China: Study on labor problems encountered in outbound strategy in China

Last Updated: 3 December 2014
Article by Jiang Junlu

Since 2000, Chinese enterprises have been responding to the call of the "going out" strategy of the State to conduct overseas merger and acquisition. Over ten odd years, transnational mergers and acquisitions have increased noticeably in number and are considerable in scale. However, merger and acquisition results were often unsatisfactory and there were even many unsuccessful cases. As for risks of transnational merger and acquisition, in addition to traditional political risks, financial risks, operating risks and so on, the impact of labor problems in target countries on the success of merger and acquisition has become increasingly apparent. From the perspective of three cases of overseas merger and acquisition of Chinese enterprises "striking a reef", this article warns that Chinese enterprises trying to "go out" should attach full importance to labor problems in transnational merger and acquisition.

  1. Three Typical Cases

Shougang Group, as an enterprise implementing the "going out" strategy in China earlier, learnt a very painful lesson in respect of international cooperation. In 1992, Shougang Group acquired 98.4% equity of Peru State-Owned Iron Mine Co., Ltd. on the brink of collapse at the cost of USD118 million. Since then, Shougang has gotten trapped into the nightmare of strike of Peruvian employees. Trade unions in Peru are powerful. In March and April every year, Capital Steel Group Peru Iron Mine Co., Ltd. had to concentrate on dealing with the aggressiveness of mining trade union. Employees of Shougang Group said, "After endeavouring to solve a problem, we are confronted with another threat. Every strike aims to raise salary and increase welfare."1 The latest strike publicly reported occurred in March 2010. Peruvian iron mine workers threatened Shougang Group with a strike without a time limit for "the company failed to keep a promise of raising salary". Frequent labor disputes incurred huge economic losses to Shougang Peru Iron Mine Co., Ltd. According to incomplete statistics, the strikes of miners incurred average daily losses of CNY1-2 million to Shougang Peru Iron Mine Co., Ltd.

Coincidentally, SAIC Motor suffered lots of troubles after taking over SsangYong Motor of South Korea. In 2005, SAIC Motor formally acquired 51.33% shares of SsangYong Motor of South Korea, becoming its largest shareholder. This merger and acquisition was the first overseas merger and acquisition of Chinese motor enterprises, and was deemed as an evidence of Chinese automobile enterprises going out successfully. However, since SAIC Motor controlled SsangYong Motor, the conflict between the Trade Union of SsangYong Motor and SAIC Motor has never stopped. The Trade Union of SsangYong Motor, which has been colliding with the merger and acquisition of SAIC Motor and has never trusted SAIC Motor all the time, frequently organized strikes, overwhelming SAIC Motor. From July to August 2006, the Trade Union of SsangYong Motor conducted a ferocious "strike struggle" for 49 days. Employees of SsangYong Motor surrounded the building of the government, occupied the factory, and even had armed conflicts with the police. Responses to frequent strikes and divergences with the Trade Union have exhausted SAIC Group, seriously affecting the normal operation of SAIC Motor. In February 2009, SsangYong Motor obtained the approval of the local court of South Korea and entered into "retrogradation procedures". SAIC Motor lost the right of control over SsangYong Motor, and its merger with and acquisition of SsangYong Motor ended in failure. In this event, SAIC Motor suffered huge losses of assets impairment of CNY3 billion due to SsangYong Motor.2

Another case is TCL which suffered terribly due to labor problems after its overseas merger and acquisition. In 2004, TCL merged with and acquired the colored TV producer – Thomson and mobile phone business of Alcatel of France. TCL, which intended to expand the business on European market by virtue of this, did not expect that it was troubled a lot because of high labor costs and differences in corporate cultures. The human resources management philosophies, remuneration and welfare system and so on adopted by TCL after controlling Alcatel were significantly different from those adopted by the original company. This directly resulted in the resistance and dissatisfaction of employees, so many former employees left, making TCL lose valuable human resources wealth. In November 2006, owing to huge losses of such two overseas businesses, TCL had to restructure European business and lay off employees just after more than one year of merger and acquisition. High labor costs and compensations for layoff of employees made TCL in a dilemma. Finally, TCL paid EUR270 million for the restructuring of European business, most of which were labor settlement fees, with layoff cost per person exceeding EUR100,000.3

At present, many Chinese "going out" enterprises waste a lot of money as they are not familiar with labor laws and environments of target companies and fail to integrate corporate cultures successfully, ultimately failing in merger and acquisition. These tortuous experiences have always been reminding Chinese enterprises about to go out and make an international cooperation of making sufficient preparations, fully learning about and grasping labor and employment laws and systems of the counterparties, so as to pave the way for successful merger and acquisition and enterprise operations after merger and acquisition.

  1. Major Concerns of Labor Problems of Overseas Merger and Acquisition

Laws and provisions on overseas investment access in different countries are similar, but labor laws and systems in different regions are usually related to local historical and cultural environments and are noticeably different. After opening the door to overseas investment, Chinese enterprises are probably confronted with "mires" of local labor laws and systems. With a view of keeping away from "mires" and obtaining expected benefits, enterprises shall pay additional attention to risk control and management of local labor laws. Major aspects of labor risks of host countries of investment are analysed as below.

  1. Trade unions and the right to strike of employees

Laws of some countries allow the existence of independent trade unions with different organization systems. Workers can voluntarily choose to join any trade union or organize and establish a new trade union. Moreover, laws may confer many rights on trade unions: trade unions may have a significant impact on overseas greenfield investments or merger and acquisition, enterprise operations, and even relocation of enterprises, layoff of employees and withdrawal of investments.

Firstly, it is worth mentioning that in some countries, a target company, which intends to receive overseas investment or conduct merger and acquisition, needs to seek opinions of the trade union thereof. While opinions of the trade union are sought, the trade union usually requires that the target company (seller) should not lay off employees or reduce existing employment conditions in a certain period, and the investor concerned shall keep promises of the seller after merger and acquisition.

Secondly, during enterprise operations after investment, laws of most countries allow a trade union to conduct collective bargaining with related enterprise on behalf of employees, and confer the right on the trade union to lead workers to lawfully strike to strive for labor rights and interests.

Thirdly, in some countries, employees of the same enterprise may join different trade unions, and the enterprise shall deal with and clarify relations with several trade unions at the same time. In practice, an enterprise may choose to negotiate with a trade union representing a majority of employees to the extent permitted by laws, and apply terms and conditions formed by such negotiation to employees of other trade unions upon consultation.

Finally, if an enterprise intends to relocate, lay off employees or close down, it needs to weigh concrete situations and deal with relations with trade unions to avoid a large-scale dispute, protest or strike. Some countries allow a trade union to initiate legal proceedings or be sued. If a trade union thinks that there is any misconduct in the process of relocation, layoff of employees or closedown, it may initiate legal proceedings against the related enterprises to seek a solution.

  1. Dismissal and layoff of employees

After merger and acquisition, the merged and acquired company may be subject to noticeable adjustment in operating mode and business structure, and need to dismiss some employees or lay off a large number of employees along with changes in economic environment. At this time, a Chinese investor shall pay attention to provisions about conditions, procedures of and economic compensations for dismissal or layoff of employees in labor laws of host countries of investment.

Philosophies of labor protection of different countries vary greatly, and laws about dismissal and layoff of employees are also different remarkably among different countries. Laws of some countries and regions, such as the USA, Hong Kong and Brazil, contain loose requirements for dismissal. These countries and regions implement "free employment" system, under which employees can cancel employment relationship with an employee for no reason, except in some legitimate special circumstances (eg. discrimination).

On the contrary, laws of some countries strictly prescribe conditions and procedures of cancellation. For example, according to Indian laws, if an employer intends to dismiss (or lay off) an employee having continually worked for it for over one year, the employer should notify the employee in writing one month in advance before layoff of the employee, stating layoff reason, deadline and salary level of the employee in notification period, and compensate the employee. Additionally, the employer should notify relevant governmental authority of this in advance. In some special circumstances, the employer should obtain the approval of relevant governmental authority before layoff of the employee.

Some countries have extremely high standards of compensation for dismissal of employees, resulting in large layoff costs to Chinese investors. The restructuring of European business conducted by TCL due to losses in 2006 involved 450 persons. Owing to high standards of compensation for layoff of employees in Europe, the layoff costs of TCL amounted to USD100,000 per person. Besides, the following lawsuits dragged TCL into mire. TCL is still paying the bill for two transnational mergers and acquisitions in 2004. A Chinese enterprise, which intends to invest in a country with high restrictions to dismissal of employees, should get familiar with laws and regulations on dismissal or layoff of employees of the said country, so as to avoid a suit for large-amount claim as well as administrative punishments arising from dismissal of employees at will.

  1. Employment system

How to make an efficient and full use and integration of human resources of a merged and acquired enterprise to facilitate future expansion of overseas business is another important issue, which Chinese enterprises need to think about in making overseas investment. Generally speaking, after making overseas investment, a Chinese investor basically retains former employees of the target company, and assigns its own management to manage the target company. Therefore, a Chinese investor needs to be fully aware of the requirements of laws of the target country about employment of local employees and foreign ones.

If local employees are employed, requirements of local laws on employment protection and employment method (eg. temporary employment, fixed-term employment and indefinite-term employment) should be met, and an economical and efficient method should be adopted to the extent permitted by laws. Nowadays, all countries have been attaching increasing importance to fair employment rights of labors, and prohibit enterprises from discriminating employees due to gender, age, race, religious belief, etc. Meanwhile, policies are formulated to provide special employment protection for some vulnerable groups. For example, in Gabon, if a temporary worker continually works for an employer for more than one week, he will automatically become a permanent worker, and the employer should pay him a certain amount of salary and traffic and unemployment subsidies for cancelling the labor relation with him. In a construction project in Gabon, a Chinese engineering company used a lot of "temporary workers" and dismissed them after the completion of engineering as it did not understand local laws. Finally, the company was protested and sued by workers. Local court ruled the said company to pay a large amount of subsidies equal to all paid salaries to temporary workers dismissed.

Besides, other important aspects of labor laws of the target country cannot be ignored. For example, in calculating human resources operating costs, enterprises should pay additional attention to the insurance and welfare which enterprises should provide for employees, standards of overtime pay of employees and statutory holidays as stipulated by local labor laws. Such factors may directly impact the control over human costs and investment incomes. In addition, provisions of laws on the work time, restrictions to overtime work and minimum salary of laborers and whether night shift is forbidden also vary among different countries. Enterprises may be confronted with legal risks due to non-compliance of operations.

In the circumstance that Chinese managers are dispatched to work at overseas target companies, enterprises should learn in advance about whether immigration and visa policies of the target countries restrict immigration and labor service activities. Chinese enterprises may have a plan about the number of Chinese employees in the target companies, but they should learn in advance about whether local laws or international treaties prescribe the percentage of foreign employees. Such countries as Brazil, Mexico, Venezuela and Saudi Arabia require that foreign employees of a company should not exceed a certain percentage. The restrictions to the import of foreign labors are also very strict in Japan and Germany. Therefore, in formulating overseas merger and acquisition schemes, Chinese enterprises should get familiar with foreign labor policies of host countries in a bid to avoid the increase in labor costs and unnecessary disputes incurred by restrictions of host countries to labors dispatched by China.

  1. Integration of human resources management of enterprises

If the aforesaid three aspects are "rigid" requirements of labor laws of host countries of investment, the integration of human resources management of enterprises after merger and acquisition is an important "flexible" requirement for the labor problems in overseas merger and acquisition.

Given differences in history, politics, humanity and so on of different countries, Chinese enterprises are confronted with differences in philosophies of corporate cultures and management methods in the process of overseas merger and acquisition. Such differences may be embodied in all aspects of employee management, such as working mode, work time, dress codes, remuneration structure and design of welfare treatment. These may directly affect the employees' recognition and trust of a merged and acquired enterprise for the Chinese investor. If managers cannot find out and solve such differences in corporate management and cultures or achieve effective communications with employees in due time and properly, employees may collide with and be dissatisfied with them and even a lot of talents may be lost, thereby discounting the effect and earnings of overseas merger and acquisition. After TCL merged with and acquired Alcatel, main posts of the new enterprise were mainly held by employees from TCL, and the former remuneration and sales mode of TCL were compulsorily implemented in the new enterprise. In the face of "cultural power" of TCL, numerous employees of the former Alcatel resigned. Therefore, before going out, Chinese enterprises need to investigate "soft environments" of target companies such as employee management, corporate culture and remuneration and welfare, integrate their own enterprise management and culture advantages with those of the target companies in a proper manner to avoid the shock of human resources after merger and acquisition. These are also considerable issues in overseas merger and acquisition of Chinese enterprises.

  1. Conclusion

For the "going out" strategy of enterprises, if the technologies and business of target companies are the core of investment or merger and acquisition, the correct evaluation of and effective control over risks of labor laws in merger and acquisition can escort for smooth investment or merger and acquisition. Only risks of labor laws of target countries are investigated and evaluated and risk management system and countermeasures are established in advance, can Chinese enterprises "succeed steadily" during merger and acquisition as well as operations after merger and acquisition. The full research of labor conditions and legal labor environments of target countries is compulsory for Chinese enterprises to successfully "go out". Therefore, it is inevitable to seek the assistance and suggestions of professionals of labor law.

Footnotes

1 http://auto.qq.com/a/20090113/000020.htm, latest visiting date: November 27, 2014.
2 http://v.ifeng.com/news/finance/201110/4ba55040-40ae-43cd-a397-02ce5b8624d2.shtml, latest visiting date: November 27, 2014.

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