Managing an Empowered Work Force in China


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By now, many people have heard of Chip Starnes, the 42-year-old CEO of Florida-based Specialty Medical Supplies, who was held for six days against his will in the company’s suburban Beijing factory. Starnes has appeared on CNBC Squawk Box, Bloomberg and countless other news shows, and the story of his “detainment” has been covered extensively by all of the international media. Among other things, it raises questions regarding the attractiveness of doing business in China.

Without knowing the details, it’s difficult to know what exactly triggered this action by the employees. What is clear is that Starnes went to the plant last Friday to finalize severance payments for 30 workers who were being laid off because the company had decided to move the plastic-injection-molding division to Mumbai, India, where production costs are lower. Other facts have been in dispute.

The employees said that they were owed back wages, while Starnes said that all wages had been paid as of Monday. The remaining employees, fearful that the entire factory would be closed and that they would lose their jobs as well, demanded severance packages similar to those received by their fellow employees. In response, Starnes insisted that the factory would not be closed, and that no severance was owed. After being barricaded in the plant for almost a week, Starnes reached a deal on Thursday when he agreed to pay two months’ wages, totaling almost $300,000, to the remaining 97 employees.

Although the crisis has now been resolved, the question of the government’s role in this dispute lingers on. “How could the government let this happen?” nearly all of the reports by the international media on the detainment ask. Before addressing that specific question, there are several historical facts that must be understood in order to put the Starnes event in perspective.

At the end of 2007, China enacted a sweeping new labor law that clearly spelled out employee rights on a wide range of issues including overtime, holidays, personal days, severance, maternity leave and social benefits. What an employer can and cannot do with its employees is clearly prescribed by law and is not an issue for negotiation. If an employer tries to do something that is counter to the law, then the employer is violating the law — pure and simple.
In order to protect employees against abusive owners, the law also stated that local governments would support employees in pressing legitimate claims against employers. This was necessary because, in the past, many factory bosses had been able to take advantage of employees by getting government bureaucrats to look the other way.

There is no question that the 2007 labor law increased wage rates and the cost of employees across the board for Chinese and international employers alike. The Chinese government understood this, but went ahead anyway because it wants to reduce the income disparity between China’s “haves” and the country’s “have nots.” Moreover, China no longer wants to manufacture and sell low value-added products that rely on cheap labor and use valuable resources. Rather than selling tennis shoes and curtains to the world, China would rather sell higher value added products like cars. Raising the cost of labor would not only reduce China’s income disparity, but it would also force manufacturers to move upstream.

Despite the tough labor law, the global financial crisis set the stage for a renewed round of abuses. Faced with declining export markets in the U.S. and Europe, many coastal factories in China closed, and, in many cases, the owners fled, leaving the workers high and dry. Both the local government officials and the factory workers learned that it was impossible to collect unpaid wages or receive severance from owners who simply disappeared.

In this context, mutual trust among all parties is paramount. If the employees and the local government believe what the owners and management of a company say, and if they trust that they will do what they say they are going to do, labor disputes can be avoided. If a dispute does occur, the local government will step in and help to resolve any differences, if they have trust and confidence in the owners and management. Quite simply, every local government wants stability in their city or town, and will do all that they can to maintain a harmonious environment.

However, if a local government does not have a strong relationship with the owners and management of a company, and if it isn’t clear as to the company’s intentions, it will ensure the safety of all parties, as it did in the case of Starnes, but will remain neutral and be reluctant to step in on behalf of the employer. If it does, and the owners then flee, the employees will most likely demand that the local government pay up. By interceding on behalf of the owners and management, the local government, in effect, underwrites the company’s liabilities to its workers.

No one can support employees detaining their employers against their will, whatever the reason, and it is impossible to know what exactly happened at the factory in Beijing where Starnes was held. However, it is clear that there was a great deal of mistrust among the company, its employees and the local government. If nothing else, the Starnes case underscores once again the importance of clear communications with both workers and the local government, as well as the importance of developing strong government relationships in China.

I discussed the Starnes detainment and more in an interview with Bloomberg on Wednesday.


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