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Manufacturers Reject Business to Stay Profitable
Summary:Companies that rely on a flexible workforce are finding it more profitable to reject big orders in order to avoid recruiting more employees. China’s new Labor Law, plus changing attitudes of the workforce, are making recruitment a very risky venture. Between severance pay and training costs, some factories would prefer to take a hit or move overseas.


By Zhang Bin (张斌)
Issue 586, Sept 10, 2012
News, page 5
Translated by Tang Xiangyang
Original article:

Li, an entrepreneur who produces shoes in Wenzhou City, says that he’d rather watch his business take a loss than try to recruit new workers.

Li has estimated that the cost of recruiting is higher than the company’s current profit. Unable to predict the future economic situation, he’d rather not take the risk. Without recruiting new employees, he can’t fulfill any new orders, so instead he’s just trying to maintain his big customers.

Wang on the other hand, whose business is exporting clothes, is sharply cutting staff and transferring orders to Bangladesh. The office building he bought a few years ago is mostly being rented out. He says it’s more profitable than recruiting new employees.

Changes in China’s Labor Law and the attitudes of workers are making it difficult for businesses that rely on a flexible work force.

“There is no so-called ‘labor shortage,’” Wang said. “At the end of this year or the beginning of next year, migrant workers will once again have difficulty finding a job, especially in the southeast coastal area.”

Rejecting Orders

Li’s shoe factory has around 1,000 workers now. Last year about 200 were laid-off.

“Now, even the most basic worker is asking for 3,000 yuan per month,” Li says. “The orders from Europe have been weakening since last year. It’s a severe blow, especially to Wenzhou’s market.”

He says things have picked up a bit recently though as he’s received more new orders from overseas. “The volume of those orders isn’t that big, if compared to orders in the past,” he says. “But they are urgent.”

Li’s factory used to spend one year completing an order worth hundreds of thousands of yuan. But he says things are different now. A big order will be split into several small ones and assigned to different factories. Sometimes the customer even requires the order to be finished within one or two months. “Completing on time is even more important than saving costs,” Li said. “If we can’t recruit enough employees [to finish on time], it will be fatal.”

Li and Wang dare not recruit employees for big orders, since they are mostly seasonal. If recruited, there will be excess labor when the orders are finished. Most factories can’t afford the high severance pay for laid-off workers required by the new Labor Law.

Materials and capital can be stored but labor can’t, Li explained. With enough recruitment but no orders, the factory has to pay salaries and will quickly go bankrupt. “The fast change of orders requires more flexibility of the labor supply,” he said. “But it’s not that flexible. It can’t match the change of orders.” 

Unwilling to Recruit

Li’s factory recently received a 3 million yuan order, which would have yielded a profit of 1 million yuan. To finish it on time, he’d have to open more production lines and recruit dozens of workers. But he figured with 30 workers each getting 50,000 to 60,000 yuan per year plus insurance, he’d have to pay around 1.5 to 1.8 million yuan. The Labor Law says the minimum contract period is two years, which means a three to four million yuan commitment. “It’s rare for me to get such a big order,” Li said. “But I’ll give it up rather than recruiting more workers.”

He said it takes about three months to train a worker. The costs including salary, training fees and waste of substandard products is around 12,000 yuan - equal to five months’ salary of a single employee. He said it’s beneficial in the long term, “but I really can’t read into the current situation. It’s impossible to keep so many workers.”

“It’s not wrong to protect workers’ interests,” he continued. “But our situation is turning worse by the day. The Labor Law has set [bosses and workers] against each other.”

Li says he always tells managers in his factory to carefully handle bad feelings among workers. “It’s really difficult to run a factory of over 1,000 people,” he says. “If feelings are ignored it can snowball in to big conflicts. We’re a bit scared of being sued. The workers always win. I’ll have to compensate and there will be bigger problems. Today’s workers are very different from those 10 or 20 years ago. They have lots of ideas and will sue you at any time.”


Li is now trying to maintain big customers and orders, even at the price of losing money. He has a representative office in Shenzhen to receive orders. He hopes to cultivate some big customers and transfer them to other factories in China, Vietnam or Bangladesh.

But because of the complicated manufacturing process, a shoe factory isn’t easily moved. The supporting facilities in other countries aren’t ready. When considering the logistics costs, it would cost at least as much as staying in Wenzhou. But Li said sooner or later he will move his factory.

“We’re almost a trading company now,” he says. “The factories will be further shrunk.” 

Wang has already shifted nearly all his clothing orders to Bangladesh. Since the clothing industry is less complicated, it was easier to transfer.

Last year Wang cut one-third of his staff. “I bought this office building several years ago,” he said. “With less staff, I rented the unoccupied floors out. It’s much more profitable than keeping employees.”

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