The Too-Fast Track

March 16, 2007
As vice president of Hyatt International Hotels and Resorts for China and Taiwan, Edward Tai has promoted countless employees during his 34-year career with the upscale hotel chain. In fact, the affable 62-year-old China native says Hyatt often creates elaborate four-year plans to groom up-and-coming execs to head a department in China.

    But some of those rising stars—and many of Hyatt’s competitors—can’t endure a lengthy development pro¬cess. In leadership-starved China, raiding the competition in search of people who display a shred of managerial potential is all too common. And it’s penalizing executives like Tai, who wants to do things the right way.

    "By the second year, we do not think he is quite ready," Tai says. "But the other hotel chains, or other places, thinking he is from a Hyatt or a Grand Hyatt, say, ‘He’s ready,’ and give him double the pay and then bring him over."

    Patience doesn’t always seem to pay off in 21st century China, which for decades had a workforce that made few executive decisions while dining from the "iron rice bowl." The country has smashed that socialist system and is reaping many fruits from a much freer market. There is skyrocketing economic growth in China—its economy rose an estimated 10.7 percent in 2006, and similarly speedy growth is expected this year. But that rapid expansion is revealing a gaping hole in leadership talent, prompt¬ing a dubious practice.

    Companies operating in China often give young managers loftier titles and greater responsibilities before they have soaked in the lessons of their previous job. Premature promotions stem both from a tight job market for managers and from all the new roles created by the country’s fast growth. But title inflation in China comes with big risks. Fast promotions can result in poor leadership quality, which threatens corporate strategies in the ever-more crucial Chinese market. Meanwhile, salary increases, which typically accompany higher posts, are eating into profits. And less-than-ready leaders in China pose problems for broader company succession plans.

    Helen Tantau, senior partner with executive search firm Korn/Ferry International in Shanghai, says many people in China now believe they should change jobs every two years to ensure their career development.

    "There’s too much opportunity and people are jumping around too much," Tantau says. "In China, 35 is seasoned."

    In the course of spending three weeks in China and interviewing more than 30 company officials and consultants, Workforce Management found that some major multinationals are attempting to solve the immature manager puzzle through a focus on employee development and careful attention to corporate culture. But many organizations in China lack a comprehensive strategy to find, retain and groom those leaders. There also are doubts about how quickly the pool of qualified local managers can expand.

    Whether China can produce enough globally minded leaders to satisfy the country’s demand and whether the ranks of managers who are already in over their heads can rise to the occasion are pressing questions. That’s the case not only for firms in China, but for the country overall and—given China’s growing international clout—the rest of the world.

Up the ladder
    Business leadership challenges in China are largely a function of history. After decades of central economic planning, the communist country began launching large-scale capitalist reforms in the late 1970s and early 1980s. At state-owned enterprises, Chinese managers for years did not have to concentrate on running lean, innovative companies. And with the country focused for much of the past three decades on manufacturing, Chinese managers overall have developed a reputation for operational excellence rather than strategic thinking or people management prowess.

    Generational issues play a role as well. People 40 and over in China frequently are not well-educated, in part thanks to school closings during the country’s Cultural Revolution. Meanwhile, China’s population-control push has resulted in a generation of often ambitious younger people.

    "These young people are often hungry for responsibility, position and the trappings of success in order to support not only themselves, but also their aging and large extended families," the Conference Board business group says in a recent report. Many young Chinese managers will readily move from employer to employer for a bigger salary, more status and more opportunities, the report notes.

    To plug leadership gaps in China, multinationals operating in the country have long turned to expatriates. Despite companies’ efforts to "localize" leadership with Chinese nationals to save money and build understanding of the Chinese market, the foreigners keep coming. In a recent study by consulting firm Hewitt Associates, more than half the firms surveyed planned to employ more expatriates in China in the next 12 months. Continued expansion of the Chinese economy is keeping that trend in place.

    Foreign firms have gradually shifted from viewing China largely as a manufacturing hub to seeing it as both an attractive site for more sophisticated operations and a potentially lucrative market of some 1.3 billion consumers. In addition, multinationals have begun locating their Asia-Pacific headquarters within mainland China.

    Multinational firms, however, aren’t the only ones vying for top business leaders in China. Government and formerly state-owned enterprises are competing for quality managers as well, as are small and midsize foreign firms moving into China. Local startups also are siphoning talent from the leadership pool.

    Last year, the American Chamber of Commerce in Shanghai surveyed 274 U.S.-based companies with operations in China and found that the No. 1 business challenge in China was "human resource constraints, including attracting and retaining managers and workers." In the survey, 43 percent of respondents said the issue of recruiting capable Chinese managers had a strong negative impact on their business operations in China.

    A study by consulting firm McKinsey & Co. points to a leadership gap just considering a subset of the firms operating in China. In 2005, McKinsey projected that during the next 10 to 15 years Chinese companies with international ambitions would need 75,000 leaders who can work effectively in global environments, but said those firms currently had just 3,000 to 5,000 such people.

    The extent of overly fast promotions in China is difficult to quantify. But statistics hint at the problem. In a recent Korn/Ferry survey about leadership in Asia, nearly half the worldwide executives polled doubted local talent in China will reach global standards within five to 10 years. And turnover among middle management in China last year was 12 percent, according to Hewitt, much higher than the 7.1 percent among top management.

    Anecdotes about hurried career advances fill in the picture.

    Consider Motorola, which employs about 10,000 people in China and is vying with rival Nokia for leadership in China’s growing mobile phone market. A few years ago, some of Motorola’s midlevel managers had below-par abilities in "soft" areas such as communication and decision-making skills, says Mary Liu Yang, director of human resources for Motorola in China. The problem came from hastily putting people into higher positions to keep pace with Motorola’s business growth, she says. "We just had to promote them quicker" than we used to, Liu Yang says.

    Since then, Motorola has shored up the problem in part through individual development plans for managers, Liu Yang says.

    Wilson Zhang knows firsthand about the pressure to promote early. Zhang is organization development manager for the Asia-Pacific region at Eaton, which makes hydraulic systems and other industrial products. More than once a week, Zhang is approached by headhunters who often offer him higher titles than his current Shanghai-based job, where he supervises the development of Eaton’s 8,000 employees in Asia.

    But Zhang, a 35-year-old Chinese national who spent six years at consumer products giant Procter & Gamble and a year at consulting firm Watson Wyatt before coming to Eaton in 2005, keeps turning them down. He says he has seen too many Chinese nationals flop after a promotion because they didn’t have the skills or experience to succeed in their new post. In the HR field, managers in China with just eight to 10 years of experience can land HR director jobs at big companies, he says.

    "The same position in the U.S. would take 15 to 19 years," Zhang says.

    Beijing-based consultant Teresa Woodland recounts the story of a young Chinese executive she observed in the HR department of a major multinational firm. The executive was bilingual and aggressive, but failed to develop team-building skills. Her company overlooked this shortcoming as it moved her up the ranks, Woodland says.

    Only when she got to a more senior post did her flaws become an issue—but even then she was not forced to face her professional weaknesses. "When she stopped getting her way, she just moved to another organization," Woodland says. "She got a promotion. That’s typical."

    Woodland, who worked for about a decade at McKinsey in China before starting her own firm recently, says hurried promotions have hurt the caliber of such services as accounting and consulting in China.

    "You have an organization that has a presence in many different countries, but the quality of the work in China is much lower," she says.

Rising pay erodes profits
    Mediocre managers jeopardize company plans for the increasingly vital Chinese market. For a sense of China’s importance to companies, look at sports clothing firm Adidas, which is seeing revenue in China rise by 30 percent to 80 percent annually.

    "Sooner or later we will be the largest market," says Sandrine Zerbib, president of Adidas for Greater China, which includes the mainland, Hong Kong and Taiwan. "Our growth path will surpass the U.S."

    As they fight for leadership talent in China, companies are bidding up salaries at a fast clip. Middle management salaries rose 9.4 percent last year, Hewitt found, quicker than the 9.2 percent rise seen for top management. Hewitt projects salaries for middle managers in China will climb another 8.4 percent this year, while top manager salaries will rise 8.3 percent. By contrast, Hewitt forecasts that U.S. executives will get salary increases of 3.8 percent this year.

    Angel Yu, Adidas’ vice president of human resources and administration for Greater China, has been offered dramatically higher pay to switch jobs. A 42-year-old Shanghai-area native who has been an Adidas HR manager since 1999, Yu is contacted by headhunters about once a week.

    "One time, I was even offered an expatriate package," she recalls. Expatriate compensation packages, which typically include "hardship pay" for living in a difficult setting, can qua¬d¬ruple the pay of local Chinese managers.

    Their salaries as a rule remain below those of Western counterparts. At Hyatt, the average salary for local senior managers is roughly $25,000. But sharp salary increases in China are chipping away at profits.

    In the American Chamber of Commerce in Shanghai 2006 China Business Report, 46 percent of respondents said changes in salaries and wages in China had a negative influence on their operating margins in China. Another 5 percent reported those changes had a strong negative influence.

    Apart from pushing up pay and bringing down quality in local operations, hasty promotions of Chinese managers can complicate global corporate succession plans. Overmatched, inexperienced managers in China may not be ready for more global roles. Asked about the biggest challenges in finding leadership talent in China, executives in the recent Korn/Ferry survey cited lack of international experience as the top problem. "Poor ability to assimilate into a Western multinational company culture" ranked second, followed by lack of innovation and creativity among candidates.

    Motorola gives rising stars in China international exposure and leadership training. The firm’s China accelerated management development program lasts about two years and involves in-class training, job rotations and international assignments for a half-year. The company also is broadening the duties of its local China leaders. Three-fourths of Motorola’s China leaders at the director level and above are now local, and many of them have responsibilities for other areas in Asia.

    "We really talk about globalization of leaders versus localization," Liu Yang says.

    Motorola is one of a number of major multinationals trying to address leadership in China by stressing employee development. With career development a priority for workers in China, leadership training programs not only serve to improve manager quality, but also act as a recruiting and retention tool.

    Pharmaceutical firm Novartis launched a major leadership effort two years ago with a focus on fostering personal connections. Novartis, which is investing in China in vital areas such as expanded clinical trials and new drug development, had noticed that higher salaries consistently ranked lower than interpersonal relations in managers’ reasons for leaving. The new program, which sends managers in China on trips to other parts of the globe, taps into a Chinese cultural emphasis on personal relations as a foundation for doing business.

    Companies in China also are paying close attention to their corporate culture to help existing leaders grow and attract the right new ones. Hyatt, for example, makes sure that 70 percent or more of senior managers at new hotels in China have already worked for Hyatt in Asia. Edward Tai says managers from other chains do not necessarily share the operating philosophy at Hyatt, which already has six hotels in China and plans to triple that number by mid-2009. What’s more, Tai says, Hyatt’s emphasis on serving customers well, achieving results and treating employees with respect helps it woo back managers who have left for fancier titles and more money elsewhere.

    "They often return to us," Tai says. "They miss the excitement and Hyatt culture."

Positive signs
    Some major multinationals in China are on the right track when it comes to leadership. But many companies operating in China are not as advanced, says Brenda Wilson of Mercer Human Resource Consulting. Wilson, who leads Mercer’s Hong Kong human capital practice, says human resources departments at many organizations in China frequently launch piecemeal talent and leadership programs without taking the time to create a comprehensive strategy.

    "HR departments don’t have enough experience in order to keep pace with the business growth," she says.

    Mercer recently studied talent management practices at 11 leading multinationals in China and found that while all the organizations undertake some form of assessment, only six of the 11 linked results to development planning. In addition, just seven of the 11 create individual development plans for high-potential employees.

    Then there are questions about how rapidly China’s supply of capable local leaders can grow. Some consultants see a hurdle in the psychological profile of many Chinese people, arguing that China’s emphasis on social norms has resulted in a populace that tends not to be very introspective.

    The education system is another area of concern. It relies too heavily on memorization, the Conference Board report found.

    "Companies need people with creative writing and speaking skills, teamwork skills and leadership ability, which are not yet taught well in most of China’s universities and graduate programs," according to the report.

    McKinsey estimated that less than 10 percent of the 15.7 million university graduates expected in China between 2003 and 2008 would be suitable for employment in multinational corporations. McKinsey called for steps including better English-language instruction.

    Despite the problems, there are hopeful signs when it comes to China’s emerging leaders. Chinese authorities are pushing to improve teaching standards in universities. And there’s greater interest in management education in the country.

    Observers also say Chinese workers are hungry to fill gaps in their knowledge and skills. Lucille Wu, managing director for China at staffing firm Manpower, has no doubt that the country is rapidly absorbing lessons on people management from Western companies.

    "Do not underestimate the learning ability of Chinese employees," she says.

    And at least some up-and-coming Chinese managers are choosing the long-term path of squeezing all the lessons out of their positions before leaping to a new job with greater power or more money. Those include Eaton’s Zhang and Adidas’ Yu.

    Zerbib, Yu’s boss, says Yu is playing a leading role in worldwide HR initiatives at Adidas and is an example of a new generation of Chinese nationals who combine the best of Eastern and Western traditions.

    Yu’s constant rejection of lucrative offers by headhunters signals that leadership in China is coming of age. "It takes a certain level of maturity to say no," Zerbib says.

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