Clocking in

Kronos has made workplace timekeeping an electronic art. From introducing the electronic punch card back in 1979 to providing human resources and payroll support to multinationals, Kronos provides companies with solutions to keep labor costs down while raising efficiency – a crucial balance amid growing demands for higher wages. David Mitchell, Kronos’ general manager in China, spoke to China Economic Review about some of the challenges facing employers.

Q: How would you characterize the overall labor picture in China?

A: A huge thing that is happening right now is the Lewis transformation factor: When labor surplus disappears you get a rapid appreciation of labor costs and rapid inflation. What has happened recently in China is that it has hit this Lewis turning point where really excess labor has vanished. The IMF said back in 2007 there were 125 million available rural workers; last year there were only 25 million available, and this year they’re saying in every single coastal region these figures are down to zero. We are now fully into labor shortage in Fujian, the Pearl River Delta region, and along the eastern seaboard. There is no more surplus labor.

Q: Are there problems unique to the Chinese labor market?

A: The Global Worker Loyalty Index asked employees in the West and in China how loyal they were to their employer. Among the 35 and younger demographic the level of disloyalty is about 2.5 times higher than in Europe or in the US. They’re heading out the door and you see this 30% turnover rate. This huge turnover and the recent rise in labor costs mean a lot of employers are beginning to feel the pain.

Q: How much of a direct rise in labor costs do you see?

A: Where you’ve seen a 10% appreciation of labor over the past 10 years, there’s been an almost 20% jump this year. Morgan Stanley expects wages to more than double over the next five years, from 15% of GDP to 30% of GDP. So you are going to get this five-year period of massive wage acceleration, and this will put a huge squeeze on all employers in China, but especially on the manufac uring side. And this is more noticeable when you compare China to say, India, which still has a massive, massive labor surplus. India is years away from this Lewis turning point we’re going through here in China.

Q: What industries are most vulnerable to rising labor costs and wasted man-hours?

A: In terms of wasted man-hours, it really seems like all industries are affected. Chinese per-employee productivity compared to a UK, US or Australian employee is about 25%. In the past the idea was that if they’re inefficient then it’s fine and the company would just hire five more workers to do the job. I was in a factory in Wuhan where they still have excess labor and the owners were saying, "I don’t care if I have to hire 10 people to track all my time cards when they only cost me US$1.25 an hour, so it’s not a problem." In the coastal areas, all of manufacturing is being whacked by the rise in labor costs.

Q: How do domestic companies compare with Western enterprises in terms of labor costs?

A: For most of China, manufacturing labor costs lie in the 5-8% range, which is still fairly small. But two things are happening. It’s 5-8% today, but it is expected to be about 15% in the next couple of years. But you’re also seeing material costs go up by 15-20% a year, and logistics costs in China as a portion of GDP are about two times higher than the US or Europe. Companies that work on 3-5% profit margins are really being squeezed. With foreign companies the normal assumption is that at least they will be more efficient. At a value-added per-worker basis, this is true, but a foreign enterprise’s costs are overall significantly higher. They are paying people a bit more and if you are looking at the ratio of the value add per worker over the cost per worker, the worst ratios are in the wholly owned foreign enterprises compared to state-owned enterprises. Their net efficiency is not necessarily better than the Chinese.

Q: If the squeeze is on, what happens next?

A: Some employers say that their only other choice is to move abroad – 20% of German manufacturers say they’ll quit China over the next year or two. Of course you can move inland but you’re still going to have to either make your labor force work harder, or improve efficiency. Overtime hours are already through the roof: 80% of plants are working their employees over 20 hours overtime a week – more than four or five hours a day. You can’t hire more people these days so you have to keep profit up by working harder.

Q: How much of an issue is overtime?

A: Most industrial workers look to work 10-15 hours overtime a week. There seems to be an intersection of about four hours a day and employees are happy with this. They take home a decent salary and the employer is happy as well. But the interesting finding of a lot of recent surveys is that at least 50% of companies actually lose money when they work overtime simply because productivity goes down. So you hit that four-hour-a-day overtime and then productivity and efficiency falls. Above four hours overtime, your level of impairment by Thursday or Friday is similar to a blood alcohol level of .08. A lot of manufacturers here push their workers beyond the bounds of reason.

Q: So, what is Kronos’s approach to improving workplace efficiency?

A: We’ve been in China since 2006 with about 50 customers and 150,000 active users, all based around what we call "workforce management." It’s based on how to measures people’s time correctly so that you are paying them the right amount, not just making sure they’re working from 8 a.m. to 5 p.m. It’s what are they doing every minute from 8 a.m. to 5 p.m. that’s important. We take that working day and break it down into increments – truly productive time compared to non-productive time. Most Chinese manufacturers do no more than 60% productive time.

Q: How do companies apply this in practice?

A: Employees at General Electric (GE.NYSE), for example, work a lot of overtime here, but the company changed its reward system from how many hours you work to how efficient you are. If you make 100 widgets in 40 hours instead of 70, you’ll make an equal amount of money. It’s based on efficiency through the number of work hours. As more foreigners adopt this kind of approach, the Chinese will pay attention and catch up. They just haven’t had the exposure yet. Their experience as managers over the last 20 years has been to hire as many people as you can and pay them as little as you can.