Wednesday, April 11, 2007

McDonalds and Yum brands forced to allow unions in China in face of anti-foreign sentiment. Really?

Widely reported controversy in Guangzhou involving accusations that McDonalds and KFC (Yum Brands) were not paying their part-time student workers the legal minimum wage. Good example of how the same event is reported as two different things by local and foreign press. The story as reported by WSJ and pretty much all others foreign papers is that (1) the MNCs in China are being forced to allow unions and (2) that anti-foreign business sentiment seems to be growing. Both are off the mark.
Firstly, there are no unions in China. The entity that caused all the fuss, the All-China Federation of Trade Unions, is de facto an arm of the government. They will only represent the interests of the workers to the extent that the interests of the workers are perfectly in sync with government objectives.

Regarding anti-foreign business sentiment, this is a fact of life on the ground in China. As it is in India, Brazil, France, and the US. It ebbs and flows. There is no evidence that it is rising in China to a level that is extreme or likely to cause government action. As always in China, the more important thing to watch is the government view with regard to foreign business and investment. And there the evidence continues to be largely very positive (a full discussion of this will have to wait for another post).

So what significance is to be gleaned from the Ronald McDonald and Colonel Sanders brouhaha by reading the local press? As the two articles below indicate: from China Daily and
from the People's Daily, the two big issues are

1. Rising Wages and
2. Extending the rule of law

The minimum wage in Guangzhou province is RMB 7.5/hour which is a tad less than $1/hour. For a 40 hour workweek this yields annual pay of $2,000. Minimum. It is my contention - and I've been making this point for the last year though you wouldn't know it cause I started blogging yesterday - that rapid wage increases in China (and India) are wiping out what was a huge cost advantage for off-shoring production in China. Yes, 2k is still much less than US wages. But many in the US, when they think of China wage rates, still have in their heads something like 50 cents a day. In other words, the common perception is that the cost advantage is so large that one doesn't even need to do the math. It obviously and always makes sense to shift to China (or India). My contention is that with wages for unskilled workers at 1/6th or 1/7th US levels (instead of 1/20th or 1/50th), the cost advantage - once one factors in higher risk, increased bureaucracy and delay, etc. - is no longer a 'no-brainer'. AND, since Chinese and Indian wages are growing at 15-20% per year and since wages for SKILLED workers are often 1/3 or 1/2 of US wages (or higher) and severe shortages in a growing number of industries - the off-shoring/out-sourcing trend will peak over the next 12-18 months. After all, anything that seems obvious to everyone today must be wrong, correct?

The second takeaway from the McDonalds story - this is especially clear when you read the local press - is the focus on rule of law. My sense is that the Chinese are less concerned about demonizing McChicken sandwiches than they are about seeing that all the new labor laws are enforced - that they get what they properly see as coming to them. This is very much just my impression but I see it as part of a larger positive trend of China moving away from a society/government where it was who you knew that counted most and where the mandarins ran the show and made the rules (pre-Mao and post-Mao) - to a government of laws. And I believe that the 'man in the street' sees these new laws being enacted and has a crude understanding that the rule of law can be good for them - if it is enforced.

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