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The China Puzzle

Global companies face a gargantuan task in the 21st century: managing employees worldwide. How well organizations handle talent wars, the shift to localized management and cultural issues will make--or break--them.

November 26, 2003
Related Topics: Global Business Issues, Managing International Operations

When U.S. consumer electronics giant Motorola set up operations in China in the late 1980s, Chinese job candidates asked a question that startled human resources executives. Would the company provide them with a place to live? "At that time, there were a limited number of commercial apartments in China, and it was hard to get a bank loan to buy one," says Cindy Xing, Motorola China human resources director. Realizing that housing would be a powerful lure for quality applicants, the human resources team convinced top management to erect apartment buildings and offer loans so that employees could buy their own units.

    Motorola offered other benefits as well that would have been highly unusual in the United States--free multi-course lunches at the corporate cafeteria and free transportation to work in a company-owned bus that picked up employees at their homes each morning. The firm also instituted a training program for new hires, who were presumed to be unfamiliar with Western-style time management, to teach the meaning of terms such as "defer tasks," "set priorities" and "delegate responsibility."

    A decade and a half ago, Motorola and other major companies were dazzled by the allure of an immense Chinese market with 1.3 billion potential consumers, and they made many such adjustments. The firm’s experience in China tells much about the complexities of employee issues on a global scale. And it highlights this overarching theme: That understanding how to manage people from China is, and will continue to be, a critical component of competitive global strategy.

    In recent decades, there have been several fundamental concerns for Western companies in China. One is learning how to manage a socialist workplace culture in which employees depend on their state-run employers for housing, food, transportation and other necessities. American managers also have been baffled by guanxi, the venerable Chinese practice of developing and nurturing intricate networks of personal relationships, sometimes giving them priority over bottom-line performance.

    The Chinese, in turn, have struggled to grasp Western-style business practices. Instead of an emphasis on process and integration across the business, for example, they are more accustomed to compartmentalization and diligent adherence to taking orders from above. Shortages of Chinese with Western-style business degrees and English-language skills have meant that many operations had to be run by expatriate managers, who were at a disadvantage in understanding the environment. "China was confusing to a lot of companies," says David Ahlstrom, an associate professor of management at the Chinese University of Hong Kong. "They couldn’t just import human resources systems from overseas. They knew things had to be different, but they weren’t sure how."

    In China, as in other countries, subtle nuances often make the difference between workplace success and failure. Motorola, which opened an office in Beijing in 1987 and a $120 million manufacturing plant in Tianjin in 1992, learned, for example, that the English word four is pronounced the same way as the Chinese word for death, a bad omen. The company quickly modified its cell phones so that they wouldn’t flash a row of fours.

    Today, about 10,000 foreign-owned enterprises in China, including big American names ranging from Amway to Warner Bros., are players in an economy that’s growing at an explosive 7 percent rate. And thanks to China’s admission to the World Trade Organization in 2001, which reduced tariffs against Chinese products, business prospects are likely to grow even more promising. With this stunning growth, global companies are facing an array of new human resources issues such as retaining Chinese managers with business-school degrees and multinational experience, and the complicated process of transitioning from expatriate to "local" management. Consultants and academic experts say that taking multinationals’ human resources programs to the next level may demand even more skill and ingenuity than it has in the past.

Reshaping Chinese business culture
    When multinationals first opened their doors in China, some of the cultural problems they faced were mind-boggling, says Ahlstrom, who has studied human resources practices in China extensively. Chinese employees had been brought up in a tightly controlled, rigidly hierarchical socialist society, and they tended to be uncomfortable thinking independently because they were used to following orders precisely. He cites an example of a secretary who didn’t refill the paper in the fax machine for two or three days because nobody had told her to do it. And because of cultural differences, employees might drive their expatriate supervisors to distraction by answering questions with an exactness that left out important information. "An example would be, if you asked if there was a bus that left from the train station, someone might tell you no, but not tell you that there was a bus stop two blocks away," Ahlstrom says. Such rigid adherence to orders was a virtue in the stagnant culture of state-run enterprises, in which workers were more likely to be punished for failures than rewarded for showing initiative, he notes.

    While the Chinese educational system produces virtuoso technical experts--37 percent of Chinese university students earn engineering degrees, compared to 6 percent in the United States--there has been little emphasis on managerial skills. Even for those with management training and experience, the concept of utilizing middle managers to coordinate and improve the production process is new in China.

    "Traditionally, orders have gone down from the top and progress reports have gone up," says Kenneth Lieberthal, a professor of corporate strategy and international business and the Director for China at the Davidson Institute at the University of Michigan. "The process was very compartmentalized, like one of those Chinese medicine cabinets where there are a hundred drawers, each with a character carved on it representing a different herb. They were great at pigeonholing things, but there wasn’t any optimization across systems. You’d find a production line where one part had very advanced machinery that milled a product down to a fine tolerance. Further down the line, where a different part of the organization was buying and using different equipment, the machines would be gouging holes in it. Managers weren’t trained to look for bottlenecks."

    At the same time, the Chinese--who actually invented performance management in the 16th century with a system for evaluating imperial officials--bring some powerful ideas and talents to the multinationals. Ming-Jer Chen, founder of the Wharton School’s Global Chinese Business Initiative, notes in his 2001 book Inside Chinese Business that the traditional emphasis on cultivating trust-based personal relationships (guanxi at work) with partners, vendors and customers makes it easier to adjust to market shifts and opportunities. And Chinese orientation toward polychronic, or "many-timed," thinking helps Chinese managers to juggle many tasks simultaneously, rather than prioritizing some but neglecting others, as an American might.

"The process was very compartmentalized, like one of those Chinese medicine cabinets where there are a hundred drawers, each with a character carved on it representing a different herb. They were great at pigeonholing things, but there wasn’t any optimization across systems."

    In recent years, many workforce-management issues have changed, in part because of the growth of Chinese business schools, which are partially subsidized by multinationals. Motorola, for example, established its own Motorola University program in Beijing in the early 1990s to provide its Chinese employees with business school training. One component of that curriculum, the year-and-a-half-long China Accelerated Management Program, includes classroom work, a rotation through various jobs at the company, mentoring by expatriate coaches and an opportunity to shadow a middle manager on the job. In addition to training its own employees, however, Motorola has helped improve the larger pool of potential management candidates by underwriting another program, in which more than 200 instructors teach 130 different business courses at various Chinese universities. Multinationals also are required to pay a fee--usually around $1,500 to $2,000 per student––to compensate universities for the cost of training the graduates they hire.

    Finally, global corporations also can tap the increasing number of Chinese--400,000 over the past two decades--who study at universities in the United States and other countries. At the University of California-Irvine, for example, about 10 percent of the students earning graduate business degrees are from the Chinese mainland, according to associate dean and professor John Graham. After a decade of such effort to improve business education, Chinese management candidates today tend to be much more personally ambitious and savvy about business practices and workplace culture, say human resources consultants and academics. (One recent study shows that 94 percent of Chinese university students are trying to master a foreign language, usually English.)

    Nevertheless, multinational managers encounter difficulties operating in a socialist country, such as pressure to hire employees who’ve been downsized from failing state-run enterprises, says Frank Gallo, managing consultant for the Chinese office of Watson Wyatt Worldwide. "It usually works like this," he says. "If you want to open a plant in such and such a province, we’ll give you a license, but you must agree to hire x number of people who were recently downsized, or you must provide x amount of money to help fund a retraining program or a new highway project that can be used to employ these people."

    Providing benefits to workers can also be maddeningly complicated. "In addition to the salary, you end up paying the equivalent of 50 to 100 percent of base pay in other costs," says Vincent Gauthier, general manager of the Hong Kong office of Hewitt Associates. "You’ve got government-required housing, unemployment and pension benefits, and the contribution rates vary from city to city. The result is that if I’m a big company with 15 locations in China, I’ve probably got 15 different compensation rates for employees." Additionally, Gauthier says, companies typically must offer supplementary benefits on top of the requirements to compete for top talent.

Recruiting and retention remain major issues
    Even with their efforts to promote business-education programs, multinationals’ operations are growing so rapidly that in a recent Hewitt Associates study, 57 percent of the 1,000 companies surveyed in Asia said they’re worried about retaining qualified management talent. Motorola copes with the tight market in part by utilizing the Chinese practice of guanxi, says former Motorola human resources manager Greg Wang, associate director of the Workforce Development Campus, a program at James Madison University in Virginia. When a department has a job opening, he says, it’s customary to first turn to the employees and ask them to help with the search by contacting their own personal networks of college classmates and former coworkers at other jobs. "Only after you exhaust all those possibilities would you go to a headhunter," Wang says. (Guanxi is perhaps more universal than is widely known. Several recent reports on recruiting in the United States show that employee-referral programs are by far the most effective way of hiring outside recruits.)

    Hewitt Associates’ Gauthier says that corporations in China have annual turnover rates of 11.5 percent, two to three times the global average. In some sought-after specialties, such as marketing and finance, turnover may approach 25 percent. "The companies are at the point where they’ve got people who’ve been in their system for 10 years and have education and a track record, and everybody wants those guys," Ahlstrom says. It’s not just the big multinationals going after each other’s talent. In recent years, an increasing number of midsize U.S. firms that supply the corporate giants with electronic parts and other wares have set up shop in China. Consultants say that these companies often try to make up for their late start by bidding up the price for talent. Additionally, even state-run enterprises, under pressure to compete for their very survival, are trying to lure away multinationals’ local middle-management talent. Motorola, in partnership with the Chinese government, is helping to mitigate the problem by operating a training program to improve efficiency and quality-management skills at state-run companies.

Guanxi is perhaps more universal than is widely known. Several recent reports on recruiting in the United States show that employee-referral programs are by far the most effective way of hiring outside recruits.

    One problem is that the retention tactic favored in the West--using stock options and grants to reward employees for staying with the company--doesn’t work as well in China, Ahlstrom says. "In China, the IPO market and the financial markets are very tightly controlled by the government, and you might run into legal problems if you give Chinese employees shares from outside markets. So you have a lot less flexibility." Health insurance and other benefits are more powerful selling points for recruiters in China, Ahlstrom says. "China is trying to set up the equivalent of Social Security, but it’s not there yet. And the health care provided by the government is inexpensive but inferior in quality."

    Motorola China, which doesn’t disclose its retention rate, opts for a different approach. It emphasizes career-development opportunities rather than riches. Cindy Xing touts the company’s Individual Development Program, in which human resources managers meet with employees to discuss their professional goals and help identify things the company can do to provide them with opportunities for advancement, from coaching and mentoring to special job assignments.

The challenge of localizing
    Today, multinationals are moving aggressively to "localize" their operations, hiring Chinese talent to fill positions once held by expatriates. The demand for expatriate managers has declined, in fact, to the extent that salaries for expatriate factory managers have dropped as much as 25 percent in the past few years, according to a recent article in the South China Morning Post. "Local talent is cheaper, they know the Chinese language and they have superior cultural skills, such as utilizing guanxi networks and dealing with local political officials," says Geoffrey Lieberthal, the son of Kenneth Lieberthal and a consultant with Bain & Co. in San Francisco who analyzes Chinese business. Motorola, whose Chinese operation has 12,000 employees and accounts for 15 percent of the company’s total revenues, has been especially successful with its localization efforts. In 1994, 11 percent of the company’s middle managers were Chinese nationals. Today, the number is 84 percent.

    Motorola’s conversion wasn’t necessarily smooth, Xing says. Initially, expatriate managers were unwilling to pass along knowledge to the Chinese staff because they wanted to hang on to their jobs. After several years of this, Motorola began stipulating in expatriate managers’ contracts that they had to train a local successor within two to three years. To give the expatriates an additional incentive, the company began offering them better jobs and/or richer retirement benefits in the United States if they helped localize Chinese operations. "As a result, the foreign experts were very glad to train the local staff," Xing says.

    Ahlstrom says multinationals also can boost retention by capitalizing on another aspect of Chinese culture--employees’ strong loyalty to their families, which he says is typically far stronger than their link to any employer or organization. Hiring the wife of a valuable employee, for example, might be viewed as unseemly nepotism in the United States, but in China it can be a way of cementing the tie between that employee and the company.

    But not all of the effects of localization are good, some observers warn. "The downside is that [local Chinese] may not have the same grasp of the multinational’s strategy and how to be effective within the company," Geoffrey Lieberthal says. Wang makes a related observation. He recalls that by the end of his tenure at Motorola, written communication was in English but at least 80 percent of the conversations among employees were in Chinese. "If there were no expatriates in a meeting, the oral communication might be 100 percent Chinese, except for maybe a few key terms in English," Wang says.

    While such a shift may foster communication and guanxi within the subsidiary, it also can create havoc for executives from the U.S. headquarters who need to know what’s going on at the company in China. And in the absence of an expatriate manager to keep the peace, Wang and others say, friction may develop between Chinese with "local" education and those with U.S. or European business degrees, who tend to have more status and higher pay. Xing says that Motorola doesn’t have this problem because the skill and knowledge gap between foreign and locally educated workers is diminishing, which in turn is causing the wage differential to shrink.

    As conducting business in China becomes more widespread and knowledge of the culture more acute, the comfort level for corporations is increasing. One sign is a new willingness to reconsider the perquisites that multinationals once thought they had to lavish upon employees. When Wang started at Motorola, he recalls, the firm provided free elaborate multi-course meals at the company cafeteria. By the time he left the country in the late 1990s, the organization had begun charging for the meals, but it issued employees debit cards that covered part of the price. Similarly, he says, Motorola found that instead of providing buses, it was more cost-effective to simply reimburse employees for cab fare. The examples are an indication that Motorola is developing a defter feel for what it takes to keep Chinese employees happy. "When I was there [in the late 1990s], I hired a guy from a Chinese university, and I tripled the pay he was getting," Wang says. "Now, that made him very happy."

Workforce Management, December 2003, p. 28-33 -- Subscribe Now!

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