Recruiting in China

By Frank Mulligan – Accetis International, Talent Software & Recruit China

China began its current economic journey back in 1979 with a very low base but it has managed no less than an economic miracle in the equivalent of only two generations.

The country has attracted among the highest rates of Foreign Direct Investment (FDI) in the world. This year’s figure is up 14% in the first 11 months alone, and is due to top US$65 billion for the whole of 2007. Although foreign-funded companies account for only 3% of China’s industrial base, they account for over 50% of the exports, and the vast majority of the high-tech exports. They also have a disproportionate influence on the overall economy in that they contribute about 20% of the total tax revenue.

Any shift in FDI can have serious repercussions for staff hiring, retention and motivation in China as FDI is somewhat of a predictor of hiring demand in the short to mid-term. In addition, constantly achieving peaks of investment and growth creates an expectation in the market of more of the same. China’s FDI peak may have been reached so we should look to what is happening in the general economy and consider the possibility that the economic growth might slow down a little next year. This would only be normal prudent behaviour.

FDI Peak - The reasons for any possible decline in FDI are many and varied, but they basically stem from an increase in costs that accrue to manufacturers in China.

It’s not just salaries. Prices have gone up in China for land as the government has regained control over the allocation of land for industrial purposes. Local officials had been asking for land prices below the actual market value of that land as they competed with each other for FDI, any FDI. Prices have doubled in the last few years as the government’s effort yield fruit.

Inflation - The ugly inflation monster has finally reared its head in China, and it has teeth. Base prices for foodstuffs and other contributors to the CPI have gone up to the extent that November’s inflation touched down at a shade under 7%, the highest figure in 11 years.

The causes are many and varied but they reflect the downside of a fast growing economy, one that not really slowed down since around 1993. Look to an increased focus on this issue by internal staff because this hits where it hurts, in their pocket. It’s not actually your company’s problem but you will be seen as the solution. The new labor law won’t hurt their efforts here.

Government Policy - The Chinese government is currently trying everything in its power to slow down the Chinese economy. Most Prime Ministers or Presidents would cut off their right arm to be in this position but it’s not inherently stable.

Actions taken include taxes on stocks and housing purchases, restrictions on land availability and prices, reductions in the VAT rebates for exports, an increased focus on the environment with mine and power plants closures, and tightening of overall economic policy. These measures have not had the desired result but with the global economy expected to slow they might all kick in at the same time.

If you are looking at hundreds of job requisitions right now you might get what you wish for next year ie. a softening job market that is biased more in your employer’s favor. Don’t hold your breath though.

Shift to Services - In mid-2006 the Chinese government announced that the FDI figures for 2005 were to be revised because US$11.8 billion of investment in the banking, insurance and securities sectors had not been included in the figures. Previous investment in this area had been so low that it had not been on MofCom’s radar, and the sudden increase had taken them by surprise.

This comes off a base of investments that are lower in value than previous years, and this is evidence that China is moving away from high-value capital investments as it moves towards a more service oriented economy. If you are in the service sector you already know about the war for talent among service firms, but you should know that this war is extending out to non-service firms. Watch out for banks that want your operations staff, never mind your finance and HR people.

Shift to Inner Provinces - I don’t have specific figures for the investment in China’s Inner Provinces but the fact of that increase is undeniable. From a low base of about 2% of the total FDI, the Inner provinces get a guesstimated figure of somewhere in the region of 4% now. The overall goals of the shift are writ large and include efforts to promote the development of the Western and Central regions, eliminate regional disparities, consolidate the unity of ethnic groups, ensure border security and social stability, and promote overall social progress

Before opening up in 1979 China had roughly balanced the income per capita in all of the provinces in the country. Admittedly, it was an equally low income per capita figure but it was roughly the same all around the country. Since then there has emerged a huge split in income figures between the prosperous East Coast, the Gold Coast, and the impoverished Inner Provinces. In response to this the government has invested heavily in infrastructure and urban development in these Inner Provinces over the last few years, and the results have been forthcoming.

If you currently manage HR for a factory on the East Coast you should be looking forward to the time when you will have to move the plant to the West. Especially if the plant is low tech.

Even if you are in the high-tech area you might still have to move.

Operations - The coastal provinces in China offer excellent logistics and access to a good base of technical and managerial skills.

But more and more companies are finding the East Coast crowded and over invested. Competition for staff and resources is intense but the option of moving West is not always on the table because the professionals that you need to run a modern plant are not necessarily there. Neither is the logistics or the market for the final products.

This increases the churn in factories and offices in the East Coast, and is likely to get worse because the West is still not proving that attractive. The FDI keeps coming into China and the bulk of it is invested in the East. Don’t look to any likelihood of an ease in hiring and retention soon.

India - Yes, the country is an infrastructural nightmare, and yes, China is very much easier to work in. But India is coming up and there is no denying the preference in MNC headquarters for a balanced approach to their FDI. Putting all their eggs in one basket called China is not the way they would choose to invest.

Up until recently there hasn’t been much choice in where to locate a stamping plant or a EMS plant but India is looking more and more attractive. It’s not likely to affect industrial FDI in a big way soon but the country is slowly developing a strong internal market that will draw in plants just to be inside the Indian tax zone. Many companies have set up in China for exactly this reason.

For HR staff you can look to opportunities to cover a broader base of countries within your portfolio. In all likelihood companies will still locate their Asia Pacific HQ in Shanghai, so this could offer you chances to travel to exotic India. This is not a problem, it’s an opportunity.

Next Steps - One of the big fears that I hear expressed in China is the possibility that China will not get to the next level. What this means in the real world is that costs rise but the new jobs don’t arrive to replace the lost ones in production.

If you look at what India is good at you might have cause for concern. They don’t do production as well as China but they are very strong in software, technical consulting and design. The worst case scenario for China is that it gets left with the production of basic products like car parts and packaging, while India gets all the high value work in product and systems design. Consider this issue if you are currently charged with hiring people for a design centre in China. Ask yourself if the failure to hire the people you need is a fatal flaw in your company’s strategy, and whether you will be able to find the people you need some time soon?.

The answer will tell you a lot about the career you can expect to have in that company.