Sourcing in China - Year of the rat

By Chandran Nair

This column by Chandran Nair appears in the April 2008 issue of the Ethical Corporation magazine.

Foreign companies in China must stay to meet the country’s new labour and environmental laws, not shut up shop, argues Chandran Nair

The snowstorms that wreaked havoc throughout China in late January could not have come at a worse time. As millions of Chinese migrant labourers queued up to board trains to return to their villages for the lunar new year celebrations, the freezing conditions brought already stressed transport systems to a halt. There were immense bottlenecks at rail stations across the country and huge losses for businesses.

But the inclement weather did more than expose the frailties of China’s infrastructure. It also shed some light on corporate misbehaviour in the face of official attempts to improve environmental and social conditions in the country.

As the snow fell, hundreds of companies reportedly defaulted on their debts and closed factories while workers went home for the holidays. The sudden closures have led to massive lay-offs and left many workers’ wages unpaid. Some of the factories were locally owned, but in Shandong Province a substantial number that suddenly closed were reportedly backed by Korean investors.

The lunar new year appears to have brought a convenient excuse for many company managers to shut down operations in the face of growing losses. Recent environmental legislation, the tightening of labour standards and the strengthening of the yuan have all affected profitability, leading to factory closures as foreign companies search for even more “competitive environments”.

But to close factories overnight and leave workers in the lurch with no information or explanation is inexcusable, and particularly poor timing given the difficulties many had travelling home in the snow for their annual reunion with families.

The specific case of the factories in Shandong is an extreme example of corporate misbehaviour escalating to the upper reaches of international diplomacy, as many Korean companies were involved. Such was the level of the Chinese government’s concern that it summoned officials from Korea to discuss how companies could reimburse workers.

Foreign hypocrisy

While this may have been an extraordinary case, the reality remains that for years foreign companies have been complaining that China has lacked proper regulation while quietly taking advantage of the loopholes that gave them a competitive edge. International chambers of commerce in China initially opposed the new labour laws.

But with lawmakers now pursuing legislation, it is time for companies to support the enforcement of regulations. In effect, rather than trying to embrace or promote vague corporate responsibility principles, which is what many do, companies should simply focus on meeting the laws of the land.

Given the growing awareness among workers of their rights, a shift in the opportunities available to the rural poor and the high societal cost of environmental negligence, companies must look more than ever beyond short-term gains and implement strict policies that will allow them to build sustainable relationships with stakeholders in China. Even if the cost of doing business increases for small and medium-sized manufacturers as a result of the new laws, the fact remains that the mainland’s consumption power is a force that cannot be ignored, and smart, responsible companies can only grow in this environment.

For too long, the world’s consumers have benefited from conveniently outsourced manufacturing in China. The recent snow-storm chaos has helped to accelerate the understanding that responsible corporate conduct must go hand in hand with government actions to strengthen the links between business and society. For those who see a long-term future in China, investing in staff (not just managers) is going to be critical, because rural Chinese workers are beginning to question the wisdom of leaving their homes and families for cities and factories – where life can be even harsher.

This is especially true as conditions at home have begun to improve as money trickles back to rural areas and as policies encouraging rural entrepreneurship start to deliver results.

Regulations that clean up China’s environment and protect workers’ rights should be embraced. Companies that have the vision to adopt a responsible approach will succeed. However, those that choose to cut and run are not only sending a very poor signal about the immorality of certain business practices but in the long run will be giving up a big piece of the global economic pie.

Chandran Nair is the founder and CEO of the Global Institute For Tomorrow.