Q: What are some of the key human capital challenges facing organizations in China today?

Guo Xin: The major challenge facing HR in China is that, despite the troubled economy and the resulting need for companies to cut expenses – including employee benefits and salary increases – there is still a significant shortage of talent. There is going to be another round in the fight for talent, but unlike during the good times – when we saw rampant title and compensation inflation – this will be a new game with new rules.

Moreover, the economic picture won’t provide the relief in this fight that might be expected because of the economic stimulus plan that the central and local governments in China have put together. It is expected that when the stimulus kicks in, the economy is likely to be humming again.

Many organizations in China also struggle to answer the “build vs. buy” question – especially at the leadership level. Most companies continue to battle for a limited amount of resources in the labor market, often to lose against those with deeper financial pockets or be forced to pay too much. Building a leadership pipeline can take years of careful cultivation and a significant investment of time and money. Our experience suggests that many companies haven’t found the right balance between buying and building leaders yet.

Q: Are the human capital challenges different for companies that are based in China compared to companies that are expanding into China and establishing operations there for the first time?

GX: For multinationals expanding into China, the challenge is to find the talent with the language skills and experience needed. In a recent Attraction and Retention survey conducted by Mercer, 72 percent of the respondents indicated that the biggest challenge in recruiting staff was a lack of qualified candidates in the Chinese market. Every year, there are about 5 million college graduates in China, but many of them are not able to converse in English and their experience level is low, so they are not employable talent. The few who graduate from the top schools with a good English education are very quickly absorbed. Then, a year or two after they get into the workplace, they become much more marketable and begin job-hopping, causing title and salary inflation.

Frank Lin: Among local companies in China, you can specify between state-owned enterprises (SOEs) and fast-growing private Chinese companies. For these two groups of companies, the challenges vary according to the business context and sometimes even by geography. For instance, I think the impact of the current economic downturn will be greatest on the fast-growing private Chinese companies. These companies, which typically operate in low-margin businesses, are particularly hard hit by the eroding export market, increasing production costs, Chinese currency appreciation, inflation and tightened credit. They are particularly sensitive to cost increases, and their challenge is how to effectively manage their labor cost. Meanwhile, they still need to get ready for rapid growth in coming years, because we do see that the domestic need within China will still stimulate the domestic market, which should lead to recovery of the economy in the second or third quarter this year. Thus, they still need to take action to attract and retain a talented workforce.

In terms of SOEs, I think that over the next year, they will undergo tremendous consolidation. SOEs have been famous in the past for having a huge workforce – including a big redundant workforce. With consolidation, the challenge they face is how to deal with their excess labor force, so that they keep the talent they want but get rid of their redundant workforce.

Q: How aggressively are major Chinese companies expanding outside of China? How does this affect their human capital challenges?

GX: When Chinese companies are going global, this intensifies the competition for the type of talent that I just spoke about. Many Chinese companies are recruiting experienced talent from multinational companies as a shortcut in helping them to realize their global ambitions. Meanwhile, headhunters are hunting for people for SOEs and from large local companies with global plans. Thus, multinationals are fighting with local companies fiercely for leadership and key talent.

FL: Because many SOEs have global expansion strategies, they also are facing the challenge of having to attract international talent and manage their businesses in a totally different global context. This is not what SOEs have been good at in the past, and it will be a big challenge for them. The CEO of one of China’s largest SOEs told me that his biggest challenge in the next three years will be to recruit and develop 5,000 employees who can really work in the international market – not only because they speak the language, but also because they understand the culture, business environment, legal environment, industry and management of financial capital.

Q: How are companies addressing these human capital challenges? What actions are they taking?

GX: In the past, multinationals competed by paying well above the local pay scale, especially for leadership and key talent. But things have changed. Local companies – even SOEs – have begun to offer international-scale compensation packages for key talent. The fight for leadership and key talent has become much more intense. Some local companies, particularly large private companies, are competing by aligning people’s personal career ambitions to the needs of the business. They offer certain equity positions and certain titles or jobs that make key talent feel that they’ve achieved a breakthrough in their careers. That’s very much the answer for multinational companies when facing that key talent fight. But they should not focus solely on compensation and benefits, because at some point it is not sustainable. Instead, companies need to ensure that a number of other things are clearly planned and communicated to their key talent, such as a career plan and a development plan that indicate there is a broad future for employees at the firm.

In a recent Mercer study (Staying ahead of the curve: Leadership practices in China), leading organizations reported that a lack of internal skills and knowledge about how and where to start was the single biggest barrier holding them back from achieving their leadership development goals. While many multinationals report that they get significant value and peace of mind from having expatriate talent in China, a more cost effective and sustainable strategy over the long term will be to focus on systematically and locally grooming tomorrow’s leaders.

Q: How are employees reacting to these changing employment conditions?

GX: This is the first time in 30 years that China has experienced this type of economic crisis. For almost everyone in the workforce, particularly in the multinational context, it’s been nothing but prosperity, good jobs, easy promotions and easy salary increases. With this crisis, however, even though we’ve taken less of a hit relative to the rest of the world, the psychological impact on employees has been big. They are starting to think about their previous ambitions and whether they are realistic in this kind of economic downtown. As a result, the attraction and retention pressures on most companies in China will become less intense and poaching activity will become less rampant. The workforce will become more rationalized.

FL: This is an unprecedented time. People of our generation haven’t experienced this before, and it is having a major impact on employees. They hear that many companies outside of China already are downsizing, and they perceive that sooner or later this will happen in China. Employees are preparing themselves psychologically for a unique year without salary increases or promotions. But still, China is unique. With a market economy that has a history of less than 30 years, the country’s well-trained, well educated workforce has only taken shape in the past two decades. In terms of the talent that most of the companies are fighting for in the China market – such as middle managers or even first-line managers with solid professional or technical expertise – it is still in short supply. In addition, China remains the hope for many global companies. Therefore, while employees are psychologically readying themselves for this unprecedented crisis, they also understand that within the China market, the hope is still much greater than it is in the rest of the world.

Q: Have HR departments been able to deal with these challenges effectively? Why or why not?

GX: Given the uncertainties in the environment, you don’t see a lot of decisive action yet. Most people are in a wait-and-see mode. HR departments are making inquiries to find out what other companies are doing, but they are putting their planned actions on hold while they consider whether the economic crisis will require that they adjust their plans.

FL: The challenges to HR professionals in China are twofold. One is that many are still lacking the data tools and processes they need to be effective, but the bigger challenge relates to their skill sets, mindsets and capabilities. A lot of HR teams in the past were focused only on personnel management rather than on providing strategic value to the business in terms of leadership development, organizational development and enterprise transformation. Their bosses – the business leaders – have been saying that HR does not understand business, has no business acumen or financial knowledge, is not up to speed with information technology, and is not ready to provide coaching to their business leaders in terms of how to manage people effectively. These are the skill sets that are in short supply in a lot of HR professionals, because they have been spending most of their time in the past focused on providing data.

Q: What do organizations in China need to do differently if they want to be successful in managing human capital?

GX: The current economic crisis is giving companies in China an unprecedented opportunity to slow down a little bit after their breakneck pace of growth. It is giving them time to assess their organizations, think through their workforce strategies and structures, and make strategic adjustments while the environment is changed. We are advising companies that this is the time to optimize their workforce structures, so that they can support companies’ sustainable growth. This is also a good time for companies to bring in some key talent that was not accessible in the past. To do this, companies need to ensure that they can articulate a career path and opportunities for their employees, so that they are not hopping to the next job if they don’t receive quick promotions and salary increases.

FL: So far, most of the foreign companies entering China have been focused on the first-tier cities in the region. But under the current economic conditions and also given the cost of the labor force in those cities, more companies are thinking about moving their costly operations to second-tier cities. China’s economic development already has affected those inland provinces, and now they are equipped with good infrastructure and a solid number of well-trained, well-educated workers. Now, companies entering China can start to think about emerging second-tier cities as places where they can still find some good people at a fairly low cost.