markets, firms and workers in chinese state-owned enterprises

58 HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 9 NO 4

The Chinese economy has undergone substantial reform over the past two decades. In

part this has been due to the internationalisation of Chinese trade and considerable

foreign investment. It has also been due to the need to tackle the growing

inefficiency and debt of the state-owned enterprises (SOEs) that has arisen under the

market-oriented economic reform. In the past, these enterprises were set production targets

and were assigned staff directly by government agencies. This often resulted in a mismatch

of skills with enterprise needs and, combined with the long-term security of employment,

meant enterprises could not use their workforce as a strategic or competitive advantage

(Child, 1994; Lu and Perry, 1997; Chan, 1995, 1998; Warner, 1999).

SOEs are now required to become `modern enterprises’ in terms of economic

performance and employment relations (Warner, 1997a, 1997b). The economic reform has

had a signi® cant impact on the employment relations system in China. The traditional

system of life-time employment, the so-called `iron rice-bowl’ , has been severely

diminished and an individual employment contract system has been implemented in most

SOEs since 1986 (Zhu and Campbell, 1996). In addition, over the last 20 years more than 20

pieces of legislation affecting employment relations have been introduced. Further

enterprise reform focusing on economic structures and the establishment of a modern

enterprise system is now advocated by the government (Lim et al, 1996). The aim is to

enable the SOEs to be more competitive in domestic and global markets.

One outcome of the reform process has been the emergence of a variety of ownership

forms (Naughton, 1995). The more pro® table SOEs have become joint stock companies,

while others have been taken over by foreign interests. Government departments,

particularly those involved in research, have not been immune from this process. Research

institutes have commenced production while others are more advanced and have sought

corporate status. Running parallel to these developments has been the massive growth in

village or township enterprises and, more lately, the amalgamation or merging of these

enterprises to form conglomerates that operate in a variety of ® elds.

The common theme in all these enterprises is the need to make a pro® t and provide a

satisfactory return to their owners. This is now irrespective of whether the owners are the

state, village, private or institutional shareholders, or, increasingly, foreign companies. This

has led to changes in the way the enterprise approaches HRM and also changes in the way

the state, albeit at a slower rate, views its responsibilities to labour. In short, labour is

increasingly being viewed as human resources that have strategic and ® nancial implications.

In the context of this change, this article seeks to analyse the way in which labour

management is changing in SOEs and to record the ways in which these enterprises have

developed their particular HR system. This article can also be seen as part of the wider

issue of how the globalisation process has had an impact on labour. The research shows the

pattern of development of HRM has been uneven and the precise con® guration of HR

practices has been in¯ uenced by a variety of factors including past practices, the rapid

Markets, ® rms and workers in Chinese state-owned enterprises

John Benson, Department of Management, University of Melbourne

Ying Zhu, Department of Asian and International Studies, Victoria University of Technology

economic change, the diversity of ownership and the nature of management. As part of the

analysis, the article reports some of the ways in which employment security has been

achieved through product diversi® cation and the seeking of new markets.

Labour market reform

By the late 1990s, the regulation and structure of Chinese industry had changed dramatically

compared to that of the late `70s and `80s. One clear example of this change has been the

shift to a more decentralised and flexible labour market (Naughton, 1995). The former

employment system known as the three irons’, namely the iron rice-bowl’, iron wages’ and

the iron chair’ has been replaced by labour contracts, a ` oating’ wage and a performance-

based management contract system (Yuan, 1990).

At the macro-economic level, new regulations and institutions have been gradually

introduced over the past two decades. Four key reforms were instituted in 1986 covering

labour contracts, recruitment, dismissals and social insurance (Zhu and Campbell, 1996).

These temporary regulations’ have now been transformed to permanent legislation. In the

`90s, both the Trade Union Law (1992) and the Labour Law (1995) were introduced, although

again they formalised practices that existed over the past decade (Zhu and Campbell, 1996:

42). These developments were encouraged and assisted by the International Labour

Organisation (ILO) in an attempt to implement ILO standards (Unger and Chan, 1995).

The Trade Union Law speci® es the organisational structure of trade unions and de® nes

their rights and obligations. This law is premised on the need for management of SOEs and

trade union of® cials to work together for the common good of the state. It does, however,

recognise that trade unions could come into conflict with management in negotiating

collective agreements, protecting workers’ legal rights, processing grievances and labour

disputes, and the monitoring of health and safety issues. The Labour Law applies to all

enterprises irrespective of their structure or ownership. The major aim is to protect the rights

of employees while promoting economic development and social progress. The Act

encourages the formation and participation in trade unions, widens the system of labour

contracts, and lists a variety of statutory wage and working conditions.

From the early `90s the focus of SOEs reform policies changed from management and

labour systems to ownership structure. For example, in the `80s the main reforms to SOEs

included liberalising market relations, increasing labour ¯ exibility, decentralising economic

decision-making powers to the enterprise level, and replacing government direction with

enterprise autonomy. The focus on ownership structure has now led to a number of SOEs

becoming joint stock companies, while others have been taken over by foreign capital and

domestic private investors. Government policy on the ownership of SOEs has become much

clearer since the 15th National Congress held in 1998. Firms with combined sales and assets

in excess of 500 million renminbi will continue to be supported by the state. State policy

towards SOEs can thus be summarised as `holding onto the big and letting go of the small’

(Wilnelm, 1999: 11). This also means that bankrupt SOEs will now be closed.

These management and ownership reforms have had a substantial impact on

employment in SOEs. At the end of 1998, over 17 million SOE workers had been laid off (xia

gang), representing more than one in ® ve employees. Urban unemployment had, by this

time, risen to eight per cent (Wilnelm, 1999: 12). Taking into account both urban and rural

areas, the unemployment rate has been estimated at between 21 and 23 per cent (Bif¯ , 1999:

5). These ® gures are substantially higher than the of® cial unemployment rate of around four

per cent (China Daily, 1998). This level of unemployment places tremendous pressure on the

government, trade unions and industries (both public and private sectors) to create new

John Benson, University of Melbourne and Ying Zhu, Victoria University of Technology

59HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 9 NO 4

jobs, to train and re-skill the workers who had been laid off, and to develop a fully

functional labour market and social insurance system.

In response to economic reforms and market pressure, individual SOEs have become more

¯ exible and market-oriented in order to survive. In the `80s many SOEs adopted the Entrusted

Management and Property Management Responsibility System that enabled enterprise managers to

take responsibility and be rewarded if the production and pro® t objectives were met (Zhu,

1995: 40). By the 90s many SOEs had become joint stock enterprises (controlled by different

SOEs or groups), joint ventures with private investors and, public companies on the stock

market. In the last case, the majority of shares are normally held by the SOE, although

individuals, including the enterprise’s own employees, can hold shares.

A new managerial system named the Management Responsibility System under the

Leadership of Board of Directors has also been implemented. Under this system enterprise

management has equal obligations to investors, employees and customers. Nevertheless, to

satisfy the investors’ pro® tability objectives and the customers’ desire for quality products at

reasonable prices, management will need to reorganise the production system and

workforce in order to reduce costs and improve productivity. This will inevitably involve

recruiting more highly skilled employees, the introduction of more intensive and continuous

training programmes, and the involvement of employees in production and quality issues.

To achieve these objectives, however, will require some early retirements and lay-offs, the

introduction of new payment systems, and a reconsideration of work organisation. Clearly,

the success of the macro economic reforms rests on changes to the management of the

enterprises’ human resources.

Notwithstanding these developments, Child (1994) has contended that the concept of HR is

absent in Chinese enterprises. There is a considerable continuity of the `iron rice bowl’

practices and personnel management in a large number of SOEs (Goodall and Warner, 1997).

This, according to Lu and Bjorkman (1997), also applies to many joint ventures. Even among

the most advanced hi-tech enterprises argued Warner (1999), western-style HRM has not yet

replaced existing personnel management due to organisational inertia and built-in cultural

norms. Nevertheless, Warner (1997a and 1999) suggested that a new model of `HRM with

Chinese characteristics has emerged’. This research is aimed at testing these propositions.

CASE STUDY

The research questions under consideration call for detailed case studies to be undertaken in

a variety of SOEs. It was decided to locate the research in the Shanghai region of China.

Shanghai is at the forefront of the Chinese economic reforms, primarily due to the

considerable freedom granted to the Shanghai business community by Beijing and the high

rate of foreign investment. As at 1995 foreign investment in Shanghai was more than 25 per

cent of the total foreign investment in China (The Economist, 1997: 30). Thus, the changes

taking place in Shanghai can give a clear indication of the future pattern of enterprise

structure and reform of HRM in China.

In March 1997 the Shanghai Institute for Structural Reform and Discussions arranged for

six enterprises to be visited. Enterprises were chosen to ensure a representative mix in terms of

size, history and industry. Three of those enterprises were SOEs. In July 1998 these three were

revisited along with three additional SOEs. The new SOEs were selected to ensure a

representative sample of SOEs in terms of restructuring and reform. Overall, products ranged

from heavy machinery, food and motors to a range of electronic, electrical appliances, and

communication equipment as well as construction, real estate and investment.

Markets, ® rms and workers: the transformation of HRM in Chinese state-owned enterprises


All case study enterprises commenced operations as collectively owned enterprises;

five SOEs and one township enterprise (ComGroup). In this latter case the initial

investment was from the local county governments. Two enterprises are now joint stock

companies (PortCo and Comgroup) and another (ElectroGroup) had a number of joint

stock companies and joint ventures in the group. For PortCo and ElectroGroup the state

maintains a majority shareholding. Only one company (PortCo) was established prior to

1949. Four enterprises were profitable. PortCo and ResearchCo were unable to provide

® nancial information Four of the enterprises were facing substantial product competition

in the domestic marketplace. In the case of PortCo competion was lower due to its near

monopoly position while ConEnt was a government `agency’ charged with developing

infrastructure in the Shanghai region.

The level of government involvement in each enterprise varied considerably. Two had

little government interference due to the low level of annual sales (VacCo) or the

township enterprise origins (ComGroup). ResearchCo also experienced a lower level of

government interference that was due primarily to the government cutting back on

research funding and allowing them to diversify their activities. Each enterprise was

thus faced with a different set of pressures and adopted different strategies in response

to such pressures. The six Shanghai SOEs in this study demonstrate a range of strategies

and initiatives used to cope with the challenges of the market-oriented reforms and the

need to transform their HRM.

At each enterprise, meetings were held with a senior manager, the personnel manager

and the most senior union official, and company documents were inspected. Three

enterprises were visited in March 1997 (PortCo, ComGroup and VacCo) and all six visited in

July 1998. The pro® le of the case study companies is presented in Table 1.

TABLE 1 Enterprise pro® le

Enterprise

PortCo ComGroup VacCo ConEnt ElectroGroup ResearchCo

Typea

SOE JSCb

JSCc

SOE SOE SOE SOE

Age (years) 114d

29 38 12 6e

22

Size (employees) 3,000 3,200 590 150 60,000 500

Workplaces 4 6 2 1 16 1

Sales (RMB) 700 ml 1.3 bl 121 ml 10.6 blf

10 bl n/a

Pro® t (RMB) n/a 74 ml 10.5 ml 600 ml 2.4 bl n/a

Product

competition Medium High High Low High High

Government

involvement High Low Low High High Medium

Notes: a. SOE: state-owned enterprise; JSC: joint-stock company; TE: township enterprise.

b. SOE up to 1996, thereafter a JSC.

c. TE up to 1992, thereafter a JSC.

d. Established in 1885 under the Qing dynasty.

e. Prior to corporatisation was a government department.

f. Total amount invested by enterprise.



Impact of reform

Prior to analysing the pattern of HRM it is necessary to examine how the case study

enterprises have responded to the market-oriented economic reform. The details of this

reform were outlined in the labour market reform section. In short, SOEs have lost a

considerable amount of government support and sponsorship. New rules and regulations

have been introduced that provide the enterprise with more ¯ exibility in managing day-to-

day affairs. In addition, centralised staf® ng and production quotas are now less relevant to

the vast majority of SOEs (or former SOEs). SOEs are now required to restructure their

coporate governance, to reduce the amount of surplus staff and to diversify their operations

so as to meet the demands of shareholders and ® nancial markets. This has led to more

¯ exible forms of works organisation. It is these issues that will be explored in this section.

At the time of the research four of the enterprises remained state-owned, while the

remaining two have become joint stock companies. In both cases they are listed on the

Shanghai stock market. The four remaining SOEs will be faced with substantial change in

the next few years as they restructure to become joint stock companies or merge with other

enterprises. It is unlikely that they will be allowed to retain their current status. Within this

general framework, however, considerable variation to ownership structure exists.

PortCo and ComGroup are joint stock companies with considerable diversity in structure

and operations. At the time of the research, however, majority shareholding still resided

with the state. PortCo was traditionally structured with a number of subsidiary enterprises

and overall central control. Many of these subsidiary enterprises have now been formed into

separate companies. While these companies provide services to PortCo they have autonomy

in day-to-day management and can engage in outside work. The state remains the major

shareholder (64 per cent) with the balance being divided between the general public (32.4

per cent) and employees of the company (3.6 per cent).

ComGroup, in contrast, began life as a number of smaller township enterprises that

subsequently merged and formed a joint stock company. Township enterprises are an

emerging industrial force and have played a major role in absorbing agricultural labour in

rural areas. Shares in this company are, predominantly owned by the six town councils,

although individuals can buy shares in the subsidiary companies. Employee share

ownership schemes are currently being discussed. In the past twelve months, ComGroup

established two subsidiary companies based on innovative ideas from employees. In these

cases, knowledge and ideas were treated as an investment and the seven workers, whose

ideas were adopted, were allocated 15 per cent of the shares in the newly formed companies.

These companies now employ 280 workers.

VacCo remains a state-owned enterprise. However, it has established a subsidiary

company that is jointly owned by VacCo and the 17 employees who invested in that

company. VacCo has been looking at possible joint venture opportunities but wanted

arrangements that incorporated a Chinese perspective. Based on the success of the

subsidiary company, management now feel that the best way to proceed is for employees to

provide the required capital and ultimately take control of ownership. ConEnt is a

government body that is involved in raising funds and co-ordinating and developing

infrastructure in Shanghai. While state-sponsored, ConEnt is expected to be pro® table and is

structured along corporate lines. Management stated that ConEnt has the capacity to

become a joint stock company but, it would be unlikely that private enterprise would want

to maintain this role.



ElectroGroup has the most complicated ownership structure of all case study companies. It

has some 16 enterprises and remains under the control and ownership of the state. Of these

enterprises 11 are wholly-owned, while three are joint stock companies, one a foreign joint

venture and one a state collective. In addition, ElectroGroup has invested directly, or through

its subsidiaries, in a further 293 enterprises. These enterprises include 150 sino-foreign joint

ventures, 12 research institutes and 5 training centres. Finally, ResearchCo is a government

research institute that has commenced manufacturing and is required to be pro® table. It has

a number of divisions and is expected to grow rapidly over the next 10 years.

Surplus Labour

State-owned enterprises are now required to be pro® table. Those enterprises that cannot

become pro® table are likely to be sold off, either to local or overseas interests, or declared

bankrupt and closed down. To achieve profitability, however, most SOEs will need to

substantially reduce the number of employees. While the Provision of Settlement of Surplus

Labour provides guidelines for enterprises that wish to reduce their level of surplus labour it

does little to reduce their liability. For example, an enterprise is required to ® nd or create

suitable jobs for redundant workers, retrain existing employees for any new positions, or

allow employees to take extended leave.

The introduction of a system of employment contracts for new employees in 1986 has

meant that there now exists some ¯ exibility for SOEs to use non-renewal of contracts to

achieve a reduction in their workforce. Nevertheless, at this stage, this strategy would

almost certainly result in the younger and more highly trained employee being lost to the

enterprise. The Government has also implemented a number of policies to assist surplus

workers. For example, ® nancial incentives exist for enterprises that absorb surplus workers

and surplus workers that ® nd other employment may be given a one-off payment from their

enterprise. Again, however, this places a ® nancial liability on the enterprise.

The problem of surplus labour has not had an impact on the case study enterprises

evenly. PortCo and ElectroGroup are large enterprises that have reduced their workforces

substantially over the past three years. Surplus labour will continue to be a major problem

at ElectroGroup as it plans to improve productivity by doubling its production and halving

its workforce. This ultimately means the displacement of over 30,000 employees. VacCo has

also reduced its workforce by 12 per cent in the past year and plans to continue to do so,

particularly since its supply contract to a Japanese ® rm has ended. ComGroup has also

reduced employment but its diversi® ed interests mean that staff transfers are the likely

course of action in the future. The remaining two enterprises, ConEnt and ResearchCo, are

both facing a growing market for their services/products and so surplus labour is not a

concern at present. Given the growth of Shanghai, and thus the demand for further

infrastructure development, it is almost certain that ConEnt will need to employ more staff.

Similarly, for ResearchCo the development of production facilities means that they will be

employing more technical and production staff in the foreseeable future.

Diversi® cation strategies

The six enterprises are involved in a number of projects in an attempt to diversify their

operations. Only in this way, management argued, can they overcome the problems created by

surplus staff and product competition, and achieve a reduction in per unit overheads. PortCo

is actively marketing its port equipment products overseas and has achieved sales in 11

countries outside China. They have also developed a range of complementary products that

have application beyond their primary products such as console desks, disc and mechanical



brakes, and sophisticated pully systems. They are currently examining ways to reform the

administration systems and also to improve the utilisation of plant and equipment. In

addition, each workship can now accept outside orders consistent with their expertise. In

these cases, the extra income is split between the company and the workers in that workshop.

A similar strategy is being undertaken by ElectroGroup. Part of this strategy is to

establish new enterprises that are smaller and can respond quickly to consumer

requirements. Products now include computers, scientific equipment, automotive

instruments and a diverse range of other electrical products. In total ElectroGroup produces

5,900 different products. ComGroup had a number of key products on the merger but has

recently branched into diverse areas such as real estate, ostrich farming and general trading.

Economies of scale are seen as the avenue to lower prices and improved quality.

Nevertheless, diversity of product offerings is seen as a major way to harness the creativity

of employees. ConEnt is a development enterprise that is now gaining contracts beyond the

Pudong area of Shanghai. A major new development is an overhead mass transport system.

ResearchCo has now begun production of the products it has developed and plans to extend

its area of research to enable it to enter new markets. One limit to this strategy, however, is

the dif® culty in the recruitment and retention of highly quali® ed technical staff.

The clearest example of a diversification strategy is that of VacCo. This state-owned

enterprise made vacuum cleaners under its own brand and under contract to a Japanese

company. That contract ended two years ago and so excess labour has become a problem.

Management had recognised an opportunity, given the boom in construction in Shanghai, to

provide state-of-the-art plastic framed windows. To ® nance this project 17 employees invested

various amounts and collectively purchased half the new company. Production commenced

on a disused SOE site and, within the ® rst year, all shareholders had their initial investment

repaid. It is envisaged that the growth in window manufacture will take any surplus staff and

become the major component of the business. Other opportunities are now being examined.

Work organisation

The changing forms of corporate governance, the problem of surplus labour, and the

diversi® cation strategies being pursued by all case study enterprises has meant that work

organisation has come under review. In an attempt to create more ¯ exible work organisations

a number of initiatives have been introduced. These include multi-skilling workers, devolving

of work and quality responsibility to the shop¯ oor, and use of new information technology.

The pursuit of these forms of ¯ exibility marks a major shift away from individualised labour

tasks under the direct supervision of management (Benson, Debroux and Yuasa, 1998).

In our case-study companies, the devolvement of work responsibility is the most widely

adopted practice, being present in four firms and to some degree in the other two

enterprises. The potential flexibility to be gained from this devolvement was, however,

limited as only four of the enterprises had attempted to develop a multi-task workforce. Two

enterprises (PortCo and ComGroup) had maintained the traditional individualised tasks

and responsibilities. At this time only VacCo, ElectroGroup and ResearchCo have achieved a

degree of work ¯ exibility.

With the exception of Comgroup all case study enterprises have attempted to devolve

quality concerns to the employees. Statistical process control, information display, and

quality circles were present to varying degrees. PortCo, ElectroGroup and ResearchCo had

the most advanced technical quality systems where quality problems were detected quickly

and responsibility allocated. This gave these enterprises not only a signi® cant competitive

advantage but also allowed costs to be closely monitored.



Five of the six enterprises had introduced new technology, including more advanced

information technology, over the past two years. The technology included computer-aided

design (PortCo, ComGroup, VacCo, ResearchCo) and process-control systems

(ElectroGroup, ResearchCo). Only in ResearchCo, however, had an attempt been made to

link design, management, production and marketing into one integrated system. This is not

surprising given that enterprise’s research background and its recent move into production.

The foregoing discussions on the Chinese economic reforms, and their impact on the

enterprise, illustrate the issues facing SOEs in Shanghai in the late 1990s. Clearly much of the

reform process has been linked to the pursuit of labour ¯ exibility (Benson, 1996). This can be

seen in a range of legislative provisions covering such issues as labour contracts, trade unions,

surplus labour, and collective bargaining. This is not surprising as for western firms the

pursuit of exibility has become a major concern (Baglioni, 1990).

The issue of ¯ exibility has been linked to the development of the `new’ HRM. Unlike the

`old’ personnel management that was about rigidly defined and enforced rules and

procedures, the `new’ HRM is about the development of flexibility, commitment and

strategic integration. For some commentators this shift is simply `old wine in new bottles’

(Fowler, 1987; Legge, 1989) while for others it is about incorporating employees into a new

corporate culture (Keenoy and Anthony, 1992). Despite these misgivings there does appear

to be some consensus that HR is about improving enterprise performance through a ¯ exible,

committed and integrated workforce (Guest, 1987; Storey, 1995).

Storey (1995) operationalised the HR approach by suggesting it consisted of four key

elements: beliefs, strategic qualities, critical management roles and key levers. The support

for HRM is based on the belief that it is HR that gives the enterprise a competitive edge. The

strategic role for HRM means that this function requires the attention of top management

and the need to be integrated with corporate strategies. As such it is too important to be left

to personnel specialists. Line managers must, therefore, learn to manage culture, devolve

responsibility and empower workers (Storey, 1995: 6). In contrast, traditional personnel

management aims to control employees through rules and procedures and to collectively

negotiate a standard approach throughout the enterprise. Senior managers are then free to

develop strategies aimed at achieving corporate success. Only when labour problems

impinged on managerial strategies would top management become involved.

Using these four elements, Storey developed 25 dimensions to measure the extent ® rms

adopted the HR approach. In a study of 15 large British ® rms, Storey (1995: 12) found that

the majority had introduced many of the individual dimensions of the HR model. For most

® rms, however, it did not represent an attempt to integrate HR with the overall corporate

plan. This may explain why research has failed to show a positive correlation between HRM

and enterprise performance (Brewster and Hegewisch, 1994: 2). Nevertheless, in a period of

intense competition, brought on by globalisation, firms are increasingly examining the

management of HR to ensure improved ¯ exibility and competitiveness.

The HRM paradigm is, thus, a useful tool to examine the effects of the economic reforms on

the type of labour practices being adopted in SOEs. A modi® ed version of Storey’s 25-point

checklist (Storey, 1995: 6) was used, as not all of the dimensions were applicable to Chinese

industry or useful in distinguishing between enterprises. As a consequence only 15 of Storey’s

dimensions are included, although to this list is added the role of the personnel manager. If the

personnel manager adopts a strategic role as opposed to an administrative role then it is more

likely that the enterprise places value on HR as a path to improved flexibility and

competitiveness. Our assessment of the six case study enterprises is presented in Table 2.



Reading Table 2 horizontally allows for a comparison between enterprises of the adoption

of the various HRM components (HRM dimensions). A verticle reading shows the degree to

which each enterprise had adopted the various HR practices and, thus, to identify the type of

HRM con® guration operating in that enterprise (HRM bundles). Overall, the average take-up

rate of the various HRM dimensions was nearly 40 per cent with three of the enterprises

adopting at least half of the 16 dimensions. In addition, ® rms had adopted a further 36 per

cent of the listed dimensions. Clearly there is potential for improved ¯ exibility.

HRM dimensions

The 16 HRM dimensions are grouped under four elements. The ® rst of these elements is the

beliefs and assumptions underpinning HRM. Table 2 clearly illustrates that it is only the

business needs of the enterprise that is driving the reform process. SOEs have had state

sponsorship withdrawn and so the need to develop markets and make a profit is the

paramount objective of enterprise management. The idea that HRM is a source of ¯ exibility

and competitive advantage has yet to become part of the enterprise strategy. Management,

with the exception of ResearchCo, has developed a degree of customer orientation, yet only in

ComGroup and VacCo has HRM been linked with the corporate objectives. In the main,

decision making remains slow and bureaucratic.

The third of the HRM elements is the importance of delegating responsibilities to line

managers. Senior management in the six enterprises have adopted a transformational role

and so have embarked upon enterprise restructuring, the development of new markets and

improved work organisation. These managers recognised that success of these reforms

depended on changes to labour management. These changes can be facilitated through the

line managers as, in all enterprises, they have full responsibility for HRM. Yet, the emphasis

on pro® ts, bureaucratic procedures and observing government rules make it dif® cult for

individual line managers to adopt new practices. Moreover, only at ElectroGroup does the

HR manager have a strategic role. This means that little attempt is made to link the nature of

HRM to the key enterprise objectives. As such, little consideration is given by line managers

to alternative models of labour management. Thus, the role of HR in the revitalisation of the

enterprise is more a reactive form of ¯ exibility where costs are reduced, surplus labour

disposed of and little attention given to the needs and aspirations of the employees. In this

sense it parallels the downsizing activities undertaken by many western ® rms.

The ® nal element is the key levers that are used in the implementation of HRM. Table 2

illustrates that many of the labour practices in the six enterprises closely resemble that of the

`new’ HR model. With the exception of ConEnt, information sharing is present, to some

degree, in all enterprises. Given the responsibility attached to infrastructure development, and

the potential for misuse of that information, it is not surprising that ConEnt is less open than

the other ® ve enterprises. Teamwork is also widespread and has been fully implemented in

four of the six enterprises. Personnel selection remains a state responsibility in two of the six

case studies and, thus, limits the degree of ¯ exibility that can be achieved in those enterprises.

Work conditions are generally standard across the enterprise and individual contracts are the

norm. While this ® nding demonstrates a potential ¯ exibility it, nevertheless, illustrates an

historical practice and the effects of legislation rather than a shift to the `new’ HR paradigm.

Continuous training was considered very important in ElectroGroup and, to a lesser extent, in

four other enterprises. Only in ConEnt was continuous training not considered important.

While some evidence of an attempt to manage culture was observed, it is clear that observing

rules and procedures remain the basis for HRM in the six enterprises.



TABLE 2 HRM practices

Dimension Enterprise


Beliefs and assumptions

Business need is prime % v v % v v

guide for action

Impatience with to rules x x x x % x

Values and missions x x x x % x

Strategic aspects

Customer orientation % v v % v x

Importance of corporate plans % v v % % %

Speedy decision making x % % x % x

Managers

Transformational managerial role % v v % % %

Importance of line managers v v v v v v

Strategic role for personnel managerx x % x v %

Key levers

Information-sharing % % v x v %

Teamwork % v v % v v

Freedom in personnel selection % v % x % x

Individual performance-pay % v % % % v

Harmonisation of work conditions v v v % % v

Individual contracts v v v v v v

Continuous training % % % x v %

Key: v - practice present; % - practice present to some degree; x- practice not present (Adapted from Storey, 1995).

HRM bundles

In PortCo only three HRM practices had been adopted and, given the comments above,

it can be reasonably claimed that little advance towards the `new’ HRM model has

occurred. The adoption of new technology and the strategy of marketing abroad meant

that little emphasis has been placed on HR. Any consideration of HR has been limited to

issues concerning surplus labour. Notwithstanding their differences, ConEnt mirrors

PortCo in their management of HR. ConEnt does not have a surplus labour problem but

its importance to the development of the Shanghai region means that it is closely aligned

with government. In their present form PortCo and ConEnt reflect the traditional SOE

with little emphasis on the principles underpinning HRM.

In contrast, Comgroup, an amalgamation of six township enterprises, has fewer

constraints than PortCo and recognised early that their success would be tied to the

quality of their HR. In this enterprise, 10 of the 16 dimensions had been implemented.

The strategy of diversification requires well-qualified, flexible and committed staff and

management has reformed many of their personnel practices. Interestingly, in both

PortC o and Comgrou p, the pos it ion of the p ersonnel manager remains an

administrative post with no strategic functions. VacCo has a similar HRM profile to



ComGroup. VacCo is a smaller enterprise than Comgroup but has also developed a

quality culture through its past supplier relationship with a Japanese electronics firm.

VacCo’s diversification strategy has meant that labour surplus will only be a major

problem if the new products are not successful. The success of these products will,

however, depend on their quality that, in turn, will depend on the management of HR.

ElectroGroup and ResearchCo fall somewhere between the two extremes highlighted

above and suggest a form of `HRM with Chinese characteristics’ (Warner, 1995). Both are

working in the electronics area, although one is primarily a research organisation while

the other produces a large array of products. These enterprises have introduced the

latest technology, and management in both enterprises claim that quality is the key

factor underpinning their success. Surplus labour does, however, represent a major

problem for ElectroGroup and explains why the personnel manager has a strategic role

in the enterprise. The extent of the surplus labour problem and the complexity of the

corporate governance means that substantial managerial reform, including that of HR,

will take place. This is illustrated by the finding that on each of the 16 dimensions

ElectroGroup has attempted to introduce reform. In contrast, ResearchCo has a problem

of finding and retaining well-qualified technical staff. It is likely, therefore, that

management will gain more freedom in personnel selection and will undertake further

reform in HRM in an endeavour to recruit and retain quality staff.

Industrial relations

How far has the adoption of a particular HRM bundle been influenced by the prevailing

industrial relations within each enterprise? All enterprises were unionised and, in all

cases, in excess of 90 per cent of workers were members (see Table 3). All enterprises, in

line with government legislation, had established a workers’ congress. The unions

within these enterprises all had full-time officials present, although only in three of the

enterprises were regular union meetings held. Union officials in the remaining three

enterprises (ConEnt, ElectroGroup and ResearchCo) conducted their business through

the worker ’s congress which, effectively, met twice a year.

Union-management meetings also followed this pattern with regular meetings only

occuring in PortCo, ComGroup and VacCo. In two enterprises (VacCo and ElectroGroup)

industrial action had occurred in the last year, although this did not involve strike action.

The matters were ultimately settled through procedures. Only VacCo had established a

workable and accessible grievance procedure involving the trade union. PortCo and

ComGroup also involved the union in grievance handling, although to a lesser extent. In

all enterprises, the worker ’s congress also undertook this task.

Only unions in PortCo and VacCo could be classified as having a substantial

involvement in the decision making within the enterprise. These unions were active in

redundancy decisions, organisational restructuring and developing training for

displaced workers. Unions in ElectroGroup and ResearchCo participated, to some

degree, in enterprise decision making. This was most obvious in the role they played in

welfare and housing, aspects of the restructuring process and the willingness to accept

some new managerial initiatives. In contrast, unions in ComGroup and ConEnt had

little involvement or participation in enterprise decision making. These unions adopted

the traditional union welfare role and tended to work through the worker ’s congress for

matters of a collective nature.



TABLE 3 Industrial Relations

Enterprise


Union v v v v v v

Worker’s congress v v v v v v

Union density 100 100 100 100 95 100

Union of® cials 11 20 2 1 20 1

Collective contract v v v v v v

Union meetings 12 6 12 0a 0a 0a

Union-management

meetings/year 52 6 52 2 as required n/a

Industrial disputes

last year no no yes no yes no

Grievance processing

union % % v x x x

Workers congress % % v % % %

Union involvement in

decision making High Weak High Weak Moderate Moderate

Key: v - practice present; % - practice present to some degree; x- practice not present.

Notes: a. Worker’s congress served this purpose.

b. Some industrial action in joint ventures.

The strength of the union in PortCo has clearly restrained the movement towards HRM.

Nevertheless, the union strength is clearly not the only variable restraining HRM as the case

of ConEnt demonstrates. Both these enterprises have a high level of government

involvement and this appears to be a key factor. In the case of PortCo the government has

been able to exercise this involvement through the union. ConEnt, on the other hand, is a

substantially younger enterprise and depends on government for its funding. The

professional nature of its workforce means that little attention is given to HRM. This

argument appears also to be able to explain why VacCo and ComGroup have moved

towards the HR model. VacCo is a small SOE and one the government is prepared to

abandon to market forces. This is clearly recognised by the union. In this case, the union has

been able to use its in¯ uence to work with management to help diversify the enterprise’s

activities and to substantially change the approach to the management of labour.

ComGroup has little involvement with the central or Shanghai City governments and

this re¯ ects its origins as a township enterprise. The absence of government interference,

in combination with a weak union, has allowed management to be innovative in the way

labour is managed. The third group of enterprises (ElectroGroup and ResearchCo) have a

moderate degree of government involvement and also moderately influential unions.

This combination has allowed both these enterprises to diversify their structures and

activities as well as attempting to reform their management of labour. Clearly the nature

of the prevailing industrial relations in each enterprise, coupled with the level of

government involvement, can go part of the way to explaining the changes taking place

in the enterprises’ HRM.



CONCLUSION

The market-oriented economic reforms undertaken in China over the past two decades

have had a considerable impact on SOEs. Individual enterprises have developed a range

of strategies that recognise the nature and history of the enterprise, the demographics of

their employees (age, gender, educational level and skills), their financial situation, the

technological state of their plants, and the competitiveness of their products in the

market. As a consequence, each SOE has a particular set of characteristics that has led to

a unique strategy to meet the challenges presented by the economic reform.

The analysis undertaken of HRM in the six enterprises revealed two important aspects

of the transformation of HRM in Chinese SOEs. First, values and missions are not driving

the reform process but rather the transformational role adopted by some senior managers.

Thus, while customer focus and business needs are important, all enterprises appear to

work within the confines of a centralised system. This is particularly the case with the

acceptance of rules and processes. Secondly, the development of HRM has proceeded

unevenly among the case study enterprises. At the present time there exists HRM bundles

or configurations ranging from the traditional labour management of the SOE to the `new’

HRM. Part of the explanation for this finding is that the economic reforms have had a

different impact on each enterprise. This has led to differences in corporate governance,

diversification strategies, and work organisation which, in turn, has had a different impact

on the management of HR. These reforms have been exacerbated for some enterprises by

the problem of surplus labour.

For some of the case study enterprises, HRM has been incorporated into corporate

strategy where labour management has become part of a customer-orientation

approach. However, this approach is still underdeveloped. In addition, the use of

HRM strategies in many of the enterprises is more a reactive form of flexibility. In

these cases, the aim is to reduce costs rather than to meet the needs and aspirations of

the employees. Finally, some of the key levers have been practised in Chinese

enterprises for a relatively long period as part of traditional Chinese management

systems. These include teamwork, information sharing and harmonisation of work

conditions. These practices are rooted in the collectivist approach, although they have

been further refined over the past two decades.

Other key levers, however, are more related to the recent changes of employment

policy and labour market development. The policies of individual contracts and

performance pay have been implemented, as mentioned earlier, as part of the central

government’ s reform of the employment system. Freedom in personnel selection and

continuous training are also part of the reform of the SOEs’ management system and

represent the government’ s attempt to develop the labour market. As these strategies are

relatively new, and the existing operational systems of SOEs have not fully changed,

individual enterprises have adopted a variety of approaches towards these levers. For

example, freedom in personnel selection remains limited, which is due mainly to

problems of surplus labour or the difficulties in recruiting and retaining quality staff.

On the basis of the research, three models of HRM appear to exist in Chinese SOEs.

These models appear representative of the HRM reform process in SOEs, at least in the

more developed regions of China (Verma and Yan, 1995). The first model is a minimalist

approach where enterprises (PortCo, ConEnt) have made little attempt to adopt a HRM

approach to the management of labour. They are either relatively large enterprises with

a strong union involvement in decision making (Portco) or have a much closer ties with



the government in terms of contributing to local development (ConEnt). They have

placed little emphasis on HR and the traditional SOEs’ management approach

dominates their current operations. The pursuit of flexibility, and subsequent HRM

reform, is essentially to reduce costs.

The second model represents an attempt to adopt the HR paradigm. These enterprises

(VacCo, ComGroup) have fewer constraints than the ® rst group in their attempts to reform

labour management. These enterprises tend to be relatively small (VacCo) or have little

connection with the traditional SOE system (Comgroup). Both of these enterprises have

strong connections with foreign companies via joint ventures or contracting arrangements.

These conditions have enabled them to adopt a more ¯ exible HR approach. They recognise

that business survival and success in the market place relies on the quality of their HR. The

case of VacCo illustrates that the presence of a strong union does not inhibit the

development of the `new’ HR practices.

The third model appears to be a transitional stage between the old and the new forms

of labour management. These enterprises (ElectroGroup, ResearchCo) have the latest

technology and they realise that quality is the key factor in determining their success.

However, unlike the ® rst group, they have little support from government. On the other

hand, they are different from the small SOEs which are more easily able to adopt a

flexibility approach. They are facing substantial competition from both domestic and

foreign ® rms. The lack of capital and the burden of surplus labour inhibits their ability to

transform their HR practices. For these ® rms, substantial managerial reforms, including

that of HR, are crucial for their future success. Nevertheless, whether they adopt fully the

HRM paradigm in the near future is problematic.

At this time, there is not a homogeneous model of HR in Chinese enterprises.

Individual enterprises are reforming their HR systems differently on the basis of their

existing conditions and the impact of the economic reform. Clearly, some enterprises have

developed the concept and practices of HR and so Child’ s (1994) observations of the

absence of HRM are no longer accurate. Equally, the so-called `HRM with chinese

characteristics’ (Warner, 1995) depicts the situation for some enterprises, but it does not

recognise the ongoing nature of change within these enterprises. It cannot, therefore, be

seen as a dominant strategy for managing labour. Traditional cultural values still

influence, to some degree, the current behaviour of management. The more important

factors that influence changes in the HRM system, however, are the challenges of

economic reform, the pressure of market forces and the changes in legislation. To this can

also be added the level of government involvement in the enterprise.

The six case studies illustrate the direct results of economic reform on the adoption of the

HR paradigm. The implementation of regulations and policies on labour contracts,

recruitment, dismissals, wages and welfare has led to the practices of individual contracts,

freedom in personnel selection, and individual performance pay. The liberalisation of the

economy and the introduction of foreign investment has created the opportunity for Chinese

domestic enterprises to adopt some of the best HR practices. SOEs that are involved in joint

ventures or contracting arrangements with foreign companies are, at this stage, the

enterprises more likely to have adopted the `new’ HRM. Clearly, globalisation is having an

impact on the HRM in Chinese enterprises. In addition, more business-oriented beliefs and a

stronger customer-oriented strategy are beginning to be seen as crucial elements for

enterprises to engage in market competition successfully.



At the present time, most SOEs have changed or are in the process of changing to a

multi-ownership system. Following the further liberalisation of the economy, in order

for China to join the World Trade Organisation, Chinese enterprises will increasingly

compete with foreign firms in the domestic market. This competition will require the

Chinese enterprises to be more flexible and adopt more international standardised

HR practices. From our research, we can see that areas such as bureaucratic rules,

poorly defined values and missions, slow decision making, and the limited strategic

role for the personnel manager will need to be addressed. These matters are all

related to some of the less developed social and political issues in China such as the

`rule of law’ , little transparency in decision making, and the inefficiency of the

administrative system. In other words, changes at the enterprise level will require a

more drastic change at the macro-economic level. In that sense, further economic and

political reform is necessary for guiding a more effective enterprise reform agenda.

Given the vastness of China and the uneven pattern of economic development, we

believe that the transformation of HRM will be another `Long March’ for Chinese

enterprises.

These conclusions have implications for the way Chinese HRM is likely to develop

in the future and for the way foreign firms operate in China. Clearly, it is too early for

predictions to be made as to the likely dominant HR paradigm. Initially, it is tempting

to accept the proposition that the final product will be a version of the `new’ HRM

approach, albeit with some Chinese characteristics. This research, however, showed

that this model is probably a transitional stage, one that depends as much on the level

of government and trade union involvement as it does on any attempt for the

enterprise to become more competitive. In addition, the diversity of corporate

governance among SOEs means that a variety of HR practices may become the norm.

In their dealings with SOEs (and former SOEs) foreign firms will, thus, confront

different approaches that, in turn, will influence the strategies they pursue.

The normal course of entry to China for foreign firms is through some joint

venture arrangement or the establishment of a wholly-owned subsidiary company.

While different laws apply to different ventures, and the obligations to labour are

different, it does mean that an `international’ HR model cannot be simply transferred.

Labour markets are still dominated by government, workers’ expectations different to

those elsewhere and local Chinese management more concerned with bureaucratic

rules. The effect of these factors on employees means that it is difficult for foreign

managers to apply their own standards and approaches to the management of labour.

Thus, for any foreign firm, worker education and retraining will be paramount for the

success of the venture.

A similar caution applies to the increasing number of foreign firms taking over the

less profitable SOEs. Under the current process of corporatisation and privatisation a

variety of SOEs are now on the market. The economics are tempting and the market

potential substantial. Nevertheless, it is likely that these firms have not attempted to

reform labour and management practices. It is, therefore, crucial for the new owners

to develop a clear understanding of the traditional personnel management systems of

these enterprises. In addition, they need to become familiar with the labour reforms

undertaken in these, and other enterprises, over the past two decades. This labour

audit will enable the foreign firms to develop a more relevant HR strategy for the

new ventures (Sergeant and Frenkel, 1998).



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markets, firms and workers in chinese state-owned enterprises

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