Editor's Note: CR4 would like to thank Bruce Martin of GEA Consulting
for this second in a series of introspective essays from China.
When one views the many foreign companies venturing to China
over the years it can be seen that the due diligence undertaken when relocating
a factory across town is frequently more diligent than the move to China.
Recently a Fortune 500 company, which supplies parts to the
HVAC industry, acquired a Chinese company recently listed on the HK stock
exchange. After the acquisition it was discovered that wages had been reduced
by 30% before the IPO in order to make the financial situation look better. The
workers had been told that after the IPO their wages would be increased perhaps
even higher than before. But then when the Fortune 500 multinational acquired
the company it became the expectation, fueled by pre-acquisition management,
that the workers' wages would be significantly increased above pre-IPO levels
since they would now be working for foreigners.
If a company complying with IPO scrutiny and regulations and
passing muster with a Fortune 500 company for whom acquisitions are their bread
and butter has such a hidden factor; then what hidden factors may
not-so-diligent diligence fail to uncover?
Consider, for example,
- In a
modernized joint-venture factory, the number of laid off workers may equal
50% or more of the work force. But those workers are still paid at perhaps
70% of their previous wage. These layoffs with pay are still considered
employed workers on the government books. The government has no
performance measurement for wage increases, only for the number of persons
employed. In return the local government will stifle dissent over low
wages and perhaps be lenient on tax collection.
- Often
wives must be hired along with the husbands. Even though they have no
skills and there is no position for them.
- How
much time will workers spend away from productive work for training? And
what is the cost of the training itself?
- In
addition to time off for training the workers get as much as three weeks
off for Chinese New Year plus three
"golden week" holidays per year.
- Although
a line worker's wage may be low; the line leader's wage may be 5-10x
higher. In Thailand, for example, the line leader's wage may be only
10-25% higher. Consequently the combined average wage in Thailand may be
lower than in China.
- A
prominent global HVAC company manufacturing in China has 3 QA inspectors
for every 10 line workers.
- A 13th
and 14th month (wage) bonus is often expected.
- Non-wage
benefits can include housing allowances, cell phone allowances, lunch
and/or dinner, transportation from a rural area, uniform and even long
johns, shampoo, towels, cooking oil, etc.
- Is
there only one Chinese worker doing the work done by one worker in the
U.S.? Not necessarily. Many jobs were split into parts in order to
simplify the work.
- How
much worker redundancy is needed to account for high turnover and/or lack
of experienced workers in the job market?
- White
collar (support) workers' wages are not low. A design or manufacturing
engineer's salary in Shanghai has been higher than in Singapore for some
time.
- The
person on whose land your factory sits likely has a lifetime work contract
for himself and family and even some relatives as part of the agreement to
sell the land use rights to the factory.
These are some factors which might be ascertained with some
due diligence. There are more that are not so easily identified. You see, the
goal is to get your investment (money, skills and technology) - not to give
ownership of the China market to foreign companies. For larger companies whose
news could affect the queue of other foreign companies lined up to invest in
China, there may be fewer hidden factors, but not necessarily. They just have
the resources to absorb many of the smaller problems and so don't make them
known.
And these are just the surprises associated with wages!!
- Bruce Martin
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Re: Be Aware The Hidden Costs of Labor in China
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