China HR, Part II -- Response to Comments

Earlier this week, I did a post on a Forbes Magazine article on China human resource (HR) strategies. The Forbes article was written by Shaun Rein and it engendered some interesting comments/questions, along with posts on other blogs (Freight Dawg, Recruiting in China, and China Herald).  Because HR is definitely not my forte, I asked Shaun if he would do a guest post addressing the issues raised in the comments.  Shaun was kind enough to respond and the following is his guest post.  Thanks Shaun.

           By Shaun Rein

My commentary for Forbes about HR strategies in China How Multinationals Err In China has evoked a lively debate on various blogs.  Dan Harris China Law Blog has engendered some of the best perspectives from commentators.  Dan has asked me to write a response to some of the comments/ debates going on which I will do here.

Within 5 hours of my piece going up in Forbes, my firm received 60 some emails from people working from the US to Europe to the Middle East with comments on the article.  A common theme is that not just Chinese youth but most people want to have jobs that afford them respect and give them chances for advancement.  Thus, my article seems to resonate throughout the corporate world.  The themes in the article and in the responses the article provoked are universal and should be recognized by all corporations as they develop sound HR strategies. The central idea is that browbeating employees or plying them with money will not ensure that a company can retain key talent.  Indeed, American employees would not want to work in companies in the States that offer no chance of advancement.  Chinese feel the same way.  I agree with Dan that while cultural differences between the US and China do exist, people are people and business is not so different.

Here are some of the major themes brought up by many commentators and my responses:


Cheap Labor

China can no longer be viewed as a place simply to produce products destined for Wal-Mart or K-Mart.  Chinese are optimistic about their career prospects and are demanding higher wages and better working conditions, even in factories where laborers were previously just thankful to have a job.  Factories are modernizing and workers are more willing to stand up for their rights and hold out for better conditions.  Foxconn's operations suffered in China because employees were unwilling to accept what they considered to be poor work conditions.  In comparison, Flextronics, a company that has approached HR and work conditions more progressively, has had fewer issues with workers.  They are treated better and tend to be happier based on interviews my firm has conducted.

Obviously, there are price advantages to locating to China as some critics of my article noted.  Smart companies will take advantage of this.  Though fees for accounting firms remain at international standards, for instance, the Big 4 accounting firms do pay less for their junior managers than their counterparts in the US.  But the key is that the partners (Chinese included) make or can make the same amount of money as expatriates.  In these firms, there is no defined class structure based on one's citizenship.

It is important that companies allow Chinese the opportunity reach the top and earn top level compensation.  In China, the industries that have done this the best are the investment banks and law firms.  Rainmakers earn huge payoffs.  Maybe only 1 out of 1000 analysts at Goldman Sachs in the US makes it to the Senior Managing Director level, but that dream is inculcated in the sweatshops of Goldman's hallowed halls.  Without the possibility of reaching the highest echelons, little motivation exists for an employee to work grinding hours for years on end.  It is much easier to change jobs frequently and take incremental pay raises than stay in one place with no hope of upward movement.


Service economy

In the late 1970s, when China was just embarking on its economic reforms, only about 25% of the economy was service based.  My firm estimates this number will hit 45% by the end of 2008 for a couple of reasons.  First, as Chinese get wealthier, they are demanding more leisure activities and spend more time and money at restaurants, massage parlors, and vacation destinations.  Second, as Chinese businesses blossom, an ecosystem of law firms, banks, consulting firms and the like are proliferating to help Chinese businesses grow their companies. 

The Government has supported this growth and is encouraging FDI in the service sector.  We often recommend to our clients in the manufacturing sector that they consider Vietnam as an alternative to China when building new factories to a) lower political risk (mostly from the US and not China) and b) to take advantage of Vietnam's push for manufacturing while China is discouraging it.  This is becoming such a big part of MNC's business that my firm is thinking about expanding and opening an office in Vietnam.

The growth in the service sector in China is an important consideration for foreign companies, both in how they view China as a business opportunity and in how they treat HR issues.  As China's service economy develops, companies are increasingly faced with employees who expect a higher quality of life, not just in terms of monetary rewards but in terms of flexibility and lifestyle.  They want more personal vacation time so that they can enjoy golf lessons or a trip to the beaches of Hainan with their family. 

The worker in the service sector cannot really be treated as an easily replaceable commodity as, unfortunately, too many companies did before in the factories in Guangdong.

Lack of Talent

The majority of MNCs will turn a profit in China in 2007.  There are a number of reasons for this turnaround in the prospects of MNCs in the Middle Kingdom, including improved transparency, continued Government reforms, and a Chinese consumer with increasing disposable income.  Another key ingredient contributing to the growing success of multinationals is the implementation of management teams on the ground in China that understand how to navigate the markets and give their clients/ customers the services and products they demand at the right price point.

A large part of this success can be attributed to the growth of China's talent pool.  Unfortunately, the talent pool is not large enough to accommodate the demands of MNCs.  Part of this is because the potential profit in China is so good that MNCs need more and more talent in order to scale up, part of it is because of an education system which does not equip its graduates with the analytical skills to cope with the electric business markets in China.  The brains are there but only companies that can implement training programs that give employees functional skills while also offering them opportunities to advance will be able to scale up to the level they need to grow along with China's booming economy.

And many of the top Chinese do prefer to forge ahead and open their own companies in the hopes of becoming the next Chen Tianqiao or William Ding Lei.  But still, there are talented folks who would be willing to work in MNCs if they felt they would be treated with respect.

Going Forward

Aside from understanding what your target market wants or improving supply chain functions, MNCs need to create sustainable HR strategies.  Though HR is often considered a laggard in the corporate hierarchy to sales and finance, in China the fight for talent is at such a fever pitch that HR departments need to play a critical role in helping their companies grow.

Companies need to see what their own employees want and figure out the recruitment and retention strategies necessary to grow profitable businesses in China.