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Cablegate: Hr Issues in South China -- The New Labor Contract Law And

VZCZCXRO5632
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0863/01 2110815
ZNR UUUUU ZZH
R 300815Z JUL 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6330
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC

UNCLAS SECTION 01 OF 02 GUANGZHOU 000863

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: WTRO ECON PGOV CH
SUBJECT: HR Issues in South China -- The New Labor Contract Law and
Beyond

REF: Beijing 4467

(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. IT SHOULD NOT BE
DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM
WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR. IT SHOULD NOT BE
POSTED ON THE INTERNET.

1. (SBU) SUMMARY AND COMMENT: Employers clearly emerged as "victors"
in the labor contract law open comment vetting process, with the
relaxation of several obligations that had been in the original
draft, especially the requirement that they "seek approval from"
their employees. Low-end manufacturers, in contrast, appear to have
gained the least from the process, especially as it will require
certain modifications in their organizational structure. The law
should help clarify the rights of employees, and perhaps even curb
somewhat the recent rise in labor disputes in South China. However,
the region's greatest challenge remains the shortage of
professionals in leadership positions. END SUMMARY AND COMMENT.

To the Employers Go the Spoils
--------------------------------------

2. (SBU) Set to take effect in January 2008, the Labor Contract Law
(LCL), published just a month ago, is the legislative product of
almost three years of public engagement. The second major China law
to have been forged out of a legitimate public comment process (the
anti-money-laundering law is the other, though as yet not passed),
the new LCL has been crafted with the support of comments from over
190,000 organizations and individuals, both from within China and
abroad. While the final legislation makes numerous gestures toward
improving workers' rights, employers have emerged as the clear
beneficiaries from the public comment process according to Nancy Wu,
Hewitt's Regional Consultant.

3. (SBU) Ms. Wu points to the relaxation of employer obligations
between the initial and final drafts. For instance, the final LCL
says employers should negotiate with -- instead of "seek approval
from" -- the trade union or employees' representatives when making
decisions that would directly affect the rights and interests of
employees. Furthermore, while both drafts arguably limit the
ability of employers to institute rule changes without first
consulting the labor unions, the final draft significantly narrows
the acceptable definition of "labor union." It therefore further
limits the potential scenarios in which employers must actually
consult with their labor counterparts.

Low-End Manufacturers Lose Out
-----------------------------------------

4. (SBU) Low-end manufacturers are among those who benefited least
from the LCL's comment process. Zach Wortham, Legal Consultant for
Wang Jing Law Firm in Guangzhou, attributes this to the overwhelming
influence of Western foreign-invested enterprises on the final draft
legislation. According to Wortham, since the LCL is in many ways a
reflection of the worker protection provided to employees in Western
nations, Western FIEs will generally be able to borrow their home
system as a comprehensive model, thus ensuring compliance under
China's new LCL without the added costs of implementing an entirely
new operational structure.

5. (SBU) Low-end manufacturers in industries such as textiles and
apparel, on the other hand, will need to completely restructure
their organizations in order to maintain compliance with the new
LCL. The brunt of this is expected to fall on FIEs from neighboring
South-East Asian countries, which typically control operations in
these sectors.

It All Comes Down to Enforcement
-------------------------------------------

6. (SBU) Because of China's previous problems with enforcement, FIEs
have raised concerns that the LCL may do little to change the ways
of local companies, which often ignore inconvenient regulations,
while simultaneously imposing an increased burden on
already-compliant FIEs. (reftel)

7. (SBU) However, a surprising number of legal and business
professionals in China's southern manufacturing region believe there
are reasons for optimism. For one, many assert that since the
current LCL is much clearer than any of China's previous labor laws,
there will be less room for local interpretations. As such, local
authorities will have less latitude in granting favorable exemptions
to local companies. Some also believe that the comment process
itself will lead to improvements in uniform enforcement. According
to Dan Harris, Managing Partner for Harris & Moure PLLC, since the
law was reached by consensus, local regulatory bodies should be
expected to defer to its provisions, as opposed to previous laws
which may have been more easily disregarded.


GUANGZHOU 00000863 002 OF 002


Labor Disputes Increasing in South China
--------------------------------------------- -----

8. (SBU) Employees in all industry sectors in the region appear to
be stepping up their efforts for increased pay and benefits, whether
against foreign-brand firms like KFC and McDonald's or Chinese
companies; in addition, the number of labor tribunals has increased
in every part of Guangzhou city. (NOTE: Due to their high caseload,
these tribunals often operate in excess of fourteen hours per day.
END NOTE.) Speaking anonymously, a representative of a major
consulting firm in Guangzhou recently described a story in which
their client, a multinational auto company, announced that it would
be closing down its facility. The situation quickly escalated to a
hostage takeover scenario between disgruntled employees and
management. This is not uncommon in South China, particularly
amidst the massive layoffs which sometimes follow large mergers and
acquisitions. With the help of local government intervention, this
particular situation was eventually resolved without bloodshed. The
lesson, according to the consulting representative, is for FIEs to
engage the government early in the negotiating process. This is
especially evident in South China, where local government is often
relatively accommodating to large multinational enterprises.

Qualified Professionals: The Drought in the South
--------------------------------------------- -----

9. (SBU) According to Nancy Wu of Hewitt, at over 20 percent,
China's professional personnel turnover rate currently leads all
Asian countries. The problem has been further compounded by a local
market of employers which so far has been either unwilling or unable
to train talented personnel at an early stage of development.
However, there are signs that companies in South China are beginning
to take notice of the problem. More and more organizations appear
to be engaging in benchmarking -- a process by which companies use
multiple information sources to determine appropriate compensation.
Ms Wu told us that some companies have even begun sharing pay data
in order to manage costs and retain talent. In addition, an
increasing number of local companies are beginning to realize the
need to develop and promote talented individuals from within. If
this trend continues, the region could remedy its current shortage
of experienced talent within five years.


GOLDBERG

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