This is China! blog

Several stories have appeared in international papers about the dearth of workers to fill Chinese factories. Guangdong, in particular, is being hit hard, with as few as one worker available for every two jobs; contrast that with four workers competing for every three jobs in the heady days of 2007, just months before the American buyer finally became exhausted buying stuff.

Workers typically came from the poorer parts of China, where job opportunities were scarce. Also, with the collapse in the prices of produce, farming was no longer the cash cow it used to be in the 1980s. Now, a generation later, and workers are better educated and have higher expectations for what employers should offer in terms of salary and benefits. Also, the majority of fiscal stimulus of 2009 went to the interior of China, to build much needed roads, highways, bridges and cities. Jobs are plentiful in the interior in a way they never have been in China’s long history.

The traditional Hong Kong and Taiwan model – prevalent throughout south and central China – of treating Mainland workers as modern-day sharecroppers is coming to end. So too, using cheap labor as an excuse to keep from modernizing equipment and updating manufacturing processes. Of course, this will take capital, which the Overseas Chinese model is anathema too. Overseas Chinese investors and Mainland Chinese investors who were able to build reserves are moving their factories either further inland along transportation routes with direct links to ports, or closing down completely and moving to the likes of Vietnam. The effect will be to accelerate China’s climb up the industrial value chain.

Western companies will experience some salary pressure; however, as Western companies typically pay better than Asian companies, and offer more hospitable surroundings in which to live, Western investors will see few changes from the normalization of the migrant “bulge” of workers that had made Guangdong the Workshop of the World.

Further reading: BBC, FT, NYT

Previous posts:

Productivity Key: Sexually Repressed Workers

Managing the Return to Normalcy

Don’t Mess with Spring Festival

Find the Cheap Labor

from Chaina Magazine
December 2009/January 2010

by Bill Dodson

China’s implementation of its new postal law limiting foreign-invested parcel carriers’ activity in the domestic market has met with a great deal of protest from major international players like DHL Worldwide Express Inc., FedEx Corp., and United Parcel Service Inc.. But does the law really matter right now?

October 1st, 2009 the Chinese government enacted a law that any parcels weighing 50g or less delivered within a city or 100g between cities through express services be controlled exclusively by State-owned post offices. The explicit citation in the law that foreign companies cannot invest in the postal segment certainly seems to raise a flag with respect to whether China is violating WTO rules of National Treatment, which states that member countries present a level playing field to domestic and foreign entrants. Nevertheless, this segment of the business represents a sliver of revenue for the major international carriers. Their strength domestically lies in getting larger packages to their destinations quickly, securely, transparently and at a consistent price level. Right now they cannot cost-effectively compete against local players in the express-letter delivery business, given the price sensitivity of the average Chinese consumer, whether private or commercial.

Before the enactment of the new law, the State-owned service controlled about 20% of the express letter market, which grew 21% in 2007 and 27% in 2008, according to the Wall Street Journal. The move actually seems more a part of an overall trend toward guojinmintui – literally, “the state advances as the private sector recedes” – than a specific jab at foreign-invested companies in the logistics sector. The State wanted a piece of the fast-growing action.

Actually, it is domestic express carriers that are most hard-hit by the new law. The new law also requires capitalization amounts that will literally close hundreds of small, domestic express services. In 2008 China had nearly 2,500 express delivery services supporting nearly 230,000 employees, many of whom ride scooters to deliver parcels as small as a letter to as large as – well, many of us have seen the elephantine-sized loads scooters in China are capable of carting. Other, more mature delivery services, though, have provided real competition to the Chinese post office. “I’ve been really impressed with domestic carriers like Shunfeng,” said Bhavesh Mistry, Managing Partner of EastWind Precision Engineering, based in Suzhou, said. “In the last eight months they’ve really grown rapidly. They’ve become quite professional. They’ve computerized in the same way as the international carriers, and they’ve formed partnerships with small local players in out-of-the-way towns throughout China that makes it prohibitively expensive to use a Fed Ex to get to. They can cost a fraction of what the international carriers charge in China.”

Nevertheless, rising salary and fuel costs are already forcing domestic carriers to increase their rates. And with the further development of inter-city infrastructure, customer requirements for quality of service and delivery time will imply further domestic industry consolidation. In two-to-four years a greater number of mature domestic companies will be ripe for acquisition by foreign players that want to penetrate more deeply into the inland express market.

It will be during the acquisitions of these mature domestic companies that the large international carriers will come up against China’s new anti-monopoly law. Already, Beijing has made judgments against Coca-Cola, Panasonic and General Motors that have greatly concerned multinationals across industries. When the major express carriers wrangle with Beijing’s idiosyncratic interpretations of the anti-monopoly law, parcel carriers will remember frustrations with the new postal law as just a walk in the park.

©William R. Dodson, 2009

A Western friend, a General Manager, told me he had been requested to attend a meeting called by Suzhou Industrial Park government officials.  He chose to blow it off and have his Chinese plant manager attend, instead. He already knew what the meeting was about: how to manage employee disenchantment.

Several thousand employees of the Taiwanese-owned factory Wintek in Suzhou Industrial Park had violently disagreed with its management the week before; and hundreds of employees from companies around the  Park protested at the  Park’s Labor bureau at the weekend about a new policy that prohibited them from withdrawing funds their companies had deposited into a housing fund the Park manages.  Both events were more akin to revolt, sparked by expectations Chinese employees have of the upcoming Spring Festival squeezed through a funnel of  privations from the previous year. In other words, they wanted the right to money they had stashed away or waited for as the traditional Spring Festival bonus. Typically, a sizable minority of staff pick up and return to their hometowns at Spring Festival, never to return: to find husbands and wives; to get married; to start businesses of their own with savings and the help of their families.

The network effect of interconnected privations and expectations – Spring Festival, a tough year operationally, lack of bonuses and the possibility they would not be able to take savings home with them – created an avalanche of worker disgruntlement.

Both instances have been resolved: the Taiwanese company relenting on the bonuses; and by SIP administration relenting on the withdrawal of funds.

In general, Western companies invested in the region tend to err on the side of generosity toward their employees; whereas overseas Chinese concerns have their own interests at heart. Western companies, then, should have little fear of events overtaking their operations, as long as they extended even a modicum of respect toward their employees during the economic downturn last year.

Operations and administrators who were either cheap(er) or (more) autocratic during the downturn might see a higher staff  turn-over than usual after Spring Festival this year. If not the occasional revolt.

Further reading: CDT, Apple Insider

As I sidled up to the counter in a Starbucks in Suzhou recently, the attendant – already well aware of my taste for espresso – called out the order to the barrista and then asked me, “Have you seen Avatar?” I didn’t know the Chinese name of the movie, so it took me a few seconds to figure out what she was on about. She chattered on, “It’s supposed to be amazing!” She pointed to the barrista, “He waited two hours in at the box office to get tickets. He said it was worth the wait.” The young man attending to my espresso grinned sheepishly.

Chinese officials are shutting down Avatar in about two-thirds of its movie theaters throughout the country. The movie has been wildly successful in the country, despite any allusions to military excursions far from home. Though foreign films are allowed to stay in China only about ten days, the film still apparently has a lot of pent up demand. China only has about 2,500 theatres and mostly those at or near middle class level will be able to see the film. Seating several hundred people at a time for a film that demands it be watched on a big screen (with or without the 3D glasses), means several hundred million people will be sorely disappointed when Chow Yun Fat (easily one of the greatest actors in the world, in my book) will stroke his pointy white beard as Confucius on Replacement Screens.

Though it would be considered rude and culturally regressive in China to protest the screening of Confucius in place of a glossy American sci-fi adventure film, I wouldn’t be surprised if many would-be theatre-goers simply did not attend screenings of the historical fiction. Certainly, DVD sales of Avatar will accelerate more quickly and in greater volume, much to the delight of the DVD black market in the country.

In any event, look forward to lines into remaining Avatar screens to be even longer, and demand to increase through word-of-mouth. It looks like it will be a while before I see the film, as I have little patience for waiting in lines with the chattering masses.

An espresso, anyone?

Further reading: NYT

Updates: Avatar survives on Chinese Screens (WSJ), China’s zeal for Avatar crowds out Confucius (NYT)

The powers that be have made it plain they will spend whatever it takes to reach the magic 8% annual GDP growth rate in 2009. But how does China actually measure its GDP, and why should the world care?

The Financial Times raises the question, and a lucid and well-written article by John Makin at the American Enterprise Institute provides some answers. China’s definition of GDP growth and America’s definition are starkly different, which has thrown into question the efficacy of China’s approach to stimulating its economy and measuring the impact of the of its US$560 billion package. America measures its growth (or decrease) in wealth (Gross Domestic Product) by guaging expenditure growth: defined as the sum of consumption, investment, government spending, and net exports. China does just the opposite: the Chinese Central government – still stuck in the soviet-style mindset of production-as-reality at all costs – measures production activity without taking into account inventory stocks or actual expenditures. The form of measurement is one of the reasons for China’s bloated State-owned enterprises and for some of the economic disasters in its very recent history.

So, if a sneaker company in Guangdong produces a hundred pairs of sneakers with an attached value of RMB 6,700 (about US$1,000 in 2009 currency), then the Chinese government tracks the value of the shipment as part of its GDP statistics; whereas the United States government measures the expenditure on the shoes plus the value of any remaining inventory. For China, this way of measuring growth in its economy reflects some level of reality so long as buyers are buying all that is produced. However, as was the case in the economic downturn of 2008-9, buyers in other countries dried up. So, the Chinese government encouraged export-driven factories to begin selling to Chinese consumers inside the country. However, the spending power as well as the appetite of Chinese consumers, though growing between 10% and 15% per annum, was far from the easy-spending Americans and the more frugal Europeans.

Makin writes in his article, “China: Bogus Boom”:

There are anecdotal reports of Chinese households buying washing machines that were aggressively shipped and counted as retail sales during the first half of the year. However, many of the households that purchased washing machines, or were virtually given such machines, have found them unusable because their homes lack either the running water or electricity (or both) necessary to make use of a modern appliance. Such problems arise when ambitious planners count shipments as retail sales while end-use demand may be absent. In such cases, the “sales” are made to happen by virtually giving away the products that have already been produced and counted as GDP growth.

So, to give the perception that China’s economy was actually on its way to meeting its 8% growth rate, it told the four largest banks in the country – all of which are State-owned – to open up lending specifically to State-owned Enterprises and to local governments for infrastructure projects. It didn’t matter whether the companies or governments produced anything with the money, or even how they spent it if they did, since the release of funds in and of itself would register as production in the Chinese economic view. In other words, the only thing that mattered was that the transaction itself would be registered as growth in GDP and – the powers that be hoped – encourage Chinese consumers to spend because the economy was outperforming other economies in the world.

The flood of money has already resulted in dubious projects appearing on the schedules of local governments. The Washington Post wrote:

A $3 billion metro rail system linking the southern manufacturing cities of Guangzhou, Dongguan and Shenzhen, for instance, has been criticized as a waste of money because there are already four railway lines linking the cities and the trains often run empty. Ditto a $4.5 billion highway connecting the Sichuan province cities of Chengdu, Zigong and Luzhou, because there are already highways from Chengdu to Zigong and from Zigong to Luzhou.

A bridge running from just outside Shanghai to a textile manufacturing center on the other side of a bay was also resurrected to create construction jobs. For years, its designers had been unable to get the $2 billion they needed to build it because its route would mostly duplicate that of another massive bridge that was already under construction.

That changed in November when at least six of the biggest employers at the other end of the bridge, in Shaoxing, went out of business. Even though there is less need because of the closures, blueprints for the second bridge were dusted off and, almost overnight, workers broke ground. The project is expected to employ about 250,000 people and indirectly provide jobs for 300,000 more.

Which, of course, is the most important goal of any economic initiative in China: to provide opportunities for its citizens to be able to make at least a modicum of living, if not actually be able to become wealthy one day.

Monies the State-owned enterprises and local governments have not yet slated for projects are flowing into the real estate and stock market bubbles the government had worked to deflate as late as last summer (2008). As Andy Xie, an independent economist, wrote for Caijing Magazine recently:

“The tough economy and easy credit conditions encouraged many companies to try profiting from asset appreciation. They borrowed money and put it into the stock market. And since China’s stock market has risen 70 percent since last November, many businesses feel vindicated for focusing on the asset market. This speculation spread to Hong Kong. Mainland money may have been behind a recent rise in the Hang Seng Index to 19,000 from 15,000, as well as Hong Kong luxury property sales. One way or another, it seems the money source was China’s lending binge.

Borrowing money for asset market speculation is not restricted to private companies. State-owned enterprises (SOEs) appear to be lending money to private companies at high interest rates, i.e. loan sharking, using money borrowed at low rates from state-owned banks. Of course, we can’t estimate the magnitude of such SOE lending. But it has replaced high interest rate financing in the gray economy.”

Even with the prospect of the asset bubbles bursting, I believe China will continue to bolster liberal lending policies to at least give the appearance to the rest of the world that China is actually creating wealth in its economy. What it is actually doing, though, is just pushing money around. The stock market will for the forseeable future remain the purview of the SOEs, shielded by inadequate transparency and restructuring of listings. Further, China is long way off from providing investors with additional, internationalized outlets for investment beyond buying domestic property. And then, the long-awaited return of the American buyer as saviour of China’s export sector will be a chimera, never to return in its original form and enthusiasm. The government will find tamping down the bubbles will be even more difficult to achieve than before. Inflation will have to be tamed by fiat, just as had been the case with electricity and oil in early 2008. However, the Yuan just might come down to a more sensible valuation, because China’s fundamentals will seem so out of whack with the economic statistics it presents the world.

Oh, that Crazy 8.

Several Westerners I’ve talked with here in China seem to be sketching a trend in the way people perceive and act on work. Instead of just working at a “job” or taking another “job” or looking to get promoted in their “job” they are either moving from a part-time “job” or no “job” at all to a Portfolio of Work. The portfolio contains several activities that are projects and/or actual businesses. For instance, one American I know is leading the start-up of a new factory that will produce goods for the American market. He has American partners – and Chinese money. But he has still formed another contract manufacturing business here in China with other Western friends.

One of those Western friends has gone from being GM of a factory in Suzhou to becoming an on-call advisor to HQ, a consultant to the staff at the factory, and a troublshooter for the supply chain. In addition, he hopes to go on to do something a bit more creative with his life.

Meanwhile, a Danish friend who ran a sales and service operation in China until last week is now a “global troubleshooter” for other operations in the world. He is also in talks to set up an Extreme Tours business with a friend in Shanghai that takes people to exotic lands and gives them exotic adventures, while at the same time planning a sports equipment import company that supplies the Danish market.

The motivation for all these guys and others with whom I’ve chatted seems to be a profound dissatisfaction with the corporate world. They see the bosses of their and other companies as having lost a great deal of credibility of late: greed, arbitrary decision-making, cronyism and a lack of appreciation for what these guys have contributed to the company as managers that have built company operations in China overshadow any heart-felt feelings they once may have had for their former employers. The newly independent have chosen to diversify their personal economic models and move toward work they personally find more satisfying. It could all be summed up with a general disgust for the present-day institution of “the job”. Certainly, the global economic downturn has magnified the causes of these fellows’ discontent, exacerbating the impact of lousy and sometimes self-interested decisions their bosses have made. Another impact of the Downturn is to make these pretty bright go-getters feel less secure about the traditional role of “the job” in their lives. Though corporations demand one’s living-breathing existence in exchange for a stable income, these young men – mostly in their early thirties – seem to feel that there is no covent between the organization and the individual beyond what the individuals at the top decide. Of course, the latest information and communications technologies facilitated their new approach to work, making it easier to stay linked with coworkers no matter where in the world they are working.

Ironically, here in China, international influences have been attempting to focus bright young Chinese to commit their lives to the Organization. Standard Chinese operating procedure is to pick and choose work and jobs as though sitting at a Chinese banquet table with a pair of chopsticks picking and choosing what morsel to pluck from what dish.

Perhaps in time, once more Chinese have upgraded their skills and better defined their abilities and the contributions they can make in a modern marketplace they too will be managing Portfolios of Work – not fully entrepreneur, but not a grunt, either.

Thousands protesting are big numbers, even by China’s reckoning. Especially if the protests occur in two separate regions in as many days, are violent, and have essentially the same reason: the rich getting richer in China by unashamedly gaming the system.

The Financial Times reports:

“The privatisation of a state steel group has been scrapped after an executive was beaten to death by workers angry at the threat to their jobs from a takeover of their company…The violent riot in north-east China late last week involved up to 30,000 workers, a reminder of the ongoing sensitivity about lay-offs from state companies in industries targeted for consolidation.”

Certainly, it doesn’t help when people become self- or otherwise-anointed emperors and treat co-workers like crap. I can certainly see from whence their anger stems:

The interim general manager sent by Jianlong to run Tonghua, Chen Guojun, had infuriated the workers with his high-handed attitude, according to comments posted on internet bulletin boards in China.

He had reportedly said that he would re-establish Tonghua “under the name of Chen” and lay off almost all the employees.

“With Tonghua Steel’s retired workers each receiving only Rmb200 ($29) a month for living expenses, Chen Guojun was paid an annual salary of Rmb3m,” the rights group reported.”

AP reported yesterday that just a couple hours drive from Suzhou, in Zhejiang province, 3,000 townsfolk went berserk at the local authority’s purportedly giving them the shaft in a land-for-spit deal the residents found wholly unfair:

More than 3,000 villagers in eastern China blocked a highway and clashed with police while protesting alleged official corruption in a land compensation deal…Ten residents of Shipu town, in Zhejiang province, were injured in the clash with more than 300 riot police Saturday…Another resident said thousands of people had been staging a sit-in on the land for nearly a week.

Without credible avenues for complaint and decision, local governments will continue to place citizens in positions in which residents must explode en masse to gain any kind of fair hearing at a supra-local level.

“The employee, who refused to give his name, said the villagers believed the land was worth three times the price the local government had set — 20,000 yuan (US$2,900) per mu. A mu is a Chinese measure of land equal to about 0.15 acres (0.06 hectares).

“The villagers want the local authorities to address the corruption and the central government to intervene in this case, but some local officials have been preventing this information from getting to the relevant authorities…”

So what set off this latest round of high-volume, high-action drama that has nothing to do with ethnic differences? In a word: stimulus package (ok, that’s two words). China’s stimulus package of some US$560 billion kicked off at the beginning of the year with the Central government ordering the banks to open the offers. Hundreds of millions of dollars have already been loaned out, re-inflating the stock market and property bubbles the government had worked to flatten two years ago. Now, local governments, State-owned enterprises and large privately-owned corporations with “special relationships” with bank lenders (read guanxi) are redistributing wealth in preferential ways. Indeed, the FT writes about the steel protests in the northeast:

The privately held Jianlong Group, one of China’s largest private steel companies, had first proposed taking over Tonghua in 2005, backed out of the deal when the economy slowed last year, but re-entered negotiations recently when industrial demand picked up.

Propelled by the government’s stimulus package, China produced steel at an annualised rate of 545m tonnes in June, a record level of output.”

AP writes of the Zhejiang protests that the land was recently sold to be developed into a science and technology park. In Shipu, Ningbo district. In the middle of nowheresville? Local administrators would be able to access bank loans for infrastructure development as well as the national level subsidies for new-and-high-tech projects. Clever.

Of course, the communications and information infrastructure the national government is putting in place will only enable citizens to band together more easily when it comes to voicing grievances. And as long as the powers-that-be continue to find it difficult to kick their millennia-old bad habits, encouraged by the prospect of untold wealth, more of these industrial actions will occur, with greater frequency and with groups in numbers that may one day mark the Ides of March on the Chinese calendar.