Doing Business in China Will Cost More

Foreign companies operating in China are being forced to deal with the state-run labor union -- and that will hurt the bottom line.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

October 1, 2008

Foreign firms operating facilities in China will see labor costs zoom, thanks to pressure from the state-run union. With the government's backing, the All-China Federation of Trade Unions (ACFTU) is aggressively inserting itself into labor-management disputes. The Chinese government is facing mounting worker discontent, with causes ranging from inflation to unpaid overtime to brutal working conditions. Beijing is determined to head off such problems before they morph into political dissent. To that end, the ACFTU is on a membership drive, forcing large numbers of firms to let the union organize their Chinese operations or face government penalties.

"The current campaign is based on size and name," says Andreas Lauffs, an expert on Chinese labor law at the Hong Kong office of law firm Baker & McKenzie. He said that means going after Fortune Global 500 companies, even if their China operations are small.

The most direct cost to firms will be a requirement that the employer pay a fee equivalent to 2% of its total payroll into a fund that supports the union. But there will be indirect costs as well. The ACFTU is taking an active role in collective bargaining with foreign businesses, something it has traditionally avoided in dealing with state-owned or politically connected Chinese companies. And requirements that employers consult the union before engaging in any restructuring will cause delays.

Manufacturers are prime targets for the organizing campaign. Taiwan's Foxconn, for example, has been singled out as a manufacturer with a record of poor labor practices. An Apple vendor, Foxconn does most of its manufacturing in mainland China, with its largest factory in the city of Shenzhen.

But retailers and service and logistics companies are also getting tagged. Wal-Mart, McDonald's and Yum! Brands (parent of Pizza Hut and KFC) have already agreed under pressure to unionize their Chinese operations. And now the ACFTU is putting the screws to Microsoft and PricewaterhouseCoopers as well.

Erin Ennis, vice president of the U.S.-China Business Council, says that the union moves should not be blown out of proportion. The ACFTU is still affiliated with the Chinese government and the ruling Communist Party. Both still have an interest in keeping businesses happy and investment flowing, in order to create jobs. "It is not like the AFL-CIO, where, when they come in, they're automatically antagonistic."

The unionization drive is just the latest factor making China a more expensive place to operate. An employment law that went into effect Jan. 1 is already making it harder to dismiss employees. Labor shortages are driving up wages, even without union help. Tax breaks that once favored foreign investors over domestic firms have been eliminated. And the appreciation of the yuan and high fuel costs for shipping are hurting exports.

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