Author: Frank Mulligan More Articles: http://english.talent-software.com/
For the past twenty years, overseas companies have largely been seeking low material and labor costs in China.
China’s contribution has been to build a very good infrastructure, called Free Trade Zones (FTZs), that allow for easy production and delivery of goods to other countries. That this model has been successful so far is obvious, but this success has its downside.
The resulting increase in GDP growth has stimulated demand for labor, to such an extent that China’s labor costs have risen substantially. It has also stimulated demand for raw materials, and prices have gone up all around the world.
When these increases were exacerbated by a skyrocketing oil price earlier this year, the notion of China as the best destination for Foreign Direct Investment (FDI) was questioned. Some suggested that factories move out of China, and back to Eastern Europe or Mexico. Some others even suggested a move back to Europe or the United States. Who’d have thought that would happen!?
Add in the financial cost to companies of the new China Labor Law, and we can see in retrospect that the recent slowdown in employment growth was predictable. (Of course I recognize the value of 20/20 vision in retrospect.)
All of this downside still leaves China with a business infrastructure that is generally acknowledged to be the best among FDI destination countries. Except that it is not so simple.
A recent survey by AMR Research shows that multinational companies believe China is now the biggest risk in their supply chain. The production and distribution base is fine in China, but the soft issues like intellectual property and quality are still problematic.
I know there is a long, convoluted causation to all this, but the end is near, I promise. My question is whether the realization that China is the big risk, logistically-speaking, is the final nail in the coffin of rapid economic growth.
If it is then human resources should be looking at a total reversal in their operating paradigm. Instead of constantly chasing increasingly difficult to find high-performers, we can expect continued decline in demand for labor, and pressure to bring down the total salary costs for the company.
Continued salary deflation means that salary reduction agreements are going to have to be re-negotiated sooner than you think. Once deflation gets rooted in the economy it is very difficult to get rid of it, and the downward spiral in world demand exacerbates further deflation. Everybody chases the customer with the same tool: price.
If the recently announced RMB4 trillion investment package does not turn the Chinese economy around, and the Chinese government takes the easy, but fatal, path of currency devaluation, HR will have to turn itself completely around.
Instead of overseeing guaranteed yearly salary increases, HR will have to push through regular reductions. These reductions will have to be sold to an employee base that has come to see salary increases as natural, normal, and independent of productivity increases.
The kind of person that is happy to do this kind of work is very different from the kind of person that can negotiate increases in salary.
It’s a bit like the difference between being Santa Claus, and being Scrooge.