The Most Important Factor for Success

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The Most Important Factor for Success

"If you are planning for a year, sow rice; if you are planning for a decade, plant trees; if you are planning for a lifetime, educate people."

Chinese Proverb

Lutz Kaufmann Dirk Panhas Boney Pouran Benedikt Sobotka Extract from ‘China Champions’, a WHU, CEIBS, AHK/GIC book project.

HR - the Most Important Factor for Success Contrary to the past, when low skilled labour was the reason for expansion into China, companies are now locating more business processes requir- ing skilled labour to China. Successful companies have understood this increased need for skilled labour and have started to build-up local human resources. Even in segments where low skilled manual work and labor-intensive production are predominant, well-educated local staff is required to take over managerial responsibilities, replacing costly expatriates. The importance of human resources cannot be overestimated: ‘Champions of human resources’, we found were often ‘China Champions’ in terms of their business success.

Not a Question of Quantity but Quality Why are human resources such an important is- sue for companies in China? China has millions of low-skilled workers available at low wages, but a suitable workforce is scarce for companies looking for staff that can fill roles in more sophis- ticated business processes such as technical development, higher technology products, or even the build-up of marketing and sales forces.

Skilled labour is difficult to attract, difficult to retain, and even more difficult to motivate.

Above Inflation Wage Increases

In several interviews, managers told us that they have to increase wages by 10 - 15 percent annually to retain local Chinese middle management, just to keep up with the competi-

tive labour market. Although wage increases have become more moderate in recent years, salaries are still growing by 6 - 8 percent on average, with higher growth for staff with spe- cific skills and international experience. Table 2 shows the annual change in wages and prices from 2001-2004 for different management levels. It illustrates that demand for skilled labour has increased faster than supply, forcing companies to pay a premium.

Wages for ordinary workers are still low com- pared to Western standards, but an interviewee in the electronics industry told us, that the to- tal costs for an IT or management accounting specialist with comparable qualifications to Western standards may costs as much as half of Western levels. Taken additional costs and government-mandated employee benefits into consideration, a company’s cost for a worker may easily be twice the monthly wage.

One important reason for the higher than ex- pected wages and staff turnover is the increas- ing number of foreign companies entering China to open representative offices and production facilities. For many of the new entrants, using higher salaries to poach staff from competitors is the only way to find suitable personnel. Although most German companies have agreed not to recruit actively from other German companies, los- ing valuable staff to competitors is an enormous problem for most established companies. One manager of a large pharmaceutical company told us: “This year I have lost 20% of my middle management already. We have educated and trained them, and now they are the best thing that can happen to a competitor. Especially new market entrants are willing to pay a high price for an employee that was trained in our company.”

Companies have to find the right mix of incentives, training, development opportunities, benefits, and corporate culture in order to find, retain, and motivate their staff.

Possible Remedies

Managing the challenge of human resources in China seems overwhelming - there is certainly no one-size-fits-all solution. However some ac-

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pany has operated a newly-built production facility, maintains an extensive distribution sys- tem of 15 distribution and sales centres, and runs three warehouses in various regions of China.

With a staff of 260 Chinese and only two German managers, Rittal runs on a very low ‘expatriate to local staff ratio’ and has been able to fill most middle management positions with Chinese staff.

How has the Company been able to Retain Their Valuable Human Capital?

Among other things, corporate culture seems to play a key role: Both German managers hold academic majors in Mandarin, enabling them to speak 'on one level' with their employees, avoiding mis- understandings and creating loyalty among employees. Coupled with strong company values of fairness, reliability, and trust, their management style has created an environment in which many Chinese employees enjoy working.

Employees are also actively involved in decision- making processes and are given responsibility very early in their career. This approach seems counter-intuitive in a society that is commonly referred to as being hierarchical and high in power distance, but the opposite is true. As Bettina Schön, the Managing Director of Rittal explained, her language and cultural skills have enabled her to build trust and even friendships with local employees:

“All our key local managers speak at least English or German, but the common language among all of us is Chinese. Of course, we offer excellent development opportunities, but in addition, our Chi- nese employees cherish the work environment where they can share even personal issues with their management. In many ways, it is a family- like atmosphere.” The ability of German management to build personal relationships with their staff has kept motivation high and attrition rates low. Almost 90 percent of administrative staff is female, on average aged below 29 years. Rittal brought together a professional, creative, and am- bitious team, well equipped for future business challenges. This year alone, Rittal plans to employ another 160 FTEs (full-time equivalents), a planned increase in headcount of more than 60 percent. With their track record, this seems

realistic.

tivities and HR-strategies seem more suitable to limiting the potential damage caused by poor human resource management and to improve employee attraction, retention, and performance.

Among the most frequently mentioned HR-strategies was cooperation with academic and edu- cational institutions for attraction and recruit- ment of qualified employees as well as to pro- vide development opportunities for staff.

Companies also frequently offer global career development plans, including professional training, staff exchanges to other global operations, and language training. This is regarded as an effective means for motivation and retention. Some companies were lucky enough to employ Chinese staff that had worked and studied in Europe or the USA; managers from such backgrounds were bet- ter able to act as cross-cultural ‘human bridges’

between Chinese operations and the European based HQ. Retaining and motivating such high quality employees poses a major challenge: companies frequently have to offer compensation packages as substantial as those provided to European’s working in China.

But human resource management in China is not just about pay and development opportunities.

Corporate culture and work environment are very important: work ‘is more than just a job’ it is an important part of their lives. Creating a company culture that Chinese employees enjoy is highly effective. Successful human resource management can rightfully be described as one of the most important success factors for Western corporate champions in China.

“There are 1.3 billion people in China. If I can’t find the right people, it’s my fault.” Nicolas Wong, President Asia Givaudan

Case Study: Rittal - Retaining Talent Rittal is the largest member of the Friedhelm Loh Group, a German industry supplier with a global workforce of well over 10,000 employees. Rittal, a global leader in electronic enclosure technology, expanded into China in August 1996 with a representative office, Rittal Electro-Mechanical Tech- nology (Shanghai) Co, Ltd. Since 2004, the com-

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P R O F I L E

China Champions - A Management Handbook What other methods did the Champions use and which programs did they initiate? In our book, China Champions, we present a number of examples of companies that have "done things right", developing and adopting effective practices for operating in China. For more information on China Champions - How German companies can successfully integrate China into their global strategies, please refer to www.china.ahk.de/gic/publications.

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