There is a Chinese business adage that goes something like, “Every company in China keeps four sets of financial books: one understated set for the government, a second set to satisfy the wife, a third set to impress the mistress, and the actual records for management." So much for GAAP compliance. Most generally, the point of this joke is that in the recent past, to put it mildly, China has been an extremely permissive operating environment, where there has neither been the will nor the means to enforce standards of accountability that are expected in the developed world.

Likewise, if you’ve ever spent time in a Chinese factory, overlooking a factory floor filled with hundreds of Chinese workers busily assembling, welding, stitching, painting, etc, you have probably taken a quiet moment to reflect upon your proverbial “lucky stars." You probably saw people performing hazardous jobs, sometimes using antiquated machinery and without protective gear, and the factory manager may have been generous enough to share a work-related injury horror story with you. Among other reasons, you would never see these conditions in many developed countries because organized labor would never tolerate it.

However, recently, Chinese organized labor has come to the fore as fanatically anti-union Wal-Mart, the world’s largest retailer with a global workforce of 1.7 million, was forced to allow chapters of the All-China Federation of Trade Unions (ACFTU) in its Jinjiang Store in Quanzhou City, Fujian Province. Since the breakthrough in Quanzhou, union chapters are being established in 19 of Wal-Mart’s 60 China stores across 30 cities, and the US company is said to be cooperating.

This is the culmination of a protracted battle between Wal-Mart and the ACFTU. In fact, as Financial Times (subscription) reports, the conflict began in 2001, Wal-Mart conceded in 2004, but it was only in July of 2006 that it actually allowed its employees to unionize.

While westerners are somewhat unfairly accustomed to images of unionized workers holding large-scale protests, hurling sheep at parliament or clubbing scabs with tire irons, unions in China have historically been relatively passive.

"We will never take a simplistic measure like launching a strike," says [Fu Furong, Union Chief in Quanzhou]. "With the unions, there will be a harmonious relationship between labor and capital."

Strikes are, in fact, illegal. The ACFTU is China’s only legal trade union, and it is controlled by the central government under the leadership of ACFTU Chairman Wang Zhaoguo. The union has been extant in various incarnations since 1925. Although it was dissolved in 1966, it was revived in 1978 at the outset of China’s economic reforms. Currently, the organization claims some 150 million members.

Moreover, it has been widely reported that a direct order from President Hu Jintao led to the union’s ultimate victory over Wal-Mart. Obviously, this is not your garden variety labor union.

China Staff writes:

The ACFTU has an ambiguous legal status under PRC law; it is neither an official government agency nor a private entity. On the one hand, the Labor Union Law does grant it a monopoly on Labor organization and allows it to promulgate regulations in order to implement the Labor Union Law, though only in conjunction with official government agencies. On the other hand, it has no direct enforcement authority, and can only submit claims of legal violations to the people's government or Labor authorities, or bring suit in a people's court.

“The ACFTU is not independent. Its first obligation is to the state, and representing the workers is secondary to that," says Andrei Lauffs, a partner in Baker & McKenzie’s Hong Kong office. Additionally, quick read of the ACFTU's published literature is fairly clear that the ACFTU is a political organ, and it is the union’s intention to align labor’s objectives with the government’s greater objectives:

Competition in overall national strength is becoming increasingly fierce. Ideological and cultural interaction is growing, resulting in various sharp contradictions getting increasingly complicated. The attempts of the hostile forces to Westernize and split our country remain unchanged…Trade unions should be more resolute and conscious in accepting the leadership of the Party… and …translate the Party’s basic line, principle and policy into the conscious action of the majority of workers.

Externally, the ACFTU serves as a bridge between government and labor. While internally, it allows Union (also referred to as a "work council") representatives to attend company meetings and participate in decision-making. Unionization also affects the company’s ability to lay off workers, requires corporate contributions to a trade union fund, may ultimately be used to introduce any number of pension or health insurance schemes, and possibly affect financial oversight. Not only will unionization directly alter company operations, but it is very concievable that such measures will affect the competitiveness of foreign firms in the China marketplace.

Currently, there is a significant push underway to expand the presence and influence of the ACFTU in foreign firms operating in China. The Asia Times writes:

The ACFTU has called for more unions to be formed in foreign-financed firms, arguing that 60% of FIEs should have unions by the end of 2006 and 80% by end-2007. Some estimates suggest that as few as 30% of FIEs in China currently have unions.

Clearly, being one of the world’s largest companies and one of the most anti-union, Wal-Mart will set an example to other firms, and having gained such momentum and well-publicized political support, it will be difficult for other firms to resist the presence of unions. However, to be sure, all of these changes will be orchestrated in a way that will not endanger all-important foreign direct investment which is projected to be $87 billion in 2006. That is, the unions will not be pushing for minimum wage increases, limited working hours, worker safety, etc.

Furthermore, one need only scan the current headlines to realize that this sort of scrutiny is not unique to Wal-Mart, and there are many examples of other foreign firms who have recently run into trouble with the the law and consumers, including Dell’s “Processor Gate", Canon, SK-II, etc. According to China Staff, “You should view the Wal-mart unionization story as a sign of a broad shift in Chinese HR policy and regulation, rather than as a specific or isolated case of government meddling. Prepare for a wave of ‘rich foreigner companies are cheating me’ lawsuits."

Stay tuned.