HR dilemmas in restructuring foreign-invested SOEs

By Xing Guang, Labours
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For state-owned enterprises facing restructuring after foreign investment, the announcement of mass staffing adjustments is a delicate matter capable of causing severe social problems

Domestic and foreign investors, if satisfying all required conditions, should both be allowed a fair opportunity to participate in the reform of state-owned enterprises (SOEs), states the Notice of the State Council on Certain Measures for Actively and Effectively Utilising Foreign Investment to Promote Quality Economic Development. Be that as it may, it is challenging for teams from different systems of ownership, nationalities and corporate cultures to work together, especially during market transformation.

TYPICAL STRUGGLES

Xing Guang, Labours
Xing Guang
Partner
Labours
Tel: +86 136 5126 1583
E-mail: xingguang@laibei.com

Aged SOEs tend to have more historical debts and senior staff, and are therefore prone to restructuring. Company X, a machinery manufacturer, is majority-owned by a foreign investor, and minority-owned by a wholly owned subsidiary of a municipal State-owned Assets Supervision and Administration Commission (SASAC) in China. The company’s predecessor was a state-owned manufacturer with a history dating back to the early days of the PRC, having since undergone many mergers, restructurings and relocations.

Since setting up a joint venture (JV) with the foreign investor, the overall operating condition of the industry had been in decline, with continual losses. After several failed attempts to negotiate a reorganisation plan, both parties grew unwilling to continue funding the JV. With some of its bank accounts frozen, the JV faced bankruptcy at any moment.

The foreign party unilaterally initiated liquidation, beginning the rearrangement of nearly 800 employees within one month. In such a time-honoured SOE, employees had an average length of service as high as 21 years, many of whom treat their workplace as a “second home”.

A long list of sensitive personnel issues added to the challenge, such as “15+5 workers” (more than 15 years of service and less than five years from retirement), work-related injuries, early retirements, maternity leave, and fixed compensation commitments. To make matters worse, as the staff had undertaken several strikes, they had become accustomed to defending their rights with mass actions.

Deep-rooted national pride and protectionism. In the early 2000s, there was a surge from foreign companies to acquire China’s leading equipment manufacturers. Numerous renowned state-owned brands were thus restructured, and many industries found their capacity for independent development hampered or stifled. Such sentiments run deep among senior employees. Their sense of belonging to a state-owned banner only makes it more difficult to accept liquidation after foreign investment.

Different way of thinking, different business objectives. Generally, foreign investors exhibit a linear mode of thinking, reaching consensus with the Chinese counterpart on overall plans, budgets, and asset and land placement in case of future liquidation, which should be sealed in writing. Chinese companies prefer taking it step by step – properly manage the personnel, then let the asset and land issues resolve themselves.

For local state-owned asset authorities, governments and labour unions, maintaining stability is the priority. State-owned companies have dual responsibilities: an economic one to increase the value of state-owned assets; and a social one to uphold public policies. These contrast with the foreign parties’ pursuit of revenue.

Foreign investors also often find the supervision of state-owned asset authorities difficult to adapt to, especially when communicating with various departments. With local projects that lead to major reforms, regulators and other stakeholders have particular requirements regarding staff communication, as well as follow-up arrangements for those refusing to sign up.

RECOMMENDATIONS

For Sino-foreign JVs facing mass staff adjustments after merger or acquisition, the author, having assisted many such companies, has the following advice.

Make good use of the party and administrative cadres, and maintain procedural compliance. In major incidents, satisfying the procedural requirements is as important to achieving project objectives as solving staffing issues. The Communist Party committee, administration, labour union and Youth League committee represent institutional strengths to draw on, ensuring proper procedures are followed.

Communicate with employees in advance with an honest, sincere and helpful mindset. Sometimes, management at SOEs are too concerned about mass incidents to effectively communicate with the employees, which may aggravate negotiations. The introduction of an objective third-party professional agency, able to help the company and staff from a neutral position, may be the needed missing piece. Such an agency can respectfully enquire about employees’ opinions and concerns, while helping them understand company decisions and legal requirements, and guiding them to defend their rights lawfully.

In mass actions, stand your ground. Based on the author’s experience, due to the uniqueness of foreign-invested SOEs, mass incidents during company-wide staffing shifts are nigh on inevitable. For both Chinese and foreign parties, it is important not to compromise at every demand. One should remain confident with the reform plans, properly communicate with staff and stand firm. This, of course, hinges on the plans being professionally designed and aptly implemented.

Seek mutual benefit with other stakeholders. The best way to resolve any conflict is to seek common ground for mutual benefit. Both sides must learn to view matters from a higher vantage point, as a self-serving approach leads to loss.

In the above-mentioned case of Company X, most executives believed that to complete the placement of 800 personnel in one go was an impossible mission. They believed it more prudent to slow down production and lower wages over time, during which employees would gradually acquiesce to the agreement under economic pressure.

However, after a month’s preparation, by balancing the concerns of all stakeholders and formulating a procedurally sound and comprehensive plan, it was possible to convince 95% of employees to accept the new arrangement within 10 days. This was described by local government officials as an “unprecedented feat”.


Xing Guang is a partner at Labours. He can be contacted on +136 5126 1583 or by email at xingguang@laibei.com

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