Labor Contract Law Slows Hiring and Investment in China's

UNCLAS SECTION 01 OF 02 SHENYANG 000169 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON ETRD EINV EFIN ELAB PGOV PREL HK CH SUBJECT: Labor Contract Law Slows Hiring and Investment in China's Northeast ¶1. (SBU) Summary: China's Labor Contract Law has had an uneven impact on major foreign and domestic businesses in Northeast China. While many of the results are seen as beneficial to labor, the law has had some unintended consequences detrimental to workers interests. Both companies and their employees complain that the labor unions collect money but provide no service to either the workers or the company. Fixed requirements for training and contract length make it cost-prohibitive to hire temporary workers for peak seasonal production, reducing the number of jobs available. Meanwhile, newly implemented rules for worker seniority and pensions when companies are sold to new owners have investment bankers who were previously very keen on purchasing State Owned Enterprises (SOEs) proceeding with great caution. Bankers fear there will be no way to streamline the companies without excessive payouts. Bankers also expressed concern about unfunded pension liabilities. However, most companies see the labor law as having a minor impact compared to market forces that are driving up costs. End summary. ¶2. U) To measure the effect of China's new Labor Contract Law, we recently polled key U.S.-invested and firms and other contacts in Dalian and Shenyang. Opinions are generally negative but suggest the law will have less impact than the current financial crisis, though that crisis seems to be having fewer negative effects here than in other parts of the country. ¶3. (SBU) Cargill Corporation's Fushun plant manager explained that the new labor law has added some cost but that the impact on the bottom line would be minimal. The greater impact is the limited flexibility the company has in hiring temporary workers. The complex system of rules forces companies to make workers permanent quickly, and it it is more difficult to get rid of poor performers. The manager said these problems are much greater than the cost of paying for the "five insurances and one allowance."(Retirement insurance, health insurance, unemployment insurance, injury insurance, maternity insurance, and housing allowance.) ¶4. (SBU) According to Cargill officials, Fushun is assiduously trying to ensure that both employers and employees understand the new law and the implementing regulations. Fushun Municipal Labor and Social Security Bureau officials conducted training seminars for employers in the area to clear up any confusion. The Cargill employees are also gathering to study the new rule to make sure they receive all the benefits they deserve. ¶5. (SBU) HR managers at Tyco's plant in Shenyang said that while the law posed no major problems, the rule requiring equal pay for equal work was being arbitrarily applied, making it impossible to reward longevity with increased wages. Local Labor Bureau officials interpret the rule to mean absolute equality, so a brand new mold operator must make the same as one with ten years of longevity. Tyco officials say this will hurt the workers more than the company, as the company will simply stop using longevity increases. The HR managers expect other companies throughout Liaoning Province will do the same. ¶6. (SBU) Both employers and employees complained that the two percent of payroll sent annually to the labor union was simply a waste of money. They explained that payments are made to the Shenyang Local Taxation Bureau which then transfers forty percent of the funds to the appropriate city district labor union. The remaining sixty percent of the labor union fees are kept by the Taxation Bureau to cover its collection costs. According to plant workers, they receive no benefit. Workers explained that the union has no organized activities, no worker welfare programs, and does not participate in contract negotiations. ¶7. (SBU) Goodyear, like Cargill, complained of great problems in hiring temporary workers. HR managers said that the new law would be fine in a mature labor environment where workers come to a company already trained in the basics of a job, either through high school, vocational training or college. But in China the labor supply is generally untrained, lacking in even the fundamental aspects of the job. If Goodyear invests in substantial training for workers, it risks not only the training funds, but also substantial severance benefits in the event of termination. Goodyear managers said that the new rules were unlikely to impact profitability but could limit expansion and will definitely limit new job opportunities. ¶8. (SBU) Epoch Corporation, a small American firm which manufactures security devices in Dalian, believes the new labor law is a relatively minor factor in rising costs. According to Epoch, increased competition for skilled workers is a much greater factor. Other costs, such as taxes and regulatory fees, Epoch explained, were also escalating rapidly. Epoch is considering the possibility of relocating because of the general cost increases in China, and not due to the labor law. ¶9. (SBU) SOEs also feel the impact of the new labor law. Since their labor pools have been with the companies much longer, SHENYANG 00000169 002 OF 002 Liaoning's steel producers, for example, face huge unfunded pension liabilities. SOEs seeking buyers to privatize their operations confront an even greater problem. Prior to the new law, all of the workers were fired when a company was sold. The new owner then hired them back, free from the previous owner's liabilities. However, under the new law, the workers are hired back at the same seniority and benefit level they had with the previous owner. While salaries and general insurance are not major issues, virtually all SOEs in the region have large unfunded pension insurance obligations. This has prompted investment bankers to rethink their positions. One firm, which invested USD 500 million in Liaoning SOEs in 2007, has yet to spend a penny in 2008. According to the company chairman, the SOEs are much too great a risk under the new law. The contract provisions make it much too difficult to cut staff in companies that, according to her, are among the most bloated in the world. When the unfunded pension factor is added in, she said, investing in large SOEs is just not a smart move. She reported that her principals, who have invested primarily in heavy industries in China and had planned to continue to do so, are now focusing their search on plants in Eastern Europe. ¶10. (SBU) While several companies and investors highlight the adverse effects from the new labor law, virtually all except the investment bankers believe the impact of the law on their bottom lines will be minimal. General Electric and ITT Flygt said that initial compliance and documentation issues would consume some resources initially but, in the long run, the costs would not differ greatly from the current level. Both companies indicated that in most areas they already provide benefits and protections to their employees that meet or exceed the requirements of the new law. Both companies said the only long term cost involved is the payment to the labor union, and both said the amount, as long as it remained at current levels, was manageable. ¶11. (SBU) There has been no major wave of factory closings in the Northeast following adoption of the new labor law, although several small South Korean garment plants in coastal Liaoning Province closed without notice, leaving workers unpaid and unemployed. According to sources in the Korean Consulate, the local government provided compensation to the workers and requested assistance from the Korean Consulate to hold the factory accountable. Korean sources told Econoff that the twenty-percent slide in the value of the Korean Won compared to the Chinese Yuan is really driving the retreat of small scale Korean manufacturers; the labor law just happened to be put into effect at the same time. WICKMAN