Recruiting in China

China is a red hot market for Cisco, which saw its second-half sales in Hong Kong grow more than 35% from a year earlier, reports the South China Morning Post. But the country is suffering from a lack of experience managers to lead the hi-tech firms - including Cisco - that have set up facilities there.

Businessweek is reporting on Cisco's answer to the problem - grow managers from within by instituting "management kindergarten" programs. Businessweek cites Cisco's Shanghai research center, where the average age of workers is 27, as an example of a unit that is offering such a program.

Quoting Jan Gronski, managing director of the Shanghai facility, and her No. 2 Chris Dong, Businessweek writes:

Gronski and Dong have opened "Cisco Clubs" at three Chinese universities, giving students a chance to work with Cisco engineers. For those on staff, Gronski runs management seminars every Thursday. He schools young managers on everything from giving presentations and decision-making to speaking their minds.

Some readers of the article think that Cisco will still churn out inexperienced managers. But what's the difference between this program and other "management trainee" programs offered by companies in the west?

HES Global Hospitality Executive Search has opened an office in Beijing to service the hospitality sector in China's capital city.

The new office is located at the Wanda Plaza, in Chaoyang District, with view on some of the longest and most established hotels in Beijing, and currently at least four other five-star international hotels opening within a perimeter of 500 meters.

According to Rene J.M. Schillings, director for Greater China and Singapore of HES Global, this move is only the next logical step to further capture the market in China, which is needy for experienced Chinese hoteliers and China-experienced expatriates.

HES Global Greater China has an office in Hong Kong, from where it serves its clients outside of Greater China, and another outlet in Shenzhen.

Francisco Partners' investment in DarwinSuzsoft and Sierra Atlantic's acquisition of ArrAy highlight increasing focus on Chinese outsourcing capabilities.

Mark Botticelli has learned valuable lessons about China. For one, employees expect cash bonuses before important holidays, like the Chinese New Year. And horizontal organizations don't work.

"Hierarchy is important," says Botticelli, VP of engineering in the mobile solutions division at Trimble, which makes software for devices used by delivery people and other mobile workers. "The project manager needs to go home and tell his wife he has 14 people working for him."

Trimble eased its way through these cultural challenges three years ago by hiring Chinese outsourcer Suzsoft to provide engineering services. This is a path more U.S. companies are likely to follow, making companies like Suzsoft--now DarwinSuzsoft since being acquired by Darwin Partners last year--increasingly popular.

As a measure of that popularity, private equity firm Francisco Partners last week said it would invest $48 million and take a majority stake in DarwinSuzsoft. The investment will be used for acquisitions and organic growth of the U.S. company, which employees 800 Chinese engineers. Also last week, Sierra Atlantic, a U.S. IT services firm with 1,100 developers in Hyderabad, India, said it's acquiring ArrAy, a U.S. company with 200 engineers in Guangzhou and Shanghai.

It's not just the small services providers gearing up: IBM, Tata Consultancy Services, and others have plans to hire thousands more engineers in China. Oracle late last month set up a second Chinese development center to support software partners and integrators, and introduced a computer science program for vocational schools in a deal with the Chinese government.

Companies doing offshore development in China say they're paying salaries that are 25% to 40% lower than what they'd pay in India, without the high staff turnover rates in that country. Chet Gapinski,VP of engineering at Crossbeam Systems, a maker of security systems, steered his company to China last year after facing some of those problems in India. Crossbeam hired ArrAy for a "hybrid" approach that keeps project managers in the United States and engineers in China, with both sides making regular visits to the other country.

Crossbeam initially had difficulty getting U.S. visitors' visas for Chinese engineers, a problem ArrAy smoothed over, Gapinski says. It also found that Chinese engineers can't work on some security technologies deemed sensitive by the U.S. government. In China, experienced service providers also can prevent problems dealing with government, which is closely involved in business.

Trimble, which employs 30 of DarwinSuzsoft's Chinese engineers, has expanded its relationship beyond developing custom apps for a Hong Kong customer to include maintenance for U.S. and Chinese customers and development work on Trimble products.

Botticelli initially was concerned about lax intellectual property protection in China but found Suzsoft's security measures more than adequate. English skills aren't nearly as good as in India, so Trimble requires its Chinese engineers to attend weekly English classes. One sign of success in China: Trimble plans to ramp up its team there to handle new products coming out next year.

Many multinational hi-tech firms in China are facing stagnation or even declining market share as Chinese competitors secure the emerging mid-range market for hi-tech goods.

McKinsey research shows that 30 to 75 percent of future growth in the global hi-tech industry will be in this mid-range segment, defined as products priced between 30 percent and 50 percent less than their premium counterparts.

Chinese hi-tech firms are quickly edging out global firms in capturing the emerging mid-range market. By defining innovation differently and looking for value throughout the business system, Chinese firms get more out of every R&D dollar spent, allowing them to launch goods cheaper and quicker than their global competitors.

Worryingly for global firms, enormous inefficiencies in their own R&D processes mean Chinese companies have a huge scope for productivity, cost and innovation gains. Many multinationals are aggressively hiring Chinese R&D managers and collaborating with global technical service partners to implement streamlined R&D processes.

Even more worryingly, as soon as Chinese manufacturers secure the global market for mid-range goods, they will gain the cost and scale advantages needed to move up the value chain into premium products. From there, it''''s just a matter of time before they capture high-end share from foreign firms in China and, eventually, in more developed markets.

For global manufacturers, achieving competitiveness in the mid-range segment will not be easy. Years of cumulative R&D experience have been directed at hi-tech innovation and superior quality, and as a result, products are often over-engineered for Chinese customers.

One European supplier of industrial components, for example, rigorously tests its highly engineered products to ensure a 5- to 10-year lifespan, but sells to Chinese manufacturers whose products only last three years.

Global tech players need to completely rethink their R&D approach and rediscover the lost art of low-cost R&D. They must ask what kind of products customers are demanding, and then redesign their R&D processes to meet these lower specifications and cost points.

Perhaps the only truly effective way they can do this is to bring their R&D capabilities to China, much as they have already done with manufacturing.

In doing so, global companies need to avoid the temptation to bring in too many expatriate engineers who implement traditional R&D processes that are unsuitable in China.

Chinese engineers already have the required technical know-how, so firms only need to bring in a few foreign experts to hone specific skills, such as the ability to translate consumer needs into technical specifications, instilling standardized R&D processes, maintaining end-to-end oversight, and designing a local production solution that best balances cost, quality and stability.

Rather than building their own localized R&D teams from scratch, firms could also acquire a local competitor and take over the company''s R&D operations and processes. Its products could then be subsumed under the global brand, or retained as a sub-brand to avoid diluting the premium brand''s image.

Some companies have already succeeded at localizing R&D to tap into the low-cost approaches of its Chinese counterparts. One global medical equipment maker, for instance, increased its market share from 18 to 45 percent by localizing its R&D processes to better meet the needs - and budgets - of potential customers in China.

Motorola and Nokia quickly identified what Chinese consumers wanted and could afford, and now develop mobile phones that span the entire price range. Together, they now capture over 50 percent of all mobile phone sales in China.

Other global manufacturers hoping to follow in their footsteps must go under a major mindset shift to make the necessary transition from "Made in China" to "Designed in China, for China".

Those companies who do not quickly take steps to produce the mid-range products currently in demand will be left behind in the world''s most important emerging market. From there, it will be much harder to defend global market share against the rising tide of Chinese hi-tech goods.

Ingo Beyer von Morgenstern is a Shanghai-based director at McKinsey & Company. Paul Gao is a partner at McKinsey''s Shanghai office

Source:China Daily

Ashish R. Thadhani (Gilford Securities) recently sent a note to clients on Chinese human resource recruitment company 51job, Inc. (JOBS). Excerpts follow:

• Investment Conclusion. Based on stepped-up S&M spending and the expiration of key tax benefits – tempered by print advertising and training/outsourcing revenue -- we are reducing our estimates: 2007 GAAP EPADS to $0.50 on net revenue of $103 million (23% YoY growth) from $0.60 on net revenue of $100 million; and 2008 GAAP EPADS to $0.68 on net revenue of $125 million (22% YoY growth) from $0.80 on net revenue of $121 million. We are introducing a 2009 GAAP EPADS estimate of $0.90 on net revenue of $152 million (21% YoY growth). We are also lowering our target from $28 to $21.50. In 12-months, this would correspond to a $465 million enterprise value and 25-30x forward GAAP EPADS – in line with 26% compound EPS growth in 2006-09E and a discount to the current valuation (32x). We are disheartened by the aggressive emphasis on marketing initiatives at the expense of long overdue margin/EPS discipline. This represents the third investor setback in as many years, undermines claims of market domination and also raises questions about management alignment (see April 2006 agreement on page 2). Still, we believe that 25% upside potential justifies a Buy.

• 2Q07 Results. GAAP EPADS of $0.14 vs. $0.12 a year ago on net revenue of $26.2 million (28% YoY growth) fell short of our $0.16 estimate on net revenue of $25.1 million. EPADS was held back by $0.02 due to a high tax-rate. 51job posted a positive variance in revenue ($1.1 million primarily in print advertising and training/outsourcing) – offset by operating costs ($0.6 million), forex ($0.2 million) and taxes ($0.7 million). Revenue from online recruitment services advanced 36% YoY to 34% of the total. Operating income rose 54% YoY to $5.7 million (21.6% margin) and surpassed our $5.2 million estimate (20.8% margin). Results benefited from a longer post- Chinese New Year peak recruiting period in 2Q07 vs. a year ago. Metrics showed improving growth in print advertising page-count (+37% YoY) but lower average revenue per page (-15% YoY in dollar terms attributed to city-mix); and normal growth in the number of employers using online services (+32% YoY) with steady revenue per employer (+3% YoY). Net cash climbed to $126.0 million (or $4.45 per ADS) from $119.0 million on March 31.

• Investment Thesis. 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 $1.33 billion in 2005-10, implying 19% compound annual growth. During this period, the online recruitment segment is expected to advance from $99 million (17% of the total) to $604 million (45%), or 44% compound annual growth. Superior positioning includes: premium brand/pricing; a comprehensive online/offline offering; wide geographic presence (25 cities); large direct sales force (over 1,500 representatives); and unmatched job seeker database (access to more than 12 million resumes for professional, clerical, industrial and hourly jobs). EPS visibility stands to benefit from top-line and profitability drivers. Specifically, 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 lower pricing and/or higher marketing expenses.
- 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.

The government of the southern boomtown of Shenzhen bordering Hong Kong plans to hold job fairs in North America, Europe and Australia next year to attract top professionals.

Although the move has not been well received by some residents, it has gained the support of overseas returned Chinese and human resources organizations.

"It's very positive. It is a goodwill gesture by the government toward foreigners, especially Chinese people working or studying abroad. It will also help companies attract quality candidates," Ouyang Hui, director of the talent research center of ChinaHR.com, told China Daily.

William Zheng, a special counsel with US law firm Sheppard, Mullin, Richter & Hampton, said the government of Shenzhen has created a good opportunity for companies.

"A growing number of Chinese companies are setting up subsidiaries abroad or acquiring foreign companies. They are in great need of senior foreign executives who are not only good at business, but also know the local accounting rules and laws," Zheng said.

The Chinese-American began working in China in 2003.

"Government-sponsored job fairs have more impact on foreign communities and attract top professionals, more so than individual companies," he said.

According to the Shenzhen office for introducing foreign talents, the city has held job fairs in the United States, Canada, Europe and Hong Kong since 1992. It was the first Chinese mainland city to hold such fairs.

"The fairs have proved successful in attracting overseas professionals," Yin Shaowen, deputy director of the office, said.

The number of overseas returned Chinese surpassed 10,000 in June this year, Yin said. Some of them have set up companies in the city with start-up funds from the government.

"To encourage these people, the government raised the start-up fund for a single project from 150,000 yuan ($20,000) to 300,000 yuan early this year," Yin said.

According to official figures, the city has attracted more than 150,000 overseas technicians and executives in the past 20 years. In the past two years alone, 72,000 have settled in the city.

Mayor Xu Zongheng said the government would soon launch a series of campaigns to make the city a most attractive destination for foreign professionals.