Chapter 5

Human Resource Challenges

“As a small company, you are really at a disadvantage because many capable young Chinese want to go to a brand-name company that gives them face with family, friends, and professors.”

Jeffrey Bernstein (USA), Founder and Managing Director, Emerge Logistics Shanghai

“If you can manage human resources in China, you can manage China. I think it’s the key factor.”

Prakash Menon (India), President, NIIT (China)

Introduction

After they had got their China-based enterprise up and running—having found the startup funding, secured government approvals, and identified the right market for their product or service—our China-based international entrepreneurs found their single-most difficult challenge was finding, training, and keeping qualified and capable employees. While this goal is likely a top-priority one for entrepreneurs operating worldwide, in China, it can be a truly make-or-break factor as the market presents several unique challenges.

The first of these challenges, according to our China entrepreneurs, is the cultural gap between a non-Chinese business owner and his or her Chinese employees. This gap affected nearly all our interviewees, who hailed from 25 different nations; however, those from the West, East Asia, and India identified different gaps. (See the boxes on comparative management skills, later in this chapter.) The bottom line: China’s business and social norms differ from those of most other major trading nations significantly enough that culture clashes persist. The first task for a non-Chinese business owner, then, is to discover where the gaps exist. They must then learn to fill them effectively, in order to form and grow a successful team.

Strengths and Weaknesses of Chinese Employees

Typical Strengths

Our 40 international business owners acknowledged several key areas in which Chinese employees excel, when compared with their counterparts elsewhere.

First and foremost among the special skills of Chinese employees is, of course, their insider’s knowledge of China. All our interviewees stressed that a strong team of domestic Chinese staff is crucial for the success of their China-based enterprise, in all aspects of the business. Israeli business development/investment entrepreneur Aviel Zilber says that one of the secrets of his and his brother Jordan’s success in launching Sheng Enterprises in 2003 was encouraging their Chinese staff to take the lead in explaining the Chinese way of operating before deciding on the method Sheng would adopt. Zilber explains: “I tend to give [my Chinese staff] credit that their way of thinking is probably the right one. We are in China. They are Chinese, and they know the business culture here and how to do things in China. If we have a discussion and they think we should do something in a certain Chinese way, at the beginning, I always consider their way first.” In other words, Zilber tends first to ask his staff for their recommendations on how to handle a certain issue; he then weighs the benefits of using the “Chinese way” before deciding whether to adapt it or modify it to a more Western method.

Another commonly mentioned strength of Chinese personnel is their sheer diligence and ambition. Co-founder of Sheng Enterprises, Jordan Zilber explains: “China is an amazing place, for several reasons. One is the discipline of the Chinese students. At the end of a class, if a university professor says, ‘I haven’t completed this lesson yet—do you want me to complete it today or tomorrow?’ The Chinese students will all reply: ‘Today.’ In Israel, the students would be gone before you could even finish that sentence.” He says that Chinese people’s hardworking, better-now-than-later attitude is shown at work as well. “People here are very motivated to do business,” he says. Thus, working overtime, studying on the side to advance one’s career, and constantly seeking career advancement are all common among the Chinese workforce, especially white-collar workers.

“I tend to give [my Chinese staff] credit that their way of thinking is probably the right one. We are in China. They are Chinese, and they know the business culture here and how to do things in China. If we have a discussion and they think we should do something in a certain Chinese way, at the beginning, I always consider their way first.”

Aviel Zilber (Israel), Chairman, Sheng Enterprises

Taiwanese manufacturing business owner Wendy Tai also finds positive attributes in mainland China employees. She compares her staff in China with those in her native Taiwan: “Employees from mainland China are much better than those from Taiwan; they’re more diligent. More importantly, people from the mainland have broader horizons, because they live in a big country; while Taiwanese live on a small island.”

Spanish consultant Josep Giro advises his China-based Western clients that the work ethic commonly found among successful Chinese students carries into the workplace. “Chinese students study for long hours every day,” he says. “For European students, if there is a party, they will join the party. For Chinese people, there are no parties—they study 24 hours every day.” This all-work-no-play ethic often continues when today’s graduates begin working, Giro adds, especially if the new employee believes that hard work will lead to career advancement.

Other interviewees also stressed that Chinese employees tend to face tremendous pressure from their families to succeed professionally. Unlike in other cultures, many professionals in China are expected and encouraged by their families to work long hours and to sacrifice social and family life. In other words, rather than viewing work–life imbalance as damaging to family, in China, it is often considered as a noble sacrifice that executives make in order to support their family. Especially in the case of parents of young children, it is widely accepted in China that both fathers and mothers will focus on their careers, leaving the primary childcare duties to nannies or grandparents.

Typical Weaknesses

While China’s rigorous and often brutally competitive education system tends to produce professionals with a hard-driving work ethic, the system also leaves gaps in the job skills needed by international employers in terms of leadership, independent thinking, creativity and initiative, and accountability—all skills that are necessary in an international business environment.

One weakness of Chinese employees in general is pointed out by Chee-Chin Wu, a Canadian business owner who has operated a luxury floor tiles business in China since 2003. “In China, there is an old saying that ‘Everyone sweeps his own snow in front of the door.’ That is to say, they don’t care much about others. Chinese people are hard working, but most of them don’t have any idea of how to help others to work together.” Such a mindset makes the concept of working in teams particularly difficult for Chinese employees to grasp.

Another weakness, Wu adds, concerns the Chinese concept of “face.” Wu expresses the frustration typically experienced by Western employers in China: “Chinese people are reluctant to ask questions while they’re attending meetings. They won’t tell you that they are unable to do things beforehand.” In North America, the situation is the opposite. Chinese people have to learn how to express themselves and how to communicate with others. I tell my employees, ‘If you can’t handle the work, please ask for help in advance.’ Chinese people have to take more initiative. When they encounter a problem, they need to think of how to solve the problem, instead of just complaining.” Wu comments that the tendency for Chinese employees to want to avoid appearing incapable before their colleagues or peers, and to generally lack initiative in solving problems, is “the consequence of the educational system in China,” which emphasizes passive listening and discourages challenges to authority. One oft-used contrast is that Westerners follow the adage “the squeaky wheel gets the oil,” while a popular Asian (Japanese-origin) saying is: “The nail that sticks up gets pounded down.”

Irish entrepreneur Ken Carroll, founder of the Praxis internet-based language learning systems, agrees with those observations. He identifies the key gaps he has seen among Chinese employees as: reluctance to voice an opinion, to take business risks, and to be accountable. “The education system in China makes [students] great learners, but what they don’t learn is to put their hands up and say: ‘I’m going to risk it. I’m going to do it.’ ”

“Chinese people are reluctant to ask questions while they’re attending meetings. They won’t tell you that they are unable to do things beforehand.”

Chee-Chin Wu (Taiwan), Founder, Novalis Intl.

Carroll also says that this aversion to risk-taking is a learned response to the Chinese education system. He points out that his daughter, who is attending a Chinese-language primary school, is learning in the traditional Chinese way. “There is a lot of chanting at her school. All the kids are just repeating after the teacher.” Speaking up as an individual is rare. Says Carroll: “I can see that the discipline [of Chinese schools] is good, but I really doubt whether this strict approach is the way to go into the future.”

“It’s not difficult to find intelligent people [in China]— there are plenty of very intelligent people. But it is difficult to find people who are able and willing to take on the challenge, to be accountable, and willing to make decisions and really manage.”

Olaf Litjens (Netherlands), Founder and CEO, Unisono Fieldmarketing (Shanghai)

Carroll adds that the Chinese government is under pressure to modernize the education system, and says he expects reforms over the next decade to promote more independent thinking and speaking out. “The schools and universities are not encouraging creativity. The thinking is: ‘If I pass my exams and I study really hard, I will be fine.’ In the world of entrepreneurship, passing exams has nothing to do with it,” he says. “But, in 10 years, Chinese employees will be more creative. I think the thinking will change, because they are bright and very ambitious.”

Others among our interviewees were less optimistic in terms of the time frame needed to overcome the weaknesses created by China’s current education system. Prakash Menon, president of NIIT (China), explained: “Another weakness [among Chinese employees] is the ability to provide solutions for new problems. This is related to the education system. Forming a human mind takes less than one year, but conditioning a mind takes a lot more time—a generation. That’s the educational problem that China faces.”

In the meantime, until the education system is reformed, international SME owners face a situation in which their Chinese employees, even highly skilled professionals, tend to lack ability in key management skills. This lack is created in the traditional education system and reinforced in traditional Chinese companies, which operate based on a highly hierarchical structure. Most are managed in a strictly top-down style, where younger, less experienced employees are rarely encouraged to voice opinions or given complex responsibilities. As veteran China fieldmarketing entrepreneur Olaf Litjens explains: “It’s not difficult to find intelligent people [in China]—there are plenty of very intelligent people. But it is difficult to find people who are able and willing to take on the challenge, to be accountable, and willing to make decisions and really manage.” Scottish publishing entrepreneur Jonathan Di Rollo agrees: “Domestic Chinese professionals do have weaknesses. They don’t see the big picture; don’t understand how to manage foreign nationals in terms of personal relationships—soft skills.”

Lack of Management Skills

China’s acute shortage of qualified management-level employees can also be attributed to historical and associated economic causes. In China, those aged over 45, whose education was interrupted by the Cultural Revolution, began their working careers under the state-run economic system. Thus, employees of this generation tend to lack management skills. “I see a lot of difference between the 40+ generation and the 40– generation. The difference is huge—as if they were from different countries,” says Prakash Menon. “It is a lot more difficult to work with the older generation. Young people in their thirties are a lot more international.”

“I see a lot of difference between the 40+ generation and the 40- generation. The difference is huge—as if they were from different countries.”

Prakash Menon (India), President, NIIT (China)

As a result of these factors, “young and inexperienced” is a common descriptor for the workforce available to many international employers in China. One case in point is the IT sector, explains software outsourcing company founder Eric Rongley. Looking at the computer engineering sector in particular, he stresses that China’s universities are swelling in student numbers, producing a flood of inexperienced graduates. “In 2002, China produced around 40,000 computer science graduates per year. By 2005, that number had grown to more than 200,000—a 500% increase in just a few years. Only China can do that,” he says. But these fresh graduates aren’t meeting the demand for experienced middle managers, Rongley says. “The problem is that there is a flood of people who have only a few years’ experience. People who are today’s middle managers are part of the 40,000 people who graduated in 2002.”

Consultant Ruggero Jenna says the problem is one that extends across industries and around the country, affecting nearly all foreign-invested companies. “Good people, especially at the senior level, are very difficult to find in China,” he says. “It’s very easy to recruit junior people—junior employees are cheap in China. But at the manager, senior manager, or partner’s level, they are very difficult to find and are very expensive. Their salary level is even above that of managers in Europe, because there are very few available.” The upshot: lack of qualified personnel has become a serious inhibitor to growth among international companies in China in recent years.

“It’s very easy to recruit junior people… in China. But at the manager, senior manager, or partner’s level, they are very difficult to find and are very expensive.”

Ruggero Jenna (Italy), Managing Partner for Asia and Asia Pacific, Value Partners

Bridging the Skills Gap: Training, Training, Training

Given the lack of experienced managers, the availability of young and naive graduates, and the lack of focus within the Chinese education system on leadership skills and innovation, most of our interviewees described facing a similar challenge in managing their China-based startup: what to do with a team of young and ambitious, but inexperienced, employees?

Nearly all our entrepreneurs agreed that the solution lies in providing more thorough and frequent training to Chinese personnel than would be needed elsewhere. Because most startups cannot afford to pay for expensive training courses, many business founders end up developing—even implementing—staff training themselves.

Chinese employees generally don’t cope well with unclear tasks and are uncomfortable adapting to new circumstances. They typically expect step-by-step instructions.

In the next sections, we present the advice of our profiled entrepreneurs on strategies for training entry-level employees and mid-level to senior staff.

Training Strategies for Entry-level Employees

In preparing entry-level Chinese employees to work in his company, restaurateur Michael Yang says he must provide broader and deeper employee training than is necessary in Hong Kong or his native Taiwan. Today, his company employs 150 Chinese nationals, many of whom, according to Yang, have large gaps in their educational or work experience training. “Most Chinese citizens who work in restaurants don’t have a very good educational background. Some of them only get a couple of years of schooling; some don’t even know how to write.”

Because Chinese managers and skilled professionals tend to come from the younger generations, companies must invest more time in training.

Yang teaches his staff many of the basics missing from the Chinese education system. “I have to let them know the fundamentals of business—such as: if we don’t work hard, and if the company doesn’t make money, you won’t have a job. You have to teach them Western business thinking. That’s a very challenging job.” As a result, Yang spends more of his own time on staff training than would be required in Taiwan, where employees tend to be more exposed to international business standards. “I spend a lot of time talking to the employees. Even with small things, I have to teach them several times,” he says.

Macedonian entrepreneur Oto Petroski had a similar experience when operating his first China-based business, a European-style coffee bar in downtown Shanghai. He tells of starting with very basic service training for his wait staff because they were unfamiliar with international standards of service. In general, the concept of consistent standards and polite customer service is lacking throughout China. “You have to teach them to provide service to people; I was very tough when I ran the coffee bar,” Petroski says. He would draw detailed diagrams showing how to serve cappuccino—placing the cup on a saucer, with a chocolate, and served with a glass of water with lemon. He says training the staff in quality control and attention to detail was a challenge, given their total unfamiliarity with both European coffee culture and international service standards.

Taiwanese business founder Maggie Yu describes the challenges of training entry-level staff as follows: “Many companies face high staff turnover, especially of entry-level employees. The main reason, we have found, is difficulty for new hires in adapting to their new working environment or lack of understanding of their job responsibilities. For this reason, adopting effective training strategies is crucial.” Yu urges managers to create a “well organized orientation.” She adds, “Be sure that your managers spend enough time and energy on new staff members, especially in the first eight weeks, in order to orientate them.” Other China-based foreign managers stress that the first two months are critical for screening any employees who are not working out well and should not be hired once past the mandatory probationary period. After the probation period has passed, Chinese labor laws place relatively tough restrictions against firing employees, as compared internationlly.

Several of our interviewees stressed that, despite the low starting point for training entry-level Chinese staff, the potential for learning quickly is very high. Brazilian trading company founder Winston Ling gives an example: “I hired my sales manager as an intern and taught him like a son. Now, he is the manager and I’m still teaching him. I want him to grow. He has a lot of potential.” Susan Heffernan, of Soozar, shares a similar experience: “I consider my key staff as my babies. I have closely trained three of my key staff who have been with me since the beginning. The one I spent the most time with now laughs at the behavior of the newcomers. I think the older and more experienced staff can pass down my methods.”

Be ready to provide training in basic international business practices and standards to your Chinese personnel, unless they already have international experience.

Training Strategies for Mid-level Managers and Senior Staff

For white-collar professionals and middle managers, our international entrepreneurs stressed the need to provide training in basic international business practices and standards. Chinese university graduates, our interviewees said, tend to be far less business-savvy and less streetwise than their counterparts in other countries. The reason: most Chinese students finish their schooling without having acquired any work experience whatsoever. In China, it is relatively rare for students to work, even as part-time hires or interns during the summer holidays.

Thus, our interviewees explained, professional staff will need to be brought up-to-speed on basic business communication, quality control, and business etiquette. For many of our startup managers, providing this training means doing the educating themselves.

Another often-mentioned weakness of younger or more junior white-collar employees in China is a reluctance to speak out in front of colleagues, clients, or superiors. Web 2.0 entrepreneur Ken Carroll works directly with his engineering team to prepare them to negotiate with international business executives by first shaking off their fear of voicing an opinion or making a recommendation. “They are bright people, very smart, but they don’t want to stand out because it’s perceived as arrogant or rude. They prefer to keep in a background role.” That means, in negotiations or meetings with Western clients, Carroll must push his Chinese team members to speak out. “They know their stuff, but how do you get them to say it and share it? I tell them. ‘Americans like to “blah blah blah,” but you’re quiet. Americans will think either that you don’t know anything, or that you are unwilling to share what you know. They won’t think you are humble—a nice Chinese gentleman. So, speak up, guys!’ I tell them.” Carroll says he works to change this tendency with every new Chinese hire. “They have improved a bit, but it’s still hard.”

Another broad area in which entrepreneurs must work to train their white-collar personnel is in creativity, initiative, and innovation. Shah Firoozi, founder of The PAC Group, based in Shanghai, identifies “lack of innovation” as a key weakness he has observed in Chinese professionals. He uses the engineering sector as a case in point: “The quality of engineering education in China is very good from the academic point of view. Unfortunately, in the engineering consulting business, the academic part is only a small portion of what we need,” he says. “We also need to know how to understand clients’ needs and deliver results, how to lead project execution.” He adds that the key skill needed is “not about inventing things, but rather about executing strategies and achieving results.” Chinese graduates tend to struggle with the implementation of business plans, and with creative problem solving—due mainly to lack of real-world experience, Firoozi says. He adds that even Chinese professors admit that “Chinese universities still haven’t reached a basic level of creating innovations. That is a very important characteristic for people working in knowledge-based companies.”

“[My Chinese staff] like the fact that they are handling a lot of responsibilities. If they worked for a big company, they wouldn’t have this level of freedom and responsibility.… I involve them in a lot of decisions. They are doing different things all the time and don’t get bored.”

Susan Heffernan (Australia), Founder and Managing Director, Soozar

How do foreign entrepreneurs offer training to Chinese personnel? Most of our interviewees lacked the funds for expensive or extensive outside training programs, so they mostly focused first on offering training themselves, and then offering outside training to the most promising rising stars in the company. Trader Winston Ling says he personally spends far more time training his personnel in China than was necessary in his native Brazil, but that his efforts help to retain talented staff. “It is difficult to retain them, because they just want to have a higher salary,” he says. Thus, training in international practices and standards is one of the perks he can offer to keep talented staff longer. “I try to teach them all the time. I dedicate a lot of my time to building the team.”

Transform the small size of your company into an advantage by giving key personnel a faster career track than they would find in a big corporation.

At Soozar, Susan Heffernan provides promising personnel with fast-expanding responsibilities designed to ready them quickly for working with international clients. “They like the fact that they are handling a lot of responsibilities. If they worked for a big company, they wouldn’t have this level of freedom and responsibility.… I involve them in a lot of decisions. They are doing different things all the time and don’t get bored.” Heffernan also sends outstanding personnel overseas for on-the-job training—a very popular perk. “I make sure they go overseas. They would never have this opportunity so soon in other companies, especially when they are so young.” Lastly, she offers “project bonuses” to quickly reward work well done.

Avoid correcting your staff in front of others. Loss of face can be devastating for Chinese employees, even causing talented middle managers to quit.

Language Skills

One of the most common types of training provided to staff by our foreign entrepreneurs is language training—either in the mother tongue of the target market, or in English. Again, this type of training quickly expands the value of the employee at the company, leading to new responsibilities, and is a perk that competing companies cannot easily offer.

For example, when Mexican import/export entrepreneur Juan Martinez found that some employees were trying to learn Spanish on their own, he hired a teacher for them. “We cannot give [our employees] as good training as the big companies, but whatever we can do, we do.”

Software startup Eric Rongley explains why and how he offers English training to all of his staff: “Our customers are in the U.S. and U.K. and our competitors are in India—and their English skills are better than those of Chinese.” He says that some of his project work—mainly software development for Western clients—requires daily interaction with English-speaking customers. “At my company, junior personnel need to defend their design to the client company’s architect every day. Everybody needs to speak good English. That’s a challenge here in China.” Rongley adds that the problem will improve over time, because English is now taught to Chinese school children beginning in eighth grade. “So, if you hire the best students from the best schools, they have the reading and writing skills,” says Rongley. However, even book-smart English majors tend to lack confidence in actual speaking, he says. “We mitigate this challenge by creating an English-only work environment. The employees have to speak English all the time.” Rongley says he facilitates interest in practicing English by this insistence on using only English during working hours, as well as by offering classes, lunchtime English-language movies, and regular English-language leisure games, such as the company’s regular Scrabble tournament.

“I talk to employees [in China] differently than I do in Israel. I do it much more delicately and in a much more positive way.”

Aviel Zilber (Israel), Chairman, Sheng Enterprises

Warning: Be Aware of “Face” Issues

Several of our foreign business owners mentioned that when Chinese employees needed training, or simply needed to change a particular behavior or mindset, employers must discuss the issue with the individual (or individuals) in private. Loss of face can be devastating for Chinese employees, even causing talented middle managers to quit.

Israeli entrepreneur Aviel Zilber explains how he has changed his management style in terms of how he tells his Chinese employees when they need to change certain behaviors. “I talk to employees [in China] differently than I do in Israel. I do it much more delicately and in a much more positive way,” he says. “It also depends on what stage of the relationship I have with the other person. If I have worked with him for a few years, and if we have built trust, then I can come to him and tell him that he made a mistake, but add that I know it happened because he was under pressure, or something. I try to do it in a more gentle way.”

“If you want to correct someone [in China], you always do it one-to-one,” says Prakash Menon. When determining career development and training for his personnel, Menon says he conducts all discussions in private, in order to save face. The performance management process used at NIIT (China) involves reviewing past performance, asking where the person would like to be in two or three years, then advising them to ensure better performance in the next year. “We want to know what they expect from the organization and how we can provide them with training and development opportunities,” says Menon. “We believe that if the person grows, the organization also grows. So, we need to look at their performance of previous years—their attitude, capabilities, ability to work with other people, and so on—and sometimes we need to give some negative strokes. It’s very well accepted. Actually, there isn’t a problem, provided the person sees [the feedback] as sincere. If the trust is built, they won’t feel it’s negative.”

“Keep it private” is also the management motto of Danish furniture supplier Simon Lichtenberg. However, he adds that if a Chinese employee has worked for a Western company for some time, he or she will tend to be “thicker skinned” and more familiar with direct, European-style communication. “I am trying to promote as open and direct a culture as I can in my company. It’s never going to be like in Denmark, but we have still started a lot of good practices.”

“The key to building any business is to find the core people who will stay with you and grow with the company. The real challenge for small companies is to provide business experience [that is appealing for employees]; what you can offer as an SME won’t be interesting to everybody.”

Jeffrey Bernstein (USA), Founder and Managing Director, Emerge Logistics Shanghai

Recruitment and Retention Challenges

One of the most frustrating aspects of operating an SME in China is that, once you have found, hired, and trained the right professionals, they quite often quit or jump ship. Eight years after founding his logistics company based on the outskirts of Shanghai, veteran China entrepreneur Jeffrey Bernstein names human resources as his main challenge. “In order to scale-up, you need very systematic procedures and the people who can design processes. But the workforce [in China] isn’t very stable now; they are very edgy to find the next opportunity.” Bernstein sums up the challenge facing his and other SMEs in China: “The key to building any business is to find the core people who will stay with you and grow with the company. The real challenge for small companies is to provide business experience [that is appealing for employees]; but what you can offer as an SME won’t be interesting to everybody.” A perk that many Chinese employees seek, he adds, is the chance to be sent overseas for training or a working stint. “This also can be very difficult for an SME to provide.”

Serviced office supplier Maggie Yu describes the challenges of staff recruitment and retention. “The booming Chinese economy means there are abundant job opportunities. In fact, many companies that are expanding are recruiting more staff than they really need. This puts a lot of pressure on their human resources management. The revised labor codes add to the difficulty by shortening the required probation period. My advice is to approach recruitment in a more cost-effective way by building a lean organization and maximizing the productivity of each employee.”

Shanghai-based businessman Aviel Zilber, who manages 20 employees at Sheng Enterprises, says: “It’s difficult to find the right people, and difficult to retain them. HR is almost the most challenging thing for us. The economy is booming and opportunities are always behind the door. It’s not easy to find good people, and not easy to make them stay.”

China’s talent shortage is worsening as foreign direct investment floods into the country and as domestic firms expand, leading to even tougher competition for qualified talent. Turning to the software industry as an example, U.S. entrepreneur Eric Rongley says he was able to attract a team of “superstars” when he first began hiring software engineers and other IT specialists in 2001, mainly because, at the time, his company was one of the few U.S. employers in China for specialists in the software field. “We were able to cherry pick the talent pool. We hired superbright people,” he recalls. Today, however, the software industry has matured and his current company must work harder to find and keep top talent.

Below, our interviewees describe some specific challenges in terms of finding and keeping qualified personnel in China.

“It’s difficult to find the right people, and difficult to retain them. HR is almost the most challenging thing for us. The economy is booming and opportunities are always behind the door. It’s not easy to find good people, and not easy to make them stay.”

Aviel Zilber (Israel), Chairman, Sheng Enterprises

HR Challenge #1: Size Matters

Dutch fieldmarketing entrepreneur Olaf Litjens explains the challenges he faces, as an SME employer, in this way: “When hiring people, the problem is that face is important for Chinese people. They like to say they work for a big company, and smaller companies don’t have that. Really talented people have a tendency to go to work for the big companies.”

One entrepreneur comments that the bias toward large, established firms is worse in southern China, especially in Shanghai and Guangzhou, where status and a large salary tend to be valued very highly.

Construction industry entrepreneur Phillip Branham also has met with a cool reception from potential hires. He says that many in the Chinese management talent pool are “reserved at the beginning, even skeptical” about working for a young startup. Some interviewees were openly negative about working for a still-young company, he says. “Some people came from very large foreign companies, and asked, ‘Why would I move to a small company? I work for a big company now.’”Several applicants, when they realized that B & L Group had only a handful of employees at the time, were “very arrogant.” Branham’s advice: look elsewhere. “The people who were arrogant weren’t ones I would want to hire anyway.”

“It’s hard to ensure loyalty from the staff. Sometimes an employee can copy everything leave the company and start his own business.”

Nic Pannekeet (Netherlands), Founder, CHC Business Development

HR Challenge #2: Lack of Loyalty

Business development consultant and entrepreneur Nic Pannekeet faces two problems that can trigger talented Chinese employees to leave. First, many follow their ambitions to work or study abroad. “The Chinese staff like to study a lot. They come to the company, work for one or two years, and then go abroad, which is quite annoying.” Second, the most talented and ambitious employees may learn the business, then leave to start their own similar enterprise. (In fact, this problem was so prevalent among our China-based entrepreneurs that it is covered extensively in Chapter 6 on ethics.) Says Pannekeet: “It’s hard to ensure loyalty from the staff. Sometimes, an employee can copy everything, leave the company, and start his own business. They learn a lot here.”

Build good personal relationships with your key employees. Chinese employees tend to form a bond with their direct supervisor. They become loyal to a person, rather than to an organization.

Educational expert Prakash Menon says another reason for lack of loyalty is cultural; Chinese employees tend to form a bond with their direct supervisor, rather than with the company. This is a marked difference from the business norms in India, he says, where employees tend to create an emotional bond with the company, rather than with an individual manager. The upshot: if a favorite manager leaves the company, or even is promoted or relocated, Chinese employees in that person’s team may quit the company rather than work with a new supervisor.

HR Challenge #3: Salary Hopping

Many of the employers interviewed mentioned the difficulty they have in keeping key personnel if they are offered higher pay elsewhere. While this challenge is well known to SMEs worldwide, it is exacerbated in China where even a small raise can convince key staff to jump ship. With the nation’s employment market tightening in key professional sectors, salaries are rising fast, both across professions and across the country. In many highly skilled positions, the salary gap between international expat wages and those of domestic Chinese hires is narrowing quickly.

Business owner Ken Carroll tells of a typical scenario that impacted his original business in China, language training schools: “We had lots of people working for us for a couple of years who went to work for Wall Street English [a competing school teaching English as a second language] after we trained them. That’s the way it is. Wall Street paid higher and took them away from us.” So, Carroll used a direct method to attack back. “We brought them back from Wall Street after offering another pay raise.” Overall, Carroll says, poaching is a fact of life for many foreign entrepreneurs in China, across all business sectors.

Internet entrepreneur Marc van der Chijs agrees that pay is a more critical factor for many Chinese employees than for Europeans: “Money is more important here. In Germany, the company is considered as important. There, what really matters is whether you are happy in the company or have an interest in your job. Here, it’s more money-based. If I don’t give someone 10% yearly salary increases, they might leave. They may leave because of a small difference in salary.”

“I train [my employees] to meet international standards, which makes them more valuable to the rest of the world. If somebody from a multinational company comes along and offers them twice the salary, that would completely break my salary structure.”

Phillip Branham (USA), Founder and President, B & L Group

However, Van der Chijs advises not raising salaries in order to keep people who come with offers from other employers. “Some of them come to me and say: ‘I can get so much money from the other company. Do you want to match this?’ I refuse. If I said ‘yes’ to one person, 40 people would come asking for more money.” Instead, Van der Chijs offers attractive salary increases for talented employees who stick with the company over time. At Tudou, the video-downloading internet service that he co-founded, he offers stock options as well, but adds that employees must stay at least four years before cashing them in. “I gave stock options to everybody, but if somebody performs badly, he gets fired.”

HR Challenge #4: Jumping Ship

A fairly common problem for our interviewees is when a superstar employee learns the business so well that he or she eventually jumps to a competitor or leaves to launch a competing business. Many of our entrepreneurs worried about—or had experienced—this risk. Construction startup founder Phillip Branham admits to worrying that a key employee may one day jump.

Says Branham: “I train [my employees] to meet international standards, which makes them more valuable to the rest of the world. If somebody then comes along from a multinational company and offers them twice the salary, it would completely break my salary structure. They’d be gone. That would bring me a lot of trouble.”

Think twice before getting into a salary “price war” as a way to retain your employees. Sometimes, it’s better simply to let them go.

Engineering firm owner Shah Firoozi also expects to lose a certain percentage of his China staff, especially after training. “The normal evolution is that if you work in a foreign company like ours, you can jump to companies like Fiat, GM, Chrysler. Our employees acquire experience that is very rare in this country. Therefore, they are in high demand and are recruited rapidly by other companies. Frankly, I can’t blame them; people with the right know-how are in high demand. They are recruited very aggressively. The temptation finally prevails. Our company doesn’t want to go into a price war, so we have to accept that they leave.” Firoozi adds that the high turnover situation isn’t limited to SMEs. “The big guys like Fiat or GM have high turnover as well. It really hinges on the supply of people with the required experience.”

HR Strategies: Selling “Small is Beautiful”

Despite the wide spectrum of different industries represented by our interviewees, many of them use a similar strategy for improving the recruitment and retention of key staff by trying to turn the company’s small size from a hardship to an advantage. Here are the key strategies shared by our 43 China-based small business owners and experts.

HR Strategy #1: Build Your Reputation

One China HR strategy employed successfully by Bleum is to work directly with the Chinese universities to build a reputation as a sought-after recruiter for fresh graduates. Eric Rongley explains: “This is my eighth year of doing college recruiting [in China]. We hire the best students out of the best schools. I think we have a pretty good reputation in the colleges.” Today, after nearly a decade of building its reputation on campuses, the company receives applications from around 2,000 university graduates per year for approximately 35 positions. These applicants are screened through a detailed and difficult recruitment process (See below).

The firm also works to promote its name in the business arena through joining business organizations and networking.

HR Strategy #2: Recruit Rigorously

One way to avoid the problem of quick turnover caused by an imperfect fit with your company, our interviewees said, is to spend more time and energy upfront in the recruiting process. This can reduce turnover later, improving efficiency and enhancing success.

Promoting your brand name among Chinese universities and business organizations will help to boost recruiting and retention.

If a new hire isn’t meeting your expectations, move him or her out during the probation period.

Swiss consultant Nicolas Musy, founder of CH-ina (Shanghai) Co., says his company uses a three-stage hiring method in China. “First we look at personality—whether the person fits into our culture. Then we look at their basic education, intelligence, and ability to learn quickly. The last thing we look at is their skills and experience. We would rather have someone who is a good person and a good fit in terms of the first two criteria, and then train him or her.”

At his software outsourcing company, Eric Rongley uses a rigorous screening process for candidates, including an IQ test (the company requires a score of 130 for those with long work experience; 140 for fresh university graduates), an English proficiency test, then a technical test depending upon the job position. Finally, those candidates who achieve passing scores in all the preliminary tests are given a “behavioral interview” designed to determine their skill level in nine competencies important to the firm, such as “clear communication,” “ability to take responsibility,” and “integrity.” During the interview, candidates receive a number score for each of the competencies.

Those who pass the first round of interviews go on for a second one, and a final decision is made after that. Rongley says this detailed and tough recruitment process culls applicants who are unlikely to fit in well. Of the 2,000 graduates applying to his company annually, only 300 pass the IQ test, 150 pass the skills test, and roughly 75 pass the behavioral interviews. “We end up hiring 35 out of the original 2,000 applicants,” says Rongley.

HR Strategy #3: Cut Your Losses

If a new hire isn’t working out, our entrepreneurs stressed the need to move that person out quickly. Mark Secchia, founder of Sherpa’s, describes his company’s tough recruitment procedures. “When we do interviewing and training, we treat our staff very hard. I want to find out as soon as possible at the end of the three months of training if any of the new recruits are likely to complain a lot. I don’t treat them very well at the beginning on purpose, because I prefer they quit early during the probation period if they aren’t going to be really committed to the job.”

Under China’s new labor laws, effective in 2008, employers face far tougher restrictions on firing employees after the end of the probation period. This makes testing out new hires during the initial trial period extremely important.

Trading startup Juan Martinez uses the probation period to measure whether a new hire has not only the skills, but also the proper work attitude, for his company. “For us, the attitude is very important. Our company culture is hardworking. We need to stay late sometimes. If people aren’t very committed to what we are doing, they would have to leave.” Since attitude is difficult to gauge in standard interviews, Martinez tests the work attitude of new hires during their probationary period. “We usually try different people in order to get one that we like. Among two or three candidates, usually only one of them will stay in the company.”

“Sooner is better” is also the motto of logistics entrepreneur Jeffrey Bernstein when making a decision on new hires. “Either people leave quickly because there isn’t a good fit, or they stay a long time—it’s two extremes. The worst situation is that someone stays one year and then goes. It’s better if they just stay through the [three-month] probation period.” Irish entrepreneur Ken Carroll agrees: “Here [at Praxis], it is so chaotic and busy that if someone’s not working out, we let them go. It’s like ‘Sorry. You did okay, but it’s not working. Bye!’”

“We usually try different people [during the probationary period] in order to get one that we like. Among two or three candidates, usually only one of them will stay in the company.”

Juan Martinez (Mexico), Founder and Director, SOLHIX

HR Strategy #4: Offer Job Security

One hiring difficulty for startups is that new hires may worry about the stability of the company. When Phillip Branham launched B & L in December 2005, he addressed such fears among would-be employees by guaranteeing them job security. “I guarantee that everyone who comes to work on a one-year contract will get paid for a year. If I don’t have any work for them for six months, I will still pay them and pay the same benefits.”

“Some people like to be in a company that is just starting and growing, because in the future, they will be able to have positions in the small company that they might not get in a big multinational company.”

Phillip Branham (USA), Founder and President, B & L Group

HR Strategy #5: Fast Tracking

Given the highly competitive and ambitious nature of many Chinese employees, one of the most important perks foreign entrepreneurs can offer is a fast track for career development. Phillip Branham stresses the opportunities for employees to grow as his company grows. “I think people see the opportunity for growth. Some people like to be in a company that is just starting and growing, because in the future, they will be able to have positions in the small company that they might not get in a big multinational company.” One selling point: Branham can promise top positions to Chinese nationals—spots that might be reserved for foreign nationals in a large Fortune 500 company.

Trading company founder Juan Martinez uses a similar philosophy at SOLHIX: “In this company, I call the employees ‘partners’ and treat them like partners.” This level of respect and responsibility can be very valuable for Chinese employees, he says. “If you are working in GM, you might be paid a lot but you are not the partners of GM and nobody will believe you are a partner of GM. In our company, yes.”

Being a small-scale startup also allows SOLHIX to give critical projects to employees who have proven their capability. “We also try to give employees projects that make them feel motivated. It also shows them that, in the future, they can grow with the company. By growing, they can grow as a person, and of course grow their income.” In general, career advancement prospects can be even more valued among Chinese employees than among their counterparts in other parts of the world.

Fast growth potential at his small-scale consultancy has been an effective way to retain high-flying employees, says entrepreneur Ruggero Jenna. “One advantage is in the growth opportunities we can provide employees. Here, you can write your own growth history. If you’re a good manager, your path to partnership is much quicker. You can make more difference than in any of the more established organizations. It’s our number one differentiating factor.”

Offer employees projects that make them feel motivated so they know they will grow with the company, professionally and economically.

HR Strategy #6: Positive Work Environment (Software)

Providing a close-knit, supportive, and flexible work environment is one perk many of our entrepreneurs were able to offer— benefits harder to find at a large company. At SOLHIX trading company, owner Juan Martinez says, flexibility can be as important as salary in convincing good employees to stay. “In my company, it’s very important that we adjust to what employees need. For example, we trust people that they can manage their time. If they are key personnel, they would just need to inform me, not ask me for permission. We can be flexible.”

Sixteen-year China veteran Aziz Mrabet stresses the importance of maintaining good relations in order to retain key employees. “I speak Chinese, and somehow have even become a little bit Chinese myself,” says the Moroccan national. “To some extent, I find it quite easy to manage Chinese. Most of our staff have been working with me for eight years, and turnover is quite small. We have a very good relationship and there is trust between us. Even when the business goes badly, they still get their bonus. Furthermore, I never shout at them; I always show respect to them—this is most important for Chinese people.”

Another suggestion for successfully managing Chinese employees comes from Marc van der Chijs. “The most important thing is to show respect to the people you work with, and try to give them face in and out of the office. Second, don’t work with a short-term mentality; show the staff the long-term results. Don’t tell them how many dollars they can earn in one year; instead, tell them how much reward they may gain after three years. Then, they may stay with you. That’s the way I motivate people.”

Others among our interviewees agreed that they sell hires on the close-knit, friendly environment that is possible in a small company. Consultant Ruggero Jenna comments: “We enjoy a more caring environment here. Compared with the big consulting firms, we have this advantage.” Phillip Branham describes the environment at B & L Group in this way: “In small companies, people are more closely knit than in big companies. You can do things at different levels that the large companies can’t. Large companies with several hundred employees cannot get together and go out for dinner every three months. We can do that.”

“Show respect to the people you work with, and try to give them face. Second, don’t work with a short-term mentality… Tell them how much reward they may gain after [staying with you] for three years.”

Marc van der Chijs (Netherlands), Co-founder, Tudou

Know your employees, and create bonds among them. This can be an advantage for small firms over big corporations.

Eric Rongley’s company sponsors a company-wide soccer team, badminton team, and basketball team, in addition to holding happy hours on Fridays. Says Rongley: “We try to create lots of chances for employees to bond with each other and to have positive experiences here.”

HR Strategy #7: Positive Work Environment (Hardware)

If you can’t be big, be beautiful. This is the strategy retail display designer and manufacturer Susan Heffernan uses when wooing potential employees. When a promising possible new hire visits her company’s Shanghai showroom, she says, he or she appreciates the value that the company places on quality, design, and high standards. Says Heffernan: “If I was in a tiny office, that would be really tough. Employees like the environment when they come to work here.”

Eric Rongley also found that investing in attractive office facilities was money well spent in terms of staff recruitment, retention, and satisfaction. Rongley discovered through an annual employee survey that “work environment” was one of his employees’ main complaints. As a result, he moved the company to an upscale highrise in downtown Shanghai, and created nicer service rooms for staff, including a “very beautiful gym.” “Rather than throwing money at employees [in terms of salary hikes], we should make a more welcoming, fun environment. Then they will stay with us,” he says.

Investing in attractive office facilities can help motivate and retain Chinese employees.

When possible, maintain good relations with employees who leave you. They may be a future source of business and your best ambassadors.

HR Strategy #8: Keep Good Relations with Those Who Go

China veteran Olaf Litjens advises entrepreneurs in China to expect to lose a certain percentage of staff, no matter how much effort is spent on creating an ideal work environment. “I just accept the turnover; otherwise, I would get high blood pressure or have a heart attack,” he says, with a smile. “What we try to do is to make the company attractive, equip people with good mobile phones, computers, and uniforms; we have a lot of company bonding events such as Family Day, and plenty of training. But in the end, in certain positions, you know there is going to be some turnover.”

When you lose staff, entrepreneur Aviel Zilber stresses the importance of allowing the employee to leave on good terms, if possible. “We still have good relations with the employees who have left us. We keep in touch and try to find ways to do business together.”

Solving the Salary Question

Setting the right salaries for China-based employees is a tricky business for any manager in China in the current climate, but particularly so for the owners of small businesses. The shortage of experienced white-collar professionals in many industries has triggered salary hikes for many positions, especially in China’s larger cities. Nearly all of our featured entrepreneurs struggled with this issue, especially in terms of losing personnel to larger companies able to pay higher salaries.

“It is very hard to keep employees, not because they are not happy with our company, but because the offers they get from outside are incredible. It’s very hard for people to say ‘no’ if the salary outside is 100% or 200% more,” says fieldmarketing entrepreneur Olaf Litjens. The problem of salary hikes and poaching has worsened in recent years, he says, especially in his retail-oriented field of market research. As soon as he trains employees in any aspect of the work, they become valuable to competitors who are eager to offer a salary increase in order to lure over pre-trained personnel. Litjens believes the current cutthroat competitive environment will continue through to 2015 or 2020.

Spanish consultant Josep Giro adds that the job-hopping fever tends to run especially hot among personnel from Shanghai or other Chinese mega-cities, where the business culture is ultra-competitive. In Shanghai, for example, friends and family members frequently compare salaries, and react accordingly. For instance, employees who learn that they are receiving less than their peers may well quit.

Many SME owners, such as restaurateur Michael Yang, end up paying above market rates in order to attract employees to a small, little-known enterprise. “My salary philosophy is that I pay a little higher than other restaurants. If the other restaurants pay their waitresses RMB1,000 [US$140] per month, I pay RMB1,200 [US$170],” he says. “I pay more to keep them here. I don’t have time to train new employees.” Yang says the time invested in constantly training new hires requires far more expense than paying above market rates to keep staff longer. He adds that, for exceptional staff, he pays far above market rates. “I want them to feel that they cannot get better pay in other places.” The stability this creates is well worth the extra expense, he believes.

In some industries, salaries for domestic professionals are rising to international levels. Entrepreneur Shah Firoozi explains that, at his engineering and consulting company, wages for domestic engineers tripled between 2000 and 2008, while costs for expats have been reduced by 20–30% through the cutting of benefits, including housing, transportation, and other costs. Also, interest in working in China is far greater today among expatriates than was the case a decade ago. Says Firoozi: “There was fear 10 years ago [among foreign hires relocating to China] and there is eagerness today. So, recruiting foreigners to China isn’t difficult. Therefore, the costs of foreigners are coming down and the costs of the locals are going up.”

“The pay scales are a very difficult issue. On the one hand, people working at the international companies are simply paid beyond what they should be. On the other hand, people from state-owned companies, and even private Chinese companies, are making much less.”

Phillip Branham (USA) Founder and President, B & L Group.

In the current volatile market, which has seen salaries for some sectors of Chinese nationals increase rapidly, even figuring out what salaries to offer can be challenging. Construction startup Phillip Branham explains: “The pay scales are a very difficult issue. On the one hand, people working at the international companies are simply paid beyond what they should be. On the other hand, people from state-owned companies, and even private Chinese companies, are making much less.” For a small business owner hiring employees from different work backgrounds (that is, from international companies, as well as from private domestic firms or SOEs), the result can be widely divergent salary expectations within a small employee group. A young engineer with a year or two of experience at an international firm may be expecting a salary twice as high as the manager you’ve hired as chief operating officer, an older manager with 20 years of experience in state-run companies.

The wage gap can be especially large—and politically problematic—when a young, foreign-trained employee is offered a higher salary than an older employee from an SOE background. “This causes headaches, because I cannot have the young engineers who don’t know that much making more money than their manager,” says Branham. “It is very difficult. If you don’t match the market rates, you aren’t going to get anywhere. If you want to attract someone away from the MNCs, you have to give more than what they are making there.”

Another problem Branham discovered after hiring for B & L Group in 2007 is that young Chinese often have unrealistic career advancement goals, and may even lie about their previous salary in order to win a pay hike. He has experienced applicants blatantly exaggerating their previous salaries, he says.

Given the volatility, how can entrepreneurs determine reasonable salaries? Entrepreneur Eric Rongley says he researches the market rates by participating in annual salary surveys conducted by two China-based international firms. “We have a good sense of where our employees are within the talent pool,” are “between 65% and 75% of the market [rate].” Initially, his company had to pay 80% of the going rate or above, “but now, we are a more respected brand here, so we can lower that a bit.”

Rongley stresses that it is the good reputation of Bleum, not high salaries, that attracts talented applicants. Currently, the company’s turnover rate is about 10%—compared to 20% for Shanghai overall and far greater levels in India (for the software industry). “Three years ago, we had turnover of 50–55%. Now, we are doing better than the market, but we are not paying as high salaries compared to the market as we used to.”

One way to avoid paying perpetually rising salaries is to offer commissions and bonuses, or to use performance-based pay scales.

One way around perpetually rising salaries is to offer commissions and bonuses, or to use performance-based pay scales. Fashion apparel retailer Valerie Touya uses commissions with her sales clerks. “In retail, it is very hard to keep employees motivated. Commission is the only way to keep them.”

At ChinArt, founder Mark Pummell offers profit-sharing to promising employees. He gives an example of how the company wooed a talented web developer. “We didn’t have very much money, so we gave him 20% profit from the web business he developed. He remained very interested and very motivated. He drove the website to a higher ranking,” he says. “This is our model to be really fair with people.”

Trading company founder Juan Martinez adds that key employees “make money like a partner,” meaning that top positions include profit-sharing schemes. “With most of our positions, we make them profit-sharing or we give bonuses or commissions. That way, employees really feel motivated.”

Conclusion

If you are able to manage human resources in China, you can manage China, said one of our opening quotes. Anyone with business experience in China will agree that human resources can be one of the major headaches you will suffer in this country. HR can become your bottleneck for future growth, and even for survival. As soon as you start attracting the right candidates, you will find you are competing with the big corporations for the best people. Even if you manage to attract them, and train them to meet international standards, you run a high risk of losing them within a year or so, if they are offered a better salary or faster career advancement elsewhere. Or even worse, your most talented employees may leave to start a business in direct competition with yours.

While there is no magic wand that can erase these challenges, this chapter offers advice and strategies used by our China-based entrepreneurs in taking on these sorts of HR difficulties. Armed with this accumulated knowledge and experience of our China pioneers, readers will have a better chance of mitigating China’s HR challenge.

SUMMARY OF TIPS

HUMAN RESOURCE CHALLENGES