Last month's labor strife at a shoe factory in Dongguan shocked Hong Kong owners of mainland factories, as Wong Joon San reports.

News of the strike, on April 5, at the Yue Yuen Industrial Holdings Ltd shoe factory in Dongguan, southern China, passed almost unnoticed in the beginning.

It was not long, however, before the labor dispute escalated to the point of setting off a full-scale alarm. Thousands more workers joined the walkout. Media picked up the story and soon, public attention was riveted.

At the height of the dispute, some 40,000 workers at Yue Yuen Industrial Holdings stopped work, accusing their employer of cheating them on payments to state-mandated social insurance and housing provident fund accounts. The principal demand was that the employer makes up the unpaid amounts.

The factory, which manufactures athletic footwear, athletic-style leisure footwear, and casual and outdoor footwear for Nike Inc, Adidas, and other international brands, has a market capitalization of HK$37.37 billion. After suffering a two-week work stoppage, Yue Yuen estimated the strike had resulted in direct losses of around $27 million.

Finally, the company gave in to some of the workers' core demands. The majority of its employees went back to work following mediation by the Guangdong Federation of Trade Unions, a government-backed trade organization. Production resumed.

Analysts say the Dongguan strike sent a clear warning to companies that pay their workers low wages and provide minimum welfare benefits. These are changing times. The Chinese economy is being upgraded and there the labor code is being updated to protect workers from exploitation.

Stanley Lau, chairman of the Federation of Hong Kong Industries (FHKI), in a telephone interview with China Daily, charged that "many black (market) lawyers had goaded the workers to claim the benefits and to demand compensation, (leading to the strike)".

These so-called black lawyers are active and eager to drum up business wherever they can. Since Chinese courts allow representatives to serve as advocates in court cases (but they are not allowed to charge any fee), "black market" lawyers promote their services among factory workers, while demanding that they be paid under the table.

Ching Kwan-lee, author of Against the Law, defined "black lawyers" as unlicensed advocates who provide legal representation in court for a fee.

Guangzhou toys factory consultant Kevin Gerhard, who is acquainted with some of the Yue Yuen workers, verified Lau's statement that black market lawyers persuaded Yue Yuen workers to go on strike. These strikes, inevitably, are followed by petitions to the courts.

"Of course, many lawyers are interested in the Yue Yuen case because it is regarded as a 'big' case, with social impact," said Gerhard, who has lived on the mainland for 10 years. Law firms involved in the case would receive publicity, otherwise, law firms would shy away from labor cases most of the time. They consider them money-losing propositions, he added.

In one case that went to court, more than 200 workers paid a lawyer 30,000 yuan to take their grievances before the court, Gerhard recounted, pointing out that legal representation on the mainland is expensive.

In her book, Ching Kwan-lee, stated that in 2002, there were an estimated 1,700 registered lawyers in Shenzhen plus a few hundred "black market" legal advocates.

Lau described the prevailing labor climate as aftershocks from the 2008 global economic recession. He said the financial crisis left factory owners hard pressed for cash.

Many couldn't maintain their legal obligation to pay state-mandated social insurance premiums, nor were they able to contribute to the housing provident fund on behalf of their workers. A large number of the owners came up with a shortcut, presenting workers with an option of cash on the table, but paying less than the law required for social insurance and housing coverage.

Young workers, who joined the labor force after the 2008 economic crisis, thought this was okay, said Lau. They preferred the "instant benefits" and didn't care if contributions to their old age security were cut back.

Older workers were not so happy. Employees who had worked all their lives and contributed to social security were counting on having some measure of security after retirement and they were unwilling to accept the employers' cost-cutting.

Older workers responded when urged by black market lawyers to demand their rights. These older workers, many illiterate, were the leaders of the call to go on strike.

Yue Yuen has been established for more than 20 years. Those older workers who had been with the factory for that duration were most concerned about their retirement savings, Lau explained.

Lau noted that critical changes in the labor climate always appear in the Pearl River Delta (PRD) first. The PRD was China's first industrial zone and is in the vanguard of the labor revolution. "Take the case of the Walmart branch that restructured and promoted some of its workers to higher positions, without increasing their compensation. In the end, Walmart had to close the operation. If workers were paid properly, they would have received significant contributions to their social security. "Since they ended up losing their income because of the closure, many lost what was due to them," Lau said.

Lau warned Hong Kong owners of mainland factories to be vigilant about their labor practices: to adhere to the Chinese minimum wage law. (See side bar). Employers also were urged to ensure that their workers receive all the benefits required under Chinese law.

Workers at the Yue Yuen factory were persuaded by black-market lawyers that they had been cheated by their employer on mandatory insurance and housing contributions, Lau charged.

"There will be factory strikes from time to time (over benefits and compensation), so owners of factories must be careful and watch out for such issues," Lau warned, adding that the owners should also consider automating their manufacturing processes to offset rising labor costs. Alternatively, he suggested that owners consider relocating their factories to other locales where land costs less to buy and the cheap labor advantage still prevails.

"This is not a new trend. It actually started three or four years ago when factory owners in Guangzhou started facing sharply rising labor and operating costs," Lau contended. "I believe that in the next three to five years, the existing industries on the mainland will shrink by at least 30 percent."

Lau explained that the rising operating costs and labor costs, including changes in regulations, make it difficult for factory owners to continue traditional manufacturing operations in southern China.

About 40 percent of the manufacturing businesses already have been affected by worker strikes over benefits and compensation. Some businesses have relocated to neighboring countries already. Others have replaced manual labor with automation, he elaborated. Still others have moved operations to the interior and western part of China to take advantage of cheaper labor and land.

With the cost of financing increasing and arrangements becoming more complex, some older factory owners wound up their operations.

Lau summarized, saying that traditional manufacturing operations have declined. The Hong Kong government and its agencies have advised companies to shift focus by producing high-value brands of their own design rather than continuing to manufacture products under contract to international brands.

Commenting on the Yue Yuen workers strike, Yau Tze-ken, a lecturer at the Faculty of Social Sciences, the University of Hong Kong, said: "The practice of violating social insurance and other regulations is widespread on the mainland."

Contact the writer at joonsan@chinadailyhk.com