Every experienced manager in China will tell you that the main challenge is to find good people and build an effective team. This sounds strange in a country with 1.4 billion people and 7.6 million fresh graduates each year , but HR is the bottleneck. This applies to multinationals as well as Chinese companies.
See for example this survey from by the German Chamber of Commerce in China in collaboration with Watson Wyatt . An overwhelming 80% of respondents face current HR challenges and 70% foresee future HR challenges.
How can there be so much manpower and still an HR problem?
In this article, we dive into the following questions:
- What are the underlying social factors causing HR challenges?
- What do Chinese employees generally prioritize?
- What challenges can you expect in your Chinese operations?
- What are the hard learnings from our experience?
Main underlying factors
Education system focused on standardized testing: from a young age, Chinese students are pushed to perform well on standardised tests. Starting from middle school, with the university entry exam (GaoKao), and throughout their time at university. Standardized tests are the only way to succeed in the education system. Questions and discussions are not common. This system has created wide literacy and a high number of STEM graduates, but does not encouraged innovation and creativity. More on the job training is needed to create a dynamic employee and this may not always be possible.
Family influences: parents generally have a much greater influence on the career decisions in China than elsewhere. This influence can continue to an employee’s mid-career. Parents often push their children towards certain jobs or industries that they think have better financial prospects. Some parents even want to come to the job interview. Other employees have to support their parents or have their parents or in-laws living with them. It is very difficult to understand the issues that come with these influences.
Rising costs & housing: most employees still “work to live” in China. Rising incomes , but also rising living costs and especially housing mean that employees need to have a good career perspective. This applies even more to men who do not come from family wealth as they, and their family, are traditionally still expected to purchase the first marital home. The astronomical housing prices in major cities make this almost impossible. Families of the bride and groom are increasingly putting funds together for the first marital home, but income and career perspective remain a major factor in employee decision making.
What do Chinese employees want?
Different employees want different things, but multinationals should be aware that Chinese job seekers are invariably focused on the starting salary and growth prospects. This is logical given the rising costs and family pressures (see above), but sometimes harder to accept for multinationals who want a more engaged employee.
A recent study (2020) by 58TongCheng recruitment clearly shows that in choosing jobs, the main driver of Chinese job seekers is income, followed by career prospects, followed by company stability and then work time. Company culture and scale are low on the list. This was a study with 2,357 job seekers of various backgrounds and education levels . In a slightly different study by Mercer, which took more of a global perspective, the top four factors that made employees join a company similarly include job security, career and development opportunities and competitive pay (see table below) .
The reasons why Chinese employees want to stay in a company and leave a company are different from why they join, but a competitive salary and strong development prospects remain crucial. It is not easy to provide accurate data on this. The below study by Mercer gives an impression of the priorities of what makes employees stay in and leave a company . Again, competitive salary and strong development prospects persist as leading factors.
The common problems
The combination of differing socio-economic backgrounds, job seeker culture and expectations of multinationals cause a number of common HR problems in China. These include:
- Poor teamwork: Foreigners struggle to motivate and properly supervise Chinese staff. It is common to see Chinese staff dynamics go one of two ways. Either, teams form a too familial bond, resulting in lower productivity and making important decisions more difficult. Or, workers become hyper individualistic, and teams lack the benefits from employee cooperation.
- Talent Shortages: The imbalance between job opportunities in China and qualified talent is one of the biggest challenges that recruitment managers face. The talent shortage is most pronounced among skilled workers. Chronic staff shortages in certain divisions create operational bottlenecks.
- “Squeaky wheel gets the oil, but doesn’t work well”: Multinationals often recognise outspoken or better English speaking employees because this is what they are used to. This can cause problems when less outspoken employees actually know the issue better. Western educated Chinese staff can often make stronger logical arguments and business cases, but have difficulty implementing these in China. As they have been outside China for some time, they also have difficulty knowing how to operate locally and get things done.
- High staff turnover: According to a report conducted by the Chinese public sector, the average annual employee turnover rate for private companies in China is about 19% . Comparatively in Europe, the annual employee turnover rate is 14% . Job-hopping is quite common in China, especially with younger professionals. There is also no system of reference checking. Quite some time is lost from training and onboarding the replacement staff.
- IP theft: Most IP is leaked by staff, especially when they switch companies. High turnover is directly linked to IP leakage. This impacts the competitive position of the company. Maintaining control over IP theft requires a close connection with employees. Most of the time, you find out from other employees that theft is taking place. If there are no good HR procedures in place, you do not find out or only when it is too late.
- “Side deals”: Commercial bribery can quickly emerge when HR controls are lacking. Aside from in-depth financial review, you mainly find out that side deals are happening when other employees who trust you tell you about it. Procurement and sales are the most obvious departments at risk, but this can occur everywhere. Side deals can severely impact the long-term profitability and even the entire survival of the company.
- Compliance issues: Foreign owned companies should ensure that they fully comply with Chinese law and regulations. Enforcement is often stricter on foreign owned companies than Chinese companies. Labour arbitration is free for dismissed employees and any disgruntled employee can launch a complaint (without or without merit). HR practices that are not backed up by contracts, code of conducts, procedures and financial accounting in accordance with Chinese law, are poorly enforceable and can backfire quickly.
The above problems, which are not conclusive, are the fermented result of serious gaps in HR management. Hiring new employees is not going to fix the issue, although this is the approach most companies take.
To get to the root of the problem, the management needs to review and improve its HR approach. This takes time to execute and implement but is the only way to change things.
Examples of basic techniques to improve HR management that we practice at LvS in China expansions include:
Testing before hiring: Chinese job applicants are particularly good at selling themselves in job interviews. The applicant will generally agree with anything the interviewer says. After hiring, you may find out that the employee is quite different. This particularly applies to the employee’s way of thinking and approach to teamwork. This can be caused by the employee’s background (see above), but still be unsolvable or take too hard to improve by training. To counter this, companies need to introduce tests and multiple interviews. Multiple testing rounds and interviews will only be accepted by applicants if the job is worth it and thus this may require reviewing the entire job description, but this is then also needed. Further screening is also needed during the probation period after hiring. These standards become the norm once they have been used a few times.
Employee onboarding, training and a handbook: When employees start, they should be properly trained and informed of a clear set of rules and standards. This helps to not only improve employee’s competency but can also reduce turnover rates. A firm employee code of conduct that spells out best practises is a key tool for onboarding new staff. Instilling correct working habits is vital.
Hierarchy and responsibility: Chinese employees tend to require more direct guidance and clear responsibility. Flat structures do not work well for this reason. Employees and managers cannot be expected to solve issues that they have not been made responsible for. Structuring the organisation with clear levels of rank and responsibility, and salaries to match, is the only way to create decentralisation and efficiency.
Introduce incentive packages: Providing a clear growth pathway is essential to keep people on board (see above). Without that, the employee on a market conform salary may still conclude that the current salary is not enough in the medium term to improve their living standard, marry, buy an apartment, have children or support elderly parents. The growth pathway should include the promotion criteria and remuneration. More complex incentives such as equity schemes are a bit more difficult to implement but can create deep engagement with long-term employees. Incentive packages should be comprehensive and include key performance indicators for both individuals and groups with different time frames. It is important to mention that the company also needs negative incentives and a way to part with employees (with incentive packages) that are not working out.
International career progression: Many multinationals promise Chinese employees that they will be part of global management/operations, but few execute on it. Inviting higher level Chinese employees to visit the company abroad is a major driver of trust and engagement. It is aspirational for many Chinese professional to work internationally, if even for a short while or project. During and post Covid, this will be difficult, but where even slightly possible, it should be considered an effective HR management tool to bring the organisation together.
The main bottleneck of expansion in China is people. Finding the right people and creating a well-functioning team is the key challenge of every industry, every market and every country.
Multinationals operating in China (or expanding thereto) need to be mindful of the social economic differences and employee preferences that are often unspoken. These differences can lead to difficult problems when not considered.
Many of these problems can be avoided by a diligent HR management, parts of which were introduced above. But with all HR matters, the proof is in the pudding. Only diligent local management adapting to the situation are able to execute any meaningful change.
- Statista 2020, ‘Number of graduates from public colleges and universities in China between 2009 and 2019’.
- EU SME Centre 2015, ‘HR Challenges in China’.
- China Briefing 2020, ‘Wage Growth in China 2020: How to Read the Latest Data’.
- 58TongCheng Recruitment 2020.
- Mercer 2020, ‘Global Talent Trends 2020’.
- Sky Executive 2019, ‘The Top 5 Human Resource Challenges in China’.
- Radford Consulting 2014, ‘Europe Leads All Regions for Workforce Stability’.