Managing Labor Relations for Innovative China

Over the past month, labor unrest has beset China, now the world’s factory. The problem has flared up particularly in South China, where a large proportion of the nation’s manufacturing is concentrated. Strikes against Honda and then Toyota closed the car makers’ assembly lines as workers demanded wage increases. Foxconn, the world’s largest contract manufacturer, has been haunted by a spate of much-publicized suicides by factory workers, apparently in protest against excessive workloads and limited pay. As strikes have spread across the country, China seems to be entering a turning point of its labor-capital relations.

Have these strikes and suicides marked the end of the cheap labor era? Probably not. China has a considerable way to go to reach the so-called “Lewis turning point”, a term that economists use to refer to the exhaustion of surplus agricultural labor in the process of industrialization. Last year China’s urban population was less than 55% of the total; there are still huge numbers of Chinese workers in the countryside who can be attracted to urban manufacturing centers, thus placing downward pressure on wages. Meanwhile, for decades productivity has been growing much faster than wages, so that Chinese workers will still be considered cheap labor even after years of wage increases.

The labor unrest will not diminish the attractiveness of China to foreign investors, either. Other than cheap labor, the accumulated investment in productivity, infrastructure, and industrial clusters will still make China a critical link in the global supply chain. The vast and growing domestic market, pumped up further by the higher incomes of the working class, will continue to lure multinational companies to China. Multinationals that have already invested heavily in China will not be chased away by labor unrest, the purpose of which is to secure a larger slice of the growing economic pie.

The real challenge for Chinese industry is whether, before its competitive advantage in cheap labor is gone, it can develop “high-road” labor practices that stress both rising productivity and rising real wages. To obtain higher living standards for its citizens, Chinese industry must generate higher quality, lower cost products even as it pays its workers higher real wages. Put differently, Chinese industry must engage in innovation that supports economic development. China will be doing nothing new. Ever since the Industrial Revolution, in nations such as Great Britain, Germany, United States, and Japan, the foundations of economic development have been the same: innovative business enterprises have accumulated the productive capabilities that have made higher wages consistent with sustained competitive advantage.

China is on its way to becoming an innovative economy; an obvious sign is its innovative enterprises, such as the global telecommunication leader Huawei, fast learning car manufacturer Chery, global leading solar energy provider Yingli, state-owned but very innovative steel producer Baosteel, and many more. But the innovative transformation is not inevitable, particularly when a business model stresses cheap labor practices instead of an equitable distribution of the gains from productivity growth. For example, a leading company like Foxconn maintains an outdated Taylorist management style on the shop floor, where strict managerial rule forces workers to maintain high levels of throughput but segments them from the learning processes through which they could contribute to real productivity growth. The recent suicide scandal demonstrates the limits of such practices. The danger is that a company such as Foxconn will choose to shift production to global locations with lower wages and a more malleable labor force instead of investing in a more innovative organization of production in China.

This article has aslo been published on the ChinaAnalysis Monthly Newsletter Issue 24, July 2010.