Recruiting in China

PARIS (MarketWatch) -- Hubert Giraud of French IT and consulting company Capgemini (12533.FR) never thought hiring people in China, the world's most populous country, would be so difficult.

As multinationals like Capgemini flood the market looking for skilled workers, they are running up against unforeseen problems. Salaries among qualified workers are rising faster than expected, mid-level managers in their 40s are scarce, education standards are weak and many Chinese say they'd rather work for a local rather than Western company.

Strong competition for experienced employees, the cultural complexities of working in a Western company and the sense that the top positions will always be held by European or U.S. managers push many Chinese workers out of Western companies after only a few years.

"Eighty million people live in this province," Giraud says, referring to Guangdong in southern China, where Capgemini employs 500 people in its business outsource unit. "When you see that you think you can get anything you want. It's just not true."

In a nation of 1.3 billion only 5.2% of the population has a college degree and above, China's National Bureau of Statistics reported in March. By comparison, roughly 25% of the U.S. population of 298 million have college degrees.

Many multinationals, which spend heavily on training young Chinese graduates to compensate for the educational shortfalls, lose them to local companies after a few years because young Chinese perceive that opportunities for career development and promotion are greater.

In China as well as rapidly developing economies like India, it isn't unusual for Western companies to lead investment and import their own educational standards. What surprises some companies are the lengths to which they have to go to train young Chinese, as opposed to Indians who generally have workable English.

It's not uncommon, managers interviewed for this article say, for a company to lose a third of its workforce in a year. Heidrick and Struggles, a headhunting firm, said in a July study that "talented managers" in China change jobs every 15 months at present.

Heidrick says most companies are happy if they can limit turnover to no more than 15%, particularly in fast-growing industries like technology and telecommunications. Bob Krysiak, STMicroelectronic NV's (STM) president and general manager for Hong Kong, Taiwan and China, says attrition rates for the company's China operations range between 12% and 15%.

"China is like the Internet bubble in the U.S. - vibrant and bullish," says Vincent Gauthier, general manager for Hewitt Associates in Hong Kong. "If you are in your 30s, have English and skills you can walk right out of one job and into another without breaking a sweat. And people do."

The recent influx of college students to Chinese universities means it is easy to recruit 22-year-olds with no job experience. However, people with even a few years of experience are in deep demand.

The surge in employment opportunities has been driven by China's entry into the World Trade Organization in 2001, which led to a leap in investment in China. Last year foreign companies invested $60 billion in China from $38 billion in 2000, according to the China's National Bureau of Statistics.

China's Ministry of Commerce said in the first four months of 2006 roughly 12,000 new foreign companies began operations in China. Heidrick and Struggles notes that established companies in China, both local and foreign, are rapidly expanding their ranks. Of the companies polled by Heidrick, the number of those with staff of more than 5,000 tripled in the last two years from two to six.
Few companies are backing down from ambitious plans to carve out a corner for themselves in China's thriving marketplace, despite rising wages and intense competition. That is because most companies see the Chinese market itself as an important source of revenue. According to Heidrick and Struggles, two-thirds of respondents cite selling to China's 1.3 billion people as the key reason for being in China while setting up operations to outsource goods for the West is a secondary concern.

Both U.S. based and other foreign companies face intense competition for staff and rising salaries to increase their operations. Capgemini, which derives 1% of its revenue from China, is looking to triple its staff in China in the next four to five years to 2000-3000 employees.

STMicro, which draws a quarter of its sales from China, announced last spring it would invest $500 million in a new semiconductor factory. It plans to hire 2,500 across China during next few years.

Meanwhile, General Electric Co. (GE) said it is looking to maintain its annual 10% earnings growth in part by outsourcing to China. At present the company makes about $5 billion in revenue from China and recently Chairman Jeff Immelt said he expects that number to double in the next four to five years. GE employs 13,000 people in China.

The labor shortage, particularly among experienced workers, means companies routinely poach talent from each other, driving up salaries in the process. Hewitt Associates estimates that wages are rising as much as 15% a year for experienced, English-speaking workers, but anecdotal evidence puts the number much higher.

Stefan Dyckerhoff, head of Capgemini's consulting arm in China, hires first-year consultants for $5,000 a year but bumps their pay up to $35,000 by the third. By comparison the average rural salary in China is $225 annually and the average urban salary is $1,164 according to the China's National Bureau of Statistics. Dyckerhoff says salary inflation is outpacing what the company charges in consulting fees, though profit is still possible.

STMicro which employs 4,000 people in China, pays a relatively experienced engineer in Shanghai about $40,000 a year, about a third less than an engineer's salary in Silicon Valley, but not a pittance, the company says.
The problem says STMicro's Krysiak, is that raising salaries alone doesn't keep workers. Many are leaving for rising Chinese technology companies or even to become entrepreneurs.

"There is a lot of venture-capital money chasing Chinese enterprises," he says. "We lose people because some of these guys all want to be part of the next IPO."

Junwen Mo, a 22-year-old Chinese business student, has an internship at BNP Paribas SA (13110.FR) but says many Chinese want to work for a Chinese company in the long run. "For prestige and personal satisfaction it is better to work for a Chinese company," he said, adding that foreign companies might pay better salaries but they don't grant promotions. "If you are ambitious you have to work for a Chinese company after a few years of experience."

Losing people like Mo is painful for Western companies that have spent both time and money training them.

Although China produces 3.1 million college graduates a year, educational standards are lacking, U.S. consulting firm McKinsey & Co. (MCK.XX) says in a 2005 report. Even engineering students from the most prestigious universities in Beijing receive little practical training in either projects or working with a team. Few speak passable English. As a result McKinsey estimates that only 160,000 engineering graduates a year are suitable to work in multinationals - a pool no larger than the U.K.'s, who's population is about 60 million.

To compensate for the poor education system companies are investing in training programs to get new recruits up to speed which can add 15% to personnel costs, McKinsey says.

STMicro routinely trains new recruits for six months or more. Teaching English is the biggest problem but the basics of business - everything from marketing to how to say no to your boss - has to be taught.

Steven Shaw, head of Networks for Nokia China (NOK), spends a fifth of his time mentoring Chinese workers.

"We have English classes, technical training classes, lots of training." Shaw says. "It can be expensive, but it has to be done. It's one of the most important things to young Chinese. They want skills."

However, they also want to believe that they can reach the highest echelons of the companies. It's a message that Western companies are finally getting loud and clear, although finding Chinese managers to head operations is by far the most vexing personnel issue, several managers said.

"Graduate degrees were basically suspended in the late '60s and '70s," says Gauthier, referring to China's cultural revolution. "The 45-year-old manager who speaks English really isn't available."

Nevertheless companies are bending over backward to find Chinese-speaking managers, increasingly poaching talent from firms in Hong Kong, Taiwan or Malaysia.

Capgemini recently hired Chen Bo, the former vice-president of Hewlett-Packard China (HPQ), as chief executive officer of Capgemini China, despite the fact that he doesn't speak English. Chen works closely with a multilingual assistant.

Nokia, too, has boosted its Chinese representation. Shaw says on his management board two thirds are Chinese nationals.

Other companies are also taking notice. Heidrick and Struggles reported that three-quarters of firms operating in China today have native-born Chinese represented on their management teams, up from half two years ago.
"It's important for morale to have Chinese managers, either from China, Hong Kong or Taiwan, at the top," Shaw says. "It is not always the easiest thing to find them."

(Mimosa Spencer in Paris contributed to this article.)