Archives April 2013

Long Live China’s Slowdown

At 7.7%, China’s annual GDP growth in the first quarter of this year was slower than many expected. While the data were hardly devastating relative to a consensus forecast of 8.2%, many (including me) expected a second consecutive quarterly rebound from the slowdown that appeared to have ended in the third quarter of 2012. China doubters around the world were quick to pounce on the number, expressing fears of a stall, or even a dreaded double dip.

But slower GDP growth is actually good for China, provided that it reflects the long-awaited structural transformation of the world’s most dynamic economy. The broad outlines of this transformation are well known – a shift from export- and investment-led growth to an economic structure that draws greater support from domestic private consumption. Less well known is that a rebalanced China should have a slower growth rate – the first hints of which may now be evident.

A rebalanced China can grow more slowly for one simple reason: By drawing increased support from services-led consumer demand, China’s new model will embrace a more labor-intensive growth recipe. The numbers seem to bear that out. China’s services sector requires about 35% more jobs per unit of GDP than do manufacturing and construction – the primary drivers of the old model.

That number has potentially huge implications, because it means that China could grow at an annual rate in the 7-8% range and still achieve its objectives with respect to employment and poverty reduction. China has struggled to attain these goals with anything less than 10% growth, because the old model was not generating enough jobs per unit of output. As Chinese manufacturing moved up the value chain, firms increasingly replaced workers with machines embodying the latest technologies. As a result, its economic model spawned a labor-saving, capital-intensive growth dynamic.

On one level, that made sense. Capital-labor substitution is at the heart of modern productivity strategies for manufacturing-based economies. But it left China in a deepening hole: increasingly deficient in jobs per unit of output, it needed more units of output to absorb its surplus labor. Ultimately, that became more of a problem than a solution. The old manufacturing model, which fueled an unprecedented 20-fold increase in per capita income relative to the early 1990’s, also sowed the seeds of excessive resource consumption and environmental degradation.

Services-led growth is, in many ways, the antidote to the “unstable, unbalanced, uncoordinated, and ultimately unsustainable” growth model that former Premier Wen Jiabao’s famously criticized in 2007. Yet services offer more than just a labor-intensive growth path. Compared to manufacturing, they have much smaller resource and carbon footprints. A services-led model provides China with an alternative, environmentally friendlier, and ultimately more sustainable economic structure.

It is premature, of course, to conclude that a services-led transformation to slower growth is now at hand. The latest data hint at such a possibility, with the tertiary sector (services) expanding at an 8.3% annual rate in the first quarter of this year – the third consecutive quarter of acceleration and a half-percentage point faster than the 7.8% first-quarter gain recorded by the secondary sector (manufacturing and construction). But it will take more than a few quarters of mildly encouraging data to validate such an important shift in the Chinese economy’s underlying structure.

Not surprisingly, China skeptics are putting a different spin on the latest growth numbers. Fears of a shadow-bank-induced credit bubble now top the worry list, reinforcing longstanding concerns that China may succumb to the dreaded “middle-income trap” – a sustained growth slowdown that has ensnared most high-growth emerging economies at the juncture that China has now reached.

China is hardly immune to such a possibility. But it is unlikely to occur if China can carry out the services-led pro-consumption rebalancing that remains the core strategic initiative of its current (12th) Five-Year Plan. Invariably, the middle-income trap afflicts those emerging economies that cling to early-stage development models for too long. For China, the risk will be highest if it sticks with the timeworn recipe of unbalanced manufacturing- and construction-led growth, which has created such serious sustainability problems.

If China fails to rebalance, weak external demand from a crisis-battered developed world will continue to hobble its export machine, forcing it to up the ante on a credit- and investment-led growth model – in effect, doubling down on resource-intensive and environmentally damaging growth. But I remain hopeful that China’s new leadership team will move quickly to implement its new model. There are no viable alternatives.

Financial markets, as well as growth-starved developed economies, are not thrilled with the natural rhythm of slower growth that a rebalanced Chinese economy is likely to experience. Resource industries – indeed, resource-based economies like Australia, Canada, Brazil, and Russia – have become addicted to China’s old strain of unsustainable hyper-growth. Yet China knows that it is time to break that dangerous habit.

The United States is likely to have a different problem with consumer-led growth in China. After all, higher private consumption implies an end to China’s surplus saving – and thus to the seemingly open-ended recycling of that surplus into dollar-based assets such as US Treasury bills. Who will then fund America’s budget deficit – and on what terms?
CommentsView/Create comment on this paragraphJust as China must embrace slower growth as a natural consequence of its rebalancing imperative, the rest of the world will need to figure out how to cope when it does.

Trading Places

With escalating labor and rental costs as well as manpower shortages on the mainland, ‘relocation’ has become the new buzzword for HK factory owners. Sophie He talks to them about their experiences.

Around 25 years ago, many Hong Kong factory owners, including Willy Lin Sun-mo, managing director of Milo’s Knitwear (International) Ltd, moved their manufacturing facilities from Hong Kong to Guangdong province on the mainland to take advantage of cheap labor and low rental costs.

At that time, a worker’s wage was as little as 8 yuan per day. Currently, wages at Lin’s Dongguan factory have risen beyond 60 yuan per day – almost more than seven times what they used to be.

Today’s mainland factories, especially those located in the Pearl River Delta, find it hard to recruit enough workers.The trend started with millions heading home annually for Chinese New Year holidays, only for large numbers to refuse to return to work. The workers preferred to stay at home for lesser-paid jobs and be nearer their loved ones and families, enhancing the jobless situation in many cities – a phenomenon that has become increasingly common these days.

As many factories in Guangdong face the triple challenges of rising labor costs, labor shortages and strong increases in rental, many factory owners, including Lin, turned to relocation or investments in factories on the mainland’s hinterland, or even transplanting to neighboring countries as a solution to their problems. By moving factories to where labor was both adequate and cheap, owners expected to offset their challenges and be rewarded with bigger profit margins. And while some have benefited from such moves, others have not.

Lin told China Daily that Milo’s Knitwear, whose Dongguan factory was established over 20 years ago, faced labor shortages several years ago, a problem shared by many such plants. As most of his workers in the Dongguan facility are from Jiangxi province, Lin invested more than 30 million yuan to set up a plant in Jiangxi four years ago, while answering the central government’s call to companies to invest in the central and western area of the country. But he simultaneously invested in automation at his Dongguan factory, replacing semi-automatic machinery with its fully automatic equivalent.

When the Jiangxi factory went operational, Lin planned to recruit as many as 2,000 workers. But despite four years of production, the factory has only hired 300 workers, Lin says, explaining that few young people who lived in the area also wanted to work near their hometown.

“Most of the young people (who are born in smaller cities) on the mainland wanted to experience life in big cities, and thanks to a well-developed transportation system in the country, they can work in big cities and return to their family overnight,” Lin says.

For those who choose to work near their family and loved ones, factory owners found these workers are easily distracted by domestic chores.

“The workers (in the Jiangxi factory) never want to work overtime, as they want to go home, prepare dinner, or take care of their children,” Lin points out, adding that such distractions from home means the Jiangxi workers are not as efficient as their Dongguan counterparts.

The Jiangxi factory still hasn’t broken even after four years. However, Lin has no intention of giving it up, as Jiangxi labor costs are still lower than those of Dongguan, and the local government is supportive.

So Lin improvised change. “Recently, it crossed my mind that since Jiangxi workers are having such a hard time adapting to our business model, maybe we should change our business model to adapt to them,” he says.

Lin says that instead of producing entire garments in the Jiangxi factory, his company decided to produce only part of the garments there, thus making it easier for workers; meanwhile, the company can also lower its requirements to adapt to their production habits.

Relocation outside the mainland

Another company Top Form International, a Hong Kong-listed brassiere manufacturer, has two production plants; one in Foshan, Guangdong province, and the other in Jiangxi province. Both were established 30 years ago to manufacture lingerie for export to the United States and Europe. The two factories have a combined labor force of some 4,300 workers.

Top Form used to have a third factory in Shenzhen, but it closed down last year, as workers’ monthly wages doubled from 2,000 yuan five years ago, to more than 4,000 yuan today. Difficulty recruiting sufficient numbers of workers was another reason for the plant’s closure.

Four years ago, the company decided to close down the Shenzhen factory as part of a “strategic shift” to reduce capacity in high-cost areas and increase capacity outside the mainland where costs were lower.

According to Top Form chairman Willie Fung Wai-yiu, producing brassieres requires numerous manual procedures, so the company is heavily dependent on workers and is highly sensitive to workers’ wage fluctuations.

Top Form then set up a factory in Thailand where it has since doubled the number of workers to 4,000 as of 2011. The company also established a factory in Cambodia in early 2012 and hopes to staff it with 2,000 workers. Average production costs in Thailand and Cambodia are 15 percent lower than on the mainland. The company expects to have two thirds of its total production capacity outside the mainland eventually, up from the current 47 percent.

But the relocation of Top Form’s factory to Cambodia brought trouble from the outset.

Fung says that by September 2012, the factory had up to 700 workers, but then out of the blue, they downed tools and went on strike.

Illegal strike

“The strike was illegal.We had to take the workers to court, and the final ruling was in the company’s favor, but by that time we had already paid dearly for the incident,” Fung explains, adding that the strike action saw the company close its factory for weeks and release the majority of the workers.

Top Form’s Cambodia factory is already back into full swing and currently has around 300 workers. But the incident forced Fung to do some serious thinking. As a result, he wants to share what he has learned from the relocation initiative with factory owners who may also want to expand their manufacture into Southeast Asian countries.

In retrospect, Fung says it is far better to train a local management team in the country the factory is relocated to, than to introduce a new management team from Hong Kong or the mainland to the country. “As it is hard to keep a non-local manager away from his family for many years, it is better to train a local manager who will ensure smoother operations,” he says.

It takes a smart firm to keep smart people

It’s good to bring in staff from overseas, but that is only half the job

Since China joined the World Trade Organization in 2001, a great number of its state-owned enterprises have developed businesses overseas. An increasing number of SOEs are also conducting international commerce with other countries. Both trends show us that the need for excellent international talent has become inevitable for SOEs. But the fierce competition among all kinds of companies in the knowledge-based economy has led to an urgent lack of foreign talent in SOEs over the years.

There is no doubt that it is critical for companies to take care of their foreign talent, especially high-end management talent and multitalented expats. From human resource management to human resource development, to retain foreign talent can be presented in every detail. But it is difficult to say whether SOEs have done a good job in retaining foreign talent.

To begin with, I would like to talk about the process of adaptation by foreign talent to the Chinese working environment. SOEs should always bear in mind that foreign employees may not stay at the company till the end of their contract.

If an SOE really wants a foreign talent to stay in the company for a long time, it really needs to take action. For instance, in order to help skilled foreigners get used to the environment quickly, a mentor from the company can be arranged to help the foreign employee with life and work issues. SOEs can also plan team-building activities to encourage them to communicate with local employees. Moreover, SOEs can organize training sessions for new employees so that they can get familiar with the company within a short time.

Another important issue is that fairness, transparency and efficiency in performance appraisals should be improved so skilled foreigners can receive objective feedback about their work. A fair performance appraisal plays an important role in the development of one’s career. Foreign employees enjoy positive recognition from their company, while negative feedback may stimulate them to work harder.

It is also very important for a foreign talent to see an SOE’s real action. To be specific, if a foreign talent performs very well, he or she expects to see a salary increase that matches what is noted in the performance appraisal.

Developing a better incentive system is also a positive action to take for SOEs.

What needs to be addressed is that both psychological and material incentives should be considered. The psychological incentive refers to an encouraging environment for foreign talent. Positive comment and feedback from management can infuse foreign talent with confidence, which can also develop into work motivation.

As for material incentives, I think SOEs should come up with some smart ones. By saying smart, I mean incentives that are tailored to foreign talent. Take housing subsidies. For foreign employees, a housing subsidy is not really practical. The majority of foreign employees in China rent houses rather than buy them. Instead of paying for the housing subsidy, SOEs could choose to pay for Chinese language courses if they are going to stay in China for a long time.

Another issue is with Chinese medical insurance. The Chinese medical insurance only covers expenditure in Chinese hospitals, but it is difficult for most foreign employees to talk with doctors or nurses in the local language. SOEs should consider foreign hospitals or clinics as options.

Lastly, taking care of the family of a foreign employee is also a good way keeping them. Foreign employees, being in another country, are unable to spend time with their families. Arranging a trip for the family of the foreign employee may be a great idea.

There are still a lot of challenges for SOEs. Attracting and retaining international talent is certainly not an easy task, but it would be helpful for SOEs to solve the issue of retaining talent by considering the suggestions set out here.

The author is CEO & founder of RMG Selection, an Asia-focused human resources and recruitment consultancy.

Secrets of the headhunters

The refined techniques of recruitment firms are in demand

An increasing number of Chinese companies are turning to international headhunters for high-quality overseas professionals, as they do not have the extended professional connections needed to find such talent.

Zhang Ruguo, the HR manager of the Beijing-based New Oriental Education Group, says that most of the recruitment is directly done by the company, save for some high-level management positions.

“Since we do not have the right connections, we have to ask for help from overseas headhunters.

“They (overseas headhunters) have a rich database and human capital resources. By going through them, we can save a lot of time and energy, and also be sure that the talent we procure is suited for our requirements,” Zhang says.

International headhunting companies had very few Chinese clients when they first entered the Chinese market some 15 years ago, but in the past few years there has been a sea change, says James Darlington, head of Asia at Antal International, a global HR consultancy.

“When we first entered the Chinese market in 1998, 90 percent of our clients were multinational companies. But today more than half of our clients are local companies,” he says.

Robert Parkinson, founder and CEO of RMG Selection, a Beijing-based recruitment consultancy, says that five years ago his company had hardly any Chinese companies as clients. But now they account for more than 20 percent of the clientele. The company plans to set up a new office in Tianjin this year to handle the workload from Chinese companies, he says.

Parkinson says the main reason why Chinese companies are looking for overseas talent is the fact that the economy is gradually changing. About 15 years ago, China was the manufacturing center of the world with the lowest prices, but now it has changed to a place where more value is added to products.

Moreover, with China emerging as one of the most dominant and resilient players in the global economy after recent financial troubles, and more Chinese companies striving to compete with multinational firms, the need for overseas talent has skyrocketed.

“If you look at what work the law firms do, you will find a lot of their work is not inbound, but outbound investment, to help Chinese companies expand overseas. That’s a huge driver,” Parkinson says.

There are large demands in two areas: one for the government-backed talent programs, which typically look for top-notch and academically qualified candidates in technology-based areas, says John Benson, CEO of Silu.com, a Chinese career site that focuses on connecting overseas professionals with Chinese companies.

The second is a more across-the-board demand for skillsets that the China talent pool cannot provide, such as professionals with experience in operating in Western cultures, especially from Chinese companies looking to expand abroad, he says.

When searching for high-level talent for Chinese companies, headhunters go through the same process as when they work for other international companies. But the situation varies from case to case, says Ed Zheng, senior client partner of Korn/Ferry International, a global executive search firm. More than 40 percent of its clients in China are local companies, with state-owned enterprises accounting for 50 percent of the total.

“The first thing that we do is to communicate with our client, so that we can understand not only what’s on the job description, but also the company’s business strategy, its growth target, structure and culture,” Zheng says. “Our first job is to help the Chinese companies figure out their specific requirements for talent.”

Following this, the company will start to look for candidates overseas. Zheng says that for high-level positions, candidates’ personalities and leadership competence probably play an equal, if not bigger, part in their career successes compared with specialized skills.

“We often spend a lot of time in assessing the potential candidate’s personalities. Usually in our recommendations about them to companies, only 40 percent are about the candidates’ professional skills, while 60 percent is about their personalities and leadership competence,” he says.

Approaching candidates is not an easy task, and it is important for headhunters to be aware of the true value of joining a Chinese company from the candidate perspective before doing so, Parkinson of RMG says.

“About 99 percent of candidates that we approach at first will be passive candidates who are not looking for changes or new experiences,” Parkinson says.

“Therefore you cannot have people with one year’s working experience calling someone with 25 years’ experience to have a conversation on career development, as they cannot engage at the same level. Engaging with them is knowing them in a deep way.”

When the candidates show interest, headhunters often arrange interviews, to see if there is something they would like to change about the current positions, and the contract-related aspects. After the candidates join the company, headhunters will help them with integrating in the first few months. In most of cases, the recruitment fees can be high and more than one third of the candidates’ yearly salary, Parkinson says.

However, even after careful matching, retention of acquired talent is a challenge for many Chinese companies. More than half of the high-level talent leave their positions in Chinese companies after one year, largely due to cultural differences, Zheng says.

“Most of the Chinese companies consider talent as an acquired skill and not as acquiring a talent,” he says. “Take a legal director in a Western company as an example. From a Western perspective what makes him tick, besides professional skills, are factors such as pets and hobbies. But in most Chinese companies, the only thing that matters is that he is an expert in legal issues.”

Zheng says the good thing about the process is that the appropriate person can be found, and skills can readily applied.
“However, ignorance about a talent’s cultural values, personalities and career aspirations will lose their loyalty. When a talent has been abstracted to a skill, and a higher-paid job has been offered, they will leave right away,” he says.
Moreover, enterprise culture in Western companies and Chinese companies are quite different. In Western companies, employees’ rights and obligations are set down in a contract and the boss is more likely to be open about it, whereas in Chinese companies, personal networks and relationships are more important, and the boss is more likely to give orders than to listen.

He adds that while retaining talent, money is usually not the prime motivator. Instead, it is more about people who have a real interest in the culture and history of China, and those who are ambitious and capable of seizing the available opportunities.

Claire Yang, managing director of the consultancy Accenture Greater China, and an expert on talent and organization performance, says overseas talent should accept that things operate in different ways in different cultures and be more positive in communicating with Chinese bosses and make changes.

Even though the number of companies using headhunters is increasing, it is still small compared with the whole market, Parkinson says.

“Chinese companies are less familiar with headhunting services. In Chinese culture, people pay more attention to their own network and relationships; they come to us only when people simply cannot be found by other channels,” he says.

It will take another five or 10 years for Chinese people to start using headhunting companies for outsourcing professionals, he says.

Contact the writers at chenyingqun@chinadaily.com.cn and huhaiyan@chinadaily.com.cn

Fight for the right sort of talent

As a human resources manager, when is the last time you talked to the leader of your company’s sales department?

Chong Ng, Greater China managing director of talent recruitment solutions provider FutureStep, is often disappointed with the answer he receives.

One of the techniques his company uses is to set up a one-day workshop and make sure all the client company’s business leaders – all its China-based CEOs, board of directors and senior HR leaders – are in the workshop.

Ng then asks them about their business strategy for the year, and the talents they need to implement it. His team will make sure they work together to come up with strategy for the year ahead.

“You’ll be surprised how often this does not happen (in their own boardroom),” Ng said.

“Most often, a sales manager picks up the phone, calls the HR manager and says, ‘I want to fill the position immediately, or we want to find a sales manager immediately’.”

FutureStep calls this a “reactive” recruitment approach, one that leads to employers failing in the increasingly competitive talent market.

“China’s talent market, especially in the high end, is becoming more and more competitive,” Ng said. “Employees now have a lot of options. They can work for big US multinationals, big European multinationals or big Chinese companies. How can your company stand out in the market?”

According to Ng, to be strategic, employers have to have a very good workforce plan. Every business plan – from opening a research and development center to increasing sales by 20 percent – should be followed by a workforce plan. As business plans change, the workforce plan should also be flexible and change accordingly.

Ng compared this process to marketing strategies used by consumer goods companies. You have to know your target candidates’ genuine needs and try to fit your company’s features to their appetites.

Generally, potential employees want to know the company’s culture, salaries and development prospects. The HR department should give them this information, in addition to other information that may suit them, such as certain traits about the company that match prospective employee’s interests and likes.

Be attractive

These days, large Chinese companies, especially State-owned enterprises, are increasingly popular among China’s young job seekers. In its annual list of the 50 best employers in China, recruitment website Chinahr.com listed 18 foreign companies. Chinese companies, most of which were SOEs, took up the rest of the list.

So what can foreign companies do in China to improve their popularity?

Ng said foreign companies should clearly demonstrate their commitment to China. This commitment can be shown by opening research and development or product development centers in China.

“It shows that they are not coming to China just to sell their products. They are also developing their products for China and for the world,” Ng said. “When candidates see this, they will feel reassured.”

Ng said it is also important for foreign companies to create a stable leadership. In the past, some multinationals’ China branches saw a leadership reshuffle every six to 12 months. The frequent changes give employees a sense of instability.

In addition, foreign employers have to make sure growth and development opportunities are available to their local employees, he said. This commitment can be shown by making leadership as diverse as possible to break the perception of “glass ceilings”.

Most-wanted talents

Upon being asked about the most-wanted professionals in 2013, Ng said he would rather talk about function than specific industries.

“In fact, except for a few technical people, talent requirements are more or less the same across various sectors,” he said.

“For example, all companies need salesmen. Actually, the need for sales managers is rising strongly in 2013.”

As markets in first-tier cities are becoming mature and saturated, multinationals have a robust demand for salespeople with a full knowledge of markets in second- and third-tier cities.

In this regard, multinationals have to put in much more effort to fostering their employers’ brands in these cities and identifying the talent pools there, because local companies have an advantage in finding local talents, Ng said.

And as the Chinese market is departing from its previous linear growth pattern, corporations operating in China need a new type of leadership, which Ng described as “a shift from operation-oriented toward growth-oriented”.

“The good old days are gone. Now not only do you need to run a business, you need also to fight a business,” Ng said. “This means leaders should run a factory, but also find business to keep the factory running.”

However, Ng said one of the most common mistakes foreign companies make is they expect the local talents they hire to be productive in a very short time, but it does not work that way.

“A lot of multinationals have a mixed organization. You get one boss in Singapore and the other in New York. So you have to be able to work on a global basis. Decision-making there is very different from local companies, so it takes time for new hires to adjust to that environment,” Ng said.

Foreign companies should also provide local talents with the resources to be productive, he added. “You can’t just send a manager to the office in Beijing and say ‘good luck’, with no backing resources, no coaching and training.”

Throughout the interview, Ng stressed that the qualified talent pool in China is “not very big”. To get them, foreign companies should prepare for a fight.

“In 2013, the war for talent, once ferocious, will become more subtle and focused. Businesses will not hire the volume of talent they once did, but against the current economic backdrop and the drive for growth, they will be focused on hiring critical talent,” Ng said.