China's labour role reversal: Now factories follow workers, what are the implications?

Doug Cahn considers a major shift in labour and factory movements in China, and considers how responsibly-minded brands should respond

For more than two decades, a reoccurring event of enormous proportion has highlighted the Chinese calendar.

The largest annual internal migration in history – over 10 million young Chinese laborers, the ones who fill the factories of the coastal provinces – make their way by train and bus to China’s industrial heartland in search of jobs.

Then, each year they return to their family homes set in villages and agricultural regions in the north and west for the Chinese New Year.

In advance of holiday, the cavernous train station in Guangzhou, the sprawling city of nearly 10 million, is overrun by the migrant laborers leaving for home.

Factories and offices close. After a respite with family, they return south and east to participate in factory life.

But not this year.

The trains and buses that overflowed with laborers going home returned to Shanghai, Shenzhen, Dongguan, Guangzhou and Zongsheng with seats to spare.

By the millions, workers voted with their feet.

And when the votes were counted, a worrisome labor shortage across the coastal regions set in.

The money these migrant laborers have been able to save and send back home has played no small role in raising the standard of living for 1.3 billion Chinese.

Yet these workers have also paid a price. There remains a gap between internationally recognized labor and environmental standards on the one hand and prevailing industry practice in China on the other.

Excessive overtime, underpayment of wages, environmental degradation and poor health and safety protections, among other issues, remain systemic problems.

What are the implications of the reduced migration to coastal areas and the increasing use of inland factories on the initiatives to bring protections for workers in line with internationally recognized standards?

Following the close of the Chinese New Year holiday, The Cahn Group surveyed over a dozen highly knowledgeable representatives of brands and retailers, social monitors, and non-governmental organizations in China and the West to learn more about the slowdown in the return of Chinese migrant workers to the coastal regions.

We wanted to understand the impact of the slowdown on factory compliance with workplace codes of conduct.

These well-informed individuals provide important insights into current trends.

Survey results

There is broad consensus by all participants in the survey that the movement of factories inland is real trend, but it is affecting fewer than half of the total number of factories at the present time.

Inland facilities are mainly performing simple, low-skill processes like stitching and cutting.

A few respondents identified screen printing, embroidery or other embellishments as inland factory functions.

Still fewer knew of inland factories that are using more highly skilled processes such as injection molding or final assembly, although some identified the possibility of further investment in machinery as a potential future trend.

Inland factories are smaller than their counterparts in the coastal areas and, not surprisingly, labor intensive.

Workers live at home, may on the whole skew a little older and may be more inclined to work at home or in small, informal workshops where workplace protections will be limited. Salaries are 20 – 30 % lower than in coastal regions.

Most of those surveyed felt that there were three primary reasons for the trend of manufacturers to use inland facilities.

The first, not surprisingly, is lower labor costs, followed closely by the fact that more workers are available in inland provinces and that workers are increasingly hard to recruit and retain in coastal areas.

Notably, however, there are other secondary reasons as well.

Many workers prefer to work near their families rather than living far away even though the salary is lower at home. Manufacturers are motivated by lower investment costs and beneficial tax and rent policies.

One respondent commented that the move inland is driven by the reduction in export incentives in the coastal areas.

In terms of compliance with workplace codes of conduct, just under half of those surveyed felt that excessive working hours would be reduced in inland facilities.

Slightly fewer felt that health and safety conditions would be improved, perhaps because the risks in factories with fewer machines required specialized skills would be reduced.

Most felt that service from local authorities away from coastal regions is better and more accessible (although not necessarily better equipped to address workplace conditions).

Yet one respondent observed that inland government authorities will have heightened awareness of poor workplace conditions and as a result will be more likely to want to address them.

Respondents concluded that workers will benefit from closer ties to their communities and, possibly, reduced work hours.

One noted that workers are more likely to have freedom of movement during employment; it is be less likely that identification documents will be held by the factory.

Others felt that code violations will increase. “In moving inland, managers worry first and foremost about production, followed by quality,” commented one respondent who oversees a well-respected workplace compliance program for a large, global brand.

“Compliance is considered only once the factory is fully operational. If the foreign buyer does not apply pressure, it will be completely forgotten.”

For many inland facilities, there may well be a lack of internal systems needed to meet routine monitoring requirements, such as pay slips for workers, accident report forms and a process for ensuring that overtime hours are paid at the premium rate.

Over half of the respondents said that health and safety standards would decline, that the use of child labor would rise and that fair wages would fall, the latter being a reference no doubt to reduced inland wages.

One respondent noted that facilities will not be watched as closely by the brands. Brand compliance teams may not be able to monitor frequently.

A respondent that works to expand the capacity of factories to meet internationally recognized standards commented: “Local authorities will be indifferent to standards that will be unfamiliar.”

NGOs will be absent due the distance from population centers and the difficulty of travel. Unauthorized subcontracting may take place with impunity.

Still others felt that lower profit margins by inland factories would make it difficult for them to make the necessary investments to achieve labor and environmental code compliance.

Under the best of circumstances, it will take time, one argued, to raise the needed level of awareness and build capacity for compliance.

There was strong agreement that to address the additional risks of noncompliance in inland facilities, primary factories in the coastal regions should enforce codes inland.

Training programs should be established and grievance mechanisms should be set up as well.

A minority of respondents felt the government should establish better labor enforcement and that democratically elected worker representatives could play a role.

More than half of respondents felt that it was “somewhat true” that brands and retailers were well organized to address any concerns with the use of inland facilities.

Considerations for the future

In addition to concern about workplace and environmental compliance, there have been two parallel trends in supply chain management in recent years.

The first is vertical integration and the second is consolidation.

Both trends enable better management systems and enhance the possibility of efficient and effective code implementation programs.

The use of inland factories in China is one notable exception to these trends, driven in part by government policies.

Under these circumstances, the use of inland factories in China is inevitable as manufacturers of products requiring semi-skilled labor seek to maintain global competitiveness.

The results of the increase in use of inland factories is not all bad, as a number of respondents noted, but brands and retailers will need to be cautious.

Keeping track of a company’s supply chain has never been as easy as it should be.

Yet, transparency across supply chains is a prerequisite to improving any business process, whether it be time to delivery, quality, or improved labor and environmental practices.

Requiring transparency is a first step. Of the suggestions called out by respondents to the survey, insisting that the primary facilities be held accountable for the workplace standards in inland facilities makes sense.

The key to making that accountability stick will hinge on development of metrics and verification tools that can demonstrate compliance when frequent site visits are no longer easy. The suggestion that workers have access to grievance mechanisms is also particularly meritorious.

The voice of workers has often been absent from many brand and retail compliance programs.

Grievance mechanisms that respect the confidentiality of workers and that are predictable, legitimate and trusted by all parties to a grievance can help.

As the migration of factories to the Chinese countryside continues, brands and retailers across the globe will no doubt see it in their interest to embrace the migration as yet another change in the every evolving quest for more efficient and effective methods of production.

Leading companies are already aware of the challenges ahead and they are addressing them.

In so doing, workplace compliance teams will be advised to align their strategies closely with their business units so that transferring the knowledge of workplace expectations from coastal factories to inland factories will take place.

It will not be easy, but it will be important to do if companies are going to stay in step with this major change in the Chinese supply chain and in the lives of the workers who support them.

Doug Cahn is Principal of The Cahn Group, LLC, a corporate responsibility consultancy dedicated to creating sound business practices that are consistent with societal needs and stakeholder expectations. He is also President of Clear Voice (www.clearvoicehotline.net), supporting workers with hotline and communication services. For more information, see: www.thecahngroup.com or email: info@thecahngroup.com.

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