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Behind The Chinese Networking (GuanXi) Buzz

By Michael Connolly

Shanghai is abuzz with the murmur of networking. Every week in Shanghai, countless events are held for ambitious fortune seekers relentlessly practicing the art of handshaking, exchanging mingpian, and of course, building guanxi or “relationships.” Many residents in Shanghai will testify that attending networking mixers is a great way to expand contacts, establish face-to-face exposure, and in general, meet some interesting people.

Social networking gatherings are still primarily a Western concept. In China one builds guanxi through introductions by family and friends, or by doing favors. The idea of holding public meetings for the purpose of making new connections and expanding relationships is still relatively new in China, but in today’s dynamic business climate it has become essential to have a multitude of connections, while still managing them effectively.

Networking is nothing new, of course. Every salesperson knows that they need to develop a base of contacts, and every businessman in China understands that he needs guanxi. In China, everything of consequence gets done through a person’s guanxi. The difference between Western-style social networking and Chinese-style guanxi has to do with the specific rules governing interaction in the social network. At some point, for a Western businessperson trying to reach a local Chinese business prospect, a cultural threshold must be crossed. Western business rules that dictate how to do things must eventually yield to the mysterious rule of Chinese guanxi. Still, the “Six Degrees” concept applies. The person seeking contact probably knows someone, who knows someone, who knows someone (and so on), who knows the prospect. This is a core concept in both Chinese guanxi-building, as well as in the Six Degees of Separation (or Small World) Theory.

Science is proving what we already know

In his seminal work, American sociologist Stanley Milgram advanced and empirically tested the theory of “six degrees of separation,” which states that any randomly selected pair of perfect strangers could be associated through no more than six common acquaintances. In one of his tests, Milgram successfully built associations between test participants in two different cities and two other participants living in Boston. The procedure was done by asking the first participants to mail a brochure to the Bostonians, using no more information than a common set of acquaintances. Columbia University began to test the six degrees of separation theory in 2002 on the Internet. Initial findings suggest that the “will” to communication outweighs the “means” of communication.

The Steps to Developing Good Guanxi

So what does one do with the pile of business cards collected at these networking events? First, it is important to realize that each connection can have hidden value, so it is prudent to look at more than the immediate needs and instead to treat each contact as potentially valuable in your personal six degrees network. While the person may not look, at first impression, like a particularly appropriate business contact, the act of just following up might make enough of an impression to open the door to further opportunities. Collecting business cards and shaking hands is only the first step. At some point, each connection has to develop some level of substance.

The next step is to simply follow up. If a person is serious about strengthening connections from the first handshake and business card introduction, then they have to be organized in a systematic way. Making the new contact a part of one’s social network is next. The savviest network builders may automate the tracking and maintenance of his/her addresses through an online tool, but such thoroughness requires the discipline to get the information from the collected business card into the software.

Is Guanxi about Quantity or Quality?

A management consultant and author, Patricia Durovy, has stated that success in business is directly related to the QUANTITY of communication that is sent out. Once a connection is made, each person needs to manage communications with the people in his or her network so that connections become stronger and continue to develop. It may require a bit more work, but with the technology tools available, having a good six degrees network is not difficult and will pay for the effort by making it easier to get things done.

The Job Landscape for Expats in China

By Michael Connolly

Want to work in Shanghai? Many people from all over the world do. There are more people from other countries who want to come live and work in Shanghai than there are jobs with expat salaries. In the last few years, the job market has been flooded with educated and experienced overseas Chinese or overseas educated mainland Chinese being attracted to the same thing other expats are attracted to — the lure of riding the booming economy. With issues of culture, language, disparity in pay scales, and suitable job availability, there is not always an easy solution to finding a comfortable niche. Many seek to move to here without the benefit of company support and an expat package. One recruitment industry manager indicates an educated guess of less than 20% of the expats in China is here on an expat package. Given the range of talents and available positions, a job seeker might break down potential opportunities:

Get hired by a company for a position in China with relocation.

(the expat relocation option). Most of the people who are getting expat salaries now are in senior management. Directors, project managers, and technical specialties are also being hired. Many, if not most, if the managers hired into these positions get hired in their home country and relocated here. At this point, this is reserved only for senior managers and technical experts. Jobs in this category also tend to have the best salaries and the best perks. Even so, the benefits offered these days are not what they used to be. Shanghai is not a hardship post, so even though salaries maybe similar to what they make at home, the perks are not what they used to be.

Relocate to China Independently.

The job seeker can pick up a position as a local expat hire. According to a 2003 Amcham survey, there is a trend to hire locally even for expat positions because hiring a person in this situation often brings added benefits to the company. Hiring a local expat is less expensive. Expats already living here are already culturally acclimated, and they tend to already have a solid set of contacts in China, which potentially makes them more valuable.

Get a job on the local economy at local or semi-local wages.

This is not a desirable option for income, but in many cases, is an option for living here to learn the language and begin making contacts. Many come to fill English teaching positions and develop their network to work themselves into a niche. However, even these positions usually require education and credentials unless it is a short term internship.

Start a new business.

This is an option if the job seeker has some experience and some capital and requires that they have some contacts, partners, and advisers that can help navigate the maze of pitfalls. The most difficult option to execute but potentially the biggest reward if done well.

Even with education, credentials, language, and experience it is still a highly competitive market. According to Wang and Li in their article “Who has the edge?”, just being educated overseas is not enough. Local mainland hires with experience and ability are more common place than even 5 years ago. The cost of the new hire is more significant factor for many companies and expat packages are being offered much less often. Being bilingual is a given requirement for just about every significant job. Soft skills and the demonstrated ability to manage Chinese staff is a huge necessity. Hiring managers are looking deeper into what is written on resumes and expecting more from those who are offered.

The process of finding a position in China that pays an expat salary is increasingly difficult. It is combination of skill, experience, contacts, and luck. This situation leaves few options to the job seeker who wants to work in China. Each option has its own set of requirements and its own set of pitfalls. However, the lure of boom here in China is too much to be ignored and many are arriving here to carve out their niche.

Toyota in China: Full Speed Ahead

Toyota (TM) might be closing in on General Motors (NYSE: GM – news) (GM) as the world’s largest carmaker, but in China the Japanese company has

plenty of catching up to do. Despite exporting cars to the mainland since the 1960s, Toyota’s market share is just 3.5% in China, compared to 13% in the U.S. and more than 40% at home in Japan. Market leader GM sold more than 650,000 vehicles in China last year, while second-placed Volkswagen (Xetra: 766400 – news) , with sales of over 500,000, is also way ahead of Toyota’s 179,000 units in 2005.

But don’t expect Toyota to be lagging behind the pack for too long. Just as the auto maker has grown rapidly in the U.S. over the last decade, it’s now gearing up for rapid expansion in China. In December, Toyota President Katsuaki Watanabe outlined plans to ramp up sales 60% during 2006, to 290,000. And ominously for rivals, by 2010, the company aims to triple its current share in China to 10% of the fast-growing market [see BW Online, 12/21/05, “Toyota: King of the Car World in ’06?”].

To meet those stiff targets, Toyota is unleashing a host of new vehicles on the mainland. What’s more, it’s showing it isn’t afraid to build its newest models in China through partnerships with First Auto Works and Guangzhou Auto. On Dec. 15, Toyota and FAW held a ceremony to herald local production of the Prius, which sells for about $36,000 and will be China’s first hybrid.

CUTTHROAT COMPETITION.

Leading Toyota’s rapid expansion in China is Yoshimi Inaba, who splits his time equally between Tokyo, Toyota City, and China. Inaba had only ever been to China once when he accepted the post last June, but brings immense know-how accumulated during various management roles at Toyota, including two spells in the 1990s at Toyota Motor Sales in the U.S., becoming president in 1999.

Inaba will need to draw on all his experience to make Toyota tick in China. Cutthroat competition has triggered a 28% fall since 2000 in the price for a compact on the mainland, and profit margins are falling. Most Chinese car buyers, meanwhile, might be new to car buying, but there are no easy sales [see BW Online, 3/9/06, “A Billion Tough Sells”].

On Mar. 7 in Toyko, Inaba addressed Toyota’s China plans with BusinessWeek Tokyo correspondent Ian Rowley. Edited excerpts of their conversation follow:

Toyota plans to grow 60% in China this year. That sounds pretty aggressive. Is it?

At this stage of the development, percentage increases don’t have so much meaning. We’re starting up a new factory in Guangzhou with a different partner [Guangzhou Automotive]. A whole new factory will be added, hopefully increasing sales by about 50,000 to 60,000 units this year.

What’s the impact of working with two partners?

With two partners — the other is First Auto Works — we have to have a totally separate sales networks. That’s two different channels and two different franchises under the name Toyota. Our guys are working to set up a whole new sales network, and have already appointed 100 dealers [for the GA channel]. For FAW, we already have about 220 dealers in operation already. On top of that, we have Lexus, which is 100% our own operation.

How different is selling cars in China compared with other countries?

The first thing I looked at [when I took charge of China] was the pay scheme at the dealerships. This is very similar to the United States. It’s predominantly commission-based sales, while the fixed salary is very small. That is very different from Japan or even Europe, and dictates the whole dealer network. We can apply many of the things we did in the U.S. to China.

The other thing is that the dealers are much younger and are mainly in the 30s and 40s. Some of the new powerful entrepreneurs in automobile retail are quite young, impressive, and have pretty much the same mentality as U.S. dealers. The whole strategy — how to set up a network in China — can be learned from our experience in the U.S. The dynamics of retail are quite similar. Japan is very different.

But is it difficult to find good people?

Actually, it’s not. There are always 10 to 20 applications, and many of those are from multifranchise retailers already operating. Many of them started as brokers, importing and distributing. Others started as used-car traders.

What about Chinese consumers? How do they compare with other markets?

Many of them, 85% I’d estimate, are new, first-time buyers, whether they’re young or old. That’s quite different and probably the biggest difference I can see between China and other countries. The other thing is the element of status or expression or lifestyle shown in the cars people buy. You get that everywhere, but the sense of pride or showing off is still very, very strong in China. There’s an element of emotion in China that’s stronger than in other countries.

Will this continue?

I think so. But the Chinese market is changing so fast. Price will become increasingly important. My theory is that you still have to have a good emotional reason to buy a cheaper car or even an inexpensive car. It’s always a question of the affordability vs. the emotions.

What about Toyota’s brand image?

Well, we’ve been exporting to China — officially or unofficially — since the 1960s and, to my surprise, the Toyota brand is recognized. We should be very careful not to damage that image.

Is it strong relative to other Western auto makers?

Yes, and among Japanese auto makers as well. In China, Toyota is a very well-known brand.

Given that most buyers in China are first-time buyers, do you market differently?

I would not say that there’s a very big difference in terms of our approach to customers. But one thing is that China is a very young market relative to the U.S. or Japan, so you have to tune your marketing approach to a younger generation of people. We also try to promote more customer test-driving experiences — it’s more about personal experiences rather than just image.

Is anti-Japanese hostility in China a problem?

We’re very conscious of this, but it’s not actually [a big problem] on the retail scene. As long as you offer good products, Chinese [will buy] Japanese products. The only area where we might [suffer] a little bit is when it comes to city government or state government purchases. They’d rather choose other brands than Japanese, but that’s a very minor part of our business. Nevertheless, we’re very careful about what we say and how we say it in terms of PR and advertising. We have to be 100% sure we don’t stimulate any anti-Japanese sentiment.

How about the luxury sector? Can the Lexus do well in China?

There’s tremendous potential for the Lexus. The rich [in China] are very rich and often younger guys. There’s a lot of room for us to grow in the luxury segment. China is the only country where we’re offering a product lineup as big as in the United States. We’re offering everything that’s available.

But is Lexus brand recognition a problem?

Recognition with the wider public is very low, but our targets are the [kind of] people who travel to the United States, and their recognition level is already quite high. [It’s] not to the same extent as Mercedes and BMW (Xetra: 519000 – news) , but I think Chinese are now really looking at the U.S. quite a bit, so knowledge of the Lexus is quite common.

Are you still targeting 1 million cars by 2010?

That is a very visionary target, based on the assumption that the market would reach 10 million and that Toyota would take a 10% share. One million is something we can aim for, but maybe the 10 million figure was too aggressive. China has healthy growth — 10%-plus growth for the total market. But [10% growth won’t be enough for] 10 million by 2010. [It will] probably be 8 million or so.

Also, in China, about 50% of the market is very cheap, old-fashioned vehicles. There’s no way we can compete there, so really we’d need to get 20% [to achieve our aim]. Whether we can do that in a short time, I doubt it. But it is still a good vision.

How will the Chinese market develop?

There will be changes in the fundamental structure of the market. The Chinese government will reshape their tax scheme, and that will change the demand structure quite a bit. The trend is going towards smaller, fuel-efficient cars. No segment will shrink, but there is potential for a fast-growing small-car segment.

At the same time, I think the Chinese government will institute emissions and safety controls, and many of the old-fashioned [car producers] will have to upgrade their technology, and prices will go up. Today, the best-selling category of cars in China is [priced] around $6,000 to $8,000. We will have to come down [in price], and they will have to come up. But there will be a shift in mix towards the lower end, that’s for sure.

Who will be the biggest rivals for Toyota in China? Will it be local players?

China is a sizeable auto market, so it can have several local players. It seems to me that the pure, privately [funded manufacturers] like Geely or Chery are the ones to watch, and Hyundai [of Korea]. [The challenge] will be both international and local.

Are you concerned about profitability in China?

One thing in China is that there are no price increases for the near future — it’s always downwards. Everyone looks at China as a growing market, so they prepare more capacity. That means there’s always some overcapacity somewhere and pressure on prices. China used to be a very profitable market for everybody, but now it’s becoming like any other market.

But you’re confident Toyota can succeed in China?

We’re a minor player in the China market, with a 3.5% share, but we’re one of the few manufacturers where demand exceeds supply. Even though we see big potential for growth, we will make sure we’re not in a position of overcapacity. That will be a very key element. And as long as you retain the quality, treat dealers as partners, and avoid oversupply, the results will come. The race for the Chinese market is just around the first corner.

Wal-Mart Plans To Boost Presence In China, Hire 150,000 more

Retailer Plans To Open 20 More Stores In China In ’06

BENTONVILLE, Ark. — Wal-Mart expects to hire up to 150,000 employees in China over the next five years — five times its current work force there — as it expands its number of stores.

Wal-Mart has targeted China, which has long been a major supplier of its products, as a key region for its international store growth.

Wal-Mart now has 56 stores in China with about 30,000 employees. It plans to open 20 more stores this year.

The news comes less than a week after world’s largest retailer moved to expand in another fast-growing region — Central America — by taking a majority stake in a local retail chain that it first bought into last September.

Wal-Mart took over Central American Retail Holding Co., also known as CARHCO, for an undisclosed price.

GlobalAutoIndustry.com to Hold ”Key Strategies for Sourcing from China” and ”Succeeding in China’s Booming Auto Industry” Seminars on May 17 in Troy

Luncheon will feature special interview with former Assistant U.S. Trade Representative (USTR) for China Affairs Charles W. Freeman III

TROY, Mich.–(BUSINESS WIRE)–March 23, 2006–GlobalAutoIndustry.com, the leading worldwide portal and intelligence source for the automotive industry, announced it will hold its 8th in a series of seminars on doing business in China. The event, consisting of two separate seminars in one day, will feature “Key Strategies for Sourcing from China” and “Succeeding in China’s Booming Auto Industry.” The seminars will take place on May 17 at the Troy Marriott in Troy, Michigan.
“The Chinese automotive market and industry have become critical to an auto supplier’s global footprint,” states Ron Hesse, president of GlobalAutoIndustry.com, adding “However, doing business in China requires a true understanding of the business culture, communications issues, laws, human capital, market scope, and more. Everyday, we receive numerous calls and emails from suppliers requesting assistance with various China challenges. This ‘must attend’ Seminar will address these needs and provide solutions for them.”

A powerful lineup of speakers will address critical issues for auto suppliers venturing into China, expected to be the world’s hottest automotive market for the next 20 years.

Lunch will include a special interview with the former assistant U.S. Trade Representative for China Affairs Charles Freeman, as well as other interviews with China experts.

Mr. Freeman is the Managing Director of the China Alliance, a unique association of four leading independent law firms that includes Detroit-based Butzel Long.

The Morning Session will share valuable insight and research on sourcing components and parts from China, and will include presentations and solutions on:

“Implementing a Sourcing Strategy in China”
“Intellectual Property Issues Related to Sourcing from China”
“Logistics of Sourcing Products from China”
“Optimizing your China Sourcing Strategy in the Context of your Global Business Strategy”
“Critical Elements for Building a Sourcing Team and Selecting Partners”
“Sourcing from China: Lessons Learned”
The Afternoon Session will focus on key issues on setting up operations in and succeeding in China’s booming automotive industry and will include presentations and solutions on:

* “Communicating with the Chinese – Language and Cultural Insights ”
* “Chinese Market Outlook – Where will the numbers go besides up?”
* “Finance, Bank and Tax Issues in China”
* “Selecting the Proper Business Entity for your Operations in China”
* “Choosing the Right Location for your China Operations”
* “Recruiting and HR Issues in China”

Throughout the day, a Chinese language trainer will be on hand to teach attendees key words and phrases in Mandarin Chinese to help get started doing business in China.

The Seminar will be held at the Troy Marriott in Troy, Michigan. Costs to attend are $395 for either half-day session, or $595 to attend both. Executives registering before April 7th will receive a $100 early registration discount.

About GlobalAutoIndustry.com

GlobalAutoIndustry.com connects the worldwide auto supplier industry with the resources to effectively do business globally. Through the web site, www.GlobalAutoIndustry.com, auto supplier executives can find insight, solutions and strategies focused on doing business in the world’s top automotive markets.

Monthly eJournals provide targeted information and insight on doing business in foreign automotive markets and GlobalAutoIndustry.com Solutions provide effective international answers to suppliers’ global business and operational needs.

The Company’s eJournals, including CHINAtalk, ASIAtalk, EUROtalk, AMERItalk, LATINtalk and GLOBALtalk HR, now reach over 25,000 automotive supplier subscribers worldwide.

Parent company, HCI Group Ltd., is based in Troy, Mich., with European headquarters in Amsterdam, the Netherlands.

The Venture Investor’s Guide to China

Seven steps to succeed in the world’s largest market

The flow of venture capital into China is on the rise. Despite challenges and regulatory uncertainty, venture capital and private equity firms are finding opportunities, according to the latest report by Deloitte Research, “Seven Disciplines for Venturing In China.” With this initial investment come some early lessons on to proceed and profit in this growing economy.

“Venture capital and private equity firms are transforming Chinese enterprises by helping them to tap into innovative practices, global, commercial, and capital markets,” says Ajit Kambil, firm director in Deloitte Services. “In addition to creating companies with modern corporate practices and high value jobs, venture capital and private equity also create a new guanxi by connecting the world economy to opportunities for growth in China. But unlike investing in developed markets, investing in China is substantially different in all aspects of the deal, from sourcing to management through exit.”

Seven strategies for success:

* Develop guanxi of social capital networks to access information and to establish and maintain business relationships. Guanxi is a highly personalized Chinese system of social capital enabling mutual, preferential favors based upon trust or mutual benefit. It is a widespread practice.

* Implement corporate governance and shareholder rights initiatives. One key role of the investor may be to educate the Chinese entrepreneur on the differences in opportunities with each form of capital, governance requirements, and the rights of shareholders.

* Manage intellectual property. Protecting intellectual property can involve a change of thinking for some Chinese entrepreneurs. Culturally, copying is not always a crime, but sometimes is homage to past masters.

* Adapt foreign business models to local Chinese contexts. For example, many Chinese do not have credit cards or if they do, prefer not to use them in online commerce. To adapt, some companies allow Chinese customers to buy online, but pay over the phone or by cash on delivery.

* Understand the value added. More than just financial investments, a venture investor can add value in other ways, including screening and recruiting management team members and installing and maintaining financial controls.

* Establish a clear exit pathway. Look to innovative legal and financial constructs that are a mix of Chinese and Western practices.

* Create opportunity from regulations. The political and regulatory climate in China is constantly changing. Instead of viewing this as a barrier, look for ways to leverage regulatory hurdles. Licensing requirements, for example, can create barriers to entry for competitors.

How Rising Wages Are Changing The Game In China

A labor shortage has pay soaring. That is sure to send ripples around the globe. Businessweek

For years, Yongjin Group has earned a decent profit selling lamps and furniture to the likes of Wal-Mart (WMT ), Home Depot (HD ), Target (TGT ), and Pottery Barn. But lately the company has seen its margins shrink to 5% — half what Yongjin made when it opened its factory in the steamy southern Chinese city of Dongguan 14 years ago. Why? Labor shortages are forcing the company to boost wages. Last year salaries surged 40%, to an average of $160 a month, and Yongjin still can’t find enough workers. “This business needs a lot of labor,” says President Sam Lin. “This is a very tough challenge.”

Some 1,500 miles northeast, in the city of Suzhou, Emerson Climate Technologies Co. is facing similar woes. The maker of air conditioner compressors has seen turnover for some jobs hit 20% annually, and Emerson General Manager David Warth says it’s all he can do to keep his 800 employees from jumping ship to Samsung, Siemens (SI ), Nokia (NOK ), and other multinationals that are now operating in the tech manufacturing hub. “It has gotten to the point that we are just swapping folks and raising salaries,” says Warth.

Wait a minute. Doesn’t China have an inexhaustible supply of cheap labor? Not any longer. From the textile and toy factories of the south to the corporate headquarters and research labs in Beijing and Shanghai, the No. 1 challenge today is finding and keeping good workers. Turnover in some low-tech industries approaches 50%, according to the Institute of Contemporary Observation, a Shenzhen labor research group. Guangdong Province says it has 2.5 million jobs that remain unfilled, while Jiangsu, Zhejiang, and Shandong provinces say they, too, face shortages of qualified workers. “Before, people talked about China’s unlimited labor supply,” says Zhang Juwei, deputy director of the Institute of Population & Labor Economics at the Chinese Academy of Social Sciences in Beijing. “We should revise that: China is facing a limited supply of labor.”

Reports of labor shortages first cropped up in late 2004, but companies thought the phenomenon was temporary. Now a surge in both turnover and wage costs is convincing multinationals and their suppliers that the China game is changing permanently. With the gap between wages in China and those elsewhere gradually closing, the pressure to pass price increases on to consumers in the U.S. and other markets will start to build. As Citigroup (C ) noted in a February report: “The continuous growth of labor costs in China, even at a moderate pace…is likely to have implications for inflation worldwide.” These factors eventually will force the Chinese to upgrade their entire industrial base to make higher-margin goods. And those bigger paychecks are building a consumer class in China that multinationals want to target.

“THERE IS A BREAK POINT”
The wage issue has started to affect how companies operate in China. U.S. corporations and their suppliers are starting to rethink where to locate facilities, whether deeper into the interior (where salaries and land values are smaller), or even farther afield, to lower-cost countries such as Vietnam or Indonesia. Already, higher labor costs are beginning to price some manufacturers out of more developed Chinese cities such as Shanghai and Suzhou. “There is a break point where people will say this is too expensive,” says Michael Barbalas, general manager at the Suzhou plant of Andrew Corp. (ANDW ), a Westchester (Ill.) maker of wireless networking gear. At his factory, he says, wages have been rising by 10% annually.

This is a slow process, to be sure. Imports from the mainland have yet to fuel inflation in the U.S., while improved productivity in China has so far offset higher wages. But economists say those productivity gains are getting harder to find, and manufacturers who are seeing their margins hit, such as Yongjin, can hold out for only so long before they have to try to raise prices.

The pressure has as much to do with skills as it does with numbers. Although the total labor force is about 800 million, relatively few people have the qualifications employers want. For most textile, toy, and tech-assembly jobs, for example, export-oriented manufacturers prefer women from 18 to 25 years old or people with experience operating machinery. “The skills base does not meet the demands of a rapidly growing market,” says C.P. Lee, Asia-Pacific human resources chief at Motorola Inc. (MOT ), which has 9,000 employees in China.

As a result, companies across the board are feeling the squeeze. Last year turnover at multinationals in China averaged 14%, up from 11.3% in 2004 and 8.3% in 2001. Salaries jumped by 8.4%, according to human resources consultant Hewitt Associates LLC. And a January report by the American Chamber of Commerce in China found that rising labor costs have pinched margins at 48% of U.S. manufacturers on the mainland. “China runs the risk of losing its advantage” of cheap labor, says Teresa Woodland, an author of the report.

That means managers can no longer simply provide eight-to-a-room dorms and expect laborers to toil 12 hours a day, seven days a week. When 30-year-old He Maofang first arrived in Dongguan in 2000, for instance, “work was hard to find.” But now “there are plenty of choices,” says He, who started at Yongjin last June. In addition to boosting salaries, Yongjin has upgraded its dormitories and improved the food in the company cafeteria. Despite those efforts, its five factories remain about 10% shy of the 6,000 employees they need.

Many companies are compensating for the shortages by penetrating deeper into China’s vast heartland, where wages can be half what they are on the coast. General Motors (GM ), Honda (HMC ), Motorola, and Intel (INTC ), for instance, have all shifted some manufacturing or research to inland locations in recent years, both to tap lower costs and to open up new markets. But a two-year-old effort by the Chinese government to lift rural incomes through tax cuts is keeping some potential factory workers on the farm. So with investment growing in the interior, labor shortages are popping up there, too. “More and more multinationals are looking for opportunities in second-tier cities,” boosting salaries there faster than in the traditional manufacturing strongholds farther east, says Jean Lin, head of the compensation practice at Hewitt.

BETTER TRAINING
The trend goes beyond the factory. Only about 10% of Chinese candidates for jobs in key areas such as finance, accounting, and engineering are qualified to work for a foreign company, estimates consultant McKinsey & Co. While China today has fewer than 5,000 managers with the skills needed by multinationals, 75,000 jobs for such managers are expected to be created over the next five years, McKinsey says. The talent crunch “is the No. 1 constraint on China’s growth,” says Andrew Grant, McKinsey’s China chief. “It will hit earlier and be more powerful than any [other] constraint,” such as raw materials shortages.

Some U.S. companies in China believe better education and training is the way to stay ahead of the game. Motorola regularly hires graduates straight from school and then trains them at its “Motorola University” in Beijing. Intel Corp., which has invested $1.3 billion in chip assembly, testing, and research and development in China, has backed initiatives that have trained 600,000 teachers there. “It helps contribute to our future workforce,” says Intel China President Wee Theng Tan.

LOWER ENERGY BILLS
Others are doing everything they can to retain employees. St. Louis-based Emerson has introduced flexible work hours at its Suzhou plant for workers with children. It has built a “green” office with solar power, ambitious recycling plans, and chargers for the electric bicycles used by many staffers. And to build loyalty the company holds quarterly parties for the entire staff and organizes free trips to resort areas. “I chose Emerson because it is a well-respected company,” says 25-year-old Rocky Lu, who started as a technician at Emerson’s Suzhou plant in February. He got a 50% raise from his last job, at a state enterprise, to nearly $400 a month.

Emerson is cutting costs elsewhere to ensure that rising wages don’t price it out of Suzhou. It has lowered utility bills by raising the thermostat a couple of degrees in the summer and dropping the mercury in the winter while passing out long underwear to keep workers warm. It has added reflective light fixtures that can use lower-wattage bulbs. And it has recently tapped excess heat from its factory to warm dormitory showers. “So far it’s an even trade-off” between rising labor costs and efficiency gains, says Emerson manager Warth. “We have to deal with it if we want to remain in business.”

Beijing realizes that it, too, needs to deal with the issue if it wants to stay in business. So the government is further loosening rules that prevent rural residents from moving to cities to work and is offering tax breaks to overseas Chinese who return to the mainland. The higher education system is also being overhauled to include more practical classes and vocational training in a bid to expand China’s skilled workforce by a third, to 8% of the population. China will still be the world’s workshop. But the world will need to adjust to the inexorable rise of the workshop’s wages.

Low Costs, Plentiful Talent Make China a Global Magnet for R&D

Kathy Chen
Jason Dean
The Wall Street Journal, 14 March 2006

BEIJING — Multinational companies, drawn by a huge and inexpensive talent pool, are pouring money into research and development in China — a trend that promises to broaden the country’s huge role in the global economy.

The total number of foreign-invested R&D centers in the country has surged to about 750 from 200 four years ago, according to China’s Ministry of Commerce. And in a survey of multinationals published in September by the United Nations Conference on Trade and Development, China was by far the most frequently cited location for R&D expansion, well ahead of the U.S. and third-place India, China’s chief rival as an emerging innovator.

Still, China’s growth as a global R&D hub faces some constraints. Among them is the country’s weak protection of patents and other intellectual-property rights. That has encouraged some foreign companies, fearful of risking their trade secrets, to keep more cutting-edge research out of China, analysts say. But others have rushed to expand the scope of their development efforts here.

Whereas R&D investment in China initially focused on adapting existing products and technologies to the Chinese market, companies such as Procter & Gamble Co., Motorola Inc. and International Business Machines Corp., among many others, have been investing to expand their Chinese R&D operations to develop products for the global market.

P&G opened a research arm in China in 1988, consisting of two dozen employees concerned mainly with studying Chinese consumers’ laundry habits and oral hygiene. Today, the U.S. consumer-products giant runs five R&D facilities in China with about 300 researchers who work on innovations for everything from Crest toothpaste to Oil of Olay face cream.

The Chinese facilities have been a lead site for developing a new grease-fighting formula of Tide laundry detergent that sells in Asia, Eastern Europe and Latin America. At one facility in Beijing’s university district, researchers use computer modeling to tinker with other promising formulas that chemists in white lab coats and protective glasses then mix and test. “We are developing capabilities in China that we can use globally,” says Dick Carpenter, director of P&G Technology (Beijing) Ltd.

Giving impetus to the R&D expansion in sectors from biotechnology to pharmaceuticals to semiconductors is China’s government. Having enlisted foreign investment to transform China into a manufacturing powerhouse over the past few decades, Beijing now is mounting a campaign to strengthen domestic innovation that could help push the country into more advanced niches of the global economy.

In his annual report at the National People’s Congress in Beijing, which ends tomorrow, Chinese Premier Wen Jiabao said the central government will increase spending on science and technology by nearly 20% this year. “China has entered a stage in its history where it must increase its reliance on scientific and technological advances and innovation to drive social and economic development,” he said.

China’s State Council, or cabinet, recently said the country would seek to boost R&D investment to 2% of gross domestic product in 2010 and 2.5% by 2020. At a news conference Friday, senior officials outlined tax breaks and other tools they plan to use to meet that target. Last year, total R&D spending in China — not including foreign investment — reached $29.4 billion, rising steadily from $11.13 billion in 2000, according to the government.

China faces numerous obstacles to joining the ranks of the world’s innovation leaders — beyond its weak intellectual-property protections. Research spending is still small compared with that of developed countries; the U.S., for example, spends about 2.7% of GDP on R&D, compared with 1.3% of GDP in China last year. And much of what is spent in China still comes from foreign companies: Less than a quarter of Chinese midsize and large enterprises had their own science and technology institutions in 2004. Of China’s high-tech exports, valued at $218.3 billion last year, nearly 90% was produced by foreign-invested companies, according to the Ministry of Commerce.

Still, the R&D trend is bolstering China’s position relative to other developing countries, particularly India, which is also seeking to build its innovation abilities. India’s total domestic spending on R&D rose an estimated 9.7% to $4.9 billion, or 0.77% of GDP, in the fiscal year ended March 2005, according to India’s Ministry of Science and Technology.

India is also trying to build R&D, “but the scale of investment [compared with China] is not much” because of budgetary constraints, says V.S. Ramamurthy, a top official at the ministry. Foreign investment in Indian R&D has also lagged behind that of China, he says. And while Mr. Ramamurthy argues that the amount of investment isn’t the only way to measure R&D success, “it is a concern for us.”

Zhang Jun, director of the China Center for Economic Studies at Shanghai’s Fudan University, says that given time, “China’s advantages in this area will become more obvious…and its attractiveness will increasingly become stronger than India’s.”

Among China’s draws, he says: the relatively low cost of hiring engineers and researchers; a huge talent pool, including five million university graduates annually (one-fifth majoring in science or engineering); and China’s own huge market of 1.3 billion consumers. China offers its students abroad incentives to return once they graduate, including generous research grants and chances to run their own R&D projects.

One early returnee is Enge Wang. Mr. Wang, who had worked as a research associate at the University of Houston, decided to return to Beijing to conduct research under a Chinese Academy of Sciences program in 1995. At the time, he says, his U.S. colleagues and friends questioned his decision, but he says he is glad he made the move. Today, Mr. Wang is director of the Institute of Physics under the academy, one of China’s top research organizations, which is engaged in several R&D cooperative ventures with foreign companies.

China’s “research funding is getting much better,” Mr. Wang says, and as a result, overseas Chinese are flocking back from top U.S. institutions like Harvard University and Lawrence Berkeley National Laboratory. Talented returnees can secure enough backing “to build up their own lab and extend their research in one direction for 10 years,” he says. “It’s hard to find such conditions elsewhere.”

“There’s been a paradigm shift among foreign companies in China,” says Chen Zhu, a Chinese Academy of Sciences vice president. “Now, more foreign companies realize

China is not just a market but a country with huge amounts of talent.”

Motorola, which began investing in low-level R&D in China in 1993, now has 16 R&D offices in five Chinese cities, with an accumulated investment of about $500 million. The U.S. company has more than 1,800 Chinese engineers, and the number is expected to surpass 2,000 this year. They have recently begun developing new phones and other products for sale not only in China, but also overseas, executives say.

One phone developed in China, the A780, lets users write on the screen with just a finger, rather than a stylus. It’s now available in the U.S. and Europe. Another phone that can scan contact information from business cards using a built-in camera and enter it into a contact database is expected to be marketed in the U.S. “China is moving from the manufacturing center into advanced R&D,” says Ching Chuang, who heads Motorola’s Chinese R&D operations.

Microsoft Corp.’s basic-research lab in Beijing was only its second outside the U.S. when it opened in 1998. That China lab now employs about 200 full-time scientists, and the software giant expects its total R&D headcount in China to double in this year to about 800 researchers.

At IBM’s research lab in Beijing, Chinese scientists have led the development of several technologies now being used abroad. Among them: “voice morphing” software that can convert typescript or a recorded voice into another voice. “Our R&D now has a global mission,” says Thomas S. Li, director of IBM China Research Lab.

At the state-run Institute of Computing Technology, engineers are tackling one of technology’s tougher challenges: designing a computer microprocessor. Though still many years behind industry leaders like Intel Corp., the institute last year unveiled its second-generation microprocessor, with about the same computing power as mainstream chips in the late 1990s. This year, it plans to finish work on a third-generation chip that could narrow the gap.

China is also emerging as an R&D force in such sectors as nanotechnology, biotech and genetically modified crops. It was the first country to establish a full rice genome database, which has helped Chinese scientists develop hardier and higher-yielding strains of the staple cereal.

Swiss pharmaceuticals companies Novartis AG and Debiopharm SA have teamed up with the Shanghai Institute of Materia Medica under the Chinese Academy of Sciences to conduct research into traditional Chinese medicines to look for treatments for malaria and Alzheimer’s disease. “This last decade, the progress we have seen in China’s scientific research sector is phenomenal,” says Ju Li-ya, director of Debiopharm’s China department.

For Indian IT biggies, China is hot

Bruce Einhorn, BusinessWeek | March 24, 2006

It’s fair to say that Hari Natarajan is obsessed with Microsoft. A vice-president at Satyam Computer Services, one of India’s biggest outsourcing specialists, Natarajan is in charge of the company’s strategic-relationship unit with Microsoft. Or, as he puts it, “I breathe, eat, and drink Microsoft every day.”

And what occupies the Microsoft-focused thoughts of Natarajan these days? Easy. Satyam and Microsoft are partners in a new joint venture designed to develop the software-services market in China. Right now, China isn’t much of an outlet for Indian outsourcers like Satyam. But Natarajan and others at Satyam are determined to change that.

“This is a huge market with great innovation potential,” Natarajan says. The local market is only about $1billion, but that will probably grow eightfold in the next five years. “You don’t see these kind of growth numbers anywhere else in the world,” he adds.

A major shift

That’s one reason Satyam and other Indian companies have been busy putting down stakes in China. Infosys has acquired 50,000 square meters of land in Shanghai and 300,000 square meters in Hangzhou, and is building new centres in both cities.

Tata Consultancy Services has reached a deal with Microsoft and the Chinese government to launch a new joint venture in Beijing this year. And on March 1, Zhang Guangning, the mayor of the southern Chinese city of Guangzhou, visited Satyam headquarters outside of Hyderabad in southern India. While there, Zhang and Satyam’s managing director, B Rama Raju, signed a deal to set up a Satyam operations center in Guangzhou.

All of this represents a major shift for India’s information-technology leaders. Not long ago, China wasn’t even an afterthought for Indian software executives, who looked pretty much in one direction: West. And who could blame them? After all, companies in Europe and North America represented almost their entire customer base. Japanese companies didn’t do much outsourcing, and what little they did wasn’t sent India’s way. Other Asian markets were similarly unpromising, and there was no business to speak of coming from China.

That’s all changing. Increasingly, companies in Japan and South Korea are outsourcing. They’re sending a lot of that work to nearby China, where it’s relatively easy to find programmers who understand Japanese or Korean — certainly a lot easier than finding people in India who can speak those languages.

Job boom

With China attracting tens of billions of dollars in foreign direct investment each year, there’s a growing list of Western multinationals that need outsourcing help for their Chinese operations. And Chinese companies themselves are starting to realise that they not only need to upgrade their IT systems, they need outside help to do the work for them.

One of the early Indian movers into China was Bangalore-based Infosys. Early this decade, following visits to Infosys headquarters by then-Premier Zhu Rongji and Li Peng — China’s longtime No 2, who at that time was head of the National People’s Congress — the Indian company announced plans to open an office in Shanghai.

To date, the growth hasn’t been spectacular: Infosys has only 450 people in China, out of 50,000 employees worldwide. But James Lin, a Taiwanese-born veteran of IBM Global Services, who joined Infosys in 2004 as chief executive of China operations, says Infosys will be embarking on a China hiring spree. “In the next five years,” he says, “we’re talking about 6,000 (Chinese) staff total.”

Maintaining lead

Why the renewed commitment to China? According to Girija P Pande, Asia-Pacific director for TCS, Indian companies have to build up their workforces there. The business model depends on it. “This is a business of skill and scale,” he explains.

“There aren’t many countries with both. In Asia, you have India and China.” Of course, companies like TCS are already employing tens of thousands of Indian engineers. That leaves China as an untapped talent pool. “So China becomes important as well,” says Pande.

Executives like Pande insist that Indian companies have little reason to fear that all of those talented Chinese engineers will go to work for homeland companies that can seriously threaten Indian IT dominance. Indian companies last year had $17 billion in revenue, compared to just $2 billion for their Chinese counterparts. Three years from now, Indian companies will have sales of $48 billion, compared to $5 billion for Chinese.

“They aren’t going to be in the same league. If anything, they will fall behind,” Pande says. “They don’t have scale, and they don’t have the marketing connections that Indian companies have established.”

Structural risk

Not everyone is so sure. A December report from analysts at Merrill Lynch noted that China produces 400,000 new computer-science graduates a year, compared to 181,000 IT-engineering grads in India. China also boasts far better infrastructure, the Merrill analysts reported, and less red tape than India.

While Chinese IT-services outsourcing companies are still in their infancy, they stand a good chance of growing up quickly. “Unlike the general belief that the China threat is a very distant one, we believe the first wave of competition from China could be felt in two or three years,” wrote the Merrill analysts. “(And) over a three- to five-year time frame, we need to watch the structural risk posed by China in ‘commoditising’ IT services outsourcing.”

All the more reason why Indian companies need to expand their operations in China now, while they still have time.

Putting china on your resumé

EXECUTIVES LOOK FOR CAREER BOOST FROM ASIA STINT
By Katherine Yung
Dallas Morning News

Bobby Carter shows all the symptoms of China fever.

Each week, he meets with a private tutor to learn Mandarin. On airplanes, he listens to language tapes. And in his spare time, he reads books about the Asian powerhouse and blogs written by expatriates living there.

China “is really intriguing to me. I want to experience it,” said Carter, 44, UPS’s international sales and marketing manager for the Southwest region.

Although he’s traveled in the region for his job, now he wants to work full time in China, for at least a few years.

“Who would think in our lifetime we would have the opportunity to be pioneers in anything?” he said.

As China evolves into an increasingly important market for many U.S. companies, a growing number of Americans are eager to work there, despite potentially formidable obstacles of language and culture.

`Not a hardship’

Interest in China extends beyond multinational corporations. Increasingly, managers at small and mid-size businesses are volunteering for forays in China, seeking excitement, riches and a career boost.

“It’s not a hardship,” said Louisa Wong-Rousseau, managing director of China for Stanton Chase International, an executive search firm. “People see going to China as a career advancement.”

Though many in China prefer to hire locals, a shortage of skilled executives means expatriates remain in demand, said Lisa Johnson, director of consulting services for Cendant Mobility, a large relocation company.

Many companies award assignments in China to their rising stars, she said. “It’s where a lot of companies’ future is.”

According to a Cendant Mobility study conducted last year, people relocating to China for business reasons are typically married men in their early 40s.

Shanghai, China’s most cosmopolitan city, ranks as the top destination for expatriates. But a growing number of them are headed to less well-known places like Chengdu, Dalian and Tianjin.

Americans who have taken the plunge and relocated to China often find the experience an eye-opener.

In November 2004, Nokia Oyj employee Ron Davenport sold his house and two cars in Grapevine, Texas, and moved to a gated community in Beijing.

Now, he is helping develop low-cost phones at Nokia’s product creation center in Beijing.

“The pace is quite frantic,” Davenport, 41, said of the Chinese business environment. “But I am much more sensitive to growth in other parts of the world.”

`Flying in and out’

For Mark Abe, living in China became a necessity. The 40-year-old executive for Plano, Texas-based Electronic Data Systems arrived in Beijing three months ago to help his company win information technology services contracts from Chinese airlines, airports and other air services providers.

“It’s very hard to build those relationships when you’re flying in and out,” he said.

The expatriate from Orange County quickly learned that conducting business in China requires forming personal relationships, not just making sales calls.

“The business models that are prevalent here in China are different from ones in other parts of the world,” he said, referring to the nation’s many state-owned firms.

“Don’t wait,” he advised others considering working in China. “The country is changing so fast. Jump in with both feet and don’t look back.”

Taking on a China assignment does involve some challenges and adjustments.

Chief among them is finding health care that meets U.S. standards, according to the Cendant Mobility study.

An unhappy spouse and children can also cause problems.

Ironically, once expatriates and their families adapt to life in China, the hardest part is often coming home.

Attorney Carter Meyer endured a difficult transition when he and his wife returned to Dallas in August 2004 after living in Beijing and Tokyo for a little more than two years.

“It was hard getting used to it,” he said of the first few months back on American soil. “I missed the food quite a bit. I missed the people.”

Meyer, 37, recently left Vinson & Elkins to become head of a small venture capital firm. But if the right opportunity came along, he would consider going back to Asia.

“On a résumé, it has a lot of credibility,” he said of his time spent in China. And “I appreciate the size of the world a lot better.”

http://www.mercurynews.com/mld/mercurynews/business/14203721.htm