Professor, IMD - International Institute for Management Development
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China’s rapid evolution to a global financial powerhouse is creating a heightened demand for talented Chinese executive candidates and white-collar administrative staff. Gone are the days when multinationals looked to China for low cost labour to manufacture goods primarily for Western countries.
The astonishing growth of China’s middle class and the enormous purchasing potential of millions of recently empowered consumers are drawing attention to China’s premium and mid-tier markets. At the same time, Chinese companies such as Huawei and Haier are going global and compete for the same talent pool. The equilibrium of demand and supply for experienced executives who understand the Chinese market and know the business environment, who are culturally savvy and could bridge the gap between the local subsidiary and headquarters and between China and the rest of the world, is not yet reached. Hence, the expression “the war for talent” has become popular.
While job openings in China often attract thousands of applicants, finding the right person can be both difficult and time-consuming. Keeping the right person in the right job is even more of a challenge. For example, in 2010, at least 50 new foreign law firms opened offices in China, and began looking for qualified personnel. The quickest way to get the experienced people is to find them in other law firms. As a result, many multinationals report a turnover among their Chinese employees of 25% a year, and in some cases 30% or higher. Even employees who are satisfied with their work environment regularly face temptation. One executive reported that he gets up to several telephone calls a week from headhunters offering more and more enticing incentives to switch companies. “It is hard to remain loyal and when you experience that kind of pressure,” he confessed.
The cost of this high rate of employee turnover is nontrivial. A multinational pharmaceutical company with a long history of doing business in China reported that a sales representative might earn USD 120000 a year, but the cost of replacing him can easily add up to USD 162000. IBM China estimated that it lost half its sales in certain markets simply because it could not find enough trained staff to make the right connections. An even greater cost is the lost ability to deliver uninterrupted leadership.
Recent surveys show that communications tend to breakdown when a global company’s headquarters and its regional office have different ideas about what to expect from a manager. Often the two are unaware that their expectations have been subtly shaped by cultural differences. China has a traditional respect for hierarchy, and it is often taken for granted that decisions flow downward from the top. A junior executive may decide not to act on his own because he is afraid that whatever he does might interfere with his boss's master plan, the details of which he may not have been told about. In the West, individual initiative is expected. Lower ranking executives are encouraged to take charge, act independently and be creative. When the expectations are not verbally communicated, this can lead managers at the company’s headquarters to conclude that certain regional executives are not proactive and have to be told what to do. On the other hand, Chinese executives in the regional office may conclude that their superiors are not clear about what they want and avoid responsibility. The result is frustration at both ends of the command chain.
The answer, of course, is that companies need to head off these issues by paying more attention to the culturally different perspectives. Above all, human resources professionals and managers need to make a special effort to educate new hires as to exactly what the corporation expects and also to examine the underlying logic that shapes the company’s approach to management. This takes time, and it is one reason that companies try to hire staff that already have considerable experience.
The situation is further complicated today by the fact that China is going through rapid social changes. Private enterprise was only legally allowed in China in late 1979, and even then, it has taken years to fully adapt to an open market economy. As a result, older managers, who grew up in 1960s and experienced the fallout from a planned economy, tend to see things with a viewpoint that can be quite different from today’s youth who grew up in the 1980s and 90s. Young people have experienced much more economic wealth than people born before the 1980s, and thus the attitudes towards life, work, and work-life balance are quite different between these age groups.
This generation gap, which the headquarters may not even be aware of, can lead to younger staff becoming frustrated with what they see as an inflexible, old- fashioned approach. At the same time, senior managers may be frustrated with a perceived general lack of discipline from their underlings. “Eating bitterness” (吃苦) is a quintessential Chinese expression to describe the person’s willingness and ability to endure hardship. People growing up in the 1960s and 70s were indoctrinated with eating bitterness to the point that that generation of people believe if they do not eat bitterness, they will never be successful. For the younger generation, especially the ones living in the 1st-tier and 2nd-tier cities, they did not have much experience with “bitterness” and they are more in tune with “to be rich is glorious”!
The solution should come from awareness and a greater understanding of the different points of view. Recent surveys show that senior executives value recognition and respect nearly twice as much as salary. On the other hand, junior executives tend to base their employment decisions on total rewards, future career opportunities and establishing a balance that allows for quality of life.
As the competition for skilled employees increases, the demands on human resource functions are more intense and more complex. Only a few years ago, most multinationals could attract the best candidates from the best universities. Foreign companies were considered solid career choices. They enjoyed prestige, offered foreign travel and other valuable international experience. Nowadays holding on to valuable staff in a competitive market is made much harder because the multinational HR departments face additional challenges. The rapidly expanding purchasing power of China’s new middle class means most future growth for companies in China is likely to take place in the previously neglected mid-tier markets. The criteria for succeeding in these markets can be radically different from those required for the premium market segment traditionally targeted by the multinationals.
The premium market demands well-educated, multilingual employees who have a certain level of international sophistication and are able to function in two cultures: China’s and that of the company. While brand, technology, product quality and services matter in the premium segment, it is price sensitivity that defines the mid-tier segment. Competing in the mid-tier markets puts the emphasis on understanding the local market in the 3rd- and 4th-tier cities and the low cost structure. In this context, foreign language capability may come across as an unnecessary additional expense. Hiring less sophisticated candidates from 2nd- and 3-rd-tier cities may make more sense since they are likely to be less demanding and at the same time, they may have a better understanding of the market that the company is trying to penetrate. On the same score, a candidate who has graduated from a prestigious university is not only likely to demand a higher salary, but he may also have a harder time identifying with and understanding the likes and dislikes of the average mid-tier consumer in the 3rd- and 4th-tier cities. At the present time, the 1st- and 2nd-tier cities in China are still perceived to be more exciting places and offer better opportunities and better living for most people. Asking experienced executives to relocate to 3rd- and 4th-tier cities is a big challenge in itself.
A leading multinational company that recently launched its own start-up targeting the mid-tier market decided to pick new hires for their entrepreneurial spirits rather than based on prestigious credentials. The criteria for selecting people and remuneration packages for the mid-tier segment are drastically different from the ones they used for the premium segment, which is consistent globally. Penetrating the mid-tier markets, the company concluded, requires a radically different approach.
China is big in terms of geography and the size of its economy. The regional differences with different levels of economic development (inland vs coastal regions, northern vs southern regions) call for a nuanced approach to talent management. The generational differences with different expectations mandate that we have a deep understanding of employees and people dynamics and caution against making generalisations about the characteristics of Chinese employees and customers. People at different stages of their lives aspire to different goals. One Chinese executive working for a Swiss pharmaceutical company was asked to relocate to Switzerland five years ago. She turned down this opportunity because her daughter was still in middle school. Now she is actively seeking similar opportunities since her daughter is in college now. The generalisation that Chinese executives do not want to work outside China is not entirely accurate. While statistics tells us the general trends, it does not necessarily explain the whys. Sometimes conclusions about talent management in China based on survey results can be misleading. The best strategy is to ask why and under what circumstances this might be true and in what context this might be valid—supplementing data with insights and observations and intimate knowledge of real people. When it comes to China, it is not one-size-fits-all.
In recent years, as more and more multinational companies try to expand into the mid-tier segment, I am more convinced that it is not one-size-fits-all. The HR practices should support the business strategy. The different business models require different HR approaches. It is in the context of business model and strategy that the discussion about talent management should be carried out.
No other countries have achieved so much economic growth in such a short period of time as China. To truly understand and appreciate the magnitude of change and the speed of change and how they affect the HR philosophies and practices, we all need to learn to be adaptive when it comes to China. What worked yesterday may not work today and what works today may not work tomorrow. This is the China that I know.