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Who will win the war for talent in China

September 1, 2011

While in Beijing recently I met with the head of Human Resources for an American based multi-national manufacturing company. Its division in China currently employs 5000.

We spoke on a number of topics with the war for talent being the most pressing. China’s manufacturing sector is vibrant. Companies continue to see growth from exports as well as an increasing percentage of business coming from domestic spending driven by investment in infrastructure and increasingly retail volume.

For workers in the manufacturing industry, a job with a local division of a multi-national manufacturer was once considered the best option for upwardly mobile employees. The salaries are higher, benefits are better and these divisions are in an invest-and-grow mode. English language skills improved and smart Chinese workers prospered. For private local companies it was difficult to compete.

Today, however, things are changing. The global recession has forced many multi-national companies to restrict investments and even close factories both in China and abroad. Other MNC’s found the complexity and costs of operating in China higher than expected and withdrew after a couple of years. Larger private Chinese manufacturers while not immune to the recession were not as exposed. Government stimulus also helped. As a result they were able to weather the storm more effectively.

As China’s GDP has returned to its blistering rate of growth the dynamics of attracting talent have changed.

Chinese companies are evolving from contract assembly or sewing shops that competed solely on rock bottom wages for low-skill jobs. As the skills developed by employees with previous experience in MNC’s and Joint Ventures seep into local companies, private Chinese companies are beginning to execute on their own global manufacturing goals.

Investors have also fueled this ambition as the stock market continues to launch new public companies providing early investors with a quick exit and potentially high return. This phenomenon allows Chinese companies to continue to pay less to employees but promise through stock options a large payout. For those who were working during the late 90’s in the US, it is reminiscent of the talent drain of large stable companies to small start-ups who had nothing to offer but long hours, low pay, an exciting culture with the promise of millions of dollars in a year or two.

These economic changes have made it more difficult for MNC’s to compete for the most skilled employees. The following are some observations from my discussions with mangers and employees during my trip.

 

In China, cheap labor can still be found but talent is expensive

Rising wages for unskilled production employees in coastal cities can run $3-$4 dollars an hour, up from $1 just a few years ago. For manufacturers who have based their competitive advantage on low cost labor and have not improved productivity, they are being forced to move inland where labor is less expensive (for now). At what is often estimated to be 1.2 jobs for every person in the large cities, talented employees have many more options today than even just a couple of years ago. They are job hopping every couple of years earning 20-60% pay increases.

Even the advantage of the lower cost inland cities is evaporating quickly. Because living in Beijing and Shanghai carry significant prestige, a commuter’s package to a tier 2 or tier 3 city begins shaving away at the cost advantage of these outlying cities. Add in additional freight costs and the justification to move inland can only be made through tax and land incentives.

Parental pressure on the young to earn as much as they can

China’s single child law has had a number of unintended consequences. Parents who have sacrificed to ensure a better life for their child are now demanding a return on their investment. Legally children must provide financial support to aging parents. In some families a successful child might also be pressured to support uncles and aunts as well.

This dynamic erases a traditional benefit that Western companies have long touted as a differentiator: better working conditions. Employees who have an opportunity to earn more or strike it rich with options are considered selfish by their family if they decide to earn a little less in return for better working conditions.

Broken Trust

China’s controlled economy has built in an expectation of job security. The last recession has brought about a new reality to Chinese workers. Jobs aren’t necessarily forever.

Those companies that have been forced to close their factories or moved some of them offshore now have a reputation as providing a less secure working environment.

When recruiting employees, a reputation for flexing the workforce through lay-offs reduces a company’s attractiveness compared to companies that offer steady employment.

What can companies do?

With rising wages, throwing more labor at problems is no longer a solution. As a result making better hiring decisions each hire becomes more important. As higher risk is associated with each hire, a corresponding investment in the hiring process is justified.

Second, investing in employees through training will increase the skills of second tier employees reducing reliance on the difficult to recruit superstars.

Finally, western companies continue to have a cultural advantage in managing high performance employees. This is the ability to empower and trust employees with increasing responsibility. In discussions with employees who have worked for both local and MNC companies, the empowered culture is favored by high performance employees. They appreciate a culture that allows them the freedom to make their own decisions and have responsibility (and control) over a specific area of work.

A low-cost unskilled labor manufacturing strategy is a thing of the past in China. China is no longer the low cost labor leaders and management strategies there must also change. Investing in productivity enhancing systems, continuous improvement efforts and a focus on innovating to increase the value added to products and services is the next stage of development for companies that want to succeed.

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