July 1, 2010 / 4:27 AM / 9 years ago

Q+A-What does China's labour unrest mean for foreign companies?

BEIJING, July 1 (Reuters) - A burst of strikes in China over recent weeks has disrupted production at factories supplying major foreign firms including auto makers Toyota (7203.T) and Honda (7267.T), showing the country’s workers are becoming more assertive. [ID:nSGE65N02Q]

Here are some questions and answers about what this could mean for foreign companies operating in or sourcing from China.

HOW SERIOUS ARE THE STRIKES?

So far the high-profile strikes appear to be spontaneous movements at individual plants, by just a tiny sliver of a vast workforce. The earlier strikes have ended after workers accepted offers of improved pay and conditions, often less than they initially demanded.

Many of the strike-hit factories are parts suppliers for vehicle plants run by Japanese firms and local joint-venture partners, although an electronics maker and a plant producing air conditioning systems for U.S.-listed Ingersoll-Rand Plc (IR.N). have also been affected.

The ruling Communist Party is wary of wider unrest that could erode its grip on power, and would quickly seek to snuff out any signs that these strikes were igniting wider confrontation.

But many striking workers say they took inspiration from hearing about the success of earlier walkouts. The copy-cat chain of strikes shows a workforce that is becoming bolder, and that may prompt some companies to pre-emptively raise wages.

“The strikes have been concentrated in a few areas and companies, but there are broader pent-up problems,” said Chang Kai, a labour relations professor at Renmin University in Beijing who advised workers striking at a Honda parts factory.

“Rather than just focus on the strikes, we need to address the broader problems,” he said.

SO WHAT DO THE STRIKES SHOW?

The strikes are a symptom of a broader trend that many investors will have to consider: a Chinese workforce becoming more assertive and selective, and sometimes inclined to protest by strikes, slow-downs and, most often, quitting. [ID:nTOE64U08D]

Government numbers show that registered labour disputes have been rising. [ID:nTOE65902W]

The recent strikers have mostly been members of China’s 150-million strong migrant labour workforce, which flows from villages to cities and industrial regions looking for work.

Younger migrant workers are becoming more demanding about job conditions. They see their futures in the cities, not in farming, and feel the pressure to save up money despite rising costs.

They are also gaining more bargaining power as the flow of potential job seekers tightens, because of wider opportunities and fewer entrants into the workforce as the population ages.

SO IS THIS THE END OF CHINA AS A CHEAP PRODUCTION BASE? Labour costs in China have been rising anyway and, partly encouraged by a government that wants to turn farmers and workers into more confident consumers, that is likely to continue.

In itself, that trend will not dislodge China as a dominant player in manufactured exports. Labour costs remain a fraction of the cost of goods made in China. [ID:nTOE65G053]

But rising overall costs, and the risk that strikes could force sudden jolts in wage levels, could prompt more companies to move production from crowded coastal regions to cheaper inland parts of China, or to other low-cost manufacturing countries such as Vietnam. [ID:nTOE65K09W]

“China is still an attractive option for most companies looking for an effective manufacturing base, although many companies have been pursuing a China plus one or a China plus two strategy in recent years to diversify their manufacturing operations,” said Geoffrey Crothall of the China Labour Bulletin in Hong Kong, which advocates for improved workers’ rights.

“I really don’t think we’re going to see companies suddenly leaving China en masse.”

WHAT ABOUT SUPPLY CHAINS?

Honda and Toyota have both been forced to temporarily suspend vehicle assembly plants in China, because strikes at suppliers choked off the flow of parts.

Their tight supply chains, modelled on the “just-in-time” system, exposed them to disruption, said Wen Xiaoyi, a researcher at the China Institute of Industrial Relations in Beijing who studies labour relations in China’s automotive sector.

The risk of such disruption may prompt some to reconsider inventories management and diversity of suppliers, said Wen.

Vincent Chen, an analyst at Yuanta Securities in Taipei, said foreign tech manufacturers in China typically have about three to four weeks of inventory, which should last them through a strike.

“The biggest fear right now for brands is what is going to happen if one of their weaker suppliers gets hit,” said Chen.

“For the tech industry, all the suppliers depend on one another, and it takes just one weak link and companies will then be unable to get their product out to customers.”

But Nissan’s (7201.T) CEO Carlos Ghosn said this week he did not see any reason to change the way inventory is held at Chinese plants. Other vehicle makers have echoed his view, saying strikes are just one of many contingencies that could disrupt supplies.

WILL THE GOVERNMENT STEP IN MORE?

The outburst of labour unrest could prompt the central government, wary of unrest spreading, to become more energetic about wage and labour standards, which have been patchily enforced by local officials worried about deterring investors.

Premier Wen Jiabao has said migrant workers deserved better. [ID:nSGE65E0C6]

The unrest could also boost government efforts to encourage more systematic collective bargaining between workers and managers to determine wages and conditions. Official unions will remain kept under the thumb of the government, but at the factory level they may become more insistent on workers’ demands.

The Communist Party will remain staunchly opposed, however, to the idea of independent unions.

Reporting by Chris Buckley and Emma Graham-Harrison in BEIJING, Kelvin Soh in HONG KONG, Chang-Ran Kim in TOKYO; Editing by Sanjeev Miglani

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