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China Focus – May 2017

Labour Outsourcing in China

Companies entering the China market have to address a number of different issues but, as with any new market, one of the primary concerns is staff recruitment. Getting your recruitment strategy right is a key element of successful market entry. Recruitment can be an expensive and time-consuming process and, given China’s exacting labour laws, it can be considerably more difficult than in many other markets.

China’s labour market, unlike labour markets in more mature economies, has been constantly changing and reshaping since the 1980s. As a result, labour disputes are frequent in China and many underprepared western companies have fallen foul of the laws. The number of employment and labour dispute cases in China climbed to about 1.75 million in 2016; a 17% rise over the previous year, according to a report at Global Legal Insights*. And with growing awareness of labour rights amongst employees and the further localisation of multinationals, the current trend is that employment and labour dispute cases in China are set to increase.

New entrants that are dipping their toes in Chinese waters for the first time, may wish to avoid the obligations of hiring staff directly with all the inherent risks that can entail. Some may be operating under a legal structure that does not permit them to hire local employees directly, while others may not wish to commit precious time and resources to hiring staff directly. Their immediate focus after all, is likely to be on market research, marketing and brand development.

Consideration of alternative employment approaches – outsourcing in particular – is essential for companies to maintain their business scale without drastically increasing costs. There are a number of agencies in China that specialise in labour outsourcing and they will typically provide the following services:

  • Recruitment processing;
  • Preparation and signing of labour contracts;
  • Payroll management;
  • Social Security payments;
  • Training on procedures;
  • Staff termination and severance.

By outsourcing the hiring and management of personnel to a third party agency, all of the risks associated with employment are essentially transferred to the labour outsourcing agency. Generally, the company will have no obligatory qualification rules to outsourced staff but does have the right to replace any workers that are assigned to them. The outsourcing service provider also supervises the performance of assigned staff.

For companies that are adjusting to the complexities of operating in China, or may be uncertain about future plans, labour outsourcing could be an excellent option. Many companies, of course, will be reluctant to give up control over their hiring. For such firms, it is essential to have a full understanding of China’s labour laws. Sovereign has worked with a number of Human Resources and Outsourcing specialists and will be happy to connect you with firms that can meet your needs.

* https://www.globallegalinsights.com/practice-areas/employment-and-labour-law/global-legal-insights—employment-and-labour-law-2017-5th-ed./china


Manufacturing in Asia: an insight from the frontline

Russ Cohen has Russ has 25-years’ experience in the manufacture of branded consumer goods, supply of raw materials and managing quality and supply chain activities, including over 15 years based in Southeast Asia and Greater China. In this article he shares his experiences and examines the key considerations for small businesses looking to source product from manufacturers in Asia.

After living in Asia for 16 years, people still ask me the same question as when I first arrived: “What’s it like to live in China?” My responses in the early years were full of exciting stories – eating snakes, flying on unregistered airlines, driving for hours over mountains then sleeping on factory floors, enjoying banquets with provincial mayors and occasionally coming down with a tropical illness.

Not any more. My replies are now much more conventional: “I have a wife and child. He’s doing well at school. My mother in-law has been sick recently but we’re looking forward to summer holidays.” Of course, I still travel abroad a lot, but I’m not going to Paris or Hamburg. I’m heading to Guangzhou or Ningbo, Xiamen or Bangkok, Ho Chi Min or Zhejiang. I eat strange food and travel for hours on planes and in cars to visit factories, but it’s all just become part of everyday life. It’s normal.

It wasn’t until I started going back to the UK more for family holidays, that I realised that what I find normal is actually quite foreign to my fellow Brits. I was visiting a friend who runs her own landscape gardening and interior design business. She wanted to expand into selling product but the costs to produce in the UK was far too high and she’d already had her fingers burned in China after finding a supplier on Alibaba.

“It went well for the first 500 order,” she told me, “When I’d sold 100 units quickly, because of lead times and thinking I was on to a good thing, I re-ordered 2000 more. First one got returned, then two, then 10. Before I knew it, I was swamped with returns. I had to pull the product, return everyone’s money and pay to dispose of the goods. I also still had 2,000 probably faulty pieces on order and I was getting daily emails from the producer asking me to pay the balance of the deposit because the goods were ready to ship. The factory couldn’t seem to understand what was wrong with the product. I lost a load of money and my confidence. All the stories you hear about manufacturing in Asia are true.”

She was part right. The stories are true. Manufacturing a product on the other side of the world, with partners who don’t speak your language and whose business culture and ethics are different to yours, can be a minefield. It reminded me of that Atari video game from the 1980s – Pitfall! – where you were tasked with collecting a series of treasures in a jungle while avoiding various obstacles and hazards.

First face the snake. Then make sure you don’t fall down the hole if you miss the ladder. If you get to the ladder, there’s a scorpion to get past that can kill you with one touch. Take the other route and there’s a lake full of crocodiles that are impossible to pass. Like most things in life, success depends on hard work if the pitfalls are to be avoided. And, of course, practice makes perfect.

In my time in Southeast Asia, I’ve learned there are five key things that you have to get right if you want to ensure that you are not going to waste a lot of time and money:

  1. Find the right manufacturing partner. Most projects that fail do so because of a breakdown in this relationship, which is the most important relationship you’ll have. You need to find a partner that aligns with not only your product, but with you and your business.
  2. Get the right project set-up. Make sure you are very clear in communicating from the outset what you want and what you expect from the partnership. Don’t assume the factory understands your requirements simply by using terms like “good quality”. Get a good non-disclosure agreement (NDA) in place so that you can share as much information as possible with the factory. Give them sales projections and timescales. Be honest and open with them about your concerns. Be organised and professional. You must ensure that everything is clear before you place any orders with the factory. Any changes later will cost you money and time and stress the relationship
  3. Product costing. Firstly, make sure you give the factory all the information required to cost the product effectively. Your manufacturing specification must be properly detailed and finalized – any changes will give the factory an opportunity to increase the product cost. Secondly, be certain that the quoted cost will work for your business going forward. Never think, “I’ll get the cost down later”. If you marginally cost, then you’re marginally dead.
  4. Ordering. Minimum order quantities (MOQs) are annoying, and can be a killer. By ordering on a regular basis – same time, once a month or quarter – you will enable the factory to bulk order materials with their other customers and this will assist them give you lower MOQs. Set a schedule for your ordering, inform the factory and your distributors – and stick to it.
  5. Brand Protection. To protect your business going forward, you must deliver a product of consistent quality. To do this, you should establish a Quality Assurance (QA) testing programme that periodically inspects raw materials and semi-finished products. QA is process-oriented and focuses on defect prevention, while Quality Control (QC) is product-oriented and focuses on defect identification. If you’re relying on QC, you’re too late.

In short, it is possible to source a good manufacturer in China that can produce excellent quality products – I’ve been doing it for many years – but you do need to be careful. You should plan your project meticulously and set out with a considered and deliberate approach from the beginning.

Russ Cohen has lived in Southeast Asia since 2000; working in manufacturing, supply chain, quality and logistics for raw material supply businesses, as well as with brands such as Maclaren and Crumpler. He currently heads up Manufacturing Services Agency Limited (www.e2emanufacturing.co.uk), which provides support for small to medium-size businesses for manufacturing and supply chain services in Greater China and Southeast Asia.


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