China's hostage-taking is a relic

June 26, 2013: 11:20 AM ET

Chinese workers once held CEOs captive because of fears of abandonment. Now they have no excuse.

By Scott Cendrowski, writer

130626111503-chip-starnes-614xaFORTUNE -- The news that Chinese workers are holding an American CEO hostage in a Beijing factory has plenty of tabloid drama. The CEO, Charles Starnes of Florida-based Specialty Medical Supplies, conducted television interviews through gated windows as reporters swarmed the Beijing factory where he's been held since last Friday. He traveled there to announce layoffs of 3o jobs destined for India. The remaining factory workers, still employed, panicked. They demanded severance packages similar to those of the departing workers.

The situation remains unresolved. But in interviews from inside the factory, Starnes has said he feels safe, and negotiations are moving ahead.

What has been lost in news reports is that China workers aren't alone in holding CEOs captive during negotiations. In fact, it's a tactic used in developed Europe. In France, workers held hostage executives at Caterpillar, Sony, and 3M as part of negotiations during 2009. There are reports as recent as March 2013 of angry French workers demanding severance from captive managers. The incidents produce dramatic headlines -- exactly what aggrieved workers are looking for.

When a CBS camera crew visited the Specialty Medical Supplies factory in Beijing early Tuesday, Starnes gave an interview at the factory's front gates in which he says he could easily escape. But he says that would send the wrong message. He wants to settle the workers' grievances before leaving.

MORE: Boss held hostage by his workers in China

What's more interesting than this nonviolent shakedown in Beijing is what the episode says of China's labor pool. Starnes said his medical device company was moving part of its operation as China's labor pool increasingly moves toward higher-skilled, higher-paying, and higher-technology jobs.

It may be the first act of a large shift underway in China. The evolution of China's economy from a manufacturing-based giant to a services-oriented economy means that lower-skilled workers will increasingly face obstacles. Workers in Pittsburgh and Detroit felt the same sting over the past forty years as jobs in those manufacturing centers migrated to lower-cost countries.

The key difference between the U.S. and China is that U.S. workers enjoyed strong labor unions. While unions do exist in China, workers often distrust them. A sweeping 2008 China labor reform law that instituted stronger unions, collective bargaining, and minimum wage increases is actually a landmark workers' rights bill. It resembles the strong labor rights laws in Europe. But in China, unions are operated by local governments. And workers often harbor distrust toward local officials.

"Given fears of corruption, they don't trust local union representatives to enforce the law," says Linda Lim, a professor at the University of Michigan's Ross School of Business who has studied China.

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Lim says the Specialty Medical Supplies incident is more a relic of China's past more than a harbinger of its future. Before China's 2008 labor reform, workers negotiated with businesses that could close shop overnight --- owning workers pay and severance -- then open elsewhere in the country. Fears of abandonment remain, which may be driving the so-called hostage situation in Beijing.

But as China's labor pool moves into more service-based sectors such as health care and education sectors, with higher-skilled positions, better legal protections, and more educated laborers, these type of grievances should decline.

Says Lim of the Beijing situation: "Unfortunately, this type of incident is stuck with them during their transition."

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