Rising costs, changing demand, and new zoning requirements are a few of the reasons companies may relocate their operations within China. Be it anticipated or unexpected, intercity or interprovincial—moving an operating facility is a complex, expensive, and often sensitive process that demands strategic planning, strong leadership, and careful communication for effective execution.
Specific action taken by a company undergoing relocation is largely dependent on the reason for the move, distance of the relocation, and internal company practices. But in recent conversations with government affairs (GA) and human resources (HR) representatives from US-China Business Council member companies that have managed facility relocations in China, like TE Connectivity and others, common best practices and strategies emerged that may help smooth out an otherwise rocky process.
Determining the nature of a move
Identifying the nature of the move is essential to determining a relocation strategy. Companies operating in China move facilities for a number of reasons, from a voluntary strategic move, to involuntary moves imposed by local government regulations. Companies may make a voluntary strategic move to reduce costs, expand facilities, access a more favorable regulatory environment, or simply adjust to changing market demand. Voluntary moves often allow management more flexibility in planning. Moves imposed by local government can be more challenging. Due to local government zoning requirements or other demands, companies may be forced by the local government to move with as short as six months’ notice. While sometimes a request to move can come unexpectedly, companies “at risk” of a forced move (i.e. have received “hints” from local regulators that a facility will be required to move due to zoning requirements or other considerations), should begin formulating a relocation strategy as a contingency measure.
In either circumstance, location is an important factor. Moving within a municipality can be a more manageable situation that yields a high employee retention rate. Moves between provinces—or out of the country in some instances—present more difficulties in managing employee retention and communicating with local governments.
Assembling a relocation task force
A common thread in discussion with companies on this subject is the importance of establishing an internal “relocation task force” comprised of senior- to mid-level management in preparation for relocation. Responsibilities of relocation task force should include: 1) formulating a timeline for execution of the relocation; 2) developing a comprehensive internal and external communication plan; 3) ensuring compliance with PRC laws and regulations; and 4) coordinating communication across the company. When it comes time to establish a relocation task force, USCBC companies recommend these important considerations:
- Timing One company suggested establishing an official relocation task force one year prior to the relocation date. Others noted that it should be established as soon as there is any indication a move may take place (even if a company is merely at risk of a forced move).
- Intra-company communication Involvement of all departments is important in effectively preparing for relocation. This includes involving all business functions (GA, HR, public relations, etc.) and impacted business units in active dialogue.
- Seeking consultation by third parties Some companies suggest employing a third party consultancy to assess potential risks in the relocation process and provide supplemental advice directly to the relocation task force.
Developing an effective communication strategy
Companies with experience relocating facilities shared varied opinions on delivery and timing of communicating relocation plans to internal and external parties. Typically, there are two approaches to announcing relocation:
- A single “town hall” announcement The majority of companies consulted suggest an announcement of relocation should occur simultaneously to internal stakeholders outside of the relocation task force and external stakeholders—including employees, media, customers, suppliers, and others directly and indirectly involved with the business. The public announcement should also reveal compensation plans and any incentives that will be given to employees.
- Or informing key “influencers” first One company cited effectiveness in first notifying a smaller group of internal stakeholders including “influential” key employees prior to making a public announcement in a town hall format. Informed “influential” employees can help assuage concerns that may be raised during a larger “town hall” announcement.
When should a public announcement be made? Company suggestions regarding the timing of public announcement range from the legally mandated 30 days in China’s Labor Law, to six months in advance of relocation. Companies suggesting a longer time period place importance on maintaining business continuity (transitioning suppliers, etc.), while those suggesting a shorter period note benefits in employee retention (employees will be less likely to look for new jobs). Execution plans will vary depending on the timeline determined by the relocation task force.
Who should make the announcement? Local leadership, not “expat leadership,” is preferred to communicate relocation and compensation plans with employees. Local management may have a better understanding of the concerns employees may face during the relocation process. The relocation task force should assess the capability of the local individual selected to deliver the message based on their influence at the working level and their ability to effectively deliver company messages.
What medium should be used to communicate with employees? While some companies suggested that the chosen medium for revealing and communicating information about relocation has little impact on the effectiveness of the delivery (noting attitude and sincerity of communication is most important), a number of companies noted that using internal online communication tools are an effective way to update employees during relocation. If communication will be conducted via social media or online messaging software (such as WeChat), companies must hire an effective content manager that understands the goals and priorities of the relocation task force.
Who should be informed during a public announcement? Companies stressed the importance of considering all stakeholders, including subsidiaries, contractors, media, employees, and others that may be indirectly impacted by a relocation to be included during a public announcement. More importantly, following the announcement companies should regularly communicate any updates on relocation plans with stakeholders. One company noted that the biggest mistake they have experienced is failure to effectively, and regularly, communicate with stakeholders following the announcement of a move. Government stakeholders (such as local labor authorities), should have knowledge of relocation plans prior to making a public announcement, and understand the company is actively forming a relocation strategy.
What should companies do if there’s a leak? A leak or widespread speculation of relocation plans prior to a public announcement is not uncommon. In many instances, information is leaked during consultations of a move with local labor authorities, or employees may encounter other sources that have informed them of an upcoming relocation. In most cases, a leak or speculation is not necessarily a harmful occurrence, but immediate action should be taken to prepare a holding statement to the press, followed by a public announcement to internal and external stakeholders when necessary.
Managing employee expectations and retention targets
Companies with experience relocating operations note that they are often able to meet their retention goals by meeting employee expectations of increased benefits to compensate for a move, which typically involves a salary increase, transportation subsidy, and other benefits. However, companies should play an active role in managing expectations. USCBC companies note three different approaches to managing employee expectations during the announcement of a move:
- Legal approach Some companies suggest communicating to employees that all benefits and compensation plans will be formulated strictly “in accordance with the law” in order to manage initial expectations. Additional compensation and benefits can then be negotiated individually.
- “Exceeding expectations” Other companies noted that it should be communicated that treatment will “exceed basic requirements mandated by PRC law.” This approach could be advantageous to encourage employees to stay with the company, but could also set high expectations and demands by employees.
- Involving employees in setting expectations One company suggested conducting a survey led by employees to develop a “democratic proposal” of their own compensation and benefit plans after a relocation announcement is made. A final compensation plan would be drafted by a designated task force leader and submitted to management for consideration, providing employees a channel to feel directly involved.
A common thread among companies experienced in managing relocations is the need to remain “employee centered” by focusing on treatment and open communication with employees. Other important retention considerations include:
- Training and capacity building Companies interviewed suggest selecting key retention targets and allowing them to be directly involved in the knowledge transfer process during a transition to a new facility. This means providing key employees with financial incentives to travel to or reside in the new location in advance of the final move. The financial incentives, direct engagement at the new facility, and time allowed to familiarize with the new environment has—in some cases—helped change the minds of key employees initially reluctant to move to a new facility in a different province.
- Offer a retention bonus One company noted that it offered a retention bonus for any employee that moved to the new location and remained on board for a certain period (one year in this case) after the move.
- Avoid “buying out” employees Regularly communicating to the employee that they are valued at the company should proceed direct communication of a benefits package.
- Get senior management engaged Getting senior management to communicate directly with employees is often very beneficial for retention efforts and allowing senior management hear the concerns of employees impacted by the relocation. Doing so may cause employees to respect senior management more and help them gain a sense of value at the company.
- Set realistic retention goals Companies should also set employee retention targets based on quantifiable industry standards. Employing third-party HR consultants can help companies understand what the average retention rate may be in their industry.
In the event of relocation, employee termination—voluntary and involuntary—is unavoidable. Companies should not assume that they can find labor in the new location. During relocation, companies can legally terminate an employee if they fail to reach an agreement with the employee after informing him or her of the termination date 30 days in advance in writing, or directly terminating a contract and paying one months’ salary one month in advance. Legal counsel, the local labor authority, and unions—if applicable—should be consulted during this process.
Dealing with local regulators
Companies agree that proactive, regular communication with the government in advance of relocation is essential to the success of a move. Companies should be able to point local regulators to specific articles and codes in relevant laws regulations and be able to provide evidence of how they are in compliance with the respective articles. One company expressed value in the ability for a legal team to demonstrate the company is “exceeding” the requirements of the law, and proactively communicating this with regulators. In-house counsel should also consult external legal counsel to ensure full compliance with PRC laws and regulations.
When communicating with the government on these matters, companies should also consider:
- Avoid damaging current relationships If a company is moving all of its facilities outside of a jurisdiction, they are at a higher risk of disrupting an established relationship with local government agencies. Companies should not only consider the impact on the government relationship, but also be aware of how damaging a relationship with a certain government agency may impact boarder relationships in the jurisdiction. For example, as one company noted, if a company leaves on negative terms with the local government, it could impact existing and future accounts with customers and suppliers (public and private) in the jurisdiction, or even the region.
- Don’t take compensation off of the table In the case of a government-imposed move, expectations are difficult to set regarding compensation companies may be entitled to from local governments. However, companies should still proactively seek compensation based on legal rights of a company.
- Proactively facilitate gov-to-gov communication Companies should proactively take the lead in facilitating government negotiation. Do not expect local governments to collaborate on their own in regards to figuring out tax adjustments and legal implications of a company move.
Company HR departments should be responsible for notifying local labor authority of a transition. Timeliness of notifying the labor bureau is important, and the local labor authority should not be notified by third parties of an upcoming move. Companies should actively engage with the labor authority and make clear far in advance that a public announcement will be made.
Early communication can allow companies to engage local labor authorities to provide assistance during a public relocation announcement. In some cases, local labor authorities can provide support in consulting with employees. Local labor officials sometimes support companies following the announcement of relocation by holding a Q&A session with employees. They can help ensure employees understand their legal rights, and these measures demonstrate that the local government is aware and supportive of the relocation.
Moving to a new jurisdiction also has tax implications. Companies have noted challenges when negotiating with the local tax bureau and suggest talking to local government about implementing a “tax sharing system”—if such an option is appropriate for the move. In such arrangements, existing tax revenue is collected in the original location, while additional revenue is collected in new jurisdiction. Companies should proactively suggest and manage the negotiation for this option to be viable.
When it comes to determining when tax officials be informed of a move, one company noted that a local tax bureau official stated—despite legal obligations—companies should inform local tax regulators at least one year in advance to allow them to factor the loss or increase in tax revenue into their annual budget. In cases where a compulsory move is required, the company should ask the requesting government agency to assist in negotiations with the tax bureau.
Engaging with unions
Companies with relocation experience in China have worked collaboratively with unions to achieve company goals during relocation, but the union’s role should be minimal, and HR departments—not union representatives—should take the lead in coordinating with unionized employees on timelines, compensation plans, etc. Companies suggest notifying unions (if appropriate depending on individual agreements) three to six months in advance of a relocation, and HR departments should proactively engage with the local plant labor union chairman leading up to relocation.
Unions should be involved during terminations that may trigger any issue with China’s Labor Contract Law, and in such situations, a union chairman is required to “sign off” on any terminations. In some cases, companies can also leverage unions to their benefit to help negotiate compensation plans. Engagement should focus on district-level labor unions, as they have authority over plant-level labor unions.
Avoiding common mistakes
- Underestimating the scope of a move One common mistake companies cite is underestimating the scope of relocation, as relocating one facility will have a global impact on the company—both from a PR and operational perspective. Regular consultation with global headquarters and business units is necessary to gain a better understanding of the wide implications of a move.
- Failure to manage expectation Companies should set reasonable expectations (backed by qualitative and quantitative analysis) for all aspects of a move, including retention rates, expected costs incurrence, and others. Failure to do so may lead internal and external stakeholders to set their own expectations, which may not align with what a company can deliver.
- Be mindful of keeping business partners apprised Respondents emphasized the importance of notifying business partners—including customers and suppliers that will be impacted by the move—to ensure business continuity. If there will be a change in suppliers (i.e. a current supplier will no longer receive the moving company’s business), notifying too early could disrupt the relationship. However, notifying a supplier too late could also disrupt a supply chain, as suppliers may need to obtain certification to sell to another location and adjust existing contracts.
[author] Owen Haacke ([email protected]) is business advisory services manager at the US-China Business Council’s Shanghai, China office. [/author]