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Chinese firms start to cut jobs and move overseas as US trade war and rising costs start to bite

Thursday - 18/10/2018 09:22
Once-booming smaller and medium-sized businesses start to feel the squeeze from rising costs with US tariffs set to make the situation worse
Chinese firms start to cut jobs and move overseas as US trade war and rising costs start to bite
Chinese firms start to cut jobs and move overseas as US trade war and rising costs start to bite
Yang Xiaoying feels conflicted and overwhelmed by the uncertain future of the factory she and her husband founded 15 years ago in Dongguan, a manufacturing hub in southern China.
To offset the impact of shrinking orders and soaring operational costs for the factory, which produces shoes and leather accessories for overseas buyers, she has been forced to downsize her workforce from over 200 last year to about 150.
Xie Xusheng, who owns a garment making and embroidery processing factory in the city, also laid off about 160 workers soon after he opened a new factory in Vietnam’s Ho Chi Minh City early this year to supply big-name American brands with shoes, bags and accessories.
He only kept on about 40 senior skilled workers at his plant in Guangdong province for complicated sample development.
The decisions by Yang and Xie to cut workers are part of a subtle but growing trend of smaller Chinese firms cutting their employment levels in an effort to allow their businesses to survive.
Small businesses are increasingly struggling with shrinking foreign orders due to US tariffs, a depreciating yuan that raises the cost of imported materials and soaring domestic costs for energy, taxes, rent and labour.
This year, the number of lay-offs at small and medium-sized manufacturing firms, tech start-ups and financial organisations has grown at a double-digit rate in percentage terms, according to industry analysts.
The situation threatens to get worse, given the escalating trade war with the US.
Washington has slapped 10 per cent duties on US$200 billion of Chinese imports effective from Monday, with the tariff rate set to rise to 25 per cent on January if Beijing does not make concessions.
US President Donald Trump has also threatened to levy tariffs on the remaining US$267 billion in Chinese imports not already sanctioned.
China’s official unemployment rate has hovered between 4 and 5 per cent for decades, though many domestic and international analysts believe the government data does not accurately reflect the worsening unemployment situation because official statistics do not take into account unregistered jobless and surplus workers in rural areas.
According to the CIER index, designed to monitor changes in China’s labour market, employment at small and middle-sized firms has fallen far this year, with the decline accelerating in the second quarter.
A CIER index score of greater than one indicates that the labour market is improving, with more jobseekers than available vacancies, while an index below one indicates the labour market is deteriorating.
The CIER index for small (20 to 499 employees) companies fell from 0.85 in the first quarter to 0.79 in the second, indicating accelerating lay-offs. The index for medium-sized companies (500 to 9,999 employees) fell from 1.01 to 0.97, indicating that they too were beginning to cut workers.
Yang said the lay-offs would help to lower her labour costs from about 700,000 yuan (US$102,000) per month to about 500,000 yuan, which would help offset the firm’s soaring expenses for raw materials, rent and employee social security.
She also hinted that there were likely more lay-offs to come, saying: “Actually, there aren’t enough orders [now] to sustain 200 workers.”
Yang and her husband moved to Dongguan from the eastern province of Jiangxi to start their small workshop in 2003 when labour and raw materials were dirt cheap.
With a steady stream of orders from America, Europe and Hong Kong, the workshop expanded to become a factory of 800 full-time and part-time workers at its peak in 2008.
“But then we had to downsize, first because of a labour shortage in the early 2000s, now because of weaker demand for Chinese goods from overseas buyers,” Yang said.
“So far, shoes accessories are not on the list of [of products subject to] extra tariffs. But we all believe they will be included sooner or later.”
Xie said: “We are seeing more and more small and medium-sized [contract manufacturing] factories that cannot withstand the double hits resulting from US tariffs and higher payments for employees’ social security, forcing them to downsize.
“Many export-oriented factories here have seen orders cut in half.”
Xie said he made his decision to move most of his production to Vietnam after his biggest customer moved his supply chain to Southeast Asia.
“A growing number of Chinese textile and garment suppliers are setting up factories in Vietnam and Cambodia because overseas customers are increasingly placing orders only from factories in these countries, instead of China,” he said. “That’s why I had to follow and set up a plant there. ”
The foreign brands that are Xie’s main customers “used to source from 25 Chinese suppliers on the mainland, but now are partnered with just two because of worries about [US] tariffs”.
Employment downsizing is also occurring at tech start-ups and private financial services companies.
“Our Guangzhou branch just downsized from 600 to 200 employees, with all [employees in the] logistics and administrative departments cut, because of the weak performance of financial funds and the stock market this year,” said a senior sales manager at a private financial capital company who refused to disclose his company’s name.
“Senior executives were required to take a basic salary pay cut of 30 to 70 per cent,” he said.
The job situation at small and medium-sized financial firms was gradually worsening due to the steady deterioration of country’s informal shadow banking system, on which many smaller firms relied for capital, and the continued decline in the stock market, the manager said.
“Investor confidence is lower than ever before because of the economic slowdown that the trade war is causing.”
Jonathan Yu, the founder of a new app company in Guangzhou, said tech start-ups were also facing a hard time. “The whole venture capital sector is becoming very cautious about investing,” he said.
In August, China’s national tax authority told local governments to stop offering tax incentives to venture capital firms as the country revamps its tax policy in response to slowing economic growth. Venture capital firms now should pay a progressive tax rate of 5 to 35 per cent, rather than the 20 per cent flat rate they have paid previously in many areas.
“If implementation of tax polices gets stricter, it would a big blow to the tech sector,” Yu said.
All the people spoke to agreed US tariffs would put increasing pressure on their sectors, resulting in many more people losing their jobs at once-booming businesses.

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