Staff sent to China still increasing

TAIPEI, Taiwan — More and more Taiwanese companies are sending employees — both expatriates and locals — to China, said Seraphim Mar, a senior partner with Baker & McKenzie, at an AmCham Greater China Business Committee luncheon held recently at the Sherwood Hotel in Taipei. AmCham is the largest, oldest and most influential grouping of international and local businesses on the island.
She questioned, however, whether companies have taken sufficient steps to comply with relevant laws. “Have you considered the consequences of employment relationships in both the short and long term?” she asked the gathering of international business executives. “Is it better, from a legal perspective, to send employees as expatriates from the Taiwan-based operation or to hire them directly in China?” she continued. In particular, she stressed that companies must consider the impacts of the People’s Republic of China’s new Labor Contract Law, which went into effect on January 1, 2008.

Mar outlined one possible scenario: “Let’s say a company in Taiwan is contemplating sending 20 Taiwanese employees as expatriates to work for its affiliate in Shanghai. The company continues paying salaries from Taiwan, while the PRC affiliate pays only minimum salaries. The company in Taiwan also continues to make employee labor insurance, national health insurance and pension contributions. The question then becomes: Who is the actual employer, and how do the various laws in China and Taiwan view the employment relationship?”

Tax issues also come into play. “The worker has de-facto employment in China,” said Mar. “That entails social insurance obligations as well as tax liability and transfer pricing issues. The same, however, remains true in Taiwan.” One solution, she said, would be for the Taiwan-based entity to reimburse its employees the cost of insurance in Taiwan, rather than contributing it directly.

Another problem is one of termination. “If the company in Taiwan does not have a position available, whose laws govern?” she asked. “If a pension is payable, is it based on Taiwanese or Chinese salary levels?”

Mar also pointed out that, according to the PRC Employment Contract Law, a fixed-term contract becomes open-ended (long-term) contract if the employee has worked for 10 consecutive years or the fixed-term contract is signed twice, consecutively. Likewise, the same occurs when an employer fails to conclude a written employment contract with the worker within a year. “Employers that fail to conclude an open-ended contract,” said Mar, “will have to pay workers double their monthly wages starting from the date that such a contract should have been put into effect.”

China marches into outsourcing

CHANGSHA, CHINA — In the foothills of Yuelu Mountain here, a young Mao Tse-tung found inspiration in nature for his political aspirations. Today, Communist Party officials have a different vision for this area: a valley of global outsourcing firms.

One of them, Beijing-based Chinasoft International Ltd., is recruiting hundreds of workers to process medical bills and health insurance claims. Its target customers: U.S. doctors.

Chinasoft is launching the venture with a Tennessee firm, Premier BPO Inc., which has similar operations in India and Pakistan. Chen Yuhong, Chinasoft’s managing director, thinks it’s only a matter of time before China makes big gains against India — which now leads the world in information technology outsourcing.

“They’re seriously concerned about our challenge,” said Chen, 44, who has a doctorate in engineering from Beijing Institute of Technology and speaks fluent English.

Most analysts reckon it’ll be perhaps a decade before China catches up. India’s IT outsourcing revenue, estimated at $18 billion in 2007, is about six times the size of China’s. The gap figures to be even bigger for business-process outsourcing, such as medical billing and back-office work. With its history as a British colony, India has workers with strong English skills and familiarity with Western culture. That gives companies there a big edge when bidding for jobs that require reading reports and talking to Americans.

But China’s sales of IT outsourcing work are growing at roughly twice the rate of India’s. Consulting firm Analysys International says they jumped 45% in the fourth quarter of 2007, to about $600 million. Although much of that was for clients in Japan and other Asian countries, China is making a push to extend its reach.

In 2006, the central government launched the “Thousand, Hundred, Ten” project, aimed at cultivating 1,000 Chinese outsourcing companies that would cater to 100 international clients. Beijing wants to situate them in at least 10 cities. Some are familiar locales — Shanghai, Beijing and Shenzhen. But success or failure may come down to smaller cities largely unknown abroad.

Wages, plus land and housing prices, have soared in China’s top-tier cities, prompting many foreign manufacturers to relocate. Officials hope that places such as Wuhan, Jinan and Changsha will be lower-cost alternatives for the service industry as well.

Junior software engineers in those cities can be hired for $170 to $250 a month — a third of the going rates in Beijing or Shanghai, said Tian Yuqi, human resources manager at VanceInfo Technologies Inc., a Beijing-based IT outsourcing firm listed on the New York Stock Exchange. Those wages also are a lot lower than in India’s outsourcing hubs such as Bangalore and New Delhi, where salaries are spiraling up.

“China enjoys the cost advantage, but India enjoys the market advantage,” Tian said.

China’s government wants both — and is helping with incentives. Firms setting up in designated outsourcing zones can enjoy a two-year waiver of taxes. They can get a subsidy of about $700 per employee for training and hiring. Local governments are chipping in with sweet deals for rent and land, as well as cash for certain sectors. Hunan province, for example, has set aside about $56 million to bolster the local animation industry, which is particularly strong in Changsha.

“They’re going after it with determination,” said Gaurav Gupta, country head in India for Everest Group, a consulting and research firm based in Britain. Gupta and others at Everest track 125 outsourcing cities in the world, including 10 in China and more than 30 in India. Yet for all their potential, he says, Chinese outsourcing companies are generally serving domestic businesses — not offshore customers, as India’s firms tend to do.

Chinasoft’s Chen, though, sees a way to leverage China’s large domestic market into offshore contracts. As more Chinese businesses and public agencies contract out their IT, back-office and call-center operations, the firms that provide those services could offer connections to Western firms to help them break into the Chinese market.

“We tell them, ‘You give us business in [your country], and we’ll give you the market here,’ ” Chen said. Chinasoft also is considering buying a stake in companies such as Premier BPO to help drive more American customers to its fledgling outsourcing operations in China. Though Chinasoft has branch offices around the world, including San Francisco and Seattle, its IT outsourcing revenue was only about $9 million in last year’s third quarter, the latest period for which results are available.

Mark Briggs, chairman of privately held Premier BPO, declined to comment on the specifics of the deal with Chinasoft. He agreed that familiarity with English was a major plus for India; something as simple as commas and semicolons can be stumbling blocks for Chinese workers coding data into computers, he said. But training can overcome such language and cultural gaps, and Briggs predicted that the same assets that propelled China’s manufacturing industry — great infrastructure and labor power — would help it become tops in outsourcing.

“I personally believe China will overtake the rest of the world in BPO,” or business-process outsourcing, he said.

Changsha may be well suited to play a key role. Many Chinese regard Hunan as a center of culture and creative talent. The wildly popular television show “Super Girl,” akin to “American Idol,” was produced here. Changsha accounts for much of the nation’s cartoon design and TV programming.

Changsha natives claim an outsize share of placements at top IT companies, managers say. The city boasts three universities rated highly for industrial design and software engineering. China’s first supercomputer was developed at Changsha’s National University of Defense Technology.

“They have a lot of talented people,” said Xuedong Huang, a general manager at Microsoft Corp.’s communications innovation center in Redmond, Wash. Like most major technology companies, Microsoft’s investment and work in China have been focused in Beijing and Shanghai. For four years, it has run a small software outsourcing project in Changsha.

“I’ve been very impressed with the quality, even by Microsoft standards,” said Huang, himself a product of Hunan University in Changsha. What’s unclear, he says, is whether an inland city as “small” as Changsha, population 6 million, can become a major player in outsourcing.

Changsha has yet to cultivate a star company in IT or business-process outsourcing. One reason is that Changsha’s homegrown talent is lured by glitzier, cosmopolitan cities on the coast. Seventy percent of engineering graduates leave Hunan, said Lin Yaping, vice dean of Hunan University’s software school. To keep them, “what we need is a dragon head,” he said, referring to an internationally famous firm.

About 300 firms have set up in Changsha’s software and outsourcing zone at the foot of Yuelu Mountain. Some have partnerships with big names including IBM Corp. and Google Inc., but most are tiny operations. One of the most promising locally bred IT companies, Powerise International Software Co., faltered and was bought by Chinasoft in 2006.

Today, Chinasoft’s 160 staff members in Changsha do IT outsourcing for mainly Japanese companies, but most of it is coding work and software testing, not the high-end engineering and designing that Changsha craves.

VanceInfo Technologies’ experience in Changsha isn’t encouraging.

The Beijing firm opened a branch here in 2003. Tian said it took him nine months to recruit 60 engineers. They had little trouble doing the work, including developing, testing and localizing software and handling electronic transfers of loans for major banks.

But Tian said his staff in Changsha, lacking strong English skills, struggled in conference calls with customers. Nor were VanceInfo’s clients entirely comfortable dealing in a small city unfamiliar to them, he said, and the firm shut the office in 2005.

“Compared to the Japanese, major clients in Europe and North America emphasized much more the city’s characteristics,” Tian said. “They preferred Shanghai. Our clients weren’t supporting our establishing centers in cities like Changsha.”

Upgrading China’s labor force

GUANGZHOU, China, This year is likely to be a difficult one for China’s economy, as Premier Wen Jiabao warned at a recent press conference. The export business has been shrinking due to the appreciation of the Chinese yuan, as well as the “austerity” policy. This is going to make it harder for people to find jobs.
Chinese academics are now avidly discussing the need for transformation of the nation’s industries. This cannot be achieved overnight, however. The most urgent task is to find employment for China’s labor force.

One solution would be to support and encourage the export of labor. If taken as a national strategy, China could focus on “branding” its labor force as an exportable commodity. Some Chinese may feel this would dishonor China, which claims a noble history and by tradition considers itself the nation of heaven. But this would be the most effective approach to serve the interests of both the laborers and the country.

When speaking of exported labor, the Chinese cannot help but think of the Philippines and compare it with China.

In the eyes of many Chinese, the Philippines is not a very successful country. In discussing national development models, Chinese academics typically criticize the country, saying, “Everyone says the Philippines has American-style democracy, doesn’t it? The result is that its women all go abroad to be housemaids!”

Firstly, whether the Philippines can be viewed as a democratic country remains questionable, in my opinion. But even so, the Chinese are not qualified to mock its democracy by criticizing Filipino maids.

Secondly, earning a living by working is not shameful. And in the global era, it’s not bad to go abroad to labor for higher pay, rather than receiving low pay for heavy work in the domestic market. Basketball star Yao Ming’s act of going to the United States to join the National Basketball Association is an example of exported labor, after all.

The export of labor has been a very significant industry in the Philippines, and Filipino maids are famous throughout Southeast Asia. For example, there are 700,000 Filipino maids in Hong Kong alone. In fact, it’s not an exaggeration to say that middle-class families in Southeast Asia cannot function well without their Filipino maids.

China’s current economic model is not essentially different from the Philippines — both countries are earning foreign currency by selling their cheap labor force.

Today China is proud of being called the factory of the world, but there are actually two kinds of world factories. One is like Britain during the Industrial Revolution, when its industrial products were sold worldwide. Britain relied mainly on its leading skills and efficiency in the world.

China, however, relies almost exclusively on its cheap labor. Its so-called export orientation is merely exchanging its major resource, the domestic work force, for foreign currency in the international market. The Chinese government thus becomes the biggest labor contractor in the world.

China should pay attention to at least two points if it wishes to expand its labor exports. The first is to brand its work force as a high-quality product, in the same way that watches from Switzerland and leather shoes from Italy are recognized for their high quality.

Filipino maids have succeeded in this. People want maids from the Philippines because they are known for their honesty, optimism and diligence, and employers are willing to pay them higher wages than their counterparts from other countries. This is the outcome of long-term assistance from the Philippine government and employment agencies.

Even though China produces consumer goods for the whole world, how many people will remember the Chinese laborers who make these products, working long hours under terrible conditions? Without a reputation for quality like the Filipinos have, Chinese workers’ only advantage is their low price. If wages are raised, many industries will move away to other countries.

The second point the government should pay attention to is protecting the basic rights and welfare of its laborers. The Philippine Embassy in Hong Kong, for example, pays attention to employers’ inappropriate treatment of its nationals. The embassy keeps a list of employers charged with abusing their maids, forcing them to work overtime or sleep on the floor, for example. If these employers do not improve the situation, they won’t be allowed to hire Filipino maids.

In China’s factories, some employees’ working conditions and wages are far worse than those of Filipino maids. Many work very long hours for a salary of just a few hundred yuan. When will they receive reasonable payment, and take pride in their work like the Filipino maids do?

One advantage of Filipino maids is their ability to speak English; most Chinese cannot compete on this point.

Nevertheless, in many other fields Chinese workers — such as construction workers, cooks and massage therapists — can be globally competitive. The Chinese authorities could work on branding such fields and supporting industry associations to develop professional standards and grading systems. Especially Chinese cooks and massage therapists could be very competitive and eventually dominate the world market, for those are among China’s traditional areas of excellence.

If the Chinese authorities can build the image of Chinese workers into a high-quality brand, like the Filipino maids, within the next five to ten years, the idea of China rising and surpassing the United Kingdom and the United States could be more than just empty talk.