Bridging China's Talent Gap

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Executiveaction seriesNo. 221 January 2007

Labor and Global Competitiveness

Bridging Chinas Talent Gapby Judith Banister and David Learmond

Finding talented managers in China is difficult. Although the number of young people earning undergraduate and graduate degrees is increasing rapidly, these newcomers to the workforce often lack the practical experience and softer creative and leadership skills required in the business world. Making the talent search more difficult is the fact that the more experienced managers are in short supply and command high salaries. For multinationals, it is now a challenge not only to recruit the best people, but also to develop and retain them.hinas rapid economic growththe fastest in the world for the past quarter centuryis fueling extensive foreign investment, with many companies setting up branch offices, regional headquarters, and factories in the country. One effect of this economic transformation is that demand for highly talented employees in China, especially people with local and international managerial skills, now exceeds supply, which is driving up compensation packages to global levels in some cases.

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Young Adult Population ShrinkingThe shift in Chinas demographic trends from high birth and death rates to low birth and death rates is changing the countrys population age structure, reducing the number of children (since the 1982 population census) both in absolute terms and as a proportion of the population, and the number of people in their 20s (since 1990) and 30s (since 2000). At the same time, the number of older people of working age is rising, as is the number of elderly people.1

Editors note: This report is based on presentations and discussions by Judith Banister and David Learmond that took place during the webcast Competing for Talent in China, organized by The Conference Board on September 13, 2006. The presenters have first-hand experience living and working in China. The views expressed here involving Unilever are Davids personal observations.

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China National Bureau of Statistics, Population Censuses of 1982, 1990, and 2000; 1% Population Sample Survey of 2005.

Chinas population, including the labor force, is aging rapidly, but the expanding number of people aged 40 and over is not well educated and does not constitute an adequate pool of talent for companies. Of Chinas employed population aged 40-44, only 2.6 percent have a university or higher degree, and the proportion is only one percent of those in their late 40s and their 50s.2 Conversely, the number of people in their 20s and 30s is shrinking over time, but this is the part of the population where the talents are located in China today. Fortunately, Chinas steep fertility decline has been accompanied by a sharp rise in the quality of children in terms of improved health, chances of survival, and levels of educational attainment. These young people are often hungry for responsibility, position, and the trappings of success in order to support not only themselves, but also their aging and large extended families. A lot of young Chinese managers bear this burden and will readily move between employers in order to get a bigger salary, more status, and more opportunities. This is one of the reasons why staff turnover rates are often very high in China.

found that employees in Chinas leading cities received annual wage increases of 6 to 8 percent between 2002 and 2005, while for managers and supervisors (who are harder to replace) the increase was slightly higher at 7 to 10 percent per year.4 Hewitt Associates reported that during 1999 through 2005, average salary increases were 8 percent in Chinas first-tier cities such as Beijing and Shanghai and 10 percent in the second-tier cities.5

Salaries all over the mapSalaries in China vary greatly. New MBA graduates from China's top business schools typically receive an annual starting base salary of RMB 115,000-200,000 (US$14,000-25,000) per year, though some earn much more.6 Those with bachelors degrees working for multinational firms in Chinas cities earn annual salaries of RMB 55,000-85,000 (US$6,750-10,500), those with masters degrees RMB 78,000-90,000 (US$9,750-11,250), and Ph.D.s RMB 85,000-120,000 (US$10,500-15,000).7 However, total labor compensation per employee (including social insurance payments) in the cities can be from 1.3 times to twice the salary, so the total annual labor compensation starts at about US$13,650-50,000 per highly educated employee. As of 2003, senior executives at foreign firms in Chinas leading coastal cities received an average annual salary of RMB 645,000 (US$77,700), mid-level executives earned RMB 297,000 (US$35,780), and the typical professional employee received RMB 100,000 (US$12,000), according to a survey by Hewitt Associate Consulting Corporation.8 Today, at senior management levels, some Chinese employees command a base salary of US$100,000-150,000 per year.

Wages in China Rising RapidlyWages in China are still low by international standards, partly due to the huge surplus labor force, but they are rising rapidly, aided by increases in productivity in all sectors of China's economy. But Chinas top talents arent the only ones receiving substantial wage increases. Over the past five years, the real wages (after adjusting for inflation) of the 29 million urban manufacturing workers in China have increased by 9 to 14 percent a year.3 Another study by the consulting firm Watson Wyatt4

Jim Leininger, The HR Challenge in China: Keys to Fostering Employee Commitment, Watson Wyatt Worldwide, 2005. Chinabusinessreview.com, March-April 2006, pp. 26-28. www.chinadaily.com.cn/english/doc/200406/15/content_339630.htm www.china.org.cn/english/Life/173321.htm www.ceibs.edu/today/news/archive/5095.shtml www.prnewswire.co.uk/cgi/news/release?id=130057 www.business-in-asia.com/china_wages.html

5 2 China National Bureau of Statistics, China Labor Statistical Yearbook 2006, p. 65. Erin Lett and Judith Banister, Labor Compensation Costs of Manufacturing Employees in China: An update to 2003-2004, Monthly Labor Review, Nov. 2006, pp. 40-45. www.bls.gov/ fls/#publications 6

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However, the large group of new graduates from less prestigious universities in China, whose education may not prepare them for work in multinational companies, command far lower salaries than those who can work for foreign companies. These graduates with weak training and poor foreign language skills are not in high demand by global companies because they lack the basic skills required. University graduates with a bachelors degree working for domestic Chinese companies have been stuck at a very low starting base wage during 2003-2006, according to numerous sources; the recent glut of such job candidates has kept their entry wage from rising. For example, Beijing University conducted a seven-province survey which showed that the average starting wage in 2004 for university graduates was only RMB 1,500 per month or RMB 18,000 (US$2,175) per year.9

Pay premiums for expatriate managers?Until recently, ethnic Chinese managers from Taiwan, Hong Kong, and Singapore, who are highly desired in China for their international experience, have commanded pay premiums. Now, a debate is underway among multinationals and leading domestic companies about how much premium they want to pay for expatriates, regardless of their country of origin. Theres a transition toward localization. Given the complexity and fragmentation of Chinas remuneration and benefits market, multinationals should consider giving local HR managers in China more freedom to decide on appropriate compensation packages for expatriates, returnees, and ethnic Chinese managers according to the market.

Employment of Chinas University Graduates by Economic Sector, 2004University graduates are spread throughout Chinas economy, according to the 2004 Economic Census of the non-agricultural economy of China: Sector Science and technology R&D Education IT Culture and sports Finance Retail and wholesale Construction Manufacturing No. of Employees (million) 3.3 15.2 2.4 1.5 3.7 13.8 27.9 83.9 University Graduates* (percent) 32% 28 28 20 19 8 4 3

*University graduates as a percent of total employees in each economic sector.

Source: China National Bureau of Statistics. China Economic Census Yearbook 2004, vol. 1, pp. 45-46, Table1-13.

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Beijing University survey.

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At the same time, multinationals also appear to be reconsidering the extent of the premiums they pay to local talent, partly because they find it relatively easy to attract people, particularly for lower-level positions. Being multinationals, younger workers view them as opportunities for learning and development, as well as increasing their worth in the market. Even if it is only a junior position, having the experience of working at a multinational company can be very good for the next job.

A 2005 report by McKinsey Global Institute, The Emerging Global Labor Market, found that global managers consider only 3 percent of graduates in China with a general degree to be employable.12 (A general degree is any degree that is not related to business or economics or specific skills like engineering or ITsuch as liberal arts or languages). One of the main problems with Chinas educational system is that it relies too heavily on memorization. But companies also need people with creative writing and speaking skills, teamwork skills, practical skills, and leadership ability, which are not taught well in the great majority of Chinas universities and graduate programs.

Steep Rise in Graduate and Postgraduate NumbersIn the late 1990s, China started establishing many new universities and graduate programs and also expanded the number of places in existing universities, giving many more teenagers and young adults opportunities for advanced education. This expansion has resulted in a steep increase in the numbers of graduates from 2001 onward, reaching a record 4.13 million graduates in 2006 a 22 percent increase from the year before, according to a Xinhua News Agency report.10 The number of people with postgraduate degrees in business-related fields is also fast increasing, in line with the rapid expansion of MBA courses in Chinathere are currently more than 230 MBA programs in China based at more than 100 institutions in 35 locations.11 However, in some cases, given the newness of the programs, the quality of the education is not high.

Positive Qualities and Common Problems of Educated Chinese WorkersIn general, educated employees in China have the following positive qualities and common problems, according to the personal observations of the authors, anecdotal reports by multinational employers, and available published material.

Positive Qualities

Young, bright, urban. Recently educated at university. Eager to work for multinationals orfor top domestic companies.

Hard working, ambitious, and dedicated.Common Problems

Chinas Educational System Is Still EvolvingThe Chinese government knows it must increase the number of educated people if it is to compete economically. However, while the number of people with advanced degrees is growing quickly, the quality of their education in general fails to meet business demands for talent.

Foreign-language skills, especially spoken English. Education often too theoretical rather than practical. Inexperienced, but expect good salariesand rapid advancement.

Frequent job-hopping (annual talent turnoverin some companies 10 to 30 percent).

Severe scarcity at management level.10 Xinhua News Agency, National Development and Reform Commission Report, May 7, 2006. 11 Jonathan Di Rollo, The China MBA Guide 2006. www.propathchina.com

12 McKinsey Global Institute, The Emerging Global Labor Market, June 2005. www.McKinsey.com/mgi/publications/emerginggloballabormarket.

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Linking up with local universitiesTo help universities develop courses that are more attuned to the needs of business, some multinationals are now identifying good universities in the area in which they operate and are working with them to devise courses that are more relevant to their specific requirements. In the past, these university-business links were often set up by state-owned enterprises. The fact that a lot of young people want to work for multinationals mainly because of the high status it gives them has persuaded some multinationals to forge links with universities to bring about change that otherwise might happen very slowly. In some universities, this approach has been well-received and multinationals are reporting success in getting whatever skills they want. It is an approach that should be mutually beneficial because it allows students to be trained in a way that is useful to the multinational. Those students then have a

fast track into a job with that multinational when they graduate. However, the practice sometimes falls short of this expectation as there is still a strong tendency for the university system to rely on learn by rote techniques. Teamwork and creativity are qualities still in short supply among Chinese managers.

Locating the Specialties Experiencing Shortages of TalentA survey of nearly 2,700 employers in China carried out by Manpower in 2006 showed that three-quarters of them have no difficulty filling positions.13 Of those that do, the top ten positions that are most difficult to fill are: production operators, sales representatives, highly skilled technicians, management and executive-level people, engineers, machinists, researchers (R&D), designers, restaurant and hotel staff, and receptionists. Some of the latter jobs are difficult to fill because these workers and employees need to interact with foreigners on the job but lack the necessary English language skills.

Recruiting GraduatesThe annual Chinese graduate milkround continues to be a drama of epic proportions. I remember traveling to a new university campus 25 miles outside of Shanghai to give a company recruitment presentation. With dire warnings of the unpredictability of the traffic, I arrived one hour early. I was staggered to see that the lecture hall was already overflowing with over 300 students. My suggestion that we start our presentation early was politely rejectedthis would be unfair to the hundred or so who were yet to arrive and would have the presentation relayed to them outside. Today, new technology is increasingly being deployed to provide company information to the huge numbers of applicants over a geographic area bigger and more diverse than Europe. We used live webcasts and interactive question-and-answer sessions with 10 company executives answering queries simultaneously. It was a bizarre mix between a recruitment call center and an Internet chat room where students felt able to ask questions they would never dream of asking face-to-face. David Learmond

13 Manpower, Talent Shortage Survey Global Results, 2006.

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International Assignments Develop Management SkillsOne way to improve managers international management skills is to give them international postings. The risk with this strategy is that Chinese managers in these positions will either not wish to return to China or that they will leave the company. Its a mixed picture. If people identify with your company and benefit from their overseas experience, often they will remain with the company and return to China. Moreover, multinationals should develop a system of short-term assignments for their Chinese managers, rather than two- to three-year postings, or get them involved in cross-cultural project teams with some overseas travel and experience in other places. To ensure that managers in China can perform not only in the international market, but also in the vast and rapidly changing Chinese market is a challenge that

requires a mutual learning process. Expatriates need to learn fast from their Chinese colleagues and employees how to function because they rarely know China well when they first arrive. At the same time, they need to train their Chinese colleagues to international standards. So it is a mutual training exercise.

Case Study: Unilever Breaks Free of Chinas Value TrapIn 2000, after 16 years competing in Chinas fast-moving consumer goods market, Unilever China was facing financial losses and negligible growth. The company was spending huge sums on marketing in one of the fiercest competitive environments in the world, but it had an ineffective sales and distribution model and an inefficient manufacturing base. It also employed more than 100 expatriates in managerial positions and had a large local talent gap. Staff turnover in key functions was high.

Investing in Leadership SkillsIn China, multinational businesses need to put a lot more effort into talent development than they would normally do in most other places in the world. In particular, they need to focus on the software talent development needssuch as coaching, leadership development, and the ability to handle change. At Unilever, we developed a range of coaching programs. Using web-based questionnaires, psychometric tests, and feedback from subordinates, participants in the programs received highly relevant and specific feedback on their leadership styles and the climate they were creating for their staff. Our Chinese managers discovered that their predominant leadership style tended towards command and control and that overusing this style was having a negative effect on their people. This realization encouraged them to develop other styles of leadership and learn how to deploy them to match the wide range of situations they encountered in everyday business. It was not always easy for managers to manage in this way but most were encouraged when they found that their staff responded enthusiastically. For managers, it meant listening more, talking less, and generally being supportive and questioning rather than directive. Staff had to get used to using their bosses as sounding boards, taking responsibility for their decisions, and learning from their failures as well as their successes. The coaching initiative was one part of an overall strategy aimed at establishing sound foundations for the business and accelerating profitable growth. I have no doubts that developing a coaching culture had a significant positive impact on improving business results in recent years and in building greater capability for the future.

David Learmond

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To address these issues, the company devised a talent development strategy with several key goals, including replacing expatriates with local managers, introducing leadership coaching and a leadership forum, and reengineering benefit and retention packages. The company also set clear standards on performance and business ethics, which meant that a large number of people had to leave the business because they were not suited to their jobs. Unilever was forced to do this even though it was facing a very difficult business situation.

One of the factors that was critical to the success of the strategy was identifying a group of about 50 local Chinese managers in Unilever Chinas operating companies who were considered high-potential and fast-tracking their development. Many of these managers tended to work in functional silos. With very little cross-fertilization of ideas, a lot of issues had to be solved by the operating company board members.

Best Practices for Hiring, Developing, and Retaining Employees

Emphasize training and development of employees on a continuing basis to encourage high morale and strong identification with the company. This is essential because new hires, although bright, highly motivated, and eager to succeed, are often inexperienced and will require training to meet business needs.

The Economist Intelligence Unit in its report The Great Buy-out: M&A in China identifies several key issues for retaining Chinese talent after a merger including: use of performance-related pay, company image, providing opportunities for training and development, and providing opportunities for promotion.**

Make employee satisfaction a high priority and be willing to direct resources to achieving this goal. Build a coaching culture where employees have the support and encouragement to try new things. Be aware of and adapt to the local environment, customary business practices, and cultural factors in the workplace in China, according to research by Manpower.* Develop the leadership skills of local managers by increasing self-awareness and providing feedback on how their style impacts their employees. Improve the English language skills of new hires; provide short English language training courses geared to the specific and targeted language needs of the company. Establish practical group projects, accompanied by strong guidance and mentoring, to help overcome the limited practical experience of new hires.

Motorola requires expatriate managers to train their local successors within two to three years, according to research carried out by Manpower. Part of the expatriate compensation package is based on their success in replacing themselves.***

Some companies in China are now collaborating with local business schools or universities to help them improve their curricula and develop better and more relevant management training courses.

Hire Chinese peopleeither returnees or Chinese people from other parts of Asiawho are often very successful in China. Aggressively train and promote middle and senior managers from within.

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Manpower, The China Talent Paradox. A Manpower China White Paper, 2006. www.manpower.co.uk

** Cesar Bacani and Katherine Peavy Sima, Economist Intelligence Unit, The Great Buy-out: M&A in China. An Economist Intelligence Unit White Paper, 2006. *** Manpower, The China Talent Paradox.

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To change this, the company organized regular business strategy meetings for group members, as well as team building exercises, which gradually gave them an overview of the whole business. In addition, it started to develop individuals self-awareness of their leadership styles and the sort of environment they were creating for employees. The combination of these two things made people realize that they needed to operate in a different way if they were going to progress in the business and move to the next level. It represented a sea change in the groups development. The result of Unilever Chinas various initiatives was a profitable business in 2006, growing by more than 25 percent per year. This has been achieved through business simplification, improved sales and distribution, relocation of manufacturing from Shanghai to less expensive locations, recruitment of local Chinese board directors to Unilever Chinas operating companies, and investing even more in marketing.

About the AuthorsJudith Banister, Director of Global Demographics for The Conference Board is based in Beijing. David Learmond, Executive Fellow and Program Director for The Conference Board Asia-Pacific Council on Talent, Leadership Development and Organization Effectiveness, lived and worked in Shanghai for five years as Senior Vice President and HR Director for Unilever China. He is also Principal Industrial Fellow in the Department of Engineering of the University of Cambridge and a partner at Better Business Coaching LLP, an executive coaching business.

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