Cost Cutting Lessons Learned From China During The Economic Slump
By Aaron Wong
When the economy struggles, one of the first steps taken by companies is to find ways to cut costs. One of the most common areas cut is in the number of employees. For example, the total number of layoffs reported in December 2008 was over 500,000, bringing the total number of corporate pink slips to over 2.5 million. This is the worst year for layoffs since 2001 when 1.6 million jobs were lost as the nation was recovering from the last recession and the 9/11 attacks.
According to human resources experts, the strategy of reducing jobs is a very “short-sighted” approach and will ultimately cost the company more in the long run when these companies are forced to pay higher salaries and offer more attractive incentives to lure the talent they let go. Tony Goodwin, CEO of Antal International a global recruitment company, has said, “In these uncertain times when the developed economies, especially the US, are sliding into a recession, corporate executives need to be careful while formulating the human resources strategies.” Goodwin goes on to say that “Companies that are now firing people would experience problems next year when the economy improves…. These companies will have no choice but to start rehiring then at higher costs”.
Chinese companies are very much the opposite in their human resources strategy. They are more conservative in their approach to cost control. Chinese companies do not offer huge salaries for talent, but also they do not turn to mass layoffs when the going gets tough. Even during this global economic slowdown, Chinese companies are encouraged to continue creating jobs and hire laid off foreign talent. Chinese companies also take measures to avoid job cuts first.
For example, China Eastern Airlines, one of China’s largest airlines based in Shanghai, recently launched a cost-cutting campaign to reduce costs during this economic slump. Instead of huge layoffs, as would be seen in the United States, they are slashing executive salaries, encouraging unpaid vacation for employees, and cutting unprofitable routes. In the US, we see no decrease in executive salaries, an increase in job cuts, and a decrease in routes and even in-flight services (a topic for another day).
Job cuts during this economic downturn will only cost more in the long-term. It may temporarily reduce costs; however, when the economy turns around (and yes, it will turn around), it will cost you substantially more to rehire lost talent due to the economics of supply and demand. Instead, we can humbly follow the example of China and look for other more creative ways to cut costs, which may mean the business owner(s) taking lower salaries and reducing services. This may also be an opportunity to hire very experienced and talented individuals.
Aaron Wong, Arrow Quality International
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January 30th, 2009 at 6:40 pm
Aaron;
China may be “trying” to prevent layoffs first, but in practical terms there have been huge layoffs in China factories and many have gone out of business by not cutting production soon enough. The West has much more experience in up turns and down turns than China. (despite some recent criticisms by Mr. Hua – this is our model – capitalism and we do it right) To some degree the late reaction times and desire to preserve staff is actually naive. I’ve made about 5 or 6 trips to China in the past 12 months and many of my contacts have never ever faced a downturn. Many appear to have that “deer in headlight” response of inexperience. Many young managers and factor exec’s only know growth and more growth. Lessons will be learned and if labor is a large component of cost, it will be cut.
In addition I believe that “large” executive salaries are overplayed in the media. Not everyone is John Thain, and not everyone is the CEO of G.E. Most American CEO’s make less than government managers and many sacrifice a lot to save their companies. A small six figure take is more the norm than what you read in the papers and American CEO’s don’t take a lot out the backdoor either, a common practice despite the anti-corruption efforts in Asian countries.
February 2nd, 2009 at 8:53 am
You have the American way of capitalism and then you have the European way. The latter is the one with a much friendlier face…. Unfortunately Europe is under pressure from the US to move away from putting the employee before the shareholder but through generations it has shown that it worked……
I am from Scandinavia (Denmark to be precise). I think that most Americans (US Americans that is) would see Denmark, Norway or Sweden as close-to socialist countries. It is generally accepted that the ones with the most money pay more tax (including a higher percentage). People moan and complain but at the end of the day when they have to make a choice the choose safety before money.
China ought to look more at Europe where we have a long history of free markets and capitalism with a human approach and stop looking at the US where the shareholder is king.
February 3rd, 2009 at 11:28 pm
I agree with you on the Cultural perspective of Chinese business vs. Western business.
One reason they don’t layoff is due to recent labor law changes. These changes in effect protect Chinese worker and make them all salaried/non-exempt employees. This needs to be strategically handled with HR to ensure you meet the law, but still have people work for the time scheduled. For this reason, it is customary to have the layoff be postponed as much as possible, or look for creative payroll cutbacks.
Second reason, the chinese workforce is a much lower percentage of selling price. Normal model is 1-3% of price. If you close the entire factory, the cost saved is not conducive to the cost of rehire and training. So, unless the company is going belly-up, as many have done… you keep them on staff.
I commend you for the perspective of Long/Short Term perspective. But when you look at other factors, it’s not just an us vs. them / East vs. West phenomena… its dollars and sense.
In terms of salaries… I agree, there are some criminal behaviors being rewarded at some top levels. I come from a blue collar background, and feel some transparency is needed on salaries to be fair to the company as a whole. If you are laying someone off, but still paid 100K for your golf club membership… that is a problem. And unless you are one of the Good ole Boy’s, that is not going to change
February 5th, 2009 at 4:42 pm
Having lived in China for the last 12 years managing a company, what I witnessed in Jiangsu province was slightly different from what you are describing now.
Managers in many Chinese companies are much less attentionate with their workers, and much more focussed on their short-term personal profits.
They often ignore the labour regulations, and even sometimes forget to pay the salaries.
I love China and its people very much, but it is not yet the paradise they show us in the official media.
Maurice
February 6th, 2009 at 8:42 pm
Maurice,
So true. To present China capitalism on layoffs as somehow wise, long term, and a model to follow is simply not in my experience. China will need more experience, trial and error on the layoff front. If one needs any evidence take a look at official State Media photographs of migrants, college job fairs and so forth. (China Daily, Peoples Daily) It’s not a great situation.
February 9th, 2009 at 6:46 am
Pink Slip Mayhem
As the recession has worsened, the companies are taking drastic cost cutting measures and layoffs. I think this pink slip mayhem will continue and will be stronger in 2009 after the first quarter. There has been a huge shift in economy and companies are trying a multitude of actions to cut down costs. The date 27th Jan 2009 was regarded as a bloody Monday for the economy as 74000 layoffs were announced in one single day, 20000 alone from Caterpillar the world leader in heavy construction equipment and the list continues .Please check the link below for complete information
http://www.wsws.org/articles/2009/jan2009/econ-j27.shtml
Yet the saddest story of this crisis is the common man. In less than 20 days, 30 well know international companies have announced job cuts. I completely agree with Aaron Wong’ views on Chinese companies’ conservative approach to the cost control. Instead of cutting jobs, the company can reduce the salary for all the staff members from 20 to 25 %, which will be better options. For my comment, everybody will oppose, but this is the best way both company and staffs will be saved. The results of layoff can be devastating and cause a lot of stress. For instance the management will rarely lay off all its employees Instead they will pick and choose who is the most valuable and who will be greatest benefit to the company .Realize that companies rarely pick people randomly for a layoff. Employers are looking for performance and value in their employees and also how each individual fits into the company structure .So gone are the days when you can just relax on your desk and your salary will be credited in the following month
February 18th, 2009 at 5:37 am
I think there is something to be learnt from both sides. Too often for Western companies the knee jerk reaction to downturns is to fire non-essential staff, cull projects and preserve profits. It can be effective but its also very damaging to employee morale and company productivity. Too often this isnt taken into account. I was in Sydney recently where Macquarie Bank, the pre-eminent employer of Australian talent – or at least that is how they have portrayed themselves – let off 20% of their workforce without even a face to face meeting. Its surely at odds to their claims to be “all about their people”.
So for the Chinese companies to seek to reduce headcount as a last resort is not necessarily a bad thing. A company really is only as good as its employees and as anyone who has been through a downturn will attest, if your employer shows loyalty during this period then the employees will respond in kind.
However in China there is also a secondary issue and that is the extremely inflexible nature of most companies employment contracts. As Rodney Miller pointed out most employees are permanent and unable to be easily let go. In Western economies a significant portion of many companies workforce is made up of contractors, part-timers and temp workers. This gives them much greater flexibility to reduce (and increase) their headcount. China is improving in this area, but slowly.
I think the current downturn will act as a wakeup call to Chinese employers & HR departments to ensure a mix between core permanent employees and an additional flexible workforce. This will allow them to ride out the lows and expand during the peaks much quicker.