For several hours on February 25, a mob of angry workers surrounded executives in their offices at Panasonic Electronic Devices (Beijing), a Panasonic Group subsidiary in China. A manufacturer of speakers and parts for audio equipment, the Japanese-owned company had just announced plans to reduce the number of local employees.

Japanese corporations in China have weathered serious disruptions twice in the past decade alone-first, the anti-Japanese demonstrations of 2005, and then growing labor disputes in 2008. Now, the global economic downturn is forcing manufacturers to slow production and reduce payrolls.

Worker protests over contract provisions such as work conditions and severance pay are nothing new in China. Confrontations with company executives and labor ministry officials are common. But, until recently, reports of violence were rare.

At the Panasonic company, executives had announced that they would be calling for voluntary redundancies as a means of reducing the payroll. But a group of employees expressed dissatisfaction with the way the severance pay was to be calculated, and took their grievances directly to the management. When the media took up the story, it sparked further protest.

Labor issues have led to violence in the southern province of Guangdong as well. A Japanese-owned manufacturer of plastic products based in the city of Shenzhen was reportedly trying to fire a number of employees, including the plant manager, on suspicion of corruption. On March 3, top executives of both the parent company and the local subsidiary suffered injuries when they were attacked by a group of employees that included the plant manager.

The main cause of such incidents is the rapidly worsening employment prospects for workers in China. Layoffs are sweeping through Japanese-owned corporations in China as parent companies are hit by the economic downturn and operating rates in Chinese production sites fall.

Employees are becoming desperate now that the job market has become tighter. Even a year ago, they would have stood a good chance of finding another job quite quickly, but with fewer job openings, they are taking a tougher stance in negotiations with their current employers.

Demand surges for labor relations expertise

Corporations trying to reduce payrolls are also feeling pressure from a government whose main concern is to stem rising unemployment among migrant laborers and young workers entering the workforce. From this year, companies wishing to lay off twenty or more workers are required to notify their labor union and seek government approval of their personnel reduction plan.

In Japan, corporations can adjust the size of their workforce by hiring and firing temporary workers as necessary. However, Japanese manufacturers in China have relatively few such workers, and most companies currently have no plans to move production elsewhere. (Uniden, which is transferring its operations to Vietnam, is among the few that are planning to leave China.) The majority of companies have no alternative but to cut costs through payroll reductions in the face of falling global demand.

Expert help is available. This year has seen a plethora of seminars on “restructuring the workforce,” which offer an overview of labor regulations, information on administrative procedures, and most importantly, advice on dealing with China’s labor bureaus.

The seminars, which are held by the Japan External Trade Organization (JETRO) as well as private consulting firms, are in great demand. Japanese executives realize that while they are free to propose and even execute whatever layoff plans they deem necessary from a business standpoint, it would be inviting trouble to actually dismiss workers without at least tacit approval from local labor officials.

Corporations realize that when the time comes to actually dismiss workers, the approval of the labor bureau may well be their most effective means of deflecting the anger of employees and preventing the kind of disorder that could result in violence.

One labor consultant acknowledged that “regional labor bureaus are concerned about labor unrest even more than rising unemployment. If a significant incident that occurs in their jurisdiction becomes widely known, their bonuses will be cut.”

Corporations must choose their strategies carefully if they are to succeed in obtaining the approval of reluctant local officials. For example, a company seeking to dismiss half of its workers might first approach the authorities and say that it may have to shut down its factory or local operations altogether. Subsequent discussions then lead to a “compromise” in which they continue at fifty percent capacity.

Steps can also be taken to reduce the risk that anger over layoffs will boil over into major confrontations. Rather than dismiss large numbers of workers at one time, companies can reduce their workforce gradually and remove potential troublemakers a few at a time. The labor seminars dispense detailed advice, and even take clients step by step through plans for holding meetings with employees-showing how such a gathering should proceed so that top company officials do not end up surrounded by an angry mob.

Caught between directives from headquarters and conditions unique to China

Japanese management practices, long considered the ideal foundation for long-term growth, may actually hamper Japanese corporations in today’s China. Whether they seek to ameliorate the hardships of unemployment or seek simply to avoid trouble, some managers are bending over backwards to offer generous severance terms. However, many labor experts in China are cautioning that such practices may be downright dangerous.

Ma Jun, a lawyer for KLO Investment Consulting (Shanghai) who has handled labor relations for numerous Japanese corporations in China, warns that “when companies offer terms more generous than labor laws require, those terms become the subject of negotiations, prolonging the settlement process.”

Calling for voluntary redundancies can also lead to difficulties. The Panasonic subsidiary in Beijing was caught off guard when its employees reacted with hostility. Voluntary redundancy, while common in Japan and elsewhere, is not widely known in China. The common practice in China is for the company to cancel a worker’s employment contract and offer compensation according to standards mandated by law.

Workers in China tend to be open about their pay and other conditions of employment, exchanging such information with co-workers and even disclosing these details on the Internet. When a company offers options not required under labor laws, it runs the risk of creating demands from other employee groups or at other sites of group operations in China. This can lead to prolonged negotiations which cost the firm both time and money.

Many of the major corporations doing business in China are seeking staff reductions and other cost-cutting measures on a global scale. Managers at operations around the world may receive the same instructions from headquarters regarding target levels and timelines, but conditions in China pose particular challenges for local executives.

Japanese firms in China are particularly concerned that haggling over labor issues could damage the company’s brand or corporate image. Major Chinese corporations, which are receiving government guarantees and other incentives to retain employees, take every opportunity to publicize their resolve not to dismiss workers or reduce wages. Against this chorus of support for workers, dismissals by foreign-owned corporations are met with public censure, and any news of conflict between disgruntled workers and foreign management receives immediate and widespread coverage in the media.

Although the Chinese economy has slowed somewhat in comparison with its period of super-high growth, its market still presents more opportunities for growth than those of mature industrialized countries. Faced with the need to cut costs, executives on the front line of business in China are walking an increasingly dangerous tightrope.

(Shinichiro Kumano, Hong Kong Bureau Correspondent)

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