Chinese New Year or Spring Festival is the most important festival for Chinese people. Since the Chinese New Year is based on the lunar calendar, the date is different every year and can create difficulties for many companies during this period.

Spring Festival is especially a hard time for the manufacturing sector in coastal cities, because of labor shortage. Most of the workers in the manufacturing field come from rural areas and central provinces to work in industrial cities. In most cases, Spring Festival is the only opportunity for these migrant workers to go back to their hometown and visit family. That is why most of the companies in China close for the Spring Festival. This period can be different for each company, but it usually takes one or two weeks before and after the date of the holiday. This period means a decrease of productivity of Chinese manufacturers that can reach more than 40 percent (compared with peak seasons). This is why it is important for foreign entrepreneurs to know the exact dates of the Chinese New Year holidays of their partners in order to schedule their production.

 During the weeks prior to Spring Festival, workers increases and are pushed in order to finish all the orders before the beginning of the holidays. Rushing production often involves a decrease of quality management processes and extra hours working. Because of these two issues a higher quality control is often required during this period.

Another problem that companies face before the holiday is the annual bonuses that they have to give to all their employees. This bonus is calculated based on the efficiency of the employee during the year and their seniority in the company. In some companies, it can reach twice or four times more than the monthly salary and it is paid before the Spring Festival. Therefore, companies in China have to plan the payment of these bonuses several months before the holidays .

After Spring Festival, manufacturers in China face a way bigger problem, which is labor shortage. This issue has been more and more critical for the last few years, and there are several reasons for this. The immediate cause of the shortage is that millions of migrant workers who traveled home for the lunar New Year holiday do not return to the coast. This is why most of the manufacturers lose between 30 to 50 percent of their workers and this directly affects their productivity.

In the past few years, the living cost has been increasing in the coastal cities, and a half-trillion-dollar government stimulus program created a favorable environment for business in the central part of China. The combination of these two phenomena has created a "go west" movement and manufacturers create new plants or simply move their plants to the interior. That is why jobs have been created in the central regions and because of cheaper living costs there is also a reason for movement of the labor from east to west. Spring Festival is the perfect opportunity for migrant workers who go back to their hometowns to search jobs closer to their families.

In order to avoid this important labor shortage manufacturers are trying to set up different solutions to encourage their migrant workers to come back after the Spring Festival. One solution is indeed to increase wages, which involves an increase of their costs. Therefore these manufacturers may decrease their competitiveness. Another solution is to provide better benefits packages to their workers, such as free meals, free housing and better working conditions.

Chinese New Year, which usually starts late January or early February, therefore places some difficulties and pressure on the manufacturing sector in China. These labor-related issues can directly affect production processes and indeed quality and delivery times. That is why it is important for foreign entrepreneurs to know these problems in order to make appropriate decisions and to plan their production schedules several months in advance.

Column prepared by Milad Nouri, Managing Director of China Consultants International Limited