Human Capital Management in CHINA 20072. Contents
1. Overview of HC market in China
2. Talent Management issues in
China
3. Leading Practices in Human
Capital Management
Copyright © 2006 Deloitte Development LLC. All rights reserved.
3. Overview of China’s Labor Market
The city labor market across China Among the city labor market, SOE’s
has seen a stable annual increase of have the largest share of the labor
approximately 3%. The market market. Employment at SOE’s has
includes all types of companies in decreased while at MNC’s it has
cities and towns. increased along with more and more
foreign capital flowing into China.
City labor market in China Unit:
Million
SOE vs. MNC in labor market
270 265
265 76 72
80 69 68 Percentage
260 257
255 249 60
250
245 40 SOE
240
240 MNC
235 20
3.5 3.9 4.5 5.6
230
225 2001 2002 2003 2004 0
2001 2002 2003 2004
Sources: Ministry of Statistic Bureau
1
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4. The Trend of Labor Supply and Demand in China
Since 2001 the relationship between labor supply and demand has become
more balanced. In 2006 the ratio of supply and demand is predicted to
reach 1:1. China will no longer have an excess of labor supply.
Additionally, in 2009 China may face labor shortage problems.
Unit(00,000) The change of labor supply and demand from 2001 to 2005
2nd quarter 2001
1st quarter 2002
2nd quarter 2002
3rd quarter 2002
4th quarter 2002
1st quarter 2003
2nd quarter 2003
3rd quarter 2003
4th quarter 2004
1st quarter 2005
2nd quarter 2005
3rd quarter 2005
4th quarter 2005
1st quarter 2001
3rd quarter 2001
4th quarter 2001
4th quarter 2003
1st quarter 2004
2nd quarter 2004
3rd quarter 2004
Source: Ministry of
Labor and Social Demand
Security, and China Supply
Youth Newspaper Ratio of Demand
over Supply 2
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5. China is Facing Talent Shortage Problems
Despite China’s 1.3 billion population, pockets of talent shortage exist.
The cause of this newly emerging phenomenon is that the job seekers’
skill sets do not match the job requirements.
The fields that suffer labor shortage in China:
Qualified Rate
2.08
Manager • Rapid economic and social change
has spurred a skills shortage that is
Sales 1.06
expected to escalate in the next few
years.
Technician 1.53
2.25
• The shortage in management
Skilled candidates is slowing the expansion
Technician of foreign businesses.
Engineer 2
Rate is the ratio of demand and supply
Source: Ministry of Labor and Social Security, PRC
3
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6. The Talent Market in China is Characterized by
Shortage of Key Talent Segments
• With the rapid growth of China’s economy, comes an increase in the number
of MNCs entering China. This results in a growing demand for talent
• The demand for key talent segments exceeds the available supply
140000 10
14 T Unit (10 Thousand)
9
12 T
120000
8
100000
10 T 7
6
8T
80000
5
60000
6T 4
4T 3
40000
2
2T
20000
1
0 0
2004
Volume of MNCs in China
China’s GDP (in RMB) The number of MNCs in China
Sources: Ministry of Statistic Bureau 4
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7. It’s Harder for MNCs in China to Find Qualified
Talent
China has a vast pool of labor supply, but only a small percentage of this
pool is qualified to work in MNCs. According to a survey conducted by the
McKinsey Global Institute, on average, fewer than 10% of Chinese job
candidates possess the skills to work in a foreign company.
Lack of English Speaking
Capability:
Skills Gap
Most Chinese employees have
low English-language skills.
An intense
competition
Lack of pratical experience:
for well-
China's education system educated,
emphasizes theory rather Skills Gap
than finding practical English-
solutions. speaking,
professional
Lack of qualified staff who have
management skills:
experience
Older managers from China's
working with
Cultural Revolution lack the Skills Gap
education needed for foreign- MNCs
based companies, while
recent university graduates
lack experience
5
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8. Polling Question 1
How much growth do you anticipate in your employee
population in China over the next 2-3 years?
• None
• Small increase (less than 10%)
• Moderate increase (10-25%)
• Large increase (25-50%)
• Very large increase (more than 50%)
• Not applicable
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9. Labor Costs Continue to Increase in China
• China has seen a consistent salary rise with an annual increase of nearly
10%. The national average wage increase covers all industries
• Average wages at MNCs are 26% - 57%, higher than those at SOEs. For
executives it may be between 50%-200% higher.
• Salaries in tier I cities such as Beijing, Shanghai, Guangzhou are higher
than other cities.
Annual Average Salary
Monthly Salary Comparison
RMB
32808 RMB
35000
4500
28348 3820
30000 4000
24045 3500
25000 2916 2789
20728 3000
20000 2500
15000 2000
1500
10000
1000
5000 500
0
0
MNC LNE SOE
2005 2004 2003 2002
Source: Ministry of Social security
Source: National Salary Report of 2004 6
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10. Average Actual Salary Increases by Nearly 8% For
All Industries in 2005
Source: Watson Wyatt “ salary survey report-2005”
7
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11. The Shortage of Talent has Pushed Up the Cost of
Business
• The shortage of talented labor is pushing up wages and swelling the ranks of the
country's middle class. According to a survey conducted of the salaries of China and
India, labor costs in China has surpassed that of India:
Position China India
HR manager $32,000 $15,100
Marketing manager $25,800 $14,300
Project manager $23,400 $10,000
Software development engineer $13,400 $10,300
Financial analyst $13,200 $8,400
Accountant $9,000 $5,700
Senior customer service officer $8,300 $8,200
Sales representative $5,100 $4,700
Customer service assistant $2,400 $1,600
Production worker (skilled) $2,300 $1,900
Source from a survey by Mercer in 2005
• Rising labor costs are pinching the margins of overseas manufacturers operating in
mainland China. Among members of the American Chamber of Commerce in China,
41 percent of companies and 48 percent of manufacturers report being negatively
affected by increased salary and wage expenses.
8
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12. Mandatory Social Insurance in Addition to Base
Salaries
• All types of companies in China are required to pay social insurance for their
employees. Ratios vary between cities, for example, in Beijing, the ratio for housing is
8% which is contributed by companies and 8% is contributed by employees, but in
Shanghai it is 7% by individual and 7% by company.
• Any failure of payment for mandatory insurance could lead to a penalty.
• Total compensation will be around 138-145% of the total base salary.
Mandatory Social Insurance
Unemployment
Cities Housing Fund Pension Medical Insurance Insurance Total Total
Individual Company Individual Company Individual Company Individual Company Individual Company
Guang
Zhou 8% 8% 8% 20% 2% 8% 1% 2% 19% 38%
Shang
hai 7% 7% 8% 22.5% 1% 12% 1% 2% 17% 43.5%
Beijing 8% 8% 8% 20% 2%+3 10% 0.50% 1.50% 18.5% +3 39.5%
Source: Beijing Labor Ministry, Shanghai Labor Ministry, Guangzhou Labor Ministry
9
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13. Contents
1. Overview of HC market in China
2. Talent Management issues in
China
3. Leading Practices in Human
Capital Management
Copyright © 2006 Deloitte Development LLC. All rights reserved.
14. Employee Management Issues are the 2nd
Largest Issues MNCs Face in China
Response % ( Multiple Choices)
83.7%
40.3%
35.8%
32.4% 30.1%
26.7% 23.3%
20.4% 17.9%
10.1% 7.7%
t
t
p
y
n
es
en
ke
g
d
k
rs
l it
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es
io
in
au
is
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ul
em
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ar
ns
ct
nc
R
bl
R
ta
Fr
pp
te
M
io
va
ag
y
na
ns
n
ro
nc
at
Su
e
ei
ti o
an
Fi
iv
U
P
el
re
ec
tit
xa
tR
IP
M
al
ur
R
pe
Ta
ic
ee
C
en
ts
l it
om
un
of
oy
Po
nm
C
pl
co
e
er
ng
Em
Ac
ov
ha
G
C
Source: Fortune (Chinese version 05/2006)
10
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15. Enterprises in China are Facing Serious Employee
Management Issues
The talent shortage at middle and senior management levels is proving a major
problem for domestic and foreign-invested companies in China. Shortages are
most severe among senior managers; two in every five companies are finding it
difficult to fill senior management positions*
Developing local
Developing local
leaders is a
leaders is a
significant
significant
challenge
challenge
It’s hard to
It’s hard to Traditional
Traditional
recruit qualified
recruit qualified retention
retention
talent
talent methods no
methods no
longer work.
longer work.
The talent war is
The talent war is Talent issues have serious High
High
getting fierce
getting fierce replacement
replacement
implications for both MNC cost
cost
and Chinese companies with
global ambitions.
* Source: Manpower China White Paper
11
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16. The Talent Management Issues Have Negatively
Impacted Business Operations
Issues Impacts
• Not able to react quickly to
• Not able to react quickly to
• The talent war is getting
1 growth opportunities
growth opportunities
fierce
• Facing higher attrition rates as
• Facing higher attrition rates as
candidates defect to other
candidates defect to other
• Companies find it hard to
companies
companies
recruit qualified employees 2
• Having to replace people who
• Having to replace people who
possess significant intellectual
possess significant intellectual
• Developing local leaders is a
capital about organization’s
capital about organization’s
significant challenge 3
products and services.
products and services.
• The cost of replacing average-
• The cost of replacing average-
• Traditional Retention
performing staff members is
performing staff members is
Methods are not working 4 about 90% of their salary, while
about 90% of their salary, while
any more
high performers can cost
high performers can cost
anywhere from 300% to 2,000%
anywhere from 300% to 2,000%
• High replacement Cost 5 • Distraction from core business
• Distraction from core business
operations while staff members
operations while staff members
must focus on training new
must focus on training new
employees
employees 12
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17. Polling Question 2
What is the top challenge you have experienced with human
capital management in China?
• Difficulty finding and recruiting qualified candidates
• Difficulty retaining qualified candidates
• Performance management challenges
• Communication challenges
• Shortage of staff with technical / managerial skills
• Not applicable
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18. Turnover Rate has Improved Since 2002 (30%), but is Still
High Especially for Management and Officers
Source: Watson Wyatt “ salary survey report-2005”
13
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19. Fierce Competition From Private and State-owned
Firms
Private and State-owned Enterprises provide more opportunities for career
advancement, which increases their attractiveness to talent.
The preferred companies
100%
5.70% 11.20%
90% 6.70%
80%
70%
29%
60%
50%
40%
79%
30% 59%
20%
10%
0%
2003 2004
Source: China Ministry of Statistics
PE 14
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20. Generalizations about Cultural Differences
China North America
Ethnic Culture Relationships Individuals
Source of Trust People Contracts
Business Culture Reserved Outspoken
Negotiation Style Group decision Individual authority
Final word by the manager Distributed decision making
Dealing with Indirect Direct
Business
Counterparts
Ability to Make Slow Fast
Quick Response
15
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21. Contents
1. Overview of HC market in
China
2. Talent Management issues in
China
3. Leading Practices in Human
Capital Management
Copyright © 2006 Deloitte Development LLC. All rights reserved.
22. Top Five Criteria for Attracting Talent
Company location
3%
Unique organizational
7% culture
Meaningful and creative
7%
work
19% Opportunities for career
development
23% Attractive salary and
benefits package
• Companies that retain the best employees offer competitive pay, promote
flexible working environments and provide career advancements.
• High-profile multinational organizations with high retention rates typically
provide more career opportunities as well as stronger training and mentoring
programs. These organizations attract employees because of the future
prospects they offer and the prestige associated with working for them.
Source: China Employee Attraction and Retention Survey 2006 conducted by Mercer
16
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23. Top Five Criteria for Attracting Talent (Cont.)
• The survey also found that 83 per cent of organizations offer
healthcare and related insurance, while 41 per cent provide health
and fitness plans and 24 per cent offer flexible working.;
• Just 21 per cent offer supplementary pension plans and 10 per cent
provide subsidized loans.;
• Overseas assignments are felt to be the most effective tool for
career development, but only 42 per cent of organizations offer such
opportunities.
• Individual career development plans, offered by 51 per cent of
companies, are also believed to be effective.
• In contrast, mentorship programmers are considered relatively
ineffective and are offered by just one-quarter (26 per cent) of
companies.
17
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24. Polling Question 3
Which of the following do you think your employees in China value the
most highly?
• Competitive wages and benefits
• Advanced training
• Clarity of performance expectations and metrics
• Enhanced communications about business strategy, objectives, and
operations
• Job rotation and advancement opportunities
• Not applicable
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25. Traditional Talent Management Approaches Don’t
Work
The Traditional Talent Management Process
Acquire Deploy Develop Retain
• Traditional approaches:
• Do not allow individuals or organizations the flexibility they need to
grow
• Are costly (firms spend 50 times more on recruiting than training)
• Focus on metrics and outcomes, rather than what really matters to
talent
• Do not get to the heart of where value is created
• Are often divorced from broader business aims, such as strategic
goals and firm branding
18
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26. How Can One Successfully Attract and Retain
Talent in China?
Learning is a priority for employees because they are
Create a learning
acutely aware of the limitations of their educational
organization... system and are keen to acquire marketable skills.
Companies that employ leaders whom
Appoint competent employees believe are competent and who provide
leaders… employees with immediate feedback are likely to
strengthen employee engagement.
It is critical for companies to appreciate and respect
Establish an appropriate Chinese cultural norms and practices. Companies
culture for China… must align certain characteristics with management
practices and organizational behavior.
Provide competitive Frequent salary reviews are essential to keep track
compensation and of the market rate; employees themselves will be
benefits… aware of what their market value is.
Careful attention to job placement increases
Select the right people... retention by ensuring an optimal fit between the
applicant and the skills and aptitude required for the
job.
19
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27. Creating a learning organization. If you can’t find
it, Make it
Among the 50 enterprises preferred by universities between 2004-2005, the
top enterprises are the ones that invest heavily on employee development and
internal promotion.
• Among the 50, the ratio of MNCs and domestic companies is 33:17
• Those investing heavily on employee development enjoys higher reputation
20
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28. The Need to Invest in Learning and Development
Learning has to be embedded
Bring curricula more in line
into daily activities
with the needs of industry.
Create a culture of Give employees projects
Learning which go beyond their
knowledge sharing. Organization
current job’s responsibilities
Develop management Participate in global tasks to
training courses learn about western culture
business management.
21
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29. Competent Leaders can Increase their Employees’
Engagement By:
• Ensuring that their employees understand how their personal work
goals are linked to the business objectives of the organization
• Recognizing that communication in China is more diplomatic in order
not to hurt employees’ face (Mian Zi). This is especially important
when delivering the results of performance reviews.
• Building personal relationships with employees (Guan Xi)
• Ensuring employees receive ongoing performance feedback from
immediate managers on a formal and informal environment
• Developing career planning for talents
22
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30. Establishing an Appropriate Culture is an Effective
Way to Adapt to the Local Market
• Even if they have good qualifications and English language skills,
Chinese employees are often cautious about taking initiative and can
be risk averse. Therefore, HR professionals in China will need to
regularly articulate the culture of the company to encourage open
communication, allowing employees to make mistakes and show
initiative
• It is the organization’s responsibility to communicate those values
clearly and simply. Developing a strong brand that describes a
company’s unique work culture will help attract and retain talent
• Leaders need to embody the values in their actions every day
23
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31. Using Market-wise Compensation to Improve
Retention
Though compensation isn’t top priority for many employees in China, a
good compensation strategy will increase retention:
Strategies
Strategy I Figure out what wages your industry is offering.
Examine internal pay disparities:
Strategy II Make sure that the pay for each job is equivalent to that of
similar jobs across the organization.
Strategy III Don’t assume you have to outspend your competitors.
Making sure you can meet employees’ needs is most important.
Pay “hot skills” premiums to employees with crucial,
Strategy IV rare expertise and stop premiums when the skills
become more available or less important to your
business.
24
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32. Compensation is Not Just About Money
• Although a good compensation package is important to employees,
they may also be looking for tuition reimbursement, staff outings and
team building activities that should be viewed as an opportunity to
reinforce the company’s values
• A housing allowance or fund can also be included in companies’
benefit schemes. This is popular among mid-level employees who
want to set up a home for their family
• Senior Chinese managers will expect their benefits to be the same as
their associates in the company headquarters, including stock options
and a retirement plan. Thus, a long-term incentive plan can become
part of the package.
• Supplemental insurance and medical programs are influential while
China continues to reform its benefits system
• Offer Performance Based Pay. Talent doesn’t want to be normalized
• Ready to lose some people because you cannot offer highest salary
25
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33. Careful Attention to Job Placement Increases
Retention
Employers need to anticipate what will be expected from future employees so
1
that they may create realistic job descriptions
2 Consider internal promotion before external recruitment. A loyal employee is
key.
3 Employers need to understand employee job satisfaction. This is possible
through the use of employee satisfaction surveys.
4 Conducting interviews with both Western and Chinese managers will ensure a
balance of Western and Chinese interviewing styles.
5 Many companies are considering developing their own assessment center.
6 Create a strong training and recruiting program.
26
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34. Polling Question 4
Overall, how satisfied have you been with the quality of talent
you have been able to hire in China?
•Very unsatisfactory
•Satisfactory
•Mixed experience
•Very satisfactory
•Not applicable
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35. Conclusion
• As the Chinese economy grows and moves into more value-added
work, the challenge of attracting and retaining staff is rising with skill
levels, as demand outstrips supply.
• MNCs need to rethink their working practices, taking Chinese culture
into account, and resist the urge to impose Western management
processes and thinking on their Chinese employees.
• All organizations need to take into account the multiple factors at play
that affect employee attraction and retention.
• Organizations must also focus on employee engagement to ensure
that their workforce is committed to the long-term success of their
organization and want to stay with the organization to honor this
commitment.
• Companies operating in China need to develop an integrated,
strategic approach to attracting and retaining talent and ensuring their
employees are fully engaged.
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36. Questions & Contact Info
Clarence Kwan
clkwan@deloitte.com
212-436-5470
Dick Kleinert
rkleinert@deloitte.com
213-688-3368
Jungle Wong
junglewong@deloitte.com
86 (10) 8520 7807
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37. Join us November 9th
at 11 AM ET as China Issues
presents:
China Business Update:
Eastern China Perspective
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