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Lay-offs are on the rise as economy slows


31 Aug 2012
Week in China

When Google acquired Motorola last August, China’s anti-monopoly regulator took its time to review the deal. Some suspected
foot-dragging motivated by political factors, namely Google’s rocky relationship with Beijing after its search-engine withdrawal from the country more than two years ago (see WiC54). But no matter, the deal was finally signed off in May. Yet less than three months later, the handset maker has announced that it is laying off 1,400 China-based employees.

The move is part of 4,000 global job cuts from Motorola’s ‘mobility’ division, with China the most affected region this time around. The Economic Observer reports that layoffs will reach Shanghai, Nanjing, Hangzhou and Tianjin. But the country’s capital is the hardest hit with about 700 out of 1,600 employees in the Beijing office receiving their pink slips.

That’s surprising given that China has become one of Motorola’s biggest markets over the last decade, prompting it to set up extensive manufacturing and design facilities in the country. But a sluggish global economy, fast-changing technology and disruptive market trends mean that Motorola’s Chinese operations couldn’t remain immune from the wave of job cuts, Chengdu Daily concludes.

Other multinational companies have been cutting staffing numbers in China too. Japanese electronics firm Panasonic, Finnish handset maker Nokia (along with its joint venture partner Nokia Siemens Networks) and Danish wind-power equipment maker Vestas have all announced firing plans over the past few months.

“Anecdotal evidence suggests that an increasing number of enterprises are laying off workers or closing down factories,” HSBC economist Qu Hongbin wrote in a recent research note. “It is time for Beijing to focus more squarely on the job market.”

Of course, rising labour costs are also an important factor. Just last week Hon Hai, one of the largest contract manufacturers of electronic products, announced that it had raised basic salaries (again) by 16% for its production line workers in Zhengzhou in Henan province.

Anecdotal evidence suggests that an increasing number of enterprises
are laying off workers or closing
down factories

On a broader basis, statistics show that the average increase of the minimum wage in 16 provinces was 19.7% in the first half of the year, according to government data. That’s a slower pace than the comparable period last year (when it was 22%) according to 21CN Business Herald. But the end of ‘cheap China’ is prompting multinationals to consider lower-cost alternatives. In July WiC reported that Adidas had closed its last wholly-owned factory in China (see WiC160). According to the German company, Chinese workers making athletic shoes were being paid at least Rmb2,000 ($313) a month, while their equivalents in Cambodia earn about 60% less.

But while some analysts warn that China could lose more business to rivals like Vietnam and Indonesia, others have argued that the competitiveness of the Chinese labour force depends not only on how much workers are paid, but also on their productivity. And in the past, improvements in manufacturing productivity have been impressive, with the World Bank estimating that output per worker has grown more than 8% a year since the mid-1990s.

Can it keep pace with the rapid run up in wages? Last year the Boston Consulting Group suggested that it would be difficult, predicting that output per worker will increase at only half the pace of the rise in wages for a five-year period. A counter argument is that labour only accounts for a small proportion of overall costs. But BCG still doesn’t think that this is enough to prevent costs in some of China’s best-known manufacturing zones coming close to American levels (in southern states like Alabama) in productivity-adjusted terms.

Hence the early signs that multinationals are rethinking some of their China operations. For the laid-off workers at Motorola, this was a rude awakening. Hundreds were so upset that they staged protests outside the firm’s offices in Beijing, citing “disrespect from the company”.

According to Century Weekly, many have refused to sign agreements terminating their contracts.

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