Engaging China 2005 Conference, Sydney 8 & 9 June 2005
PETER ARKELL. PARTNER AND CHINA CHIEF REPRESENTATIVE
THE SWANN GROUP. MELBOURNE, SYDNEY, PERTH, AUCKLAND, SHANGHAI, MOSCOW, LONDON
The feature of just about every facet of life in China, be it business or in general, the more that you think that you know it, the greater the potential for surprises. There is a well-worn phrase there that seems to excuse all twists and turns, This is China.
The following discussion will skim over some of the many varied possible HR issues that confront an enterprise that is engaged in China. There will be times when the reader will feel that there are contradictions and times when they will recognise their own experience. However, keep in mind two very important points as you consider the HR issues raised.
Firstly, these are the observations of a humble headhunter in China who learns something new every day. Secondly, that this is China.
China is an exceptional place to be today, perhaps the most exciting place in the world to be doing business at the moment. With an economy that is said to have been cooled down over the past six months, yet is running at about 8% growth. It would appear to be a land of rich opportunity. This emerging market is unlike any other that has been seen in recent history, in that its growth is being driven not only by its place as the factory for the world to quote Premier Wen JiaBao, but also by enormous domestic demand. This is a feature that has significant impact on a number of the HR issues that confront business. Issues such as high turnover rates, markedly variable wage rates, the competition for talent, the mobility of the workforce are very different in China than from mature and steady labour markets like Australia.
Until recent times, HR was not an issue for great discussion in China. It was barely covered in universities, and the large State Owned Enterprises saw the function as an administrative department that attended to payroll and associated benefits including housing. As the countrys doors opened to foreign enterprises and they brought with them their business processes, the modern application of HR practices first started to be observed. The early 1990s saw the emergence of professional HR practices being integral to the strategic operation of business in China.
The size and scale of China has many newcomers convinced of the opportunities for quick and easy success. All those with any experience there will know that this is a highly competitive market that is littered with casualties that failed to appreciate the multiple pitfalls; HR issues being just one facet.
For an Australian used to open space and relatively small operations, it is difficult to appreciate the mammoth scale that confronts you in China. You wonder how can a city with the population of Australia have traffic that moves while Sydney has gridlock? You are amazed at the efficiency of the subway system that is constantly crowded. But business operations can be staggering. A visit to the VW plant in Shanghai will show you the most modern and automated VW plant in the world. It is a highly technical operation that turns out almost 400,000 vehicles per year. An enquiry to the HR Manager about how many of these are for the export market brought the reply that they would send 500 abroad next year to satisfy a government requirement that they must engage in export. Otherwise domestic demand requires their full capacity.
Australia is about to build a number of large ships for the RAN. Ships of about 30,000 ton. It is 20 years since we have undertaken shipbuilding of this size; the ANZAC ships are about a third of this size. As a headhunter with an interest in the Defence and Aerospace sector, it was thought that investigation of the China shipbuilding talent would be prudent. We found at one shipyard in Shanghai an enterprise that was almost too large to comprehend. There they turn out 26 super large ships per year, the smallest being 75,000 ton and they can be as big as 130,000 ton. Ships that are welded together in sections that are each 900 ton. This is China.
Robert Freidland is the Chairman of a Canadian mining company, Ivanhoe Mining, which has huge copper and gold reserves in Mongolia. To hear Freidland talk of the insatiable Chinese demand for copper as it manufactures millions of cars and constructs thousands of huge buildings, all requiring copper wiring, gives the listener an appreciation for the demand for resources to feed this rapidly emerging market.
With 1.3 billion people it might be assumed that one resource that China has in abundance is labour. However, there is intense competition for the available talent across the board and not only do enterprises compete for that talent but also you can observe the various city and provincial governments competing to attract people to meet the demands of the industry that they have fostered in their region.
Shanghai, for example, has had a birth rate of 3% for several years yet its population has been growing each year. Today 25% of its population comes from other regions.
Shenzhen in the south is a major manufacturing hub. A recent municipal government report indicated that there will be a need for more than 2 million skilled workers in the next five years. The same report, quoted in the China Daily, said that there were 53,000 people vying for its 105,000 vacancies for skilled workers and technicians.
Various governments will introduce policies designed to attract particular industries to their centre. Offering tax breaks or other incentives to make that region a centre for the industry. As a result, these industries become hot. Clothing manufacturing is hot around Shenzhen, finance has been a focus of the Shanghai government, Dalian has reinvented itself with automotive industry. This is a double edge sword, attracting talent to that centre for the opportunities that it presents, but also creating high demand for those people and therefore pushing wages higher.
A report published in May 2005 by 51job.com, an internet based recruitment company, similar to Seek in Australia, gives an indication of the industries in most demand for talent in the developed east coast centres. The figures next to the industry sector indicate the percentage of the total positions that were advertised on 51job.
Hot Industry Table
What To Do?
Perhaps the hiring choices come down to three categories:
- Local
- For most foreign firms operating in China this is seen as the first and best option. Localisation is the HR strategy that most are pursuing
- Ex Pats
- Often this will be the place to find the most senior of the management team
Could also include Overseas Chinese, people born abroad of Chinese heritage
- Returnees
- A potential bridge between the cultures of China and head office
The Swann Groups earliest entry into the China market was with a particular emphasis on the identification of successful Chinese professionals in the West, with a view to bringing them back to China for the multi purpose of filling a talent shortfall and also to bring the depth of appreciation of how to do business in China while appreciating the needs and drivers of head office back in Australia, US, Canada or wherever. It was both surprising and satisfying to find that there are many such potential Returnees around the world who are keen to come back to China and to be a part of and to make a contribution to the China phenomenon.
Some observations of each of these three talent pools are:
- Local
- While generally lower cost, there is a lumpiness in the compensation rates and the expectations of the local workforce. Salaries for locals will be discussed later in this paper.
- Some reports suggest that a local managers compensation can be as low as one fifth of a counterpart in Hong Kong.
- There is a very high turnover rate. The across the board rate is 12.5%, the highest in Asia.
- There is a consequential short-term employment feature to the large proportion of CVs that are received.
- There is a very well educated workforce, particularly in the larger centres. For example, in seeking an EA for the President of a very large multi national firm, all of the shortlisted candidates had MBAs.
- While English capabilities vary, there is a surprisingly deep resource of English speaking professionals.
- There is a desire to work for a famous foreign firm and to break away from the old State owned enterprises. Just as they are attracted to labels in clothing, the Chinese are keen to be employed by a brand company.
- In the larger centres, there are many people who have spent their whole working careers in foreign companies, with good appreciation of the needs of that type of operation.
- There is a very high acceptance of family members living and working in different locations.
- Some talented locals perceive a glass ceiling as they see a revolving door with ex pats filling the most senior positions.
- There is an emerging class of particularly talented people in the 35/36 year old professionals. The observation is that this is the first group whose education is entirely post Cultural Revolution.
- Ex Pats
- There is the obvious benefit of bringing corporate knowledge and company networks
- A Hewitt Associates report in late 2004 indicated that, while still expensive, there is a downward trend in the differential with locals.
- There is a significant population of foreign management living in China, with long experience there, who are talented and not necessarily looking for full ex pat conditions. Some refer to these people as local plus.
- Having a foreigner in a leadership position can act as a magnet for local talent who feel that they will get more career development under the wing of that manager than a Chinese counterpart.
- There can be difficulties if the ex pat does not speak Mandarin and they will often struggle to fully appreciate the China culture.
- Overseas Chinese ex pats can bring a Mandarin skill and they may have an appreciation of China culture.
- On the other hand, there can be a view among Chinese people that this is not the ex pat who will help them to learn western business.
- Returnees
- These Hai Gui (translates as sea turtles) have their own websites and associations.
- Many will be expecting full ex pat compensation, having taken citizenship in their new country.
- Others are keen to return to China and willing to accept a premium local compensation, often in order to be reunited with their family.
- These professionals bring a bridge between the culture of China and the culture of the foreign firm.
- There is a high level of interest among the China born overseas Chinese professionals to come back to China.
- Putting together packages can sometimes be difficult neither for the Returnee who is neither a Chinese citizen nor from the country of the foreign firm. They are a third national.
Hiring
Companies considering a China engagement will have been in discussion about the nature of operation that they will use for their business. Be it a WOFE (Wholly Owed Foreign Enterprise), a Joint Venture or a Representative Office.
From a hiring perspective, a WOFE and JV are able to engage and pay their own staff, while a Representative Office must use an agent of which there are a number, such as FESCO, who are established just for that purpose. This service is well established and effectively provides a payroll facility for the foreign firm.
Local candidates will often discuss openly their current compensation. It is important to keep in mind that they usually talk in monthly terms, usually expect it to be a 13 month year and they will usually only be talking about the cash component of the compensation. Other elements that add to the total cost of employment include:
- Tax
- Pension Insurance
- Unemployment Insurance
- Medical Insurance
- Occupational Injury Insurance
- Housing Fund
These additional items can add significantly to the cost. For example, a cash compensation after tax of RMB4,500 will cost almost double that if you are a Representative Office using an agency to administer the payroll. The total employment cost is actually RMB8,750.
Salary Structures/Differentials
As discussed earlier, from a compensation/salary perspective, this is a very lumpy labour market. A HR professional in Australia might be able to estimate a persons salary at home and be within a few thousand dollars if they know enough about the duties and the type of company. In China there are wide, some might suggest wild, variations across the board that make benchmarking very difficult.
A survey of the hi-tech industry in Beijing by Beijing Dehan Management Consulting Company found that the gap between the highest and lowest salary within an enterprise ranges from 3.5 times to 45 times, with the average being 15 times. And the range across the whole industry saw the highest salary being 69 times the lowest.
In a specific role there will be wide variations in expected compensation. Our own experience has seen, for example, a senior finance position with a field of excellent candidates seeking the role with expectations from RMB360,000 to RMB1,200,000 per year.
There has been upward movement on wages in general over the past years. A survey of 2 million workers conducted by another of Chinas leading on-line recruitment services, Zhaopin.com, indicated that there was a movement of 4% over the 2004 year. That increase has not been uniform across the industries or occupations. Occupations such as HR, sales, marketing and business development were held within that increase of 4%. Some industries, however, experienced much greater increases. According to the Zhaopin.com survey, telco engineers for example had an average increase of 15% and workers in the environment protection industry increased their compensation by 14%.
The same report also confirmed that those working for state owned and domestic owned enterprises are generally paid less than their counterparts in foreign companies.
A glance at a sample of candidate CVs for almost any role will surprise those unfamiliar with China, with the regular changes in employment. It seems at times that a two-year stint with a single employer is the norm. However, with the high demand for talent in a rapidly growing market and relative low base pay, foreign firms have contributed to this mobility. It has been relatively straightforward decision to take a planned monthly compensation of RMB10K to RMB15K when the conversion to AUD is $1700 to $2500 per month. What's $800 per month, its not much over the year? you hear the hiring manager rationalise. For the Chinese worker this is the means to ratchet themselves up the payscale. It has been observed that Chinese HR managers have less difficulty with this mobility on a CV than foreign HR managers. But it has caused many foreign firms to look at their HR practices to consider how to reduce their turnover. As discussed earlier, the national turnover average is 12.5%. One large Australian company with operations across China is very proud of its 3% turnover, which is achieved without pushing their wage rates into the top rates. Rather good HR practices have given them the stability.
Conclusion
There are many confusing and often conflicting signs in setting the HR course in China. Just as there are with all aspects of business here. Government policy varies from region to region. Compensation rates will be wildly at variance within a region. Strategies for localisation versus ex pats will cause headaches in China and at home. There will be as many people ready to give advice, as there are possible strategies.
But keep in mind the positives. Having made the business decision to engage with China, the HR side of the business is do-able. China is a country rich with a well educated and business savvy population. There is a terrific network of Australians in China. Some have been there for more than 25 years and yet have maintained their unique Australian touch. There is camaraderie among that community that provides support when it is needed.
It is a country that seems different to the newcomer, but when you scratch the surface, the differences are not too great and certainly not a disincentive for pushing forward. In fact, often it will seem that things are impossibly difficult and that the system is conspiring to frustrate you, then unexpectedly you will be surprised to find fresh opportunities to give you a renewed burst of optimism. This is China.
If in need of a recruitment hand or just a double check, please feel most welcome to contact The Swann Group in Australia or China. Our web address is www.swannglobal.com. Our China office is in Shanghai, and we are doing tasks in the north, south, east and far west of the country. If in Shanghai, drop in for a coffee; it is the best in town.
Peter Arkell
Managing Director - Swann China
Located at: Shanghai Times Square Office Tower
Room 1406, 93 Huai Hai Zhong Lu, Shanghai 200021. PR China
Phone: +86 21 6391 0688, Fax: +86 21 5382 0977, Mobile: +86 136 8184 4802
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