With the exception of 2008 when the financial tsunami affected China’s economy, China’s economy has grown without a hitch for the past ten years. Today, however, it is different. “Layoffs,” which have seldom happened in China, are starting to show up here and there.
Those industries on which the macro-economy have the most profound influence and the companies that are at the forefront of the economy have been the first victims of the wave of layoffs.
On August 14, 2012, Motorola announced a 20% reduction (about 4,000 people) in its global workforce and a plan to close one third of its 94 offices around the world. Earlier, the world’s number one cell phone manufacturer, Nokia, announced that it would lay off 10,000 employees globally, which is the largest layoff in Nokia’s history. In some divisions in China, one-third of their employees have been let go.
Also earlier, Heilongjiang Longmay Mining Holding Group, Co., Ltd, the largest coal company in the North-east area of China, initiated a plan to lay off a total of 12,000 people, while the second largest coal company in China is delaying its layoffs by initiating incremental pay cuts.
There is a long list of large companies that are laying people off. However, the list of small companies that have the same problem is much longer. Although layoffs are not news in the U.S. and in European countries, this is the first time that massive layoffs have occurred in China.
I. Though Quiet, the Situation Is Disturbing
On August 3, 2012, Wang Dongping from Jiangxi Province pedaled his pedicab as usual in Liushi Town, Leqing City, Zhejiang Province, to solicit customers. Business has become more and more difficult, because many customers who had previously hired pedicabs have become pedicab drivers themselves.
Wang explained, “I have to do this job because there is no more work at our factory.” Drivers rent the pedicabs on a monthly basis. One year ago, hardly anyone ever came to the pedicab rental office, but “now unemployed workers line up at the door. More than 800 pedicabs have been added to the business since the beginning of the year.”
Liushi Town was known as “the capital city of China’s electric appliances.” It was densely crammed with more than one thousand enterprises. According to Vice Executive President Huang Zhongping of the Zhejiang Provincial Electric Appliances Industry Association, “In recent years, the industry’s revenue has increased by 20 to 30 percent each year.” However, the regulation of real estate and the European debt crisis have caused the industry to suffer a 10 percent decrease in sales in 2012 as compared to a year ago, which means a net revenue decrease of 30 to 40 percent for the industry.
Wang Dongping’s wife, who had a job at a small factory producing printed circuit boards, was told that there was only enough work for her to do for one more week. “Her boss was nice. After paying her salary, he also gave her an extra 200 yuan (US $30) to buy a train ticket home.”
Huanghua Town in Leqing City is worse (than Liushi Town). Shipbuilding is another important industry in Leqing City. Huanghua Town is one of the most important shipbuilding centers.
Su Junshan was working hard on a ship. He and more than 40 others got the welding contract from the Xinshun Shipyard Group to build three ships.
Su faced a dilemma. The sooner he completed the three ships, the more money he would make, but finishing the ships would mean he would then be out of work. These three ships are among the only ships currently under construction in Leqing.
In 2005, the ship-building industry in Leqing was in its heyday. China’s economy was developing rapidly, and the demand for ocean freight had increased significantly. Goods were shipped either out of China or into China. The demand for vessels increased dramatically. China quickly became the world’s largest shipbuilding country.
The Baltic Dry Index (BDI) is the barometer for the international dry bulk cargo shipping market. [2] The index reached 11,033 in 2007, but by February 2012, that number had slid down to 651, which was even lower than the historical low set by the global financial crisis in 2008. Su Junshan’s and Huanghua Town’s fates are tightly tied to this index. At the height of the industry, there were over 150 vessels being constructed at the same time in Huanghua Town. Now, only around a dozen ships are being built in all of Leqing.
“Orders for export are more profitable; they accounted for more than 80% of the company’s profit,” General Manager Zhou Fanglong of Xinshun Shipyard Group told the reporter from Nanfang Weekend. In September 2011, the overseas orders dried up due to the European debt crisis. Xinshun had no choice but to accept the domestic order for three ships. “We have to put 20% of the equity investment into each ship. In the end, instead of making money, we have to spend our own money (to keep this business afloat).
Why do they want to accept this business even though they are losing money? “To keep the workers.” said Zhou. “Many shipyards cannot even get this type of money-losing order. Now we are competing to see who will be the last to die.” Zhou’s company has already laid off 90 percent of its employees.
The largest shipbuilding enterprise, Orient Shipyard, has already suspended its production. The director, Yang Tao, said, “Currently, all we can do is just wait for the situation to change. The shipyard needs money and orders; otherwise it will have to shut down.”
Nearly 300,000 people worked in Leqing’s electric appliance industry. The maximum number of people who worked in the shipbuilding industry was over 20,000. Nobody knows how many have been laid off, but there is no doubt that the number is definitely disturbing. However, it is quiet here. Workers have already gotten used to the situation. If there was work, they would do it. Otherwise, they would leave.
II. The Repercussions of Layoffs at Big Companies
Unlike the enterprises in quiet Zhejiang Province, big companies have made a bigger noise. Each round of layoffs has had lasting repercussions.
July 15, 2012, is payday at the Dalian Midea Sales Company, a branch of the Media Group. Li Jian (an alias), an employee at Midea, didn’t get a paycheck. Instead, he got a notice from the Human Resources Department: “Your salary has been suspended.”
Li Jian had worked at Midea for 10 years. He came to the Dalian office in 2010. One year later, he witnessed massive layoffs. More than 60 people, half of the Dalian office, were let go. Six months later, the rest were also laid off, with just five people, including the chief financial officer, to wrap things up.
Layoffs did not involve either individuals or positions. “Each department was given a hard quota, for example, to cut 50%,” said Li Jian. Based on the company’s compensation plan, he could only get three months’ basic salary with no bonus, commission, or cost of living subsidy. “I worked (for Midea) for 10 years. The best years of my life were given to Midea, but we were discarded like used toilet tissue.”
A large number of people were as dissatisfied as he was. Midea’s latest annual report indicated that the number of employees in 2011 was 30,000 fewer than in 2010. On December 14, 2011, three QQ groups [3] were set up to protest Midea’s layoffs. There are still over 100 protesters active in those groups.
Thousands of miles away, Wang Wen (an alias), an employee at the Shanghai Scientific and Technological Department of Sany Group, was told that he would have to transfer to another job or be laid off. The reason was that his position had little direct relationship to the company’s operating performance.
His department’s performance had always been at the bottom, so it bore the brunt of the layoffs. From the June 2012 human resources report, Wang saw that there were 2,492 employees in Shanghai Scientific at the beginning of this year, and 1,871 employees by the end of June. The company had already stopped all external recruitment.
The reports regarding Sany’s layoffs have frequently appeared in the newspaper. On July 6, 2012, over 100 employees of Shenyang City Sany Heavy Equipment Company, Liaoning Province, appealed at the Shenyang Appeals Bureau, complaining that they had been given excuses as a disguised way of being “laid off.” One week later, Sany Zhangjiakou Wind and Electricity Company, Hebei Province, was shut down with only four employees remaining.
Nanfang Weekend reporters inquired at the Sany industrial parks in Beijing, Shenyang, Changsha (in Hunan Province), Changde (in Hunan Province), and Kunshan (in Jiangsu Province) about the layoffs. The universal answer was: “Personnel structure optimization.” The data provided by Sany revealed that the entire Sany Group employed 60,612 workers at the beginning of 2012. Six months later, the number had been reduced by 12,763.
According to a source familiar with the situation, there were also 9,539 employees working for Sany’s dealers. Over the past two years, all of them were transferred out of Sany Group. Counting the attrition and transfers, the Sany Group had a reduction of 16,419 employees.
III. The Big Expansion Encountered a Big Economic Chill
Why were there suddenly so many layoffs?
On July 14, 2012, the National Bureau of Statistics released its data for the first half of this year. It revealed that the national GDP growth rate was 7.8 percent. This is the sixth consecutive quarter in which GDP growth has slowed. It is also the first time in the past three years that the GDP growth rate fell below 8 percent, which is a most important number psychologically.
The sudden deceleration first shot down those who were frontrunners in the economic arena, such as Midea and Sany. Although they were among the fastest expanding companies in recent years, both of them have made considerable layoffs.
Only a few months ago, the news about Sany was still inspiring and exciting. In April, Sany bought the German company Putzmeister, known as the best concrete construction machinery company in the world and whose concrete pumps were often compared to “elephants.” Recently, Sany also purchased Intermix, Europe’s third-largest concrete mixer manufacturer.
Sany once did something quite remarkable: When the financial crisis came in 2008, the Sany Group didn’t cut employees’ salaries, didn’t lay off any employees, and didn’t even accept employees’ voluntary pay cuts. To deal with the crisis, Chairman of the Board Liang Wengen took one yuan as his annual salary and all the board members and executives took pay cuts of 90 and 50 percent respectively.
That crisis passed quickly in China. China pushed through a four trillion-yuan (US$586 billion) economic stimulus program. The infrastructure construction, railways, and real estate industries all boomed. Sany got its reward. In that year, Sany Group’s sales revenue exceeded 20 billion yuan (US$2.9 billion). Sany became the leader in the construction machinery industry in China. In the following year, it surpassed Germany’s “elephant” to become the world’s number one in the field of concrete machinery.
The tactic Sany used to gain ascendancy in the market was a double-edged sword. Sany Heavy Machinery introduced the low down payment and zero down payment sales models into China. David Phillips, the President of the British Construction Machinery Advisory Company, told Financial Times, “A particular problem for companies such as Sany was the generous credit terms of their machinery sales. As a result, they have accrued huge debts.”
In 2011, Sany Heavy Industry’s sales revenue was 50.776 billion yuan (US$8.1 billion), but its accounts receivable was 11.305 billion yuan (US$1.8 billion), an increase of 97.36 percent from 2010. The accounts receivable rose to 20.123 million yuan (US$3.2 billion) in the first quarter of 2012; for the first time, it surpassed the sales revenue for the same period.
When domestic economic growth slowed down so suddenly, its heavy debts staggered Sany.
When the economy is in good shape, high accounts receivable will not have much of an adverse affect on an enterprise. If there is a problem with the economy, the receivables will quickly become bad loans. Executive Vice President Liu Shogun of the China-Europe Institute of International Finance once said, “Sany Heavy Industry’s biggest problem is that it excessively pursues high-speed business growth.”
Sany Heavy Industry provided this explanation to Nanfang Weekend reporters: “The net cash flow for the first quarter of Sany’s operating activities was an outflow of 4.3 billion yuan (US$683 million), which was caused by seasonal factors. It will improve in the second quarter. That is the pattern of this industry.” But they also admitted that Sany, due to the industry slowdown, had intentionally kept the number of employees from increasing.
The leader in the field of household electrical appliances, Midea Group, faced a similar situation.
Over the past five years, the number of Midea employees rose from 70,000 to 200,000. By the end of 2010, when Midea’s new headquarters was completed, the Chairman of the Board, He Hengjian, announced that the company would “build another Midea in five years” and planned to double its revenues from 100 billion yuan (US$16 billion) in 2010 to 200 billion yuan by 2015.
When the market was bullish, Midea made large profits from its dealers and distributors by using the “small regional agency plus direct marketing” model. It quickly reached its 100 billion-yuan sales miracle. However, this strategy also led to a large increase in its sales staff.
Unexpectedly, the government cancelled its policy of “sending household electric appliances to the countryside.” This, along with a slump in the real estate industry, quickly changed the market.
Shen Linlin, a member of the sales staff at Midea’s Foshan Company in Guangdong Province, visited each of his stores every day. He learned that the majority of the stores only met 60 to 70 percent of their sales targets.
AVC Consulting data showed that the income from the sale of air conditioners dropped by 32.1 percent in the first quarter of 2012 compared to the same period last year, while the amount received from the sale of refrigerators and washing machines decreased by 12.4 percent and 20.2 percent respectively. According to information from the Chinese Household Electric Appliances Association, many small enterprises that won the bid to provide electric appliances to the countryside had already changed their product lines or gone bankrupt.
Experiencing the drop in sales, Midea had no choice but to return sales channels back to dealers. The subsequent massive layoffs were inevitable.
IV. After the Craziness
There are also some industries that returned to normal after the craziness (of over-expansion). The most typical is the group buying business.
China e-Business Research Center released a report in early August 2012, showing that the trade conducted over group buying websites in the first six months of 2012 had reached 14.65 billion yuan (US$2.3 billion), a 124% increase over the same period last year. However, a total of 2,859 group buying websites (about 48% of the total group buying websites) closed in the same six-month period.
55tuan.com, a company that used to advertise heavily at bus stations, is one of the failing sites.
55tuan.com was the site with the largest number of sub-sites (by location) in China. An employee from its Nanchang site (in Jiangxi Province), Jiang Tingting, recalled that in February 2012, the company’s headquarters instituted large-scale layoffs at all local sites. Four people out of a total of 23 at the Nanchang site were let go. By May, only ten remained.
“Nanchang site’s office was downtown. In July, it was moved to a relatively remote location. The company used to hire cleaning staff. Now the money is added to employees’ bonuses.”
In July 2012, 55tuan.com’s Yinchuan site in Ningxia Hui Autonomous Region laid off Xin Yue. The manager announced her layoff at a company meeting. She didn’t know why she was being laid off and she also did not get her July paycheck.
Xin Yue, who had worked at several group buying sites, thought that it was due to the fact that e-Business websites in China were not making money. In the past, all they did was expand. Now they need to think about how to improve their profitability, so they’ve started laying people off.
Salary cuts have accompanied the layoffs. At 55tuan.com, every month for the past several months, some salaries have been cut. After their salaries were cut too low, many employees resigned.
55tuan.com Vice President, Zhao Wenqiang, said publicly in March 2012, “We are facing a lot of pressure. At our peak time, we had nearly 6,000 employees. Now we are down to 3,000.”
Lashou.com planned an IPO on Nasdaq for November 14, 2011. It cancelled the plan due its large losses. Lashou.com’s prospectus said that its revenue for the first six months of 2012 was 57.8 million yuan (US$9.2 million), but its net loss was actually 391 million yuan (US$62 million), 6.7 times its revenue.
Sinopharm Group’s e-Business project manager Lu Zhenwang said that the e-Business sites started to have cash flow problems in 2012. Starting in October 2011, the e-Business industry had three waves of layoffs. The first one was October/November 2011, the second one was January 2012, and the third one was April/May 2012.
The “wild west” era in China has passed.
V. The Difficulty of Transformation
Danger accompanies opportunity.
Zheng Chenai, Chairman of Wenzhou Clothing Chamber of Commerce, Zhejiang Province, had this description of the clothing industry: “The total sales in our industry decreased 20 percent while those companies that focused on exporting decreased 40 percent.”
His factory used to employ over 1,000 workers. Now there are only 600. But what is interesting is that his total revenue remains about the same and his profits are even higher.
The secret was that he transformed his business model. Before this downturn, Zheng had changed his factory into a custom-clothing business. It required more delicate sewing, more comfortable materials, and training in the clothing culture. “Why are Italian and French clothing more expensive? Because they have the culture that can add value to the clothes, they are leading the trend.”
Zheng kept promoting his transformation at every opportunity. “Many companies lack the incentive to transform. When they could still make money using the old ways, they did not worry about transforming their business model. But it’s different now.”
For most people, it is not that they don’t want to transform; it is that they can’t.
Huang Jingfa, Chairman of Wenzhou Cigarette Lighter Industry Association, worries about his business.
Given the European Union’s trade barriers, China’s cigarette lighter industry faces a cold winter. Before 2008, there were more than 500 cigarette lighter factories in Wenzhou. Now there are only a little over 100 left.
Before 2010, the Rifeng company could make US$0.2 to $0.3 on a lighter that sold for $2. Now the profit is only $0.04 to $0.1.
Huang Jingfa believes that China’s cigarette lighter industry is at a stage where it must transform. They tried to expand to Latin America and Southeast Asia, but since they did not have contacts there and the legal system was not well established, Chinese companies couldn’t enter the market on a large scale.
How to increase the added-value of a lighter? Japan’s lighters can be used 40,000 times, but China’s only 10,000 times. The difference lies on a small chip, but China doesn’t have that technology.
Huang wants to carve the lighter’s metal case more elegantly as an art product, but China’s technology standards can’t get him there.
Huang Jingfa and his lighter business are still trapped in this dilemma.
Endnotes:
[1] Nanfang Weekend, “The First Layoff in the Last Ten Years,” August 17, 2012.
http://www.infzm.com/content/79782.
[2] The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides “an assessment of the price of moving the major raw materials by sea. http://en.wikipedia.org/wiki/Baltic_Dry_Index
[3] Tencent QQ, generally referred to as QQ, is a free instant messaging computer program in China. Users create different QQ groups as communities to share information and chat over the Internet. http://en.wikipedia.org/wiki/Tencent_QQ.