As
you may have heard, Adidas recently announced the closure of its last
remaining directly-owned factory in China. They’re going elsewhere in
search of lower labor costs. However, that decision did not go over well
with their local suppliers, who do not seem willing to accept it
without putting up a fight.
Chinese
suppliers are calling on the clothes manufacturer Adidas AG to
compensate them for the consequences of its decision to close the last
factory it wholly owns on the mainland, saying that they might otherwise
turn to the courts for assistance.
Adidas
announced its plan to close the factory last week, saying it will shut
down an apparel operation in Suzhou, Jiangsu province, in an attempt to
become more efficient by restructuring its business in China and the
world. It also said it will terminate its contracts with five suppliers
in the country.
Those
companies have been working with Adidas for several years. In 2011,
they delivered about 8 million garment pieces to Adidas, said Sun
Yingli, general manager of Shanghai Manlang Textile Co Ltd, one of the
suppliers.
Sun
said Adidas informed her and her colleagues in April that it wanted to
end the contract it has with Shanghai Manlang Textile. “The original
document said Adidas can terminate it whenever they want,” Sun said.
“They just have to tell us about that decision six months in
advance.” Sun said she has consulted a lawyer and said the contract
appears to be a one-sided agreement.
This
lawsuit threat looks like a weak negotiation tactic. As I’ve said
before, this strategy doesn’t work all that well if you don’t have a
real case to back up the threat.
In
this instance, going to court would be a joke (unless there are other
facts here we don’t know about). A six-month termination clause is quite
reasonable and is very common. It’s a valid contract term and should be
upheld by a court or arbitration body. Moreover, it sounds as though
Adidas exercised the notice provision correctly.
Sorry, suppliers.
The
Adidas dispute is simple and limited in scope, but what will happen
when more factories and entire sectors start closing down in the years
to come? The big picture here is worth thinking about.
Several
things are going on in China at the moment with manufacturing. The ones
closing up shop are doing so because costs are rising (a long-term
trend), and demand, particularly in the export sector, is falling
(hopefully only a short-term trend).
The
acceleration of plant closures in some sectors, like textiles, will
mean lots of unemployed folks. The government will have to deal with the
resulting disputes between labor and management, involving things like
back pay, social insurance payments, etc.
But
I can’t help thinking about entrenched industries and political power.
Maybe I’m simply looking at this like a Westerner, but when you have an
industrial sector in decline that has sufficient juice with a
government, what usually happens? Well, where I’m from, it ends in
recriminations and protectionism.
We’re
already on heightened alert for increased levels of protectionism now
that China is dealing with sagging exports. Stay tuned for more trade
disputes over the next couple years.
This is mostly foreseeable and
expected.
The
decline in labor-intensive industries like textiles is also expected,
and since China wishes to “move up the value chain” and leave some of
this low-end work to other developing countries, it will probably be
quite all right to see those companies depart. In the short-run, of
course, it will mean job losses and pain, and perhaps some political
turmoil for local officials.
However,
if China continues to experience wage increases and sees more
manufacturing enterprises flee the country, when will the protectionism
kick in? These factories, these industries, represent important
constituencies for local and provincial governments, who will no doubt
lobby on their behalf. What will that dynamic look like, and how will
the Central Government balance long-term national economic strategy
against short-term dislocations and pressure from locally powerful rent
seekers? This will be fascinating to watch.
Additionally,
will we see some sort of backlash against those nations getting all
those new jobs? As the U.S. lost huge numbers of manufacturing jobs, it
was easy to single out China, a gigantic, identifiable scapegoat. For
China, there won’t be such an obvious target. Vietnam? Indonesia?
Bangladesh? Not the same dynamic at all.
Those
Adidas suppliers are nothing to worry about, but if their ilk band
together and push for government assistance, things might get
interesting.
Source: http://english.ctei.gov.cn/innews/domestic/201208/t20120807_1368619.html
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