HR Challenges in China

As China’s economic growth continues to outpace the economies of the West, a growing number of foreign companies have looked to establish and expand their China operations. Whereas in the past this typically meant setting up and operating a China-based factory or sourcing office, multinational companies are increasingly looking to expand their China offices to take advantage of the growing market opportunity within China. A growing number of Western multinationals, including the likes of GM, Henkel and Honeywell, have transferred their Asia-Pacific headquarters, while a whole host of companies in the life sciences, electronics and manufacturing industries have made China the base for their regional or global R&D centres.

As an increasing number of foreign businesses look to expand their China headcount, the challenges associated with attracting and retaining the best talent have been brought into focus. Limited availability of human talent is perhaps the number one challenge facing multinationals in China. A 2006 McKinsey survey found that less than 10% of new Chinese university graduates – estimated at more than 4 million in 2006 – had the skills required by foreign firms in China. Talent recruitment has been a particular challenge for Small and Medium-Sized Enterprises (SMEs), with local Chinese employees typically attracted by the higher status and perceived security of working for a larger organisation.

Another key challenge facing employers in China is the problem of retaining talented staff over the long term. Rising wage inflation in China’s major cities often makes it difficult to meet employees’ increasing salary aspirations, and employees are often lured away by the promise of higher salaries or better career opportunities elsewhere. As more foreign companies deepen their commitment to China, and with a growing number of local Chinese companies able to pay higher salaries for top talent, competition for the best Chinese employees is becoming ever more intense.

Developing effective HR strategies for China is increasingly a major consideration of companies commissioning market research both from outside and within China. Many companies actively conduct annual employee engagement research to monitor the views of employees, while the importance of finding ways to retain and incentivise key sales staff is often a key research output. Research that helps to define and improve a company’s core value proposition can also help to attract and retain the best employees over the long run.

Research being undertaken on the subject generally points towards a number of different strategies to help firms to attract and retain the best employees in China. To begin with, companies are urged to adopt a total rewards strategy that encompasses training, career development opportunities and other non-financial benefits, rather than simply using higher salaries to attract talent. Developing the skills of Chinese managers through training, development and overseas placements are also key ways of increasing employee engagement and commitment over the long term, while rotating overseas talent through the China office can also help to ensure key people throughout the organisation have an understanding of the China market. Finally, companies can use talent segmentation; that is, the manner in which companies organise, structure and incentivise talent, to make the most out of their human resources and encourage talent retention.

There is no quick-fix solution to the shortage of talent in China, and any business looking to establish a China presence should think carefully about its HR strategy before making any significant commitment to the country. Smaller companies in particular are likely to face significant challenges in recruiting experienced managers for senior positions, and it may be necessary to employ expatriates in senior positions during the start-up phase. However, making use of advanced HR practices, having a good understanding of local Chinese culture, and taking the time to research and understand the concerns of local employees are all likely to lead to a happier workforce and better talent retention over the long term.