ASrIA Briefing

Thursday 23rd January 2003, 4 PM
Schroders Investment Management (Hong Kong) Limited
19th Floor, Two Exchange Square
8 Connaught Place, Central, Hong Kong

Invitation

ASrIA Publication: Labour Standards in China, The Business and Investment Challenge

Post briefing materials:

Summary:

Dr Stephen Frost conducted the briefing on Thursday 23rd January at ASrIA member, Schroders' office. Dr. Frost is currently a research fellow of the Southeast Asia Research Centre at City University of Hong Kong and previously Research Co-ordinator at the Asia Monitor Resource Centre in Hong Kong, a non-governmental organisation that documents workplace conditions in Asia.

The purpose of the briefing was for Dr Frost to present the findings of his research report released by ASrIA in December 2002 entitled "Labour Standards in China, The Business and Investment Challenge". A summary of the report is available at www.asria.org/publications. The report may be purchased by non-members for US$150. It is available free of charge to members via the members' portal. This is the first comprehensive report on how to consider labour standards when making investment decisions in China. The report is based on Dr. Frost's handson experience whilst working in this field based out of Hong Kong for the last three years.

The report presents the key issues and raises the fundamental dilemmas that fund managers who consider social and environmental factors as well as financial and operational factors in investment decisions may need to address when determining whether to invest in a company. The five key areas that the report covers are: (i) the role of The All-China Confederation of Free Trade Unions (ACFTU), (ii) Chinese labour law, (iii) working conditions in the Chinese supply chain, (iv) sensitivity in exerting influence to encourage change, and (v) monitoring and third party verification. These are the critical areas that investors seriously aiming to assess Chinese companies on labour standards should consider up front.

At the briefing, Dr. Frost summarised the issues and dilemmas relating to these five key areas. He raised the question as to whether the ACFTU can be considered a genuine trade union providing freedom of association. If you do not believe that the ACFTU is a genuine trade union, then how can you invest in any Chinese company? This prompted much debate in the audience regarding the ability and willingness of companies to collaborate and take collective action. Dr. Frost mentioned that Reebok is already undertaking its own Trade Union Elections but that it has proved difficult to get companies to work together in this regard. Others mentioned that there is a high level of mistrust by the good labour NGOs and trade unions trying to implement change - they struggle for accesss and they struggle with setting appropriate standards because there are so many different codes, despite having the ILO standards as a basis. Finally, it was concluded that although freedom of association and the role of the ACFTU is very important to the development of improved working conditions in China, it is not the only answer - one attendee pointed out that India has freedom of association, but workplace conditions are still very poor in many places there. The conclusion drawn from this discussion was that ACFTU needs to revamp itself in order to survive and to have any meaningful impact in China, but there are also many other problems that need to be resolved.

One of these is the enforcement of the Chinese labour law. Dr. Frost explained that the labour laws are actually fairly stringent, but the enforcement is weak. Again, there is much disagreement over Chinese labour law - AmCham considers that the laws provide too many rights to Chinese workers whilst many other groups believe that workers do not have nearly enough rights. In fact, the Labour Laws were introduced in 1995 but there are so many loopholes and ambiguities in the laws that in practice enforcement is very, very weak.

On working conditions in the Chinese supply chain, Dr. Frost explained how the pressure that overseas companies put on the Chinese suppliers can sometimes be the cause of many of the workplace problems. Unrealistic deadlines put enormous pressure on suppliers who cannot afford to lose contracts. There was, of course, much discussion on the point of overtime and wages. Why do many workers end up working such long hours, and indeed in some cases want to work extra shifts? For many because it costs them a fair amount to achieve employment in the first place and for others because their actual wage is so low that they have to work extra hours just to earn enough money to survive and to send back to their families. There are very fundamental issues at the root of the overtime problem that cause workers to 'want' to work overtime. Dr. Frost did make the point that not all factories in China are sweatshops. There are some factories that have reached exceptional standards making them very agreeable places to work - including high safety standards, reasonable shifts, holiday pay and other benefits.

Finally Dr. Frost touched on the issue of third party auditing and monitoring. Often it can be a case of guessing who is telling the truth - the internal auditors, the external auditors, the NGOs, the press? The increasing adoption of codes of conducts helps to some degree. The main issues relating to the use of codes of conduct include the fact, again, that some companies who have moved or outsourced manufacturing to China might not believe it is in their best interests to try to hard to improve conditions. In addition, many factories are supplying to multiple companies and as such, one company on its own does not have the ability to exert great influence. Companies that have invested heavily in a workplace to produce goods exclusively for them have more success.

To finish up, Dr. Frost recognised that the issues are highly complex, but urged a focus from investors on them. As someone who has worked on workplace issues for many years, he feels that they key problems have not been addressed by the investment community who has focused more on environmental than social issues. It was largely agreed that it is critical to establish a common set of international standards that all factories can comply with and perhaps those are the ILO standards. The ACFTU does need to be revamped in order to address the current contradictions. Finally, it was agreed that the next step was to undertake some research that measured the benefits of good work place conditions in terms of actual productivity, then there would be a tangible case to make for improving labour standards.
Dr. Frost can be contacted on stephen@asria.org.