U.S. companies announced more than 240,000 layoffs in January, the highest total in seven years. The picture in China is not especially happy, either. More than 20 million migrant workers across the country lost their jobs last year, as shrinking export orders led to the closure of low-value-added factories for goods such as toys and shoes, mainly in South China.
Now, celebrated global brands in sectors such as consumer electronics and semiconductors are adding to the numbers of China’s unemployed. Here are just some of the most recent examples, taken from company announcements and the news media:
· Suntech Power, the Wuxi-based New York Stock Exchange-listed maker of solar modules, which relies on Europe for 80% of its sales, is cutting 4,000 employees, or 30% of its workforce.
· Electrolux is closing a low-end refrigerator factory in Changsha, Hunan province, to focus on high-end home appliances, costing more than 700 workers their jobs.
· Intel is closing its microchip testing plant in Pudong, Shanghai, eliminating 2,000 jobs. Intel said the affected workers would be offered positions at facilities in Chengdu or Dalian. The company said it was making the move to optimize its manufacturing resources in China.
· A Suzhou-based original equipment manufacturer unit of Taiwan BenQ Group, one of the world’s biggest manufacturers of information technology products, cut its staff of 5,000 by a third last year. Some employees are leaving the company because overtime pay, which can constitute two-thirds of workers’ monthly salary, has evaporated, leaving only a monthly salary of RMB 800 (US$117), not enough to cover living expenses in Suzhou.
· Another major chip manufacturer in Suzhou Industrial Park is expected to make mass layoffs in the coming months, due to a huge loss in its global operations.
· A January 2009 HR Monthly Watch report released by Hewitt Consulting, a global human resource company, indicates that companies in China are under significant pressure to control costs and scale back wherever possible, particularly in certain hard-hit industries such as the automobile, semi-conductor and electronics sectors, according to its study of 167 organizations.
To forestall mass layoffs, China’s State Council issued a notice in early February, requiring companies to notify local labor authorities before any layoffs involving at least 20 employees or 10% of staff. The provisions leave much to the discretion of the government, some legal experts say.
As a result, enterprises managed by the central government won’t lay off workers, though they may take other measures. Shanghai-based China Eastern Airlines, for example, one of China’s four big airline groups, is reducing managers’ compensation because of huge recent losses.
China operations of multinationals, however, get their cues from their overseas headquarters. Shanghai-based FESCO, which serves 5,000 foreign companies across the country, surveyed 356 of its clients over a wide range of industries in mid-February and found that 27% had already started laying off employees.
Some are making layoffs as part of global restructuring. Maersk Group, the shipping and logistics company, said on February 10 that it would close its China headquarters and reorganize China business units within its Hong Kong office. Employees in Shanghai said the company had laid off nearly 20% of its staff and that the restructuring was still going on. A recent internal notice from Maersk’s Shenzhen operations, the employees said, called for employees to take 22 days of unpaid leave this year.
Motorola China has cut nearly 1,000 employees since late last year from its mobile research and development department, primarily in software platform projects, as part of its global actions.
The Side Effects of Layoffs
The decision to lay off workers comes with lasting effects. For starters, layoffs change the relationship with remaining employees, said Peter Cappelli, director of Wharton’s Center for Human Resources, in a recent video lecture produced by the Financial Times. “When the business picks up and the labor market gets tight,” Cappelli said, “you probably can’t expect they are going to have the same commitment to you. That’s something worth thinking about.”
Also worth thinking about is the long-term effect on the business itself. “I think particularly in the U.S., there is a tendency to focus very much on the short-term quarterly performance numbers,” Cappelli said. “But to think a little bit further out, what happens if the business picks up, and how long will it take us to rebuild the capability in the future?”
“The decision to lay off professional staff involves several trade-offs,” said Wharton management professor Raffi Amit. “On one hand, boards of directors often encourage management to maintain profitability and control operating expenses (OPEX) when sales do not meet projections. Layoffs are one way to cut costs and align OPEX with realized sales revenue. Yet, on the other hand, short-term cost savings enabled through layoffs of productive, well-trained and loyal employees can damage the long-term competitiveness of the firm.
“If, for example, the firm lays off R&D engineers who are working on the development of the next-generation products, and that development effort is discontinued as a result of the layoffs, the firm may well be at a competitive disadvantage when the economy turns around,” Amit said. “Another example involves the layoffs of customer service professionals. This can adversely affect the willingness of buyers to transact with the firm and may well lead to declining market share. Further, when the economy turns around, and sales revenue picks up again, new employees must be recruited and trained. This is costly and time-consuming. Hence, boards and management are advised to be exceptionally careful in making layoff decisions, since short-term profit gains may well result in midterm and long-term losses. Loyal and productive employees are the heart of any enterprise and its most valuable assets.”
Kang Lan, a partner at Korn/Ferry Shanghai, a unit of the U.S executive search company, noted that in professional-services companies, middle-level managers are sometimes the first to be cut. Although they are experienced, they are also expensive, and their jobs can be grudgingly shared by upper- or lower-level staff in tough times. But when the economy gets better, she said, such managers will be the most difficult to find. In good times, she said, amid booming demand, these managers have greater flexibility, which allows them to adapt to different posts in different companies.
The Importance of Preparation
Workers who had grown accustomed to the last booming decade in China’s urban areas have often been caught unprepared. Consider this blog entry from a Shanghai employee of a multinational auditing firm: “The real horrible thing is the impact of these black-box layoff decisions on our psychology. No announcement of layoff ratio, no announcement of what criteria for the cut-off decisions to be made. Everything is based on rumor and internal gossip. The remaining employees are feeling highly insecure. Along with the frozen overtime pay, the further downsizing of the economy, and the unsecured expectation of further layoff actions, the remaining staff are being placed in a dual-pressure mode of overloaded work amounts and the danger of being cut at any time. The people who have been cut are pushed into an almost stagnating labor market without any preparation or advice beforehand.”
Wharton’s Cappelli cautioned against such an approach: “Bear in mind that when you do this, there is a big audience watching you who are the survivors. The first thing is to do the [layoff] process as quickly as possible. Do not go back and do it two or three times. The next thing is when you decide who gets cut, it’s easier for people to accept if performance appears to be the condition. The third thing is to offer people support as soon as possible. For example, give them information and guidance and counseling assistance, and better to have these in place even before you start layoffs.
“The decision to lay off employees is a very difficult one,” he said. “You should go into this with your eyes open, recognize the costs involved. It’s also important to remember that by thinking carefully before you go in, you can reduce or eliminate some of the problems you will otherwise experience.”
Before you devise a strategy to cope with economic uncertainty, said Jason White, Business Performance Improvement Leader of Hewitt Asia Pacific, it’s important to determine where your company fits today and how likely it is that you’ll be in a different category in six months. “The key is to have an organization design and resource allocation plan that effectively meets customer needs in the most efficient manner. Being effective in the current economic environment may mean a shift in resources from one customer segment to another to better capitalize on short-term growth and profit opportunities. In many cases, being dynamic in shifting resources can result in incremental performance without any increase in selling costs.”
White suggests that “for companies that are only in worried mode, the results of this process may be limited to a clear communication of targeting priorities. Supporting tools and marketing programs can be developed for selling into ‘recession-resistant’ market segments. Organizations in the taking on water category are often in a position of cost reduction, with extreme pressure to eliminate discretionary spending and to reduce headcount. A key mistake most companies make in this situation is to be too ‘one size fits all’ in their application of such mandates. The optimal solution may be to significantly reduce one channel while actually increasing the size of another. Rather than focusing on reducing costs, the effort should be centered on improving efficiency, which opens up a new set of potential solutions.”
White says that market conditions like today’s need not generate equal alarm to businesses in all industries. In the United States, businesses in or reliant upon the financial and real estate industries have had to take dramatic action just to stay afloat. Yet the environment for health care, energy and education has continued relatively strong.
The same holds true in China.