Recruiting in China

With 20 million new jobseekers flooding the market every year, China could face a 'very severe' unemployment situation, the country's labour minister has warned.

Tian Chengping predicted that the vast amount of new entrants to both the rural and urban job markets would continue for some time, according to AFX News.

Chinese premier Wen Jiabao recently called for more measures to limit unemployment, which he wants kept below 4.5 per cent in towns and cities.

They include retraining workers with out-dated skills and doing more to encourage small start-up businesses.

Currently there is no definite figure for unemployment in China, which the news agency blames on unreliable employment statistics, but it predicts that it is "probably higher" than the rate of four per cent given at the end of 2007.

Despite concerns about joblessness, it was recently reported that some big-name firms in China are having difficulty recruiting enough migrant workers to meet their needs.

A "Made in China" tag usually means the goods cost less to make there than in the U.S.

But the difference in labor and other expenses with the rest of the world is narrowing. And new labor laws could add to the cost of doing business in China.

New rules that went into effect on Jan. 1 could offer more job security for Chinese workers, analysts say. On paper, the rules will require firms to sign contracts with longtime employees and shell out overtime pay. They'll also make it easier for workers to unionize.

"China can't afford to have tens of millions of workers who are getting abused," said Auret van Heerden, president of the Fair Labor Association.

FLA is a Washington, D.C.-based coalition of companies, universities and other groups promoting better labor practices worldwide. Most FLA firms are apparel makers. They include Nike, (NKE) Nordstrom (JWN) and Eddie Bauer, (EBHI) which all have workers in China.

Given China's record of passing and then ignoring labor rights laws, some say the new laws could be another toothless tiger.

"They have sets of laws that, if companies followed them to the letter of the law, would make things much different," said Andrew Connor, a senior associate at recruiting firm Pacific Bridge, which finds managers for firms in China. "But what's in the law isn't necessarily what happens in China."

U.S. Firms See Little Impact

American companies operating abroad usually follow U.S. work standards. Those are already more strict than the laws in China and other developing countries.

"We'll have to watch and wait and see what happens," said George Scalise, president of the Semiconductor Industry Association. "We're staying in touch with a number of people in HR departments (of U.S. companies with facilities in China)."

The rules' biggest impact likely will be on Chinese firms, says SIA spokesman John Greenagel. "From where we stand, we have learned they aren't used to doing business this way."

Many U.S. electronics firms have operations in China. Chipmakers Intel, (INTC) Advanced Micro Devices, (AMD) Cypress Semiconductor (CY) and Micron Technology (MU) all have test and/or packaging facilities there.

Cypress CEO T.J. Rodgers says U.S. firm have to employ people in China if they want to sell there.

"If you want to play in China, you have to have resources in China," Rodgers said.

But he figures the laws won't add much to the cost of American firms doing business in China. He views them mainly as another layer of bureaucracy.

Victor Ma, head of Websense's human relations in China, agrees.

"There might be a cost to the employer (for added paperwork), but the cost is unremarkable," Ma said. "It is small, and can be balanced by higher productivity."

Websense moved part of its operations to China in January 2007. The Internet filtering and security software firm now has 120 employees there, or 10% of its staff.

Worker Rights

Under China's new laws, companies have to sign work contracts with all permanent employees who've been there at least 10 years.

SIA's Scalise notes that most U.S. firms already do so in China. But up to 80% of Chinese workers have had no job contracts, according to various estimates.

The rules also force firms to pay overtime wages — a practice not always followed by Chinese firms.

The new rules could reduce China's notoriously high employee turnover. Many Chinese factories have 100% annual turnover. Analysts seldom capture that cost of doing business in China, says FLA's Van Heerden.

Lower turnover would boost productivity and lower hiring and training costs, watchers say.

The new laws also strengthen the hand of the country's main union, the government-backed All-China Federation of Trade Unions. They give the ACFTU the right to bargain with employers for the first time. The union says it wants to organize workers at foreign-owned companies.

The rules' ACFTU ties might give them a better chance of being enforced. As retail giant Wal-Mart (WMT) found out, the state-backed union can be very persuasive.

Wal-Mart has resisted unionizing efforts in the U.S. But in August 2006, it let the ACFTU organize its 30,000 employees in the 60 stores it had in China at the time. Public pressure played a role in the retailer's decision.

"Wal-Mart made a decision to comply rather than fight it because of the negative image they were afraid of getting," Connor said. "When you're dealing with an authoritarian government like China, things are open, but you don't know when they can close."

It was a smart business move for Wal-Mart. As of February, it had more than tripled the number of stores it has in China to 202.

In the long run, U.S. firms have no choice but to go along with the law and deal with the newly powerful union, says PricewaterhouseCoopers analyst Ed Pausa. "A number of international companies will resist, (but) I don't think they will succeed."

As costs rise in China, some U.S. companies are looking elsewhere, including Vietnam and India.

"Vietnam is becoming more attractive and stable. Wages are still lower than China," Connor said.

Despite the size of China’s workforce, and the growing ranks of educated, young graduates available for hire, one of the main challenges for human resources managers continues to be identifying and recruiting talented employees. Because of the difficulty in identifying and hiring talent in China, it becomes that much more important not to lose these valuable employees once they are onboard. Human resources managers are increasingly looking beyond the traditional benefits and salary packages as a means of retaining staff.

While “Duty of Care” is often viewed as simply the responsibility an employer has to its employees, this concept is increasingly being seen as an important component in retaining employees. Duty of care has evolved from its traditional form, largely involving guarding against conventional workplace safety hazards and the provision of standard medical benefits to ensuring employees have access to care in the event of illness and providing proactive support to employee’s families in the form of wellness information and training. In the global workplace, however, the types of hazards and risks HR directors face when it comes to protecting their human assets have evolved to include a myriad of new areas.

Global Risks and Responsibility

The definition of the workplace has expanded. Employees are becoming increasingly mobile as business operations become more global, making direct physical oversight of all employees at all times less feasible. Some companies respond by helping employees in the event of a problem, which offers no ongoing support to employees over the course of their travels. However, travel into areas known for threats ranging from terrorism to natural disasters and pandemics warrants more active support and monitoring of employees. As employees are asked to travel to increasingly distant and foreign locations for business, human resources managers are first responsible for being aware of the potential risks of travel to various locations throughout the world. While business must continue even in areas known for higher travel and security risks, companies must be able to contact or account for employees as quickly as possible in the event of an incident in an area in which employees are traveling. The use of services to provide 24-hour travel support may help employees feel more secure and confident, with direct access to emergency assistance anytime, anywhere. This equally applies to Chinese employees traveling outside of Beijing and Shanghai – they may not be familiar with their surroundings and their presence as a “non-local” could make them a target for petty criminals or worse.

For companies with global operations, employees are often required to conduct business in countries with unfamiliar cultures or dangerous environments, with both often going together. While proper systems and monitoring are one part of strong travel support for employees, training is also an important component in preparation for travel or postings in foreign environments. For some locations, training may simply involve putting employees in a better position to fit in and succeed in a foreign business culture. In other environments, training is crucial in protecting and preparing employees to be able to handle dangerous situations. For example, with the increasing amount of Chinese investment in Africa and the Middle East, it is quite feasible that a senior project manager based in Beijing may be asked to travel to high risk areas such as Afghanistan or Nigeria for an extended period to oversee a crucial project. Providing that manager with pre-travel High Threat Environment training and emergency support while they are on the ground will enable them to better focus on the job at hand and also be prepared to handle incidents that may occur. They will be better aware of the threat environment and less likely to put themselves in danger. This kind of support from the company will also provide some peace of mind to the employee’s family back home in China. Training is also important in raising awareness and helping traveling employees to become familiar with the services and support the company offers. Having a top of the line foreign medical/security assistance program or emergency evacuation service is of no use if traveling employees are not familiar with the services or how to access them if necessary.

Duty to Identify Internal Risks

Duty of care also begins to enter the area of legal requirements employers must fulfill when it comes to protecting their employees. On a very basic level, employers have a responsibility to protect their staff from foreseeable risks. A major component in prevention is thorough due diligence of new employees, vendors, suppliers or any internal entity engaging the company’s people, assets or information. Background checks have generally been seen as an exercise to ensure the capabilities and qualifications of a potential employee or vendor. However, in addition to being a means of measuring capabilities, background checks may also surface historical risks that could threaten the company in the form of fraud, loss of assets or even violence. Having in place an effective due diligence program can also have a deterrent effect upon potential offenders from even approaching the company.

Even if there are no legal requirements, companies may consider voluntarily adopting a higher standard of duty of care as a part of good corporate social responsibility on behalf of all stakeholders involved, also making the company a more attractive employer.

Duty of Care and Retention

Extending beyond a form of infrastructure to protect employees from various risks, duty of care has evolved into a more organic concept as companies strive to show employees that they are valued on a very personal level through active engagement. A company that shows it values its employees as people, making employees feel as though they matter to the company on an individual level, is a company that will be seen as a good employer. A competitor can always offer to pay marginally higher salaries in an attempt to attract away employees. However, employees will not be ready to leave a good company, where they know they are well cared for, merely for a few dollars.

Neal Beatty is General Manager of Control Risks in Beijing. Control Risks is an independent risk consultancy with 18 offices on five continents. It provides advice and services that enable companies, governments and international organisations to accelerate opportunities and manage strategic and operational risks.

Every day, I get calls from frantic and sometimes frustrated HR people. “Can you find a government sales specialist in Seattle? How about a sales manager in California? Is there a metalworking sales specialist in Detroit?”

Unfortunately for everyone involved, the questions come easier than the answers. In fact, the panorama of industrial supply distribution has changed dramatically over the past eight years, especially within the sales arena. Boeing relocated, China infiltrated, 9/11 happened and the experienced industrial people made like rabbits and high-tailed it for safer havens [read: other industries]. Add the proliferation of non-compete agreements to the brew and we have ourselves the perfect storm for industrial headhunters, HR personnel and sales specialists.

The problems are compounded by disinformation emanating from the various media mavens. They manipulate statistics to create news and cause fear with talk of rising unemployment coupled with a labor shortage caused by millions of retiring Baby Boomers. But what’s really going on?

As someone who has been recruiting within the industrial supply sector for more than 20 years, my feeling is that there are still plenty of good times ahead, both for larger and niche players. Here is what I tell clients who ask about the industrial supply industry from the perspectives of talent retention, recruitment and the hiring process:

Talent Retention: From the inside out
• The company that offers options to cross train, interchange jobs and relocate for career advancement has the decided advantage. The cost to the company is more than made up for by successful internal promotions which yield measurable and quantifiable results.
• Positive buzz generated by in-house staff and associates that transfers into the marketplace can be a corporate “Gatorade infusion” of energy and enthusiasm for the entire company. It will attract new talent from within the industry as well as adjacent industries.

The recruitment process: Communication is the key
• Once the need is determined and the funds are provided within the corporate budget, companies want positions filled yesterday. The pressure to hire is immediate and burning. Therefore, every day that the job goes unfilled builds up cost-of-vacancy, which can be very expensive.
• In the vast majority of companies, the hiring process is plagued by delayed responses to resumes, indecisive management follow-ups and poor feedback from line management interviews to the HR departments or the outside recruiter. If these hiring companies ever determined the actual cost-of-vacancy caused by these delays, there would be a great outcry from senior management.
• The faster a company moves within the interview/hiring process, the better the rate of hiring and retention.

The hiring process: Close the deal without delay
• Open your doors to any trainable, sales-oriented individual who understands and believes in relationship sales. That means thinking as broadly as possible as to industry experience. Some companies put their salespeople people through rigorous training.
• Give feedback to every candidate within 72 hours of receiving their resume. This shows you care and mean business.
• Set up a phone interview with either a manager or HR rep within five days of receipt of a candidate’s resume.
• A face-to-face interview should be set up within one week of the phone interview. Thereafter, whatever necessary steps, including tests, background checks or reference screens, should be set up in a similar time frame.
• The completion of the interview/hiring process to the offer phase should take no more than five or six weeks. Add to that at least two weeks for a start date and you have a two-month process. That’s the way to make a strong impression on any candidate.

These are best-case scenarios. It might take longer to unearth the hero/heroine. You might need a recruiter with the right synergy, who can help you avoid many of the potential pitfalls. They can serve as the first line of offense to promote your company, its objectives and its culture — and prepare the candidate for each step in the process.

Whatever you decide, if you stay the course with a proper timetable, you can maximize your chances to make that strategic hire.

Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent note to clients on 51job, Inc. (JOBS):

• • •

Solid 4Q: 33% YoY Growth, 15% Op. Margin, Cash ~$5 / ADS; Aggressive S&M (Sales & Marketing) Posture Delays Upside, EPS Estimates Cut

Investment Conclusion. Based on stepped-up operating expenses (marketing, sales force expansion and online product development) – offset partially by continued currency-aided revenue growth – we are reducing our estimates: 2008 GAAP EPADS to $0.55 on net revenue of $131 million (23% YoY growth) from $0.68 on net revenue of $128 million; and 2009 GAAP EPADS to $0.75 on net revenue of $163 million (25% YoY growth) from $0.90 on net revenue of $159 million.

We are lowering our target from $23 to $20.50. In 12-months, this would correspond to a $434 million enterprise value and 25-30x forward GAAP EPADS – a premium to 20% compound EPS growth in 2007-09E. Although 51job stated that "business fundamentals are stronger than ever," we are disappointed by ballooning near-term S&M expenses (27% of 2008E net revenue vs. 22% in 2007) – ostensibly to match rival ChinaHR.com. On a positive note, the $360-405 million valuation placed on ChinaHR.com by Monster (MNST-Hold) has positive implications for 51job ($386 million), which remains much larger and more profitable than its nearest competitor.

4Q07 Results. GAAP EPADS of $0.10 vs. $0.09 a year ago on net revenue of $27.7 million (33% YoY growth) beat our $0.09 estimate on net revenue of $26.0 million. 51job posted positive variances in net revenue ($1.7 million led by training/outsourcing – this segment could benefit under the new labor law) and tax/other items ($0.2 million) – offset partially by operating costs ($1.1 million) and a forex translation loss ($0.5 million).

Revenue from online recruitment services advanced 40% YoY to 36% of the total. Operating income rose 57% YoY to $4.1 million (14.9% margin) and exceeded our $3.5 million estimate (13.3% margin) by 17%. Metrics showed somewhat slower growth in print advertising page-count (+21% YoY) with lower average revenue per page (-3% YoY in dollar terms attributed to city-mix); and steady growth in the number of employers using online services (+30% YoY) with higher revenue per employer (+8% YoY). Net cash climbed to $138.0 million (or $4.85 per ADS) from $131.7 million on September 30...

Investment Thesis. According to recent surveys, a shortage of qualified staff and high turnover ranks as the biggest business concern in China. 51job is enviably placed to capitalize on the rapidly evolving market for HR services in China – by applying a proven business model across its vast labor force (5x U.S.). Compared with traditional job search channels such as referrals and fairs, pioneers like 51job offer significant reach and speed advantages.

Favorable demographic drivers include GDP growth (~10% in recent years), Internet usage (ranked #2 behind the U.S.), an aging workforce and increasing private, urban and service sector employment. iResearch forecasts that the total recruitment market in China will increase from $568 million to $1.39 billion in 2005-10, implying 20% compound annual growth. During this period, the online recruitment segment is expected to advance from $99 million (17% of the total) to $631 million (45%), or 45% compound annual growth.

Superior positioning includes a premium brand/pricing; comprehensive online/offline offering; wide geographic presence (25+ cities); large direct sales force (over 1,600 representatives); and unmatched job seeker database (access to more than 16 million resumes for professional, clerical, industrial and hourly jobs). EPS growth stands to benefit from ramp-up of online subscriptions (from single-digit penetration of client budgets at present) and a scalable model offering 30%-plus operating margin (excluding share-based compensation).

JOBS is suitable for aggressive investors. In our opinion, principal risks include the following:

Deterioration of economic conditions in China, slowing of hiring activity or a “hard landing” scenario.

Competition from ChinaHR.com and Internet portals could pressure future profitability by way of higher marketing expenses and/or lower pricing.

Rapid online migration could result in cannibalization of offline revenue.

51job has an inconsistent execution record.
Uncertainties in the PRC regulatory and legal system, particularly laws governing foreign ownership and licensing/operation of HR and Internet business entities. Note that 51job is incorporated as a holding company in the Cayman Islands.

Disruptions such as spread of the H5N1 virus or a recurrence of SARS, political unrest, breakdown in relationship with a major publishing/distribution contractor, etc.
Influence of Recruit Co. and current management over all matters requiring a shareholder vote.
Correction in the U.S. markets.

Microsoft Corp has launched its first Windows Embedded regional development center in Asia. This new facility, the Microsoft Embedded Systems Development Center (MESDC), will support global product development and drive smart, connected, service-oriented device development.

Located within the Microsoft Advanced Technology Center (ATC), part of the Microsoft China Research & Development Group (CRD) in Beijing, China, the MESDC is a significant part of the US$75 million global investment in R&D that the Windows Embedded business is making this fiscal year.

The MESDC will support global product R&D, drive development of innovative features of Microsoft's embedded operating systems, and accelerate collaboration between the US-based Microsoft product groups and their counterparts in the ATC. In addition, the MESDC will support the needs of the active windows embedded partner ecosystem in China by engaging with OEMs in embedded systems to showcase high visibility embedded systems projects that accelerate the development of connected consumer devices.

Microsoft has started recruiting embedded systems engineers for the MESDC. By the end of 2008, the MESDC will have up to 15 engineers working closely with the Windows Embedded product development team in Redmond, Washington.