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China’s New Labor Law And Why Vietnam Is No Big Thing

Posted in Legal News

T’aint no big thing….
Bryan Ferry, Roxy Music

I remember a time (Reagan era, I believe), when there was considerable talk about greatly reducing public television (PBS) funding here in the United States. In response to this, PBS reacted like any good bureaucracy does. It threatened to terminate that which the people found most precious. PBS told everyone who would listen that it would need to cancel Sesame Street, a hugely popular educational show for children. Of course, this left reasonable people wondering why PBS would cut off one of its highest regarded and most watched shows, rather than one of the interminably dull shows that made up the bulk of its offerings. Local governments threatened with reduced funding have been known to threaten to halve their firefighting force. Again, reasonable people can only wonder why such a vital service would be the first to go.

Of course, neither PBS nor the local governments that threaten to halve their firefighting were really serious. They just were going after that which the public holds most dear in an effort to scare them into raising (or not lowering) funding. I believe this argument was at one time actually known as the Sesame Street defense.

There has been a bit of that in China of late with respect to China’s new labor contract law. Story after story is coming out of China of 3,000 factories here and 5,000 factories there and 60,000, no make that 120,000 factories having closed or moved to Vietnam because of the new law. Hogwash.

Employers in China are painting the new labor law as far worse than it really is because they believe doing so now might either influence the law’s yet-to-be-released regulations or perhaps even lead to a revocation of the law. I do not fault them for this, but, at the same time, I do think its impact needs to be kept in perspective.

China’s new labor contract law is a big deal (as we have noted on countless occasions ), but it is not earth shattering or paradigm shifting. It is a big deal because it shows China’s continuing evolution to rule of law and it is a big deal because the employees (pretty much for the first time in a long time) have won one. But, in terms of factories closing or moving to Vietnam because of it….we are just not seeing it.

I was asked about the impact of China’s new labor law by a Newsweek reporter the other day. She wanted to know about the impact this new law is having on my law firm’s clients in China. I told her how they have had to pay anywhere from $5,000 to $25,000 to clean up their employment contracts and policy manuals, including getting them into Chinese. I also told her how we are concerned about how to handle matters for those of our clients who typically hire employees seasonally. And that was it.

She wanted to know what our clients were saying about the new law and I told her they were just asking us whether and how we could help make sure they were complying. What about the impact on their business, she asked. Are they talking about that? Yes, a few of them have complained about the new law the same way people always complain about taxes. Have any of them left China because of the new law? No. Are any of them threatening to leave China because of the new law? No.

I then flipped the questioning and asked her if she was aware of a single well-run Western company that is claiming to have left China because of the new law and she was not aware of one either. She quoted me an AmCham survey saying that 20% of American companies are thinking of leaving China because of rising costs. I said that sounded about right to me and that there will probably always be around that number looking to move to a cheaper locale and that of these 20%, I would guess the overwhelming majority of them will stay in China when they discover the grass is no greener on any other side.

Which brings us to Vietnam. The talk was that all these companies would go to Vietnam. My thought is that if they have, Vietnam should be bulging at the seams about now, but it is not. Yes it is booming, but does anyone seriously believe it has seen 15,000 new factories since the first of the year?

My sense is that China has seen a number of factory closings of late, but most of these are domestic factories that produced low end goods, not Western companies doing business in China. I also have no doubt that many Taiwanese and Hong Kong and Korean factories producing the same sorts of goods have closed as well. But, it is not fair to blame even these factories’ problems solely on China’s new labor law as Beijing has instituted a number of policies explicitly aimed at marginalizing such factories so as to push China up the value chain.

The labor law is a huge deal, but it is not everything.

  • Sinosceptic

    I’ve said it before and I’ll say it again – any legitimate and forward thinking company that cares about it’s employees and their welfare has no problems with the new labour laws. As GM of a growing US company (60 employees this time last year, 115 as of now and expecting ~180 by year end) I only look on the new law from the positive. Don’t try to fight it just get on with it and comply. We were probably about 90 to 95% compliant before the draft law was released and were fully compliant long before implementation. That was mostly due to the fact that we based our own policies, procedures and principles of our own US based HR activities. That along with the fact that we always advocate 100% compliance with all Chinese laws.
    Sure we’re looking at India – but not as an alternative, more as an additional opportunity with the added benefit of not having all our eggs, etc.
    We’re by no means a large company in China but it wasn’t really that difficult to do. I get bewildered by those small companies who complain that they’re too small to implement such changes. Well, to them I say – try doing it for 100 employees and then also think about those companies that employ thousands. Doing it for a few should be simple and straightforward and it’s no where near as difficult – or costly – as you might. Spend less time in the bars and brothels and devote sometime to considering those that work for you. Of course, if you don’t like it and don’t want to comply with Chinese laws, then don’t. You have alternatives – like a one way ticket back to where you don’t want to go cause you can’t make any money.
    Apols for the tirade (oh, I could go on) – it’s a hot stick day here in NJ.

  • Joello

    This is a “law blog” and your subject is a “law” but the truth is that what’s going on right now – or rather just started now – is far greater than the written word in the law. I have been to lunch on Saturday with Chinese friends who mentioned how they have been dragged to court by two employees suing them just because they can and just because this employer cant really do anything about it to defend itself (trust me, this is the true situation). He will have to pay and ALL the other employees will know that they can do it now as well. THIS is the situation. It’s not the “law”, it’s business and HR. It’s implications will be seen perhaps a few years from now.

  • http://www.chinafubar.com Bob S

    For sure, there’s been a lot of hand wringing and weeping and wailing by the factories. I agree, what I suspect have been closing are second and third tier local, HK and TW factories, of the type that any really reputable company wouldn’t want to work with anyway.
    That having been said, down here in Dongguan there’s several other factors affecting the exodus, ranging from local government policy to tax breaks running out, to labor shortages to rising labor costs. The Labor Law is a good excuse, but I think is just the scapegoat.
    I’ve been running a series of posts on my blog http://www.chinafubar.com regarding “Where Next” and an as of yet unmentioned possibility on my blog is out of the Pearl River Delta, to inland locations, which I feel is more likely in the long run.

  • http://www.chinalawblog.com Dan Harris

    Nyon Trang,
    I think you have misunderstood my post. I am actually a huge booster/fan of Vietnam and we have recommended it to many a client and then helped them locate there. But, and I am sure you will agree with me on this, it is not the best country for every sort of company and, in most cases, it does not make sense to uproot an already established factory and essentially relocate it to Vietnam. Companies that are making money just don’t tend to do that sort of thing.

  • Joello

    Sinosceptic, I think you are completely missing the point here; you can comply 100% (congratulations for being the only one that can actually figure it out 100%) and it would still affect you. If you don’t get it now you’ll get it in time, as it seems you are quite new.

  • Sinosceptic

    Joello – of course it will still affect us, but please don’t assume that I’m as stupid, ignorant and naive as you. Of course I’m new here – I only arrived just over 7 years ago and I’ve only been the GM of 2 companies in China (one JV and one WFOE) so I’m still quite wet behind the ears and I bow down to your superior and worldy experience. I’ll be sure to email if I need your sage advice.
    Oh, and what point do you think I was missing?

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  • jim

    i agree with joello. sinosceptic, you might be trying to comply, as we all have, but sooner or later you are going to be slapped with a complaint from probably your worst worker who is going to accuse you of terrible things. even though in your heart you are trying to be compliant, you will lose big time. i think you are naive and missing the point. 7 years and 2 companies or not, the day is coming when you will be affected negatively by this law and then you will be back, hat in hand telling us how this labor law sucks.
    joello is right, even complying 100% with this labor law isn’t going to save you from the problems with this law. if it was as simple as being compliant i could easily agree with you. but i have been sued by one worker who received a 120,000 rmb settlement that was totally unjust and the rest of the workers ran to file their suits too. i have now closed the factory. i always paid my workers above average salary, never overworked them and was more than 100% compliant. but as anyone who has a shred of experience in china knows, it is impossible to do everything right all of the time. try as you might to be complaint, someone somewhere forgot to do something and you will hang for it.
    come back after you have been sued once or twice and lost a couple in court. after you lose your cherry on that one you will fully understand.
    for the record, i hope you never have to experience it.
    jim

  • Alain

    Not specifically about the new Labor Law, but about China vs Vietnam.
    Lots of Taiwanese companies with operations in China are splitting heavily to Vietnam…and not SME ones: HonHai, Compal…
    HonHai has signed a deal for a US$ 5 billion park to be opened near HCM.
    Sure their industries are also labor-intensive, although less than the shoes and toys manufacturers, but labor is important…
    Now in Vietnam, this year, because of the wild inflation, there have been numerous strikes in factories…So why Taiwanese investors leave China?? They were the first ones to rush to invest into China in 1990 !!
    My guess is the labor law is just the last straw on the back camel: add the RMB appreciation, the disappearance of preferential tax treatment, the perception of a very instable society (83,000 riots acknowledged by the government in 2007), and the inflation . Ok the inflation is same problem in Vietnam…but right now,in east China , average salary is at least 2000 rmb (i.e. us$ 290) while it is about 60 to 80 US$ in vietnam…
    Vietnam starts from the basis where China was in 1998…That’s the real difference in my opinion.

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