“Investing Abroad – People Are the Key Ingredient” 

Address by Peter Arkell to China Mining 2009

Good afternoon and thank you for giving me the opportunity to talk about the people, or HR, aspects of investing abroad. Obviously the spotlight in discussions regarding investment anywhere is centered on the financial considerations – “how much are we going to pay and what will the returns be for the investment?”  And inevitably there will an army of advisors – be they financial, legal, government and so on – working closely with the investor to ensure that the merger or the acquisition will be successful.

But, while “money may make the world go round”, the success or failure of an investment will often depend on the people strategy that has been developed for the transition from one owner to another. This afternoon I would like to discuss this people strategy issue for the Chinese company that is embarking on outward bound investments in the mining/mineral processing industries. Get this aspect right and you have ticked a major box in the quest for success abroad.

I am the Managing Director of the China operations of Swann Global. Swann Global is an international HR consulting firm that I believe is uniquely qualified to address this issue. It was founded in Australia in 1993 with a singular focus on the natural resources sector. For the past 17years the company has built its specialization in the mining and associated industries. For almost eight years we have also focused on China with full time offices in Shanghai, Beijing and Hong Kong since 2004. I doubt that there is any other HR firm in the world with this concentrated attention to the global mining industry as well as on China.

When we first turned our attention to China it was at the invitation of a very large multinational company that had great ambitions for investment in China. In fact, I recall that their plan was to invest $6b here, in mining, smelting and downstream operations. Our task was to work with them in putting the right people into place so that they could adjust their operating style to fit the business environment of China.

The strategy was not only to find the appropriately talented people, but also those who could provide the right cultural bridge between the operating style of the west with the particular business style of China. I recall many times discussing that there is “not only the culture of China, but also the culture of head office” that needs to be addressed.  Both sides have their mysterious ways and a lack of appreciation for either side’s quirks or idiosyncrasies will be a disaster. These differences could bring great frustration. One president of the China operation of a huge international company said to me that “China will either teach me patience or send me crazy; I fear that I’m going crazy” he said. It was clear that he was struggling with one side of the cultural coin and, as a consequence, his company’s very substantial investment strategy was at risk.

I would like to talk initially of some of the people lessons that I think have been learned by the international mining community as they manage their investment strategy in China. By discussing this first, I think that it might be possible to draw some conclusions on how Chinese companies might tackle their own people strategies as they go abroad. Many of the challenges will be similar. Perhaps there will also be some which are going to be particular to the Chinese companies. Swann Global has been very fortunate to work with some of those Chinese companies who have gone abroad already and later I will try to point to some of the solutions that have tested in those foreign countries.

For the past four years here in China, Swann Global has conducted surveys of the international mining community here. The primary focus is to examine the compensation paid to the various levels of that workforce, the executive, the technical professional and the support staff. We have been particularly interested in the make up of this workforce and how international companies have spread their talent throughout their organizations. For your interest, we placed copies of the 2009 study summary in your conference packs.

We look not only at the Local and Ex Pat components of the workforce, but also the Chinese Returnee. That professional who had started their careers in China, gone abroad and successfully built their skills in foreign companies before returning to China.

When I first started to work with that large international client some eight years ago, these Returnees were to be the “bridge” that would link the business culture of head office with that of China.

It seemed a logical solution and it was also my main pitch to prospective clients back in those earlier days. But, of course no single strategy would provide all of the answers and the international companies knew better than I did, that there was going to be a blend of backgrounds if they were to succeed in China. In many cases there were Ex Pats who came here with little appreciation for this business environment and they “went crazy” like my friend and soon returned to their more familiar western operations nearer to home. But others developed their appreciation of, and for, China and  were able to not only bring the requisite skills to their operations here, but also to assist in the “internationalizing” of the Local professionals with whom they worked. Many Local people gained the “cultural bridge” attributes of the Returnees by gaining vicarious international experience alongside the skilled foreign professionals. In some instances, I referred to these foreigners as “talent magnets” because they attracted the bright Chinese who were exceptionally keen to develop their careers in an international business environment.

The value of the people providing these “bridges” has been clearly demonstrated in Swann Global’s annual surveys. By 2007, the highest executive salaries, by average, were paid to the Returnee. They overtook the average for foreigner Ex Pat executives, demonstrating the high value that international companies placed on their executives who are equally comfortable with China’s and international business styles. So for three years of our study this trend has been consistent.

But running in parallel with this has been the steady increase in the average paid to Chinese executives in these foreign firms. That internationalization that I referred to earlier, has been seen to be of added value. In fact, as you can see from this graph, there has been a remarkable growth in their representation in that executive category.

In the space of four surveys, the Local Executives have gone from representing 14% of the group, and this year they turned up 51% of the total.

I think that this is good news for the Chinese company that is embarking on a plan to invest and operate abroad.

Just as the foreign companies had to adjust to this different environment, the Chinese companies that are looking to build businesses abroad will also need to keep an eye on people issues such as·        

• Differing cultural environments        
• Labour laws that are not the same as those at home        
• Work practices that may be at odds with what we are used to here in China        
• A different approach to EH&S        
• Physical locations that we do not experience in China        
• Significant salary differentials when compared to here in China

I had wondered if this last point was fully appreciated by a Chinese company that had either merged with or acquired an operation in a foreign country. How would they integrate professionals into their company, who were paid far more than their counterparts in China? Shortly I will come back to this when I reflect on the experience of some Chinese investors that I have observed as they have made the adjustments abroad over the past couple of years.

Before I discuss that point, I would like to return to the value of the “internationalized” Local mining professionals and the Returnees that I was discussing earlier.

Rather than call these people a “bridge”, as I had in my description of the workforces of foreign companies operating in China, one very smart Chinese executive, who has been part of the acquisition movement abroad, had a way of describing these people that really caught my imagination. He said that it was like he has a very powerful laptop computer. This laptop is capable of performing all of the modeling and analytical tools that he needs at hand as he does his work. In China this laptop works beautifully, and is an integral part of his operation. However, when he arrives in a foreign country, Australia, Canada or wherever, he finds that the power socket does not match the plug on his lead. For a short time the computer can perform all of its functions, but inevitably the battery’s power will be exhausted. From then the computer is of no use to him and the power within is inaccessible. The solution is to acquire an “adaptor” and very quickly the great value of the computer is restored.

]This executive described these internationalized Chinese professionals as the “adaptor” for their business abroad. I would extend that just a little to include the foreigners who have had rich experience in China and who can also bring those adaptor qualities in these new markets while still appreciating the drivers for the Chinese investor.

Let’s take a quick look at three examples of how some Chinese companies have broadly addressed the people aspects of operations that they have either acquired or merged with in foreign countries.

The first company acquired an asset that was to be built into an operating mine. Their people transition strategy was to put in place an executive team that was entirely made up of professionals from that country. They decided that the issues that I listed earlier, such as labour laws, EH&S, culture and work practices were very important and did not want to risk their investment. But like the computer without an adaptor, the executive soon became powerless because they could not effectively communicate with their owners in China.

The second example was also of a Chinese company that acquired an asset that required the company to build it into an operating mine. In this case there was a strategy of putting an executive team that recognized the value of both the Chinese talent and the professionals within the country. This executive team was not layered with just Chinese or foreigners in the top jobs. Rather, they appointed a Chinese “adaptor” as their country head and then found a blend of backgrounds, Chinese and foreigner, that could be intermingled across their business.My final example is slightly different in that the Chinese investor bought an existing operation. There was a structure in place, with an entire executive team from that country heading up the company. The Chinese invested a very large amount of money into this company, but entrusted the management to the existing team. Much as the company in my first example had done. However, in this case, they had appointed a Chinese professional with vast experience in that country’s mining industry to a very senior position. I am sure that there was no reference in this person’s contract to him being an “adaptor”, but his role is, in its essence, to be a communicator between his owners in China and his colleagues in the executive team.

It is worth stopping here to consider the added value that an acquiring company accesses when it takes over an existing business. It is not only the assets and the balance sheet that is being bought, but also the wealth of talent and capability that resides inside the acquired company. This value in itself can be the driver for an acquisition.

Of course this can present an enormous challenge for a Chinese investor. Perhaps head office here has a team that is exclusively Chinese. The pay rates and other benefits are competitive in the region of China in which they operate. However, in acquiring the business there are talented professionals who are integral to the investment, but whose compensation is considerably out of synch with those paid to their counterparts in China. There will be many difficult transition issues to confront in the integration beyond this matter of pay relativities, but it is demonstrative of the challenges that must be confronted early. And change may not necessarily need to be driven in the acquired organization; perhaps these issues will be drivers for change at the China end – even in head office. The complexities are not to be underestimated and planning, perhaps with the assistance of an external partner to facilitate change, will need to address these people differences that translate to organizational restructuring.

The blending of business cultures is an exceedingly difficult task. Without taking into account the Chinese factor, I have seen reports on the success or failure of organizational transition that suggest that such transformations of businesses take a long time and cost a lot of money and yet as many as 70% fail to meet their targets.

Studies also show that the impact of a major change event on productivity during the first eight months or so can be, on average, a decline of 45%.With an eye to my third example earlier, 25% of the top performers in the acquired company consider leaving the organization as soon as the transition is announced. So great care and planning at this stage is imperative. Lack of attention could seriously devalue the investment that has been so hard won.

Now these studies were of organizational transitions between companies of similar business cultures or backgrounds. Introduction of the Chinese way of doing business and a different alignment of expectations, will cause a variety of complex organizational challenges as the realignment of the new business is accomplished. These people issues can be managed and are not cause for avoiding otherwise attractive business investments. Careful attention to planning, communication and to post-transition recovery strategies will pay handsome dividends.

I have raised a number of challenges that have confronted investors into China as well as going abroad. These experiences often will hold the key to success. My area of interest, the people side of business, is always acknowledged as being critical. Business leaders regularly refer to their people as their greatest asset. Yet on many occasions it will be the neglect of the people strategies that will bring an investment down.

It has been my honor to talk at China Mining and in particular to those interested in taking Chinese investment abroad. Almost three years ago it was my New Year’s Resolution to turn Swann Global’s attention from an exclusive focus on the international mining companies in China to a concerted effort to partner with the outbound Chinese investors in this dynamic industry. Clearly there is still work to be done, but I am very happy to have joined with you in taking an interest in this significant power shift in the world’s mining community.

I wish all of you great success in your businesses and thank you for giving me the opportunity to reflect on the people side of this investment story.