The Future of Chinese Manufacturing: Employment and Labour Challenges

Singapore

Chapter One

Introduction: China's Manufacturing: Labour Challenges Ahead

Abstract

Along with the 2008 financial crisis, the 2010 Euro zone debt crisis, and the 2015 Brexit ‘yes’ vote, the world's economic and political situation has become more volatile and unpredictable, while global manufacturing industries are facing a new round of restructuring. Given that a viable manufacturing sector constitutes the cornerstone for a nation's social and economic growth, to sustain national competitiveness in this new era riddled with uncertainties, several of the top manufacturing countries have proposed strategies at the state level: the United States proclaimed a reindustrialization and manufacturing renaissance strategy in 2010; Germany advocated a new concept of Industry 4.0 in 2013; and the United Kingdom called for economic ‘rebalancing’ with the resurgence of manufacturing.

Keywords

Crisis; Economic; Financial; Global; Growth; Manufacturing

1.1 Introduction

Along with the 2008 financial crisis, the 2010 Euro zone debt crisis, and the 2015 Brexit ‘yes’ vote, the world's economic and political situation has become more volatile and unpredictable, while global manufacturing industries are facing a new round of restructuring. Given that a viable manufacturing sector constitutes the cornerstone for a nation's social and economic growth, to sustain national competitiveness in this new era riddled with uncertainties, several of the top manufacturing countries have proposed strategies at the state level: the United States proclaimed a reindustrialization and manufacturing renaissance strategy in 2010; Germany advocated a new concept of Industry 4.0 in 2013; and the United Kingdom called for economic ‘rebalancing’ with the resurgence of manufacturing.

China is no exception to this developmental trend. The government has also proclaimed the Made in China 2025 initiative, encouraging local manufacturing firms to upgrade themselves from the traditional labour-intensive to a modern high-tech, innovation-driven, and service-oriented manufacturing industry. In other words, moving towards higher value-added domains is the guiding direction of China's manufacturing transition.

However, this upgrading and transformation process has and will inevitably bring forth new and complex labour- and employment-related challenges for China's manufacturing as traditional jobs requiring low pay, manual dexterity, and physical skills are disappearing, coinciding with the appearance of more labour shortages, high-tech, and knowledge-intensive job opportunities. Yet the current manufacturing workforce in China is mainly composed of poorly educated migrant workers, many of whom come from poverty-stricken rural areas. Hence, it is not easy for these workers to upgrade their skills in adaptation to new job specifications and qualifications, particularly for those who are aged or have spent more than 10 years in similar positions. This situation sometimes creates a dilemma for companies. Old staff need retraining to meet new work standards while young migrant workers do not see manufacturing jobs as a good career choice as more and more such jobs will be replaced by machines.

In this vein, in recent years, manufacturing employment in China has been confronted with severe labour-related issues, such as high turnover rates, difficulties in recruiting young people, and shortages of skilled workers. While labour strikes, mass layoffs, and downsizing are deemed as a common business practice in Chinese manufacturing, the conflicts between production workers and management have become one of the major concerns that requires greater attention and deeper investigation (Chin & Liu, 2015). Hence, our book aims to elucidate the employment and human resource (HR)-related challenges that the Chinese manufacturing industry is facing in the new era of economic transformation.

1.2 Structure of the Book

In Chapter 2, using the auto manufacturing industry as an example, our book begins with an overview of the historical development of the Chinese manufacturing industry over the past three decades. It then introduces an empirical study that illustrates the role of the government as the most crucial ‘invisible hand’ in influencing goal orientation towards the creation of own brands among manufacturing firms in China.

In Chapter 3, three cases that focus on Singapore-, Taiwan-, and British-invested companies in China demonstrate how foreign manufacturers from different home countries cope with changes in the Chinese market and make strategic options when carrying out upgrading along global value chains (GVCs). In addition to addressing the contributions of foreign investment to the growth of Chinese manufacturing, this chapter also highlights the importance of acquiring institutional resources to compete in China.

In Chapter 4, two empirical studies are presented to introduce a typical, yet still under-researched, type of global start-up manufacturer emerging from China. Facing the recent global industrial and economic restructuring, such firms could not continue to rely on the export-oriented growth model of the past three decades to sustain profits. Hence, this chapter addresses a prominent ‘reverse internationalization phenomenon’, delineating why and how these Chinese entrepreneurial manufacturers are striving to transform their focus from international competition to local markets.

In Chapter 5, two studies are introduced to elucidate how Chinese harmonious culture—which is decoded and interpreted by Yijing’s eight-trigram model (Fung, 1997)—affects manufacturing employees’ attitude and behaviour at work. While China to date still has more than 100 million production workers, many of whom are recruited by the foreign-invested enterprises (FIEs), this chapter explores what fosters an attitude of openness to see the wisdom ingrained in Chinese harmonious culture and, most importantly, to link it with HR practices during the transition from a transitional labour-intensive and export-driven system to a modern service-oriented and innovation-driven manufacturing system.

In Chapter 6, from an emic Yin–Yang harmony perspective, we present a unique, indigenous circled 5C (conflict–clash–communication–compromise–consensus) model for helping to possibly resolve labour conflicts in China's manufacturing sector. While more and more Chinese manufacturers shut down their local factories and shift production lines to other regions with cheap labour, it is expected that the number of labour dispute cases and work activism will possibly continue to increase. This chapter helps to deepen our understanding of how to tackle labour conflicts in China's socialist market economy system.

In Chapter 7, considering the ongoing trend to build geographically dispersed manufacturing bases for cost advantages, cross-cultural management and corresponding language and translation-related issues are raising harsh challenges for Chinese manufacturers. To better describe this phenomenon, we introduce a research that proposes a novel, indigenous model delineating the dynamic and vital role of translation as a boundary-spanning tool in cross-border knowledge transfer within the intra-organizational networks of Chinese manufacturing firms.

In Chapter 8, we first make a brief summary of this book and then examine the prospect of future employment in China's manufacturing.

1.3 Conclusion

Overall, the overarching aim of our book is to delve into the root causes of relevant issues in China's economy today in a more comprehensive and contextualized way. We present several studies built upon the Chinese context to elucidate the distinctive growth patterns and models of Chinese manufacturing relative to those of the developed economies in the West.

In addition, it is worth noting that owing to the uniqueness of China's socialist market system, culture, and rich history, its manufacturing-led economic miracle and the above-mentioned labour-related issues cannot be fully explained or solved by the rationales underpinning Western business theories and practices (Chin & Liu, 2017; Redding, 2016; Rowley & Oh, 2016). Hence, in our book, to truly embody the cultural idiosyncrasy of Chinese employees, we employ a unique ‘Yin–Yang Harmony’ perspective to discuss labour–management relations that could better make sense, decode, and contextualize the phenomena that may be indigenous to China's manufacturing industry.

In sum, we aim to provide relevant theory, research, evidence, and practical insight and impacts for twin audiences: first, for academics globally to both expand and teach with; and second, for business and management practitioners and policymakers. Too often, for both ‘camps’, these domains are seen and treated as somewhat irrelevant to each other and sealed. We hope to break that seal.

References☆

Chin T., Liu R.H. Understanding labor conflicts in Chinese manufacturing: a Yin-Yang harmony perspective. International Journal of Conflict Management. 2015;26(3):288–315.

Chin T., Liu R.-h. Critical management issues in China’s socio-economic transformation: multiple scientific perspectives to strategy and innovation. Chinese Management Studies. 2017;11(1):12–18.

Fung Y.L. A short history of Chinese philosophy. New York, NY: Free Press; 1997.

Redding G. Impact of China’s invisible societal forces on its intended evolution. In: Lewin A.Y., Kenny M., Murmann J.P., eds. China’s innovation challenge: Overcoming the middle-income trap. Cambridge: Cambridge University Press; 2016.

Rowley C., Oh I. Business ethics and the role of context: institutionalism, history and comparisons in the Asia Pacific region. Asia Pacific Business Review. 2016;22:1–13.

☆ To view the full reference list for the book, click here

Chapter Two

Challenges for Manufacturing in China

Abstract

With one-fifth of the world's workforce, China has taken advantage of its cheap labour to become the world's factory—such as providing low-end, labour-intensive production services, that is, original equipment manufacturing to mature-market clients. This has helped to achieve stunning growth in the past three decades. The manufacturing sector has attracted huge foreign direct investment, making tremendous contributions to the gross domestic product (GDP), still accounting for 40.9% of total GDP (US$ 10.4 trillion) in 2015.

Keywords

Challenges; Employment; Investment; Labour; Manufacturing; Policy

2.1 Introduction

2.1.1 Labour Challenges of China's Manufacturing Industry

With one-fifth of the world's workforce (Chin, 2015), China has taken advantage of its cheap labour to become the world's factory—such as providing low-end, labour-intensive production services, that is, original equipment manufacturing (OEM) to mature-market clients. This has helped to achieve stunning growth in the past three decades (Child & Rodrigues, 2005; Chin, Liu, & Yang, 2016; Warner, 2015). The manufacturing sector has attracted huge foreign direct investment (FDI), making tremendous contributions to the gross domestic product (GDP), still accounting for 40.9% of total GDP (US$ 10.4 trillion) in 2015 (National Bureau of Statistics of China, 2017).

However, the new labour contract law was promulgated by the Chinese government, which began to raise labour costs in 2008. The fluctuation of the RMB exchange rate was among the factors diminishing the original cost advantages in the Chinese manufacturing. To tackle the resultant enormous cost pressure, many large multinational corporations (MNCs), such as Panasonic, Philips, and Seagate, increased their automation levels and also shifted their production bases from coastal to inland cities of China or to other developing countries with lower wages, such as India, Vietnam, and Indonesia. For example, the Yue Yuan Group, listed on the Hong Kong Stock Exchange, is the world's largest footwear manufacturer. It set up its first manufacturing facilities in China in 1988, mainly providing OEM services for global brands such as Nike, Adidas, New Balance, Puma, Converse, etc. It once had > 10 plants with around 175,000 workers but now has only five factories with about 40,000 employees in China. The Yue Yuan Group has vastly expanded its production lines in Vietnam and Indonesia since 2009, its factories accounting for 64% of its total output in 2015.¹

Despite the above phenomenon signifying a new trend of shifting production capacity from China to other countries with cheaper workforces among OEM firms, China still has the largest manufacturing companies and factories in the world and continues to be the United States biggest trading partner for manufacturing goods. The information of the development history of China's manufacturing sector over the past three decades is provided to the readers in the following sections. The development history of China's auto industry is described in the next section, followed by recent study of the effect of policy support on own-brand innovation in China's auto industry. The concepts of the GVC and three corresponding upgrading terms are explained in the conclusion.

2.2 Development History of China's Auto Manufacturing

2.2.1 Employment Dilemma

Before introducing our research on the growth story of the Chinese auto industry, we use Fig. 2.1 to provide readers with a clear picture and better understanding of the significance of the labour-related issues facing China's manufacturing. The histogram shows the contribution proportions of the manufacturing sector to total GDP (see values on the right side), while the curve indicates the proportion of the manufacturing employment to the total employment from 1978 to 2015 in China (see the values on the left side).

Fig. 2.1 Employment versus GDP in China's manufacturing.

A closer examination of Fig. 2.1 suggests three key turning points (V curves):

(1)About 1990: The key event explaining the trend from fall to rise was the emergence of GVCs that enabled low-end, labour-intensive manufacturers in China to serve as OEM suppliers for advanced economy MNCs whereby the Chinese manufacturing industry gained quick access to export markets and began to boom.

(2)About 2002: The key event explaining this turning point was China joining the World Trade Organization (WTO) in 2001 whereby the government agreed to reduce trade barriers, such as import tariffs, and provide export tax exemption for WTO members. Since then, the Chinese manufacturing industry has attracted a substantial amount of FDI and grown at a remarkable rate.

(3)About 2009: The key event explaining this turning point was the 2008 global financial crisis that triggered a prolonged global economic stagnation and the restructuring of global manufacturing. To tackle this challenge, the Chinese government forcefully implemented the 4 trillion RMB investment plan to stimulate local demand. Chinese manufacturers therefore have been encouraged to return and compete in their domestic market from the export market since then—the reverse internationalization phenomenon (Chin et al., 2016).

Overall, the three turning points explicitly highlight the major driving forces for Chinese manufacturing over the past three decades, namely the rapid rise of the GVC and the tremendous inflow of FDI during the 1990s—which to a large extent underscores the pivotal role of the government intervention in China's development trajectory. However, implicit in Fig. 2.1 is the evidence of the employment dilemma—that the ratio of manufacturing employment to total employment kept increasing—despite the contribution of the manufacturing industry to total GDP declining sharply after 2011.

2.2.2 Development History of the Chinese Auto Industry

Since China's economic reforms and the opening up of the economy, auto manufacturing has been designated as a pillar industry—a crucial engine fuelling China's economic growth. Referring to Tian (2007) and Yang, Chin, Liu, and Yao (2017), we also divide the development of China's auto industry into three phases: (1) 1953–78, (2) 1979–94, and (3) 1995–present.

In Phase 1, the entire auto industry was totally controlled and subsidized by the central planning economic system. This consisted of 53 small-sized car producers and 166 car parts manufacturers. According to national statistics, there were only 149,000 vans and 2640 sedans produced in 1978 since consumer demand was not a concern at that time (Tian, 2007).

In Phase 2, the auto industry was formally proclaimed by the Chinese government as a ‘pillar industry’ that could propel the national economy and people's livelihoods. Owing to the deepening of China's open-door policy and market reform, there was a rising demand for cars. Nevertheless, the automotive industry necessitated the implementation of complex production processes (Lockstrom, Schadel, Harrison, Moser, & Malhotra, 2010), but—it was impossible for Chinese firms without sufficient experience to quickly and independently develop all the technical expertise and capabilities required to produce vehicles. To protect and strengthen the competitiveness of local carmakers, since the late 1980s the Chinese government, instead of waiting passively for the ‘natural’ transfer of advanced technology from FDIs, had enacted a series of ‘market for technology’ policies to encourage state-owned enterprises (SOEs) to proactively learn know-how from world-renowned automakers by forming joint ventures (JVs) with them (Redding & Drew, 2016). Thus, a few foreign auto brands have been granted privileged access to the Chinese domestic market. The primary goal of these policies was to diversify and reinforce the technology spillover channels between the local firms and the MNCs for accelerating the pace of indigenous innovation (Chou, Chang, & Li, 2014; Yang & Tang, 2014). However, in the 1980s, the above-mentioned ‘market for technology’ policy permitted only six large SOEs to set up JVs with selected MNCs and to build joint manufacturing bases, which included three large bases as follows: First Automobile Works (FAW), Second (Dongfeng) Automobile Works and Shanghai Automotive Industry Corporation (SAIC), and three small bases: Beijing Jeep, Tianjin Xiali, and Guangzhou Peugeot.

The auto industry benefited greatly from the 1986 to 1991 national 5-year plans. In 1994, the Chinese central government reiterated the significance of vitalizing the auto industry. One of the most influential policies was announced—which pointed out several future development directions enabling Chinese SOEs to cooperate more closely with international auto brands (Motohashia & Yuan, 2010). The three directions were as follows: (1) consolidating small and fragmented local auto producers by raising the entry threshold; (2) further protecting and fostering domestic auto-related industries (i.e. the auto parts and components industry); and (3) better clarifying FDI regulations. As a result, most Chinese automakers formed strategic alliances with well-known foreign car brands during this period.

In Phase 3, the Chinese government continued to position the auto industry as a vital growth engine for the whole country; though the State Council had halted the ‘market-for-technology’ policy in 2006 in the auto industry, it implemented more preferential treatment policies to support domestic car brands. Since 1995, the demand for vehicles further boomed at a record-setting pace, as the fast-growing economy enabled more families to afford a car. With this trend, vehicle production reached 2 million in 2000, 8.8 million in 2007, and over 20 million in 2013.

To grasp this opportunity, policymakers launched stronger policies in which SOEs and Sino-foreign JVs were given higher priority to expand their production and market shares for achieving economies of scale in China (Gallagher, 2006; Lockstrom et al., 2010). Since 2000, the whole Chinese car market has been dominated by Sino-foreign JVs equipped with superior innovative capabilities over pure SOEs and domestic private firms. It is worth noting that the entry barriers, such as strict FDI constraints preventing foreign carmakers from investing directly in China, remain even today, though the total purchase taxes, such as import tariff and other levies, were reduced from a very high rate of > 100% to about 50% in recent years.

2.2.2.1 Brief Summary

The above detail confirms that Chinese SOEs have been accustomed to relying on favourable policies to form strategic alliances with foreign auto brands for better profits and rapid product upgrade. Viewed from this angle, the state-controlled Sino-foreign JV, as a unique type of state-owned MNC in China (Curevo-Cazurra, Inkpen, Musacchio, & Ramaswamy, 2014), has evolved to become a kind of interest group with substantial monopoly power. The JVs with their foreign-brand vehicles are the national champions in China's auto market. This kind of JV is very likely to keep occupying the predominant position and more JVs are expected to emerge in the future if the degree of policy support stays the same or increases.

In short, this development history of China's auto market highlights the vital role of governmental intervention/policy agenda in shaping the competition patterns in Chinese manufacturing. However, despite a series of preferential policies issued to encourage domestic companies producing own-brand cars, creating proprietary brands seems to remain difficult for both SOEs and local private carmakers. For a better understanding of this critical issue, our recent study on relevant topics is presented in the next section.

2.3 Policy Support for Own-Brand Car Production: Panacea or Placebo?

2.3.1 Introduction

China surpassed the United States to become the world's largest car market in 2009 and has evolved into a new competitor in the global auto market with fast-growing domestic brands such as Chery, BYD, and Geely (Drauz, 2013; Wang & Kimble, 2013). Consequently, increasing attention has been paid to analysing the determinants for growth of this industry as well as its significant upgrading trajectory from OEM to own-brand manufacturing (OBM) (Chin et al., 2016; Wang & Tanaka, 2011). Among the key success factors, the industry supporting policy is widely recognized as the most crucial one because of its prominent contributions to boosting vehicle sales, knowledge transfer between MNCs and local firms, and the privatization of SOEs via the establishment of international JVs (Curevo-Cazurra et al., 2014; Motohashia & Yuan, 2010; Townsend & Calantone, 2014). The prosperity of the Chinese auto industry occurs within a unique institutional framework comprising various legal constraints, political connections, and bureaucratic rules, where the government intervenes in the market by means of industrial policy. However, although China's strong growth momentum in the past decades has stimulated demand for cars, its automobile industry is confronting unprecedented challenges due to the global economic slowdown and restructuring. It requires more empirical and timely studies to examine the effectiveness and actual influence of policy support on this industry to predict whether policy support can continuously help carmakers achieve sustainable development under China's economic situation. Therefore, we investigate relevant issues in depth from a more pragmatic perspective.

In the 1990s, the Chinese central government explicitly promulgated the view that the automobile industry was an important ‘national pillar’ industry that should be fully controlled and even monopolized by the central government in consideration of its strong association with the usage of tremendous strategic resources of a nation. As such, the auto industry inherently carries a duty to act as a major driving engine nudging the entire Chinese economy in a certain direction (Tian, 2007). Consistent with this, a variety of industrial policies were stipulated to enhance the innovativeness and protect the competitiveness of local firms, particularly SOEs. Among these, the most influential policies often reinforced the entry regulations for FDI so as to prevent foreign auto firms from investing in China independently. More specifically, though the Chinese government carried out the ‘trade market for technology’ strategy to facilitate indigenous firms to pursue innovation by collaborating with developed-country partners (Zheng, 2014), the wholly foreign-owned vehicle manufacturers have only been allowed to enter China by partnering with Chinese SOEs via the establishment of JVs. Despite having certain constraints, this national strategy still provided a valuable opportunity for all the world's big automakers to gain legitimate access to the fast-growing Chinese market. As a result, a rising number of Sino-foreign JVs emerged and have been holding a monopolistic position in this context.

However, although SOEs received vigorous policy incentives to form Sino-foreign JVs with world-famous carmakers, their performance was not very satisfactory in terms of developing and marketing their own brands. In 2004, to fuel the desire for cooperative innovation, the Chinese government further put forward a variety of tempting financial initiatives for Sino-foreign JVs to create new car brands, but these initiatives seem to have been ineffective so far. For example, the total sales volume was around 12 million vehicles in 2013 in China, of which only 3.3 million were local-brand vehicles while > 8 million were produced by the Sino-foreign JVs under foreign and co-brand names, such as Dongfeng Honda and Bejing Benz. Even worse, some of the JVs that took advantage of the policy support were found to have frequently engaged in rent-seeking behaviour to lobby the government for privileges, rather than being dedicated to public welfare (Ngo, 2008). It is questionable whether policy support fosters independent brand development in the Chinese auto industry, despite the fact that upgrading to OBM status as a national priority constitutes the basis for moving China up the GVC (China's 12th 5-Year Economic Plan 2011–15; China's 13th 5-Year Economic Plan