today

In the past, government/companies were used to a quiet workforce Willingness of workers to uproot their lives and work in coastal cities Large numbers of migrant workers willing to work for lower wages Large and cheap labor force to fuel the giant export machine Workers were displaced during the 1990 reform of state enterprises Demonstrations were confined to those factories unable to pay wages or severance

Now, employers must contend with assertive demands from the workforce for higher wages and better working conditions

Competition for skilled labor has intensified Rise in wage level Companies willing to share the higher sales and profitability Labor contract law enacted in 2008 improved worker rights, restriction on using temporary worker, Raised employees’ expectations and awareness of rights Labor grievances escalated Increasingly restless and vocal workforce Increased employment costs Wave of labor strikes in 2010 did come as a shock

Labor rights and employee awareness Labor Contract law in January 2008

Move upstream to higher values added products Targets factories with poor working conditions Guarantee contracts for full time employees Limit the use of temps Sets minimum standards Steep cost rise

Protections raised employees expectations and awareness Empowered employees to file grievances Sharp increase in cases The haves and the have nots is widening Took to the streets Wave of strikes in 2010

Honda strikes, suicides at Hong Hai Presision also known as Foxxcom China is still a good place for manufacturing

Migrant workers are not as available as in the past Migrant workers are staying home and get jobs

Workers have choice now More employment opportunities inland

2009- 22.5% reduction in migrant workers working in Pearl River Delta Government survey –working home migrant workers in 2009 increased by

8.2% Coping with reduced flow of labor

Find workers locally Setting up local training and recruitment centers Raising minimum wages Pushing companies to improve working conditions

Contention in using trainees by employers

To keep costs down: hire a large number of trainee workers The practice is legal and trainee workers are paid less than the

minimum wage Part of the complaints in last year’s Honda strike was trainee

workers. Honda’s May 2010 strike:

Crippled the Japanese auto maker’s car production for 10 days Demanding pay raise and better treatment 30% workforce was trainees

Honda offers Chinese strikers a 24% pay boost

China Faces a Glut of Graduates

China faces glut of graduates WSJ 4-29-09 P 14 21.5 m university students were enrolled in 2008. 1/3 of the 2007 5.6 m university graduates, were unemployed Finding jobs for the 2009’s 6.1 m graduates became top national

priority University debts may be a bubble in the making

Government ordered universities to expand 30% per yr in 1998 Financing is a cinch More students, more tuition Universities are now crippled with debts

Resulting poorly qualified students, diploma mills A student graduated with a computer science degree from a Chinese

traditional medicine university with no history of teaching computer sciences

Universities tend to provide popular subjects such finance, English, trading courses instead of engineering courses

Students are trained to interview but not the technical skills

China faces glut of graduates WSJ 4-29-09 P 14

Chinese basic education is excellent that resulted in almost 100% literacy rate. Even the poor farmers can be trained into the best machine operators/technicians.

75 elite universities were lavishly funded by the central government Beneath the elite are 2,100 other universities.

Vast majority undergraduate students Almost all are saddled with unserviceable debts In Anhui, 50 universities owe $1.2 b In Guangdong, the wealthier government spend $30 m to bailout universities Estimated 100b were spent in this expansion, but government told the universities

to borrow

China faces glut of graduates WSJ 4-29-09 P 14

Debts need to be paid off No significant alumni donation Slash costs and lure more students

Teachers salary cut Delay equipment purchase Increase classroom size Change to popular programs like, English, tourism, government, journalism and law Not focus or expansion for training program for technical job

Example: NJ University Student enrollment expanded 11 fold to 17,000 Library volume increased by half Faculty staff increased 20% to 1200 Interest payment at one time totaled 60m and tuition is 30 m Half of the university city is used for education, the other half for other

commercial uses such as golf course.

1977 78

79

80

81 1999 2001 2006 2007 2008

End of cultural revolution. May 16, 1966. Class Struggle, Red Guards, Gang of Four,

Deng assume power

First batch of graduates

After Asian financial crisis

Ave 30% of senior did not sign an employment contract

Unemployment rate 4.1% exclude unemployed college grads

270,000 students enrolled in Universities

E Reform

3 m high school graduates enrolled into college

First 250,000 graduates

4.95 m college graduates

5.2 m college graduates

5.6 m college graduates

Weakness in today’s workforce Lack of management skills Unwillingness to take responsibility Unsure about the ethical issues Too much rumors Weak middle management Eager to change jobs Unwilling to work harder Acquired all the bad habits

Companies have more HR issues than before

China’s Economic Reform resulted in an unprecedented economic growth. Prior to the reform, enterprises are state owned College graduates are allocated to enterprises for work Jobs are life time, iron rice bowl jobs, subsidized housing, job securities After the reform, MNCs entered the country and private companies sprung up Workers can hop from company to company Attracted by higher wages elsewhere

Demand for talent workers becomes a top issue for most MNCs HR issues facing the MNCs:

Acute shortage of talent workers High attrition rate MNCs struggle to attract talented and skilled workers Higher cost to attract and retain workers Need to train the new college grades because less than 10% are up to the job

Companies solutions

Short term “buying” the talent approach Throwing more money Inflating the title

Long term “developing” strategy Salary and bonus Benefits packages Training Career development Two way communication

Turnover rate/minimum wage increase % in Asia

Macau Hong Kong China Taiwan Japan

Turnover 2% 3.4% 4.2% 4.25% 4.5%

Ave. Raises 8% 4.5% 6% 4% 2.3%

Source: China Daily 2012

Compensation Trend – salary increase in China

2002 2003 2004 2005 2006 2007 2008 2009

Salary increase 8% 8% 8% 10% 8% 8% 4% 4%

1995 1996 1997 1998 1999 2000 2001

Salary increase 15% 15% 12% 12% 12% 10% 8%

2010 2011 2012 2013 2014 2015 2016 2017

Salary increase 6.9% 8.3% 12%

Corporate culture to attract and retain employees

Build brand Value proposition to customers Emphasizing quality control Global leader World class organization

Employment image Employee sense of connection to company Commitment to the company Employee engagement

Some companies now are developing the next generation leaders in China in the changing global market

Build a scalable and sustainable workforce Include process that practices that contributes to development of future

leaders The concept of developing future leader is not new Rapid growth and ever changing nature of business in China makes it a

tough challenge to the most experienced EXPAT manager. Developing future leaders

Train the Chinese managers leadership skills Overseas rotation Intra China rotation for high potential employees

Shorter EXPAT assignments Allows high potential employees and future global leaders to gain a

deeper understanding of China Leaves the company better equipped to deal with ever changing global

market

In Beijing, One-Child Policy’s Is Modified Family planning policy, is the population control policy of the

People's Republic of China. Sometimes the policy is misunderstood as the policy allows many

exceptions rural families can have a second child if the first child is a girl or is

disabled, ethnic minorities are exempt. Families where both parents are the only children are also allowed

to have two children Residents of the Special Administrative Regions of Hong Kong and

Macau, and foreigners living in China are also exempt from the policy

In 2007, approximately 35.9% of China's population was subject to a one-child restriction

In November 2013, the Chinese government further relaxed the policy by allowing families to have two children if one of the parents is an only child.