When production capacity is not saturated and profit margins are compressed, more and more manufacturing companies are starting to find ways to “reduce costs and increase efficiency” in terms of employment, including but not limited to reducing wages or adopting flexible employment methods.
Author: Tian Jin Du Tao
Guide
I Under the superposition of multiple pressures, Zhang Liang’s company suffered losses in the second half of this year. He could only use the method of reducing workers’ working hours to force workers to resign voluntarily, and finally achieve the result of reducing production capacity.
II Some companies use “shared gig workers” to reduce costs, while others are looking at college students.
III Affected by the volatility of export orders, the increase in labor costs for enterprises, and the improvement of workers’ rights awareness, the trend of gig work in the manufacturing industry has expanded in the past two years.
In the second half of this year, Zhang Liang’s tire company had people leaving almost every day. The departing employees were mainly young people, but middle-aged employees were also watching.
The reason for the departure is: the wages of the company’s front-line employees have been adjusted to piece-rate payment and all overtime has been cut.
Zhang Liang said: “Young workers mainly rely on overtime to increase their income. Now they are not allowed to work overtime, so the young people leave.”
Although he knew the result, Zhang Liang still had to make changes. In the second half of this year, the price of rubber soared, but the downstream prices were difficult to rise, and the company’s profit margin was eroded. The more tires produced, the more losses the company would suffer.
The company’s management had calculated the cost. If production was stopped directly, the company would suffer greater losses. The best way was to reduce production, maintain cash flow, and wait for the market to recover. At present, the company’s tire shipments have decreased from about 120,000 units/month in the same period last year to about 80,000 units/month.
But this also means that not so many employees are needed.
When communicating with local peers, Zhang Liang learned that in the face of market fluctuations, many manufacturing companies will adjust their employment strategies: for example, some factories will use a large number of vocational school interns to fill the demand for labor, while another small manufacturing company will employ lower-cost middle-aged and elderly employees.
When production capacity is not saturated and profit margins are compressed, more and more manufacturing companies are starting to find ways to “reduce costs and increase efficiency” in terms of employment, including but not limited to reducing wages or adopting flexible employment methods.
Zhang Dandan, Vice Dean of the National Development Institute of Peking University, found in her recent research on industrial enterprises in Kunshan, Jiangsu, that affected by the decline in order demand, there was no phenomenon of a small increase in workers’ wages in the peak season as in the past this year, and the wages of many factory workers were even lower than the same period three years ago.
In the previous research, Zhang Dandan also found that affected by the volatility of export orders, the increase in labor costs for enterprises, and the improvement of workers’ rights awareness, the trend of “gig work in the manufacturing industry” has emerged on a large scale in the past two years.
Although the trend of “gig work in the manufacturing industry” reduces the labor costs of factories, this type of labor outsourcing, which is widely adopted, also further weakens the protection capabilities of workers.
Zhang Liang said: “If the market does not improve for a long time, the factory may collapse, and the biggest impact will definitely be the employees of the factory. Employees are actually the weakest link in the manufacturing chain, and the layers of pressure accumulated in the manufacturing industry may erupt first in the employment link.”
1 Reduce costs and increase efficiency, employees pay the bill
Zhang Liang’s company was once rated as one of the top ten outstanding private enterprises in the local area, but under the transmission of layers of pressure, the company encountered trouble this year.
Among the various costs of tire manufacturing, natural rubber accounts for more than 40%. Since the beginning of this year, the price of natural rubber has gradually increased from about 11,000 yuan/ton to about 18,000 yuan/ton, which has directly increased the overall production cost of tires by about 40%, and the company’s remaining profit margin has been completely swallowed up.
At first, he tried to seek help from local government departments for the rapid rise in raw materials, hoping to obtain corresponding subsidies or appropriately reduce the rent of the factory building, but the feedback from the local government was “this is a market behavior, and enterprises need to be prepared for and take measures to deal with the risks.”
He also tried to increase the price of tires to alleviate the pressure brought by the rise in raw material prices. But after the ex-factory price of finished products increased slightly by 3%-5% in October, it could no longer increase further. As soon as the price increased slightly, downstream dealers immediately responded that “it can’t be sold if it increases again.”
Zhang Liang said, “In the past thirty years, China’s tire manufacturing industry has had overcapacity, and the industry has been in a state of internal competition, and the production capacity has not been effectively integrated.”
Another reason that erodes corporate profits is financing difficulties. Because the company does not meet the qualification requirements for bank loans, Zhang Liang turned to a large state-owned enterprise downstream for financing in the form of supply chain finance. In the past three years, Zhang Liang’s company has obtained nearly 200 million yuan in loans from the state-owned enterprise, but at the same time, it has been forced to sign “unequal treaties”.
First, the company needs to pay high loan interest to the state-owned enterprise; second, the state-owned enterprise requires taking about 30% of Zhang Liang’s company’s net profit, and the method of calculating net profit is the tire sales price minus the manufacturing cost calculated by the state-owned enterprise for Zhang Liang’s company. In most cases, the actual manufacturing cost of Zhang Liang’s company is higher than the manufacturing cost calculated by the state-owned enterprise; third, the tires sold by the company need to be sold to the state-owned enterprise’s subordinate subsidiaries first, and then resold to the corresponding customers. The state-owned enterprise’s subsidiaries can use this to increase revenue and obtain export tax rebates.
In the past three years, the loan interest plus profit extraction, Zhang Liang has paid an additional 60 million yuan to the state-owned enterprise.
This year, Zhang Liang tried to suspend the loan cooperation with the state-owned enterprise and turned to another state-owned enterprise in the local area for help, and the annual interest rate of the loan given by this state-owned enterprise was 15%.
Zhang Liang said: “Now the two cooperation methods are like two poisons. In order to get loan funds to survive, I can only choose to drink one bottle,”
Under the superposition of multiple pressures, Zhang Liang’s company suffered losses in the second half of this year. He could only use the method of reducing workers’ working hours to force workers to resign voluntarily, and finally achieve the result of reducing production capacity.
Another small manufacturing enterprise familiar to Zhang Liang is also planning to further reduce workers’ wages by gradually replacing all the original workers with lower-paid middle-aged and elderly employees.
The direct reason for this measure is that the small manufacturing enterprise recently received a request from a large upstream customer to “reduce the supply price by 20%”. This enterprise mainly supplies cable reels for a large local private cable company. In recent years, the large private enterprise has continuously asked the small manufacturing enterprise to reduce the supply price, otherwise it will change suppliers.
2 “Chinese” solutions
Under the dual pressure of declining orders and declining profits, some enterprises “creatively” explored methods that take into account the normal operation of the enterprise and reduce labor costs.
In the past two years, Li Di and the enterprises in the same industrial park have used manufacturing gig workers more and more frequently. Usually, a ten-million-level order of the factory can be completed within two months, because the number of orders has decreased a lot this year, and after an order is completed, the workers have nothing to do, and the cost of maintaining long-term workers has become a huge pressure for the enterprise.
Due to the decrease in order demand, the number of long-term employees of the water meter manufacturing factory in the same industrial park as Li Di has decreased from more than 140 at the end of last year to 100 after the Spring Festival, and has now decreased to 40. When encountering a peak in orders, the factory will use manufacturing gig workers.
Li Di’s company’s main business is the research and development and manufacturing of power grid equipment. In the past, the company could receive sub-contracting contracts from a state-owned enterprise every year. After receiving the contract orders, the company would sub-contract the related parts production links to different downstream enterprises, and finally complete the equipment assembly, software installation and testing steps in its own factory.
In 2018, due to the decline in order stability, Li Di and other factory managers in the same park formed an idea in the QQ group: each enterprise can share the assembly line workers according to the progress of the project production. These “shared” workers usually only need to undergo a simple one-day training to work in different factories, and the positions arranged are generally auxiliary positions that will not have a fatal impact on product quality, such as assembly and receiving and sending goods.
With the increasing demand for shared employees, several labor companies that lead workers to “run around” have directly emerged locally. In this business model, manufacturing gig workers are like the “harvesters” of many years ago, led by labor companies, going to different factories in different seasons to meet the employment needs of different employers. Because the work is more saturated, the monthly salary of manufacturing gig workers is generally higher than that of long-term employees.
Li Di took a team of 20 workers as an example and calculated an account: if long-term workers are used, including social security expenses, the labor cost of a worker is about 7,000 yuan per month, and the annual labor cost of a team of 20 people is about 1.68 million yuan. But if the order volume only needs the factory to operate for half a year, using flexible employment methods, even if the labor cost of manufacturing gig workers rises to 10,000 yuan per month, the labor cost can still be reduced to 1.2 million yuan.
In the past two years, the price of sub-contracting contracts received by Li Di has been suppressed lower and lower by the upstream company, and most of the profits have been used for intermediary fees (remuneration for intermediaries who facilitate business). He said that the company’s current idea is to “hold on” and wait for the economic situation to improve. As long as the company can maintain its operation, even if the sub-contracting orders have no profit to earn, the company will try to strive for it.
In early November 2024, under the pressure of the continuous shrinking of factory orders, Li Di went to Beijing to use all his connections to find potential orders. For this reason, he was willing to take 10% of the total amount of the order contract as an intermediary fee.
Li Di said: “The fluctuation of order volume is getting bigger and bigger, and the factory can’t maintain stable production, so it is not worthwhile for manufacturing enterprises to keep full-time employees.”
Some companies use “shared gig workers” to reduce costs, while others are looking at college students.
Zhang Liang said that college graduates need to intern in enterprises for three months to one year in order to obtain their graduation certificates. For this reason, many manufacturing factories will recruit a large number of vocational school interns. Zhang Liang found that in the past two years, labor companies will arrange them to intern in multiple factories during the student internship period, so as to meet the temporary employment needs of different factories.
According to Zhang Liang’s understanding, both schools and labor companies will take a commission from the wages of the interns. Generally, the school will deduct 500 yuan to 1,000 yuan from the internship wages of each student per month, and the labor company will deduct more. The actual wages that students receive each month may be less than 2,000 yuan, while the actual payment of the factory is far more than that.
Zhang Liang said: “Every year, higher vocational colleges will continuously provide lower-priced labor to factories, but students are increasingly dissatisfied with this model.”
Dong Baohua, Vice President of the China Society of Jurisprudence, said to Economic Observer that because interns have not signed labor contracts with enterprises, they are generally not protected by the Labor Law, and enterprises can replace interns at any time without paying compensation.
3 The trend of gig work in the manufacturing industry is accelerating
On June 16, Zhang Dandan mentioned in her speech at the 186th issue of the Langrun·Gezheng of the National Development Institute of Peking University that the trend of gig work in China’s manufacturing labor market has quietly emerged in the past ten years. Affected by the volatility of export orders, the increase in labor costs for enterprises, and the improvement of workers’ rights awareness, the trend of gig work in the manufacturing industry has expanded in the past two years.
According to a large number of on-site research data, Zhang Dandan estimated that in the manufacturing clusters such as the Yangtze River Delta and the Pearl River Delta, the proportion of dispatched workers (employees dispatched by labor dispatch companies to work in the employing units) can reach one-third of the enterprise’s employment scale, and can reach two-thirds in the peak season of employment.
In June 2024, the “2024 Blue-collar Talent Development Report” released by Zhaopin also shows that under the trend of “reducing costs and increasing efficiency”, enterprises are increasingly adopting flexible employment methods such as outsourcing. The number of flexible employment positions on the Zhaopin platform continues to grow, and the number of positions in the second quarter of this year increased by 35% compared with the same period in 2019.
Du Jing, the person in charge of labor outsourcing business of a human resources company, introduced that due to the difficulties in recruiting personnel in the manufacturing industry, and the impact of the large fluctuations in order volume, which makes it difficult for enterprises to hire long-term employees on a large scale, the labor outsourcing field has developed into a huge red sea market. The labor outsourcing model can quickly recruit hundreds of workers for manufacturing enterprises in a short period of time. Nowadays, whether it is large state-owned enterprises or small and medium-sized private companies, more and more manufacturing enterprises are starting to adopt the form of labor outsourcing to recruit workers.
Du Jing said that an important reason why a large number of manufacturing enterprises choose labor outsourcing is that they want to outsource non-core, auxiliary, seasonal, and irregular production links or production lines, so that enterprises can concentrate their main energy, manpower and financial resources on core businesses or high-value-added businesses, so as to maximize the operating efficiency of the enterprise.
Du Jing said: “Long-term employees pay more attention to the compliance of the enterprise’s salary and benefits, and in contrast, the most concerned issue of labor outsourcing workers is how much income they can get every day, followed by social security payment and the working environment.”
Zhang Dandan pointed out that under the background of employment market changes and gig work, attention should be paid to the new challenges posed to the social security system, and the challenges that this short-term, high-mobility employment method may bring to the accumulation of individual human capital and the improvement of labor productivity.
As a “barometer” reflecting the development of the manufacturing industry, the manufacturing purchasing managers index (PMI) in October 2024 returned above the boom-bust line after five months. This usually indicates an increase in production and demand at the macro level, and the confidence of enterprises has recovered somewhat. And the workers on the manufacturing assembly line are still waiting for the recovery of micro-enterprises.
(At the request of the interviewee, Zhang Liang, Li Di, and Du Jing are pseudonyms)
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