The Union-Free Good Times May Be Over in China

In 2006, Wal-Mart agreed to allow unionization of its workers in China. McDonald’s struck the same accord just several weeks ago.

    Is Starbucks far behind? What is happening in this supposed employer paradise of low wages, high productivity, an endlessly available labor pool and compliant employees?

    There is, of course, a union in China that claims to represent more than 150 million workers through its enterprise affiliates. It is known as the All-China Federation of Trade Unions (ACFTU), and it is the only legally recognized workers organization in China. Independent trade unions are not permitted. The ACFTU is also an arm of, and controlled by, the Communist Party of China.

    For years, the ACFTU and its enterprise affiliates have been passive insofar as foreign-invested enterprises in China have been concerned. While unionization was permitted under the law and even required when requested, where unions were in place in foreign-invested enterprises they were largely concerned with social events and keeping the workforce compliant. At more than one production facility, the head of the local enterprise affiliate union was the company’s director of human resources.

    But when Wal-Mart marched into China and continued its U.S.-style scorched-earth opposition to unions, it seemed to have rubbed even the compliant ACFTU the wrong way. Chinese union officials made a public example of Wal-Mart and used it to make the point that even the titan of Bentonville, Arkansas, wasn’t mightier than the Chinese Communist Party.

    Following the successful establishment of unions at Wal-Mart, the ACFTU appears to be intensifying efforts to establish enterprise unions in foreign-invested enterprises. In October 2006, it announced that it would begin “another wave” of unionization, with a target list that included Eastman Kodak, Dell and Foxconn Technology, a Taiwanese parts supplier for Apple’s iPods. The ACFTU goal for 2006 was to get 60 percent of foreign companies in China to unionize.

    That goal has been met, according to the ACFTU, and the federation set a target of 70 percent this year. The most recent example is McDonald’s, which in late May agreed to allow workers at its 750 outlets in China to unionize. That announcement followed by only two weeks an ACFTU claim that McDonald’s and Yum Brands, which owns KFC and Pizza Hut, were violating labor laws by underpaying part-time workers in the southern city of Guangzhou.

    In an interesting coincidence, Andy Stern, president of the U.S.-based Service Employees International Union, was visiting with ACFTU members just before the announcement of “another wave” and the list of target companies. It is a PR pressure tactic well honed by the 1.8 million-member SEIU in the U.S. in its own corporate campaigns.

    The global union movement also has taken note of the possibilities in China. At a recent UNI-Europa conference, a proposal by the U.K.-based union Amicus to build solidarity with workers in China was endorsed.

    “Whether we like it or not, China has a real impact, either directly or indirectly, on the working families that we represent in Europe,” said Amicus assistant general secretary Tony Burke.

    Why the newfound energy and aggressiveness on the part of the ACFTU, which cannot be occurring without the tacit approval if not direction of the Chinese Communist Party leadership? With all due respect to Stern and his persuasive powers as a labor leader, I suggest that at least two factors are at work.

    The first is that the widely known and growing disparity in China’s income between those that have and the have-not immigrant workers from more remote provinces has the government and party concerned. Unofficial unions and protests and strikes in certain areas, while not widely reported, are a potentially serious threat.

    What better way to provide a channel for this unrest and unhappiness than to use the establishment of enterprise unions as a safety valve and control mechanism? While this avenue is fraught with the risk that organized, compliant workers may not be so compliant in the future, party leaders may believe that they can control this situation better than one where independent trade unions are involved or no organized structure is in place.

    A second factor may be the same one that is affecting U.S. unions—the decline in membership dues-based revenue. If you don’t have members, you don’t have revenue.

    In the U.S., such revenue is based on a dues structure worked out as an agreed-upon amount between the elected union leadership and the membership. In China, when a union is established at an enterprise, 2 percent of payroll is paid by the company to the union.

    The ACFTU, like its U.S. counterparts, is learning all about the benefits of capitalism and revenue generation. For years, the ACFTU membership was stable because it represented workers in state-owned enterprises.

    With the decline of such enterprises and the rise of private ownership, they have suffered a serious membership and revenue drop. What better way to make up this shortfall than with foreign-invested enterprises?

    If all that were occurring in China was a slightly more aggressive posture by the ACFTU toward foreign-invested enterprises, then the situation might not be of much concern to business. However, there is another, more significant aspect of this newfound Chinese interest in protecting worker rights.

    In March 2006, the National People’s Congress released a proposed draft Employment Contract Law. That law would be China’s first national law specifically governing employment contracts.

    It would also have imposed new requirements and restrictions on the way companies manage their employees. Enterprise unions or employee representatives would have veto rights over adoption of employee manuals, codes of conduct and company rules.

    It would be more difficult for employers to terminate employees for poor performance and impose non-compete agreements. The proposed draft also would have given the union veto power over layoffs of more than 50 employees whether due to downsizing, merger or transfer of assets.

    After receiving some 190,000 comments from employees and employers about this initial draft, a new draft was presented to the Standing Committee of the National People’s Congress in December 2006. The new draft eliminated certain provisions of the initial version, including consent to change company rules and layoffs of more than 20 employees. On June 30, the new draft was passed to take effect on January 1, 2008. Most significantly, it gives the AFCTU the power to bargain with employers.

    At this point, it is not clear what the impact of this new labor law will be. It is safe to say, however, that the labor and employee relations landscape in China is undergoing change that will favor employees and unions insofar as foreign-invested enterprises are concerned. Multinational corporations will continue to move work to China and it will continue to be an attractive location both in terms of costs and its potential domestic market for goods and services. However, companies that move or expand operations in China going forward would be wise to pay close attention to these legislative and labor developments and factor them into their strategic planning.

    Can corporate management truly imagine an ACFTU with teeth? Can it imagine having to contend with a 150-million member union with a growing revenue stream? Maybe it’s time to start considering how to deal with that possibility.