The Chinese Worker, the American Consumer, and the World Market

I read an interesting article from Business Week the other day. The article, titled “Secrets, Lies, and Sweatshops” details the practices used to try and prevent unethical and illegal treatment of workers in Chinese factories and the loopholes and tricks used to get around the system. All major American retailers have a system in place for inspecting, monitoring, and auditing factories for abuses to workers. In most cases, each supplier factory is required to undergo a yearly factory audit that checks on such things as underage workers, fair pay, and safety. If a factory fails, they must make changes to come up to code, much as a restaurant would have to do if it failed a health inspection, or face consequences. These changes can be very costly, and so of course factory owners find ways to cut corners. There are many practices used, such as having two sets of books, one with the actual employee’s age and time sheets, and one with false information, or coaching workers on how to respond to inspectors if questioned, or even good old fashioned bribery. None of this is new, but the article does mention one very interesting trend: a new industry has sprung up to help factories out. For a $5000 fee you can hire a consultant from Shanghai Corporate Responsibility Management & Consulting Co. to come to your factory and “solve” your audit problem. Of course, the consulting firms’ stance is that they only assist factories in making legitimate improvements to come up to code, but the Business Week article mentioned above interviewed a former worker, Tang Yinghong, at Ningbo Beifa Group, a factory which supplies various items to Wal-Mart:

Lai [Mingwei, the consultant] provided advice on how to create fake but authentic-looking records and suggested that Beifa hustle any workers with grievances out of the factory on the day of the audit, Tang recounts. […] After following much of Lai's advice, the Beifa factory in Ningbo passed the audit earlier this year, Tang says, even though the company didn't change any of its practices.

While American companies do make good faith efforts to try and stop unethical practices, and Chinese factory owners, for the most part, are willing to comply where reasonable, all too often ethical treatment is trumped by the almighty dollar. The American consumer wants low prices and every retailer’s number one strategy is to provide that. Time and time again, price is the determining factor in a consumer’s choice. You only have to look as far as declining customer service as an example of how that strategy didn’t work as well as 10% less cost did when trying to draw customers. For example, Home Depot built there business on customer service: “You Can Do It, We Can Help”, remember? However, having an ex-plumber or electrician work in your store costs a lot more than an 18 year kid working over the summer, so experience goes by the wayside and a few pennies less to Joe Consumer (and another point or two to the company’s margin) takes over.

This price pinch, of course, stretches to the suppliers as well. To pay their workers more and to implement certain safety practices costs money. Most Chinese suppliers make very low margin, the money is in the volume, so an extra 5-10% cost can be the difference between making money and breaking even. Every major retailer will fight tooth and nail to keep prices the same for products year after year, even if material prices go up. Every retailer knows that there are 100 other Chinese guys waiting to get the business if a current supplier can’t perform. If material prices are the same for everyone, and labor prices are supposed to be the same, where do those extra savings come from? All too often it’s from cutting corners. The retailers know this, but they have to show that they are trying to curb unethical practices. As long as Joe Consumer thinks that the store he shops at is cracking down on unethical practices, his conscience is clear to buy cheaper socks.

The problem, of course, is on both sides. American companies could agree to raise prices a bit to allow for more ethical practices, and implement even stricter audit regulations, but at the same time the deception would most likely still go on, and the factory owner would pocket the extra cash. Unfortunately, human nature is such that saving a few bucks trumps any altruistic good we wish on our fellow man. This is true no matter what country you’re in.

This being the case, the only thing that could possibly change the system would be to put some power into the worker’s hands. Of course, even now, the worker is not forced to work in the factories. He chooses it because it allows for a better life. It still may not be fair or ethical, and this certainly isn’t an argument for the rightness of unfair practices, but the worker does make the decision that the extra money is worth the long hours and low pay. However, there are changes in the air. Wages are increasing and hours are decreasing for factory workers. The main reason is there has been a massive shortage of workers over the past year.

Most years, Chinese New Year puts a dent in production schedules, especially for spring goods. The reason is that many workers do not return from vacation. They go back home, get comfortable, and decide time with their family is more important than venturing back to the city. However, last year after Chinese New Year, around 1.7 million workers didn’t return. The problem has only gotten worse for factories in southern China.

Why the shortage? One reason is that the Chinese government recently repealed many of the taxes they had on farms. With the extra money, more farmers can stay and work at home instead of seeking out work in the city. But the biggest reason is China’s “one-child” policy. Every couple is allowed only one child by law. This went into effect 18 years ago, so the current emerging work force comes from a generation where there are no brothers and sisters. This decline in the workforce combined with the fact that a family with only one child will put all of their resources into that one child has caused the migrant worker pool to dwindle (read more in this NYT article). Also, the large amount of business done in China has caused larger and larger factories to emerge, which can pay workers better and offer more benefits and with the rise in technology, workers from different factories can communicate easier on what they are making.

While there is a long way to go, the money we are pouring into China does seem to be improving the quality of life there. In fact, some companies are beginning to source in countries such as Bangladesh because labor rates are rising in China. While we should continue to monitor abuses, and should punish them when found, we also must hope that the market will allow for better conditions naturally. This isn’t to say we just sit back and wait, there is much that can be done to care for people well, and we should be active in it, but you can’t change human nature. As much as I hate to admit it, in many cases, market forces do a better job of policing us than we do.