The Rupp Report: Clouds Over China

For decades, China has been synonymous with a constantly growing economy, stable working conditions and cheap labor costs. But it seems that some things are changing in the Middle Kingdom.
Declining Economics (?)
The decline of China’s gross domestic product (GDP) from 7.7 percent in fourth quarter 2013 “down” to 7.4 percent actually is only a little below the targeted 7.5 percent. Due to the satisfactory employment situation, it is reported that the government doesn’t want to implement new short-term economic stimulus packages. On the other hand, weak capital investment growth and a sharp 25-percent decline in construction activities in the real estate sector in first quarter 2014 speak against a quick recovery. Up to now, China’s construction sector has been a reliable indicator of the country’s economic development and situation.
Different Steps To Take
In recent weeks, the Chinese government and its central bank have repeatedly emphasized that the Chinese economy — with a somewhat weaker 7.2- to 7.5-percent growth — would be good enough to provide a stable employment situation. The Rupp Report has informed its readers several times on this topic. Basically, Beijing is ready to slow the pace for a more sustainable and ambitious reform agenda based on market-based processes.
However, the situation has become more complicated thanks to the slow development of China’s industrial output. Although manufacturing sector production in March was slightly stronger — growing 8.8 percent compared with 8.6 percent in both January and February — there is little expectation or hope that industrial output will recover quickly. Yet, there is hardly any sign of a new regression. The consumer sector offers some hope, as March 2014 retail sales rose by 12.2 percent after increasing 11.8 percent in January and February.
Strike In The Shoe Factory
Now, China is facing a real problem that could affect the entire economy long-term: A strike at Yue Yuen Industrial Holdings Ltd.’s workshop in Guangdong province in southern China, is impacting the production of branded products including adidas, Puma, Nike, Reebok, Asics, New Balance, Crocs and Timberland, among others. Workers have paralyzed the workshop, demanding higher wages and better social insurance. With 425,000 employees and workshops in China, Indonesia, Vietnam, Mexico and the United States, Yue Yuen, the world’s largest athletic shoe manufacturer, produces some 21.5 million pairs of shoes per month.
Approximately 30,000 Chinese workers have been protesting since April 5 for increased social insurance payments. The strike is one of the largest strikes ever in a private company in China.
No Comment
Nike management was not prepared to make a comment to local media, and there is no comment from Yue Yuen either. The Rupp Report tried to open press releases on adidas and Nike web pages; apparently, these pages have been blocked. Adidas says on its open webpages that “Corporate information on social and environmental affairs, including labor issues, can be found in the ‘sustainability’ section of, which you can access by clicking here.” However, that page is not available.
And the strike is getting worse. The strikers have blocked access roads to the factory, held solemn vigils and marched through the city center. They have demanded higher wages and better social insurance and are protesting against unfair terms in their working contracts. China Labor Watch (CLW), a New York City-based independent workers’ organization, mentions “tens of thousands of strikers.”
Yue Yuen faces several challenges, including growing local competition and surging labor costs in China. Taiwan-based Pou Chen Group, the parent company of Yue Yuen, produces shoes for more than 60 brands around the world, and has a 20-percent share of the global shoes and casual footwear markets.
The Accusation
Strikers charge that the company is not paying a sufficient amount in social security insurance, as mandated by Dongguan’s social security bureau. According to company regulations, employers must pay 11 percent of their income as the company contribution to social security insurance, while the workers pay 8 percent. The workers say that Yue Yuen was only paying the 8 percent deducted from worker salaries, and not its 11-percent contribution. Top management says that it will start to pay the insurance fees for the workers beginning May 1. Due to rising labor costs, Pou Chen has gradually shifted its production lines to Vietnam and Indonesia. It has cut 51 of its production lines in mainland China, or 20 percent of the mainland total. Yue Yuen sales in 2013 totaled US$7.58 billion, a 4.1-percent increase over the previous year.
At first, the topic was not reported in the state-controlled media. This has now changed: even official government websites are reporting it. At the same time, the Chinese leadership sees an opportunity to denounce authorities’ arbitrariness and corruption, and to push the local authorities to do right. On top of that, Beijing is interested that wages are rising in the region. Up to now, textiles and light industry have dominated the region. The Chinese government would like to establish more high-tech industries there.
The workers’ displeasure over low wages and poor working conditions is big, and such a violent insurrection has never happened before in the region.
Pou Chen stated its promise to increase workers’ welfare contributions could affect its financial performance. The strike has also led to concerns that renowned sports footwear brands could cut their orders by 20 percent if costs rise.
China Labour Bulletin, a Hong Kong-based rights group, reported 202 labor disputes in the country during the first quarter of 2014 — a 30-percent-plus year-on-year increase.
Less Capital Investment
Experts report that, apart from China’s industrial production, the decrease in fixed investments is proving to be an economic barrier. In recent years, investments have grown by more than 20 percent annually. In the first quarter of 2014, there was an increase of “only” 17.6 percent. The reduced investment growth is considered to be a desirable development to reshape the economy and foster domestic consumption. However, the weaker development of industrial production should be absorbed by a dynamic service sector and stimulate private consumption.
On the other hand, experts are predicting a revival of global trade. If this is the case, the Chinese export industry would likely benefit. This could be a good sign for the upcoming ITMA Asia + CITME, which will take place very soon in Shanghai. One can hope for the best!
April 22, 2014