In order to meet the objectives of its various stakeholders–stockholders, employees, creditors, suppliers and anyone else with an interest in the company’s success–a company must run its business and perform according to a variety of metrics. Sometimes, however, circumstances become so critical that it must adopt an overriding, singular focus for the good of all. In the 1980s, at a time when the quality of its products was being called into question and foreign car sales were surging in the United States, the Ford Motor Company coined the slogan, “Quality is Job One” to emphasize Ford’s commitment to regaining its quality image.

In 2008, China’s government had to shift its economic focus based on changing circumstances. Last year at this time, it was cooling a red hot economy. In February it was controlling the worst inflation China had seen in ten years. In May, it was dealing with the aftermath of the devastating earthquake in Sichuan. And in August, it was all about ensuring a smooth Olympics. With the current global economic crisis having such a severe impact on China’s economy, make no mistake about it, jobs–both creating them and keeping them–is now “Job One” in China.

China’s government has said that its economy will grow by eight percent next year. This is the growth rate China’s leaders believe is necessary for the economy to absorb the millions of new entrants that come into its workforce every year and to maintain a stable level of employment. As we have heard from Prof. Yijiang Wang, professor of economics and human resource management at CKGSB, this is his principal worry for 2009.

Countries the world over are putting in place various types of stimulus packages to create new jobs. When he takes office, Presdent-elect Obama is expected to announce a package of infrastructure projects and stimulus programs that could exceed $1 trillion. An equal amount of attention, however, is also being paid to preserving the jobs that already exist in the economy, no matter the price. President Bush has agreed to a $17.4 billion bridge loan to tide General Motors and Chrysler over until the end of March. The reason: no one can even contemplate the consequences of putting at risk the 3 million jobs that the heads of the Big Three automakers say would be lost if they are forced into bankruptcy.

Even Canada is getting into the act, pledging to provide loans totaling 20 percent of whatever the United States commits. “We cannot afford, in the United States or Canada, the catastrophic short-term collapse of the Big Three automakers. The U.S. has signaled that they are not going to allow these companies to fail, and we will do our share of the North American package to see that this doesn’t happen either,” Canadian Prime Minister Stephen Harper said at a news conference on Saturday.

In 2009, expect the same in China. Every other issue in the country will be subordinated to the closely-related issues of creating and keeping jobs and maintaining stability. China has announced a 4 trillion yuan (US$586 million) stimulus package, but that is only the beginning. We are now seeing signs that China will back off on strict enforcement of key initiatives such as environmental regulations if they threaten job loss. In the interest of maintaining stability, government leaders will be very sympathetic to workers’ concerns. Faced with a series of strikes across the country, government authorities have been allowing worker protests and have been having high-profile meetings with strike leaders to talk over concessions.

A strike by nearly 8,000 taxi drivers in the southwestern city of Chongqing in early November helped spark the recent wave. After three days, the city’s top Communist Party official, Bo Xilai, held a three-hour meeting with cabbies’ representatives, televised live. Mr. Bo, who is also a member of the Communist Party’s powerful central committee, urged drivers to set up an organization to mediate between their employers and the government.

Under the current circumstances, I have several suggestions for foreign investors in China.

• If you are in a joint venture, now is not the time to be pressing for those labor-saving measures to increase its efficiency. In the best of times, Chinese partners and the local governments they answer to are sensitive to any job cuts that may threaten stability. In the current economic climate, expect the resistance to be even greater.
• If you have a wholly-owned company in China, be careful in how you implement any layoffs. In the face of uncertain economic prospects, Western companies will instinctively seek to adjust employment levels, which is understandable. Even though your operation in China may be wholly-owned, however, this will not stop laid-off workers from taking their complaints to the local government–and the government will be listening. Talk to your friends in the local government ahead of time so there are no surprises.
• Make the most of any expansion plans your business may have in China by publicly or privately announcing them. China has a long memory and remembers companies and individuals who come forth in difficult times.
• Watch China’s power consumption numbers. In the aftermath of the Asian Crisis, published figures for China’s economy were not always reliable. Astute analysts began to track growth in power consumption as a more reliable indicator of the economy’s performance. The same will likely be true in 2009.

Before leaving China for the holidays, I had an opportunity to attend a discussion of China’s economy in 2009, sponsored by the Cheung Kong Graduate School of Business (CKGSB) in Beijing, featuring Jing Ulrich, managing director and chairman of China equities for J.P. Morgan, and Yijiang Wang, professor of economics and human resource management at CKGSB. In providing their views on China’s economic prospects in 2009, both panelists outlined the risks they believe lie ahead.

The biggest risk in 2009 by far, according to Prof. Wang, is rising unemployment and the social instability it may cause in China. Outbreaks of striking workers have already been in the news this year, and he is concerned there is more to come. In Unemployment and SMEs: Two Worries For 2009 (CKGSB Part III) MTD discussed Prof. Wang’s analysis of China’s labor situation and his concerns about rising unemployment in the country, so we won’t repeat them here.

However, Prof. Wang is not alone in worrying about this issue. The risk of social instability is also paramount in the minds of party and government officials. That is why China acted so quickly in announcing a massive stimulus package. The government wanted to reverse deteriorating psychology in the country–and to do it quickly–so that private consumption, along with increased government spending, has a chance to offset what the government expects the economy will lose in exports. In addition to the size of the stimulus package, officials in China received clear instructions to implement spending measures quickly. The head of a large state-owned company told me his company had received funding for several projects, but was told that spending had to begin within two weeks, or the funding would be withdrawn.

Apart from the risk of social instability, Jing identified four major risks going forward:

• Earnings Weakness: Earnings will be weak through the first half of 2009. The combined impact of the economic slowdown and high operating leverage in key industries has increased the number of loss-making companies in China. Moreover, 22 percent of all profits of A share companies last year were due to gains from stock and property investments. Investment losses are obviously now more prevalent. Therefore, the stock market will have to look past earnings weakness to any underlying signs of a recovering economy in order to regain ground.
• Accounts Receivable and Default Risk: Falling profits and cash flows, as well as collateralized loans being called in by nervous lenders due to shrinking asset prices are hurting companies balance sheets, and so called “triangular debt” is re-emerging as an issue. Companies facing liquidity issues are, in turn, trying to shift their burden to trading partners. Jing reported that Beijing Capital International Airport, for example, was owed more than 800 million yuan by China’s struggling airlines at the end of October. Telecommunications companies are reportedly delaying payments to their suppliers. If this practice becomes more widespread, the solvency of companies impacted by the credit crunch could be threatened.
• Competition for Bank Loans: Although China has lowered interest rates and increased available credit, new bank loans are likely to favor large state-owned companies and infrastructure projects. Small and medium sized enterprises (SMEs) in China have historically had trouble obtaining bank financing, and this situation is likely to continue into 2009. This strikes right at the heart of Prof Wang’s concerns about China’s lack of support for the country’s SMEs. As in many countries, SMEs account for the bulk of employment in China.
• Implementation Risk: Implementing such large infrastructure projects and spending initiatives carries risks of its own. Considerable financing issues are raised, as well as the practical issues of finding enough skilled workers, project managers and building materials. The construction of modern, high speed railways, for example, which represent a high percentage of the planned spending, requires highly skilled workers and managers. The hasty implementation of a large number of projects across the country also raises the risks that imprudent and duplicative investments will be made.

Central banks the world over have reacted to the global financial crisis with heavy doses of monetary stimulus, while China has led the way with fiscal stimulus. As the new U.S. president prepares to take office, it appears that the Obama administration will follow suit with a large fiscal stimulus package of its own. Whether these measures will have the desired results, China and the world will just have to wait and see. 2009 promises to be a very pivotal year for the global economy.

The most frequently asked questions I get about doing business in China relate to the human resource issue of how to attract, develop and retain good local managers. A recent article in the August 16th issue of the Economist, Capturing Talent, does an excellent job of showing why this is such a problem today in Asia generally and China specifically. It summarizes the situation as it exists, and describes how companies are dealing with shortages of managers, doctors, lawyers, accountants, pilots and just about every type of skilled professional imaginable. Some companies will manage to deal with these shortages more successfully than others. Those that aren’t able to deal with them effectively will need to scale back their aggressive growth plans in Asia, the article concludes.

The article was written by Graeme Maxton, a consultant based in Hong Kong with long experience in Asia. Formerly a Director of the Economist Intelligence Unit, Graeme is a frequent contributor to the Economist.

Another interesting article on the subject is one written by Shaun Rein in the May 27th edition of Forbes, How Multinationals Err In China. As the title suggests, Mr. Rein recounts some of the mistakes companies have made in dealing with this problem. Mr. Rein is the founder of a market research firm headquartered in Shanghai.

Taken together, the two articles provide a fairly complete picture of the unique human resource issues confronting companies of all sizes as they seek to grow their businesses in Asia and China.

Mr. Rein’s article is one of the best I’ve seen on the subject of human resource practices in China. The research summarized in the article (if I may use my own words) shows that educated Chinese managers understand that there are substantial opportunities in China today, and are extremely sensitive to whether the company they work for is helping them to take advantage of these opportunities. When they see a classmate who has set up his or her own company and is doing well financially or another who is working for a multinational or local company and receiving opportunities for advancement, the natural questions they ask are: “How am I doing? Am I getting career growth opportunities? Am I getting the training needed for me to develop professionally?” In this context, simply paying a higher salary will not keep Chinese managers. If there is a glass ceiling and a limit to advancement, or if the employer is not investing in training its managers and employees, they will leave. Based on my own experience in China, Mr. Rein’s research is right on.

Combining good local managers, who know China intimately, with higher paid expatriate managers who can bring the global perspective to a company’s China operations presents a particularly thorny problem. While it is necessary to have both types of managers for a company to be successful in China, balance is important. Having too large a number of managers with vastly different compensation schemes can be demotivating to local managers.

As with most issues in China, there are no right answers, and if there were, they may not be the right ones tomorrow. Nonetheless, the two articles do a good job of framing the issues and starting the discussion.

Not a month goes by where the email doesn’t come at least once – sometimes from a friend of a friend, sometimes from a friend’s friend’s friend, sometimes from students currently at my alma mater or language program. Regardless, the questions are always the same: What are the internship possibilities in China? How can I find a job in China? Can you help me find a job in China?

Everyone wants a piece of the dragon.

And according to the 2006 study by HR consultancy Hewitt, they’re getting it. Last year, 47% of expatriates in China fell in the “China Hire” category and, a Hewitt consultant maintained, “it is this category of expatriates that typically fills more junior positions.” (Note: locally hired expatriate packages vary and these hires often referred to half- or quarter-pats).

As for the interns, they seem to be getting it too – with a little more help, structure, and sometimes a fee. Several agencies/organizations have created a business out of finding students internship opportunities in China (just google internship and China for a market overview). In addition, universities such as University of North Carolina, Cornell, and Yale have established internship and externship programs where students can apply to internships obtained by program coordinators who are mostly on the ground in Beijing or Shanghai. Read more »

A recent article in The Guardian highlights the growing concern in China over the increasing numbers of Chinese students who are not only going abroad to study, but more significantly, staying overseas after graduation. Living and working in China, one becomes very familiar with the discrepancies in quality between a Chinese education and a Western education as well as the almost superstar status that many young Chinese feel they deserve after having returned from studies overseas. As such, it is not surprising that with the rapidly increasing number of students who are financially capable of going abroad, more and more are choosing to do so.

It is not this movement to study abroad that is concerning the government though, but rather the fact 7 out of 10 students are never coming back to China with their enhanced abilities to contribute to the country’s growth. Many of the students polled for this article stated that they would likely spend several years overseas because of the competitive job market in China in addition to the fact that overseas work experience opens up many more opportunities. Some said that they plan to come back eventually, others weren’t so sure – it depends on where the opportunities are.

It is not surprising that many Chinese students who left in the 80s and 90s did not return – the differences with regards to both opportunity and quality of life back then were so much more salient. Today though, the opportunities that a Western educated Chinese with several years of Western work experience has are immense. Not only do they have the Western ability to think creatively and to differentiate their work from peers and competitors (even when it does require taking risks) but they also have language skills and an inherent understanding of China that few expats can claim. If one looks at the senior management of many of the top MNCs in China, especially in technology and telecommunications, one finds a heavy emphasis on returning overseas Chinese.

This level of opportunity, in itself, should serve to dramatically increase the number of overseas Chinese who decide to return home. Perhaps part of this crisis over the “brain drain” is that many of these returnees are coming back with MNCs as opposed to developing their careers in domestic companies.

Sources:
http://www.guardian.co.uk/china/story/0,,2093739,00.html