bridging china's talent gap

8
Executiveaction series No. 221 January 2007 C hina’s rapid economic growth—the fastest in the world for the past quarter century—is fueling exten- sive 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. Young Adult Population Shrinking The shift in China’s demographic trends from high birth and death rates to low birth and death rates is changing the country’s 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 Bridging China’s Talent Gap by 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. 1 China National Bureau of Statistics, Population Censuses of 1982, 1990, and 2000; 1% Population Sample Survey of 2005. Labor and Global Competitiveness… Editor’s note: This report is based on presentations and discussions by Judith Banister and David Learmond that took place during the webcast “Competing forTalent 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 David’s personal observations.

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Page 1: Bridging China's Talent Gap

ExecutiveactionseriesNo. 221 January 2007

China’s rapid economic growth—the fastest in the

world for the past quarter century—is fueling exten-

sive 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.

Young Adult Population ShrinkingThe shift in China’s demographic trends from high birth

and death rates to low birth and death rates is changing the

country’s 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

Bridging China’s Talent Gapby Judith Banister and David Learmond

Finding talented managers in China is difficult. Although the numberof young people earning undergraduate and graduate degrees isincreasing rapidly, these newcomers to the workforce often lack thepractical experience and softer creative and leadership skills requiredin the business world. Making the talent search more difficult is thefact that the more experienced managers are in short supply andcommand high salaries. For multinationals, it is now a challenge notonly to recruit the best people, but also to develop and retain them.

1 China National Bureau of Statistics, Population Censuses of 1982, 1990, and2000; 1% Population Sample Survey of 2005.

Labor and Global Competitiveness…

Editor’s note: This report is based on presentations anddiscussions by Judith Banister and David Learmond that tookplace 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 workingin China. The views expressed here involving Unilever areDavid’s personal observations.

Page 2: Bridging China's Talent Gap

China’s 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 China’s

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, China’s 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.

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 China’s top talents

aren’t 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 Wyatt

found that employees in China’s 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 China’s 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 multi-

national firms in China’s 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 China’s

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.

2 executive action bridging china’s talent gap the conference board

2 China National Bureau of Statistics, China Labor Statistical Yearbook2006, p. 65.

3 Erin Lett and Judith Banister, “Labor Compensation Costs ofManufacturing Employees in China: An update to 2003-2004,”Monthly Labor Review, Nov. 2006, pp. 40-45. www.bls.gov/fls/#publications

4 Jim Leininger, The HR Challenge in China: Keys to Fostering EmployeeCommitment, Watson Wyatt Worldwide, 2005.

5 Chinabusinessreview.com, March-April 2006, pp. 26-28.

6 www.chinadaily.com.cn/english/doc/2004-06/15/content_339630.htmwww.china.org.cn/english/Life/173321.htmwww.ceibs.edu/today/news/archive/5095.shtml

7 www.prnewswire.co.uk/cgi/news/release?id=130057

8 www.business-in-asia.com/china_wages.html

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executive action bridging china’s talent gap the conference board 3

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. There’s a transition

toward localization.

Given the complexity and fragmentation of China’s

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 China’s University Graduates by Economic Sector, 2004

University graduates are spread throughout China’s economy, according to the 2004 Economic Census of the

non-agricultural economy of China:

Sector No. of Employees (million) University Graduates* (percent)

Science and technology R&D 3.3 32%

Education 15.2 28

IT 2.4 28

Culture and sports 1.5 20

Finance 3.7 19

Retail and wholesale 13.8 8

Construction 27.9 4Manufacturing 83.9 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.

9 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.

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 China—there 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.

China’s Educational System Is Still EvolvingThe Chinese government knows it must increase the num-

ber 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.

A 2005 report by McKinsey Global Institute, The EmergingGlobal 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 IT—such as liberal arts or languages).

One of the main problems with China’s 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 China’s universities and graduate programs.

Positive Qualities and Common Problems of Educated Chinese Workers

In general, educated employees in China have thefollowing positive qualities and common problems,according to the personal observations of the authors,anecdotal reports by multinational employers, andavailable 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

• 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.

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

10 Xinhua News Agency, National Development and Reform CommissionReport, May 7, 2006.

11 Jonathan Di Rollo, The China MBA Guide 2006. www.propathchina.com

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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.

“The 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 rejected—this would be unfair to the hundred or

so who were yet to arrive and would have the presenta-

tion 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 interac-

tive 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 ques-

tions they would never dream of asking face-to-face.”

— David Learmond

13 Manpower, Talent Shortage Survey Global Results, 2006.

Recruiting Graduates

Page 6: Bridging China's Talent Gap

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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. It’s 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 China’s Value TrapIn 2000, after 16 years competing in China’s 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.

“In China, multinational businesses need to put a lot

more effort into talent development than they would nor-

mally do in most other places in the world. In particular,

they need to focus on the “software” talent development

needs—such 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 sup-

portive 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

Investing in Leadership Skills

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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 China’s 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.

• 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.

• 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.

• 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.**

• 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 people—either returnees or Chinese people

from other parts of Asia—who are often very successful

in China.

• Aggressively train and promote middle and senior

managers from within.

* 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.

Best Practices for Hiring, Developing, and Retaining Employees

Page 8: Bridging China's Talent Gap

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 group’s development.

The result of Unilever China’s 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 distribu-

tion, relocation of manufacturing from Shanghai to less

expensive locations, recruitment of local Chinese board

directors to Unilever China’s 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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