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The Big Question China After the Hong Kong Handover

July 1, 1997
The curtain rises. As the world audience watches the tightly scripted Handover Ceremony passing Hong Kong from the United Kingdom to the People’s Republic of China (PRC), the spectators know this is only Act One. The drama continues to unfold. It’s the big mystery and a momentous event of the last decade of this century.

But, while our attention is focused on Hong Kong to discover what will happen to that vibrant, capitalistic shrine, our gaze also is fixed on China. We look in wonder at the vast opportunities and in dismay—or horror—at the ethical issues we encounter there. Questions leap to mind; our sense of right and wrong is challenged by a value system different from our own. But are we considering what’s truly important as we move into the next millennium? As we in the West scrutinize curtailed freedoms, acts of political repression and human rights abuses, is it possible we’re actually missing a crucial part of the plot?

As the wild cacophony of business activity surges ever forward, there are also other pressing questions HR professionals should ponder. How will western society expand its cultural assumptions and learn to work with China? And the big question: Will we develop strong relationships and promote long-term involvement and business investment that will meet the needs of both the East and the West? Watch closely as human resources professionals, the heroes of our story, face the extraordinary challenges of doing business with this complex, multifaceted giant.

It’s a tale that will unfold with many subplots and characters, ultimately offering unimaginable opportunities. As China establishes a presence in the world marketplace and multinationals open operations there, HR will be responsible for understanding China’s culture, designing functional organizational structures and meeting the staffing challenge. The story we present here is only a beginning, a first scene to what will play out over years to come.

Prologue to the present.
More than 150 years of history have passed since the United Kingdom took possession of Hong Kong. The subsequent 99-year lease is over. While the people of Hong Kong lived a century under British rule, their neighbors in China lived a very different existence. They saw the origin and rise to power of the Chinese Communist Party, the Cultural Revolution and the emergence of such world figures as Mao Zedong, Chiang Kai-shek and Deng Xiaoping. During this period they experienced the severing and the restoration of diplomatic relations between China and the United States.

On June 30 at midnight, the transfer of Hong Kong back to China—and all that it implies—took effect. It’s a very different country today with which Hong Kong is being reunited. And it’s clear that China is changing still. In early 1997, Deng Xiaoping died. Gone is the man most responsible for liberalizing the economic atmosphere of China in which forms of capitalism could exist alongside communist social controls. His successors will grapple with a future that is rife with instability, apprehension and promise.

"The agenda has always been the same: to keep Hong Kong a lively, stable, vibrant, prosperous place," says Brian Renwick, managing director of ECA Asia Pacific, and Renwick McCormick & Maule Ltd., a Hong Kong-based human resources consulting firm.

Indeed, Hong Kong is a picture of robust health. Consider this. The colony of six million citizens has the strongest purchasing power in the world, the busiest container port in the world, 12 million visitors per year (growing at 15 percent to 20 percent annually) and a low crime rate. You need only look around at the flood of multinationals entering the area to realize confidence is high. According to Renwick, the biggest fears about Hong Kong are inflation and the labor shortage.

Rather than speculate about political changes that might occur in Hong Kong after the hand over, we should use this window into China to study the country that will be instrumental in reshaping Hong Kong—and the world. It’s time to take a serious look at the HR challenges ahead.

The backdrop: China’s character is shaped by its ancient culture.
Considering the country’s complex history, the countless ethical dilemmas and tough business decisions companies encounter, it’s a wonder that organizations go into China at all. Nevertheless, most global executives believe their firms must be there. Indeed, they find it irresistible. Motorola, for example, will have invested $1.2 billion by 1998, and its sales in the PRC and Hong Kong reached a staggering $3.2 billion in 1995 (almost 12 percent of its worldwide revenue) according to Fortune magazine (May 27, 1996).

It isn’t possible to overestimate the obstacles to doing business in China. This third-world country is industrializing at a blistering pace. At the same time, tens of millions remain in abject poverty. The People’s Republic of China has 1.2 billion people (one-fifth of the world’s population) in an area slightly larger than the United States. It has the world’s third-largest economy after the United States and Japan, according to U.S. News & World Report (March 3, 1997). It’s so big and so different from the West.

"When doing business in China, the first thing to remember is that it’s first a Chinese country, second a country fascinated with capitalism and the desire for profit, and third a communist country," says Noel Miner, vice president of consulting, for Boulder, Colorado-based Prudential Intercultural Services. Chinese put an emphasis on maintaining order and avoiding social chaos. In other words, China is a group-based society in which the focus of members is the collective needs and interests of their clan. Group members identify themselves as part of a group—many small groups. These include families, regions, schools and communities.

"[Without] a strong central bureaucracy to provide structure, it’s likely the Chinese society would spin out of control as each of these groups competes with each other," he says. "The bureaucracy not only serves as a control function, but also provides social balance so the society doesn’t move into chaos." This structure and control owes original authorship to the Confucian period. The concern of many China experts is the following: If people in the West focus too strongly on political and social issues, and as a result, the central bureaucracy begins to disintegrate, it could lead to social chaos, not democracy.

The central theme: Understand your organizational opportunities.
The complexities of China offer untold strategic opportunities for HR professionals. "In the coming decade, human resources professionals at large- and medium-sized businesses will face a new reality in the relationship of the HR function to business strategy," says Kenneth DeWoskin, professor of International Business in Asian Studies at the University of Michigan. According to DeWoskin, a Chinese organization is accountable to a group of stakeholders rather than to what we (in the West) call shareholders. Shareholders are interested in a profit that can be distributed to people who don’t work in the organization but who have ownership of it. Stakeholders are the managers and the workers.

"The inclination of a Chinese organization that starts to generate a profit [what they call a surplus], is to redistribute it—not to shareholders, but to the stakeholders. They’re perfectly comfortable if nothing falls to the bottom line. The point of the entity is to create a community and a mechanism to support the stakeholders. That’s a very fundamental difference," he observes.

This difference in organizational purpose is one reason joint ventures get into trouble. Chinese managers want to take the revenue and reinvest it in equipment, housing for the workers and better working conditions. The western partner, on the other hand, must see some of that money in profit, which means taking some of the profit out of the entity.

Chinese organizations aren’t based on a corporate culture but on the local culture, and are geared to make sure that a substantial portion of the revenue is directed to the community for building schools, hospitals, better transportation and so on. This is the reason Chinese can’t close down money-losing state-owned enterprises. The resulting unemployment would destroy the economic fabric of the community.

This orientation means that while the Chinese are interested in profitability, they aren’t so concerned about productivity. "We say that a Chinese entity has a lot of reliability internally and poor reliability externally. A western corporation has high reliability externally and low reliability internally. In other words, if a Chinese corporation comes under economic stress, it will first use its resources to support its workers and will default on its accounts payable and external obligations. It will go to the state-run banks for money. A western corporation will lay off thousands of workers before it will default. For a large corporation in the West, defaulting inflicts enormous pain on its shareholders, so CEOs are willing to inflict pain on other stakeholders."

Against this backdrop of differences, add one more crucial subplot. As company managers consider doing business in Asia, they’re looking at many more expansion opportunities than resources could possibly support. Even the largest companies don’t have the resources to pursue all the possibilities.

This presents a powerful opportunity for HR managers because it heralds the creation of a new strategic role for the HR function. "The critical constraint is no longer the availability of the market. [It’s the answer to] the question: Where can you successfully assemble the people to create the kind of organization you need to carry your product, your culture and your business into the marketplace?" says DeWoskin.

According to DeWoskin, we’re partnering with organizations that have different reasons for existing, are guided by different behaviors and operate with almost entirely different structures from what we’re accustomed to. If the Chinese think of an enterprise in completely opposite terms, it becomes evident through the critical issue of staffing: recruiting, hiring, training, retaining and compensating people.

Staffing issues take center stage.
Think it’s complicated so far? Now, add labor laws that are convoluted and may not even be disseminated and widely available, things like guaranteed benefits and income adjustment. Recruiting, training and retaining management-level people become critical—even daunting —HR issues. Staffing is one reason there are so many joint ventures in China.

Between the enormous influx of companies going into the region and China’s gallop toward industrialization and globalization, there has been severe pressure on the small pool of skilled Chinese workers. Of the 1.2 billion people, only a small number are educated.

The pool of workers may comprise local nationals who have received experience and training in how Westerners do business, returning Chinese who have been educated abroad and other local nationals who need significant training. Finally, there are expensive expatriates, and companies are trying to figure out how to decrease dependence on them.

This skills shortage results in predatory tactics in hiring experienced, trained people away from other companies. These sought-after individuals job hop, escalating salaries as well as expectations about their real abilities. "People in China are obsessed with getting employees who can do their jobs. It’s a universal observation that turnover is a terrible issue," says DeWoskin. "It’s not difficult for someone who’s really capable to double or triple his or her salary every couple of years."

Ask Kathy Hanna, Shanghai-based director of human resources Greater China for Allied Signal China Investment Company Ltd. With more than eight years in China, Hanna handled HR for 15 start-ups, both joint ventures and wholly owned foreign enterprises. She confirms, "A main issue is how to find skilled staff and then how to train them, how to develop them and how to integrate them." Another hurdle to overcome is title inflation. You may interview a person who has manager or director in his or her title but the substance of the position can be very different.

Especially challenging are the educated, internationally savvy individuals who move around so much. "There’s a lot of opportunity for highly skilled Chinese managers throughout Asia—in Indonesia, Malaysia and the Philippines—because they can work in the Chinese language," says Bill Thompson, Hong Kong managing director for the Greater China Region for Pinkerton Asia, who does pre-employment and background checks.

Hanna emphasizes the need to be creative when looking for people. Often people will join a firm because of their personal affinity to the boss. "If I know there’s a management turnover, I know there’s going to be a lot of Chinese talent turning over," she says, "because when the top person leaves, often the whole team will leave."

Loyalty plays an enormous role in staffing. "I’ve got a good person in the HR group in China who came out of my organization in Hong Kong. He’s looking to continue his career with the bank. But he wants the head of the business in that country to tell him which is the best career for him to pursue because he believes that’s the proper way to do things," says Richard Bahner, Hong Kong-based human resources head for Emerging Markets North Asia for Citibank N.A.

Chinese workers will expect the same loyalty from employers. "It’s terribly important that companies create a corporate culture that demonstrates a long-term commitment," says Renwick. "They’re going to have to keep people in places to get the relationships right—and that takes a long time, five to 10 years."

Renwick continues, "In China, it’s important that you have long-term benefits and want [employees] to be a remaining member of the company. "You can demonstrate good faith in a number of ways. [This includes creating a cadre of expatriates who are in the country long enough to develop relationships—in other words, more than two or three years. Short-term expats don’t convey a sense of continuity to local people,]" emphasizes Renwick

Hanna knows that China is a society that values maturity and seniority, which is of even greater significance when serving 40-plus-year-old customers. But there’s a dearth of educated 30-plus and 40-year-olds because their educational opportunities were limited during the Cultural Revolution. "Many of these individuals were in family businesses before the revolution and learned through their families," she says. "[Recruiters] need to know how to access their other experiences—such as decision-making skills—through behavioral interviews."

And, if you make a poor choice and hire a bad performer, you rarely fire the person. Making changes like this is disruptive. In fact, she explains, "If you start moving people around, you start losing all of your people. One major multinational changed its senior China management team several times. That started five years ago. Now, you can’t pay people enough to work [for the company]."

Paula Bennett will tell you that one of the immediate challenges is to foster a sense of teamwork among players, "There’s a greater imperative for creating more cohesion and better team-building between Hong Kong Chinese, other expatriates and their mainland Chinese counterparts." Bennett spent nine years in Asia (China, Taiwan and Hong Kong), and she’s an HR consultant for Hong Kong-based Renwick, McCormick and Maule Ltd. "Historically, organizations were structured so that Hong Kong operations were overseeing a lot of their mainland operations, particularly in sales, marketing and even finance." Now, you’re starting to see less top-down management because of the development of business in China, the increased skill base of the Mainland Chinese and the handover of Hong Kong.

"That greater integration is the driving need for better management skills, better personal skills and better communications skills between some of these parties," Bennett says.

McDonald’s offers a noteworthy performance.
Businesses can demonstrate their commitment to the PRC in many ways. Beyond setting up proper organizational structures, firms that do well understand China’s long-term perspective and reverence for stability. How does this play out? "Companies that have success retaining people are those that have developed a good corporate image in China," says Prudential’s Miner. "Corporate image includes not only technological and financial achievement, but also an ability to be recognized as having good relationships with the government. A company that has incorporated some of its HR practices into the Chinese model, [begins to create a corporation that is seen as a] family unit."

For a role model, just look at Oakbrook, Illinois-based McDonald’s Corp. It set up a policy that created a family atmosphere so that people feel they’re working for the greater good rather than just for themselves. Talk about long-term commitment, Bob Wilner, home office director of international human resources, has been going to Asia once a month for more than 10 years. He was part of the new market opening team and in the beginning went to learn as much as he could about the market, the way people were managed and employment systems. Wilner talked with foreign companies operating in China (U.S.-based, European and Asian) and examined local companies as well. "We design specific practices that support the HR foundations we think are so important. We try to take a global approach to HR and not a U.S.-based approach. Unlike the way we cook our hamburgers exactly the same in all 101 countries, the way we manage, motivate, reward and discipline is more sensitive to the culture."

McDonald’s views retention (and turnover) as the result of everything that comes before. How you select people; the kind of orientation, training programs and career opportunities you give employees; and the way you offer feedback play vital roles. "It seems that people are looking for a magic bullet or some new secret management technique or something unique to China. I think it’s simply doing an outstanding job with the basics: communication, performance feedback, clear policies and keeping an open mind. This is going to build employee loyalty. How you establish yourself and your company and the way it shows that you have a commitment to develop the people is paramount," he says.

Selecting the right people is important anywhere, but in urban China it’s as critical as it gets because of the tight employment market and McDonald’s long-term investment in the people it hires. Consequently, the company has a structured selection system. Based on the success of hiring thousands and thousands of management people around the world, the company has a portfolio of specific skills that are suited for the Big Mac environment. After the initial interviews, potential management candidates spend three days working in a restaurant. It allows the restaurant manager or area supervisor to see how the person will perform, and it allows the applicant to experience working inside a restaurant. The usual orientation process establishes what’s expected in the company, what the salaries and benefits are, and what opportunities may await them, long term.

"We really try to emphasize in China the importance of open communication," says Wilner. Again, formal communication sessions exist in which managers gather together in a group with their managing directors or HR supervisor to talk about their jobs. They’re encouraged to openly discuss what they like and don’t like, and what they think would improve their situations and make them better managers. The role of senior managers is to listen and pay attention to the ideas of the people who are in the restaurants. "Management really has a role in trying to make as good a work environment as it can for employees."

This approach fits perfectly with the Chinese notion of building relationships. Although managers had been warned that subordinates would be reluctant to express their ideas to their bosses, it hasn’t been the case. "We established this kind of relationship from day one and have reinforced it with opinion surveys and small group communication sessions that greatly reduce any unwillingness to speak up to authority."

Next is rewarding performance. McDonald’s designs its reward program around two broad areas: the particular market and the individual’s contribution to the team effort. For example, in Beijing, senior managers look at the success in the city and decide they’re going to share that prosperity with everyone who had a part in it, creating the sense that everyone is in the process together. At the same time, each person performs differently, and if one individual is working very hard, this superior performance also is rewarded.

Managers at McDonald’s focus on both team and individual accomplishment and effort, and also tie the performance-evaluation system to the overall communication scheme. Before the first supervisor in China gave a merit increase, the employees understood what and how they were being evaluated.

The organization thrives because of its career development, and promote-from-within policies. More than half of store managers began as entry-level crew members, and a large percentage of upper-level managers began as store managers. What better way to demonstrate stability and commitment? And the reward is employee loyalty plus a better business understanding.

Keep your eyes on star performers like McDonald’s Corp. At this early stage, no lesson could be more valuable than the experiences of those multinational pioneers that have set out for China and have been successful in establishing roots there. It’s a complicated formula involving the host-country culture, an intricate framework of local communities and a mosaic of staffing dilemmas. But in keeping all these in mind and asking many more questions along the way, you’ll be on the right path to start operations in one of the most exciting new markets of our time.

Global Workforce, July 1997, Vol. 3, No. 2, pp. 10-16.