Recruiting in China

A "Made in China" tag usually means the goods cost less to make there than in the U.S.

But the difference in labor and other expenses with the rest of the world is narrowing. And new labor laws could add to the cost of doing business in China.

New rules that went into effect on Jan. 1 could offer more job security for Chinese workers, analysts say. On paper, the rules will require firms to sign contracts with longtime employees and shell out overtime pay. They'll also make it easier for workers to unionize.

"China can't afford to have tens of millions of workers who are getting abused," said Auret van Heerden, president of the Fair Labor Association.

FLA is a Washington, D.C.-based coalition of companies, universities and other groups promoting better labor practices worldwide. Most FLA firms are apparel makers. They include Nike, (NKE) Nordstrom (JWN) and Eddie Bauer, (EBHI) which all have workers in China.

Given China's record of passing and then ignoring labor rights laws, some say the new laws could be another toothless tiger.

"They have sets of laws that, if companies followed them to the letter of the law, would make things much different," said Andrew Connor, a senior associate at recruiting firm Pacific Bridge, which finds managers for firms in China. "But what's in the law isn't necessarily what happens in China."

U.S. Firms See Little Impact

American companies operating abroad usually follow U.S. work standards. Those are already more strict than the laws in China and other developing countries.

"We'll have to watch and wait and see what happens," said George Scalise, president of the Semiconductor Industry Association. "We're staying in touch with a number of people in HR departments (of U.S. companies with facilities in China)."

The rules' biggest impact likely will be on Chinese firms, says SIA spokesman John Greenagel. "From where we stand, we have learned they aren't used to doing business this way."

Many U.S. electronics firms have operations in China. Chipmakers Intel, (INTC) Advanced Micro Devices, (AMD) Cypress Semiconductor (CY) and Micron Technology (MU) all have test and/or packaging facilities there.

Cypress CEO T.J. Rodgers says U.S. firm have to employ people in China if they want to sell there.

"If you want to play in China, you have to have resources in China," Rodgers said.

But he figures the laws won't add much to the cost of American firms doing business in China. He views them mainly as another layer of bureaucracy.

Victor Ma, head of Websense's human relations in China, agrees.

"There might be a cost to the employer (for added paperwork), but the cost is unremarkable," Ma said. "It is small, and can be balanced by higher productivity."

Websense moved part of its operations to China in January 2007. The Internet filtering and security software firm now has 120 employees there, or 10% of its staff.

Worker Rights

Under China's new laws, companies have to sign work contracts with all permanent employees who've been there at least 10 years.

SIA's Scalise notes that most U.S. firms already do so in China. But up to 80% of Chinese workers have had no job contracts, according to various estimates.

The rules also force firms to pay overtime wages — a practice not always followed by Chinese firms.

The new rules could reduce China's notoriously high employee turnover. Many Chinese factories have 100% annual turnover. Analysts seldom capture that cost of doing business in China, says FLA's Van Heerden.

Lower turnover would boost productivity and lower hiring and training costs, watchers say.

The new laws also strengthen the hand of the country's main union, the government-backed All-China Federation of Trade Unions. They give the ACFTU the right to bargain with employers for the first time. The union says it wants to organize workers at foreign-owned companies.

The rules' ACFTU ties might give them a better chance of being enforced. As retail giant Wal-Mart (WMT) found out, the state-backed union can be very persuasive.

Wal-Mart has resisted unionizing efforts in the U.S. But in August 2006, it let the ACFTU organize its 30,000 employees in the 60 stores it had in China at the time. Public pressure played a role in the retailer's decision.

"Wal-Mart made a decision to comply rather than fight it because of the negative image they were afraid of getting," Connor said. "When you're dealing with an authoritarian government like China, things are open, but you don't know when they can close."

It was a smart business move for Wal-Mart. As of February, it had more than tripled the number of stores it has in China to 202.

In the long run, U.S. firms have no choice but to go along with the law and deal with the newly powerful union, says PricewaterhouseCoopers analyst Ed Pausa. "A number of international companies will resist, (but) I don't think they will succeed."

As costs rise in China, some U.S. companies are looking elsewhere, including Vietnam and India.

"Vietnam is becoming more attractive and stable. Wages are still lower than China," Connor said.