AROUND THE WORLD WITH SEYMOUR J. MANSFIELD
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Seymour J. Mansfield
Founding Partner

GIORGINI ON THE SPECIAL CHALLENGE HUMAN
RESOURCES MANAGEMENT IN CHINA

Foreign Enterprises rarely fail [to meet their expected potential] in China because of
failure to properly vet the economics. The primary cause of difficulty is because of
failure to communicate or act in a culturally appropriate or expected manner.

Thus warns our esteemed guest author, China HR Insight expert Mark Giorgini. As part of Mansfield Tanick & Cohen’s continued efforts to heighten awareness of business, legal and financial issues in the world’s fastest growing market, namely China, we are pleased this month to present the following article: Employment in the PRC: Some Human Resources Considerations by our esteemed guest author.

Mark Giorgini is the founder and Managing Principal of China HR Insight Ltd, headquartered in Shenzhen, China.

Mark has worked in Human Resources in the energy, banking, and insurance industries for more than 25 years. He’s lived in China for nearly 11 years and consults on Human Resources issues for multinationals, Chinese domestic companies, and joint ventures. Mark has master’s and JD degrees from the University of Minnesota and is an adjunct professor of Human Resources in the international MBA program offered at Sun Yat-sen University in conjunction with MIT’s Sloan School of Business. Mark has spoken at numerous professional conferences in Asia and appeared in USA Today and on Minnesota Public Radio, and writes the timely and topical The China Blog focusing on hot China HR related issues at www.worldwideerc.org/Blogs/China/default.aspx.
Mark can be reached most easily by e-mail: mark.giorgini@chinahrinsight.com.

As highlighted in my recent presentation at U.S. China Business Connections (UCBC) regarding Developments in China’s Employment Law, http://www.mansfieldtanick.com/CM/Articles/China-Legal-System.pdf: The PRC’s employment and labor law system is elaborate; it is more protective of employees than U.S. law (e.g., no concept of employee at will as prevails in U.S.), and it is much more comparable to the kind of detailed employee protection regimes which prevail in Germany and other EU countries. For those reasons, the PRC labor law system can be endlessly confusing to foreign investors employing Chinese workers. Compliance, including with the 2008 Labor Contract Law, however, is a must in order to successfully operate your company in China. And compliance is achievable with a well designed and managed HR system and good legal and HR advice.

Beyond that, as Mark emphasizes in his article below, another key to success in China business is learning how to act, communicate, motivate, lead and manage in new ways which meet Chinese cultural and social expectations.

A founding shareholder of Mansfield Tanick & Cohen, P.A., with 40 years of diverse lawyer experience, Seymour Mansfield now focuses on business, complex and class litigation, mediation, executive employment and employee benefits, trade secrets and restrictive covenants, international business law and acts as legal counsel to emerging medical device companies. He is the firm's primary representative to Lawyers Associated Worldwide (LAW), an association of 109 independent commercial law firms located in 57 countries and 148 key cities, comprising over 3500 lawyers worldwide, and served on LAW's Executive Committee (governing board) from 2002 through 2008. LAW empowers our firm to serve the needs of our clients in domestic and foreign markets worldwide.

Employment in the PRC:

Some Human Resources Considerations

By Mark Giorgini
Managing Principal
China HR Insight Ltd
Shenzhen, China

Being questioned in a Chinese police station interrogation room around midnight when one wall of the interrogation room consists of bars and a jail cell focuses the mind incredibly. Or so I was told by a client who landed there one evening recently after a bout with a difficult employee.

The American-owned company had done business successfully in China for nearly 20 years and actually has a lot more going for it in the Human Resources and management/leadership areas than the bulk of foreign companies here. The company has a record of hiring good employees, paying competitively, maintaining top notch ethical standards, and retaining staff in a labor market known for high turnover rates. The owner is one of the most culturally aware people I know here.

So what could have happened to merit a late night “chat” with police? Over an employment issue, of all things?

As with most things in China, there are multiple answers. The immediate cause was because a foreign manager physically grabbed the employee’s arm as she was walking out the door while carrying a flash disk of all the company’s client contact and some other proprietary information after being fired. The termination situation occurred because the company, while having its eye on the ball of finding, selling, and serving its clients – the “technical” component of the company’s operations, deferred complying with certain aspects of China’s 2008 Labor Contract Law. And the deferral of labor contract law compliance probably occurred because, in the welter of day-to-day business activity, it’s all too easy to lose sight of those so-called ‘soft’ people management issues which are, in reality, so hard.

The generally accepted failure rate of Chinese joint ventures by scholars who study this sort of thing is 70%. The failure rate for other types of cross-cultural businesses is similar. ("Failure rate" here means organizations didn’t live up to their initial planned potential. It does not mean bankruptcy or going out of business.) This failure rate is important for two reasons. First, foreign enterprises devote large sums of money to establishing operations here and yet generally fail to achieve their anticipated returns. Second, the Chinese are generally aware of this failure rate and so working in joint ventures or for other types of foreign enterprises has lost a lot of the luster that doing so may have had ten or 15 years ago. Consequently, to become one of the 30% success stories and be able to effectively find talent in the labor market, a key need is to understand what it takes to create success and understand why other organizations fail.

Cultural Context

Foreign enterprises rarely fail in China because of failure to properly vet the economics. The primary cause of difficulty is because of failure to communicate or act in a culturally appropriate or expected manner. This failure can either be organizational or individual. Consequences include heightened staff turnover, poor partner relations, lost business opportunities, difficulty recruiting desired talent in the labor market, difficulty in building and maintaining institutional relationships, and then all the business results that flow from those failures.

In our experience, foreign enterprises typically act in one of two ways: they either adopt an attitude of "this-is-our-business-model-and-we’re-sticking-to-it" or they adopt an attitude of "if-you-can’t-beat-them-join-them." Either response results in failure.

The former results in failure because it does not take account of Chinese expectations or behaviors or is not sensitive to them. Where a Chinese person or institution has an option of working with an organization with which they feel "comfortable" or one with which they feel "uncomfortable," not unsurprisingly, they’ll opt for one with which they are comfortable. The latter attitude also results in failure because there are aspects of Chinese business culture which do not fundamentally mesh with international business expectations, i.e. aspects of relationship-building, how and when business priorities are set, and expectations for results delivery to name a few.

Foreign enterprises which survive and prosper in China are typified by one or more of the following. The enterprise has at enterprise and on-site individual levels (1) established an understanding of Chinese business culture and expectations, (2) incorporated that culture and those expectations into daily operations, and (3) gone through a process of accommodating its own plans and processes to the Chinese environment. That does not mean “becoming Chinese” or throwing out a business model; it does mean having made a series of conscious decisions about must-haves, nice-to-haves, and don’t-needs and ensuring that those decisions mesh with local reality.

In addition, China is methodically seeking to change its employment base. Having become the world’s manufacturer, China Inc is now focused on high-tech enterprises. For example, Shanghai’s two latest five-year economic plans have called for changing the area’s former manufacturing emphasis to an 80/20 service/manufacturing split. Numerous cities either have or are developing high-tech zones complete with tax breaks and special allowances. Shenzhen recently successfully concluded its 11th China Hi-Tech Fair, the biggest yet, with 500,000 visitors visiting 3,000+ exhibitors from 49 countries over 25 acres in five days. Plans are in development to make this now-annual event the biggest fair in the world. The writing is on the wall: China plans to move beyond low-cost manufacturing.

Implications for Foreign Employers

Discussions with numerous Chinese graduate students and current employees of foreign employers suggest a reversal in views about working for foreign enterprises during the last 10 years. Brand cachet, opportunity for training, opportunity for exposure to international management techniques, higher salaries, potential for moving abroad, and a perception of stability were initially high motivators for Chinese nationals to come work for foreign companies.

However, with the growth of the Chinese economy and enhanced employment options as a result of internal reform in the major state-owned companies, coupled with the general failure of foreign companies to fully leverage their initial advantages in the marketplace, working for an foreign company is not necessarily "the ticket" that it once was. Specifically, foreign companies have

• developed the reputation of having a boom-or-bust approach to employment which has failed to provide employees with the long-term stability and sense of career progress they seek,
• invested in training initially as a way to buy in or establish presence in the market but then cancelled training during periods of economic retrenchment or turned training functions over to ill-prepared national partners,
• handled expatriate staffing in a non-organic manner by sending in leaders who are more often technically or financially schooled but who lack the social or management skills to identify appropriate cultural adaptation from inappropriate cultural adaptation,
• often turned over expatriate positions to ill-prepared nationals as a means of cutting short-term costs, and
• failed to establish a clear employment value proposition for national staff by aligning so closely with national partners that national staff cannot identify the value of the international company.

Successful foreign companies in China differentiate themselves by:

• being long-term oriented and riding out booms and busts,
• adopting and implementing “global” (global/local) strategies and processes that can maintain a local face/presence regardless of back office operation locations – Chinese will typically need a local face/presence with which to establish a relationship,
• sending in staff with broader global outlook and management skills than most foreign companies have typically done,
• taking early and visible steps to demonstrate commitment to recruited staff that the company is prepared to support them in their career aspirations through training, project assignments which expand business competencies, etc.,
• understanding that “soft” skills are actually quite difficult to perform well and that rewarding managers and staff who have those skills is value-added over the long haul, and
• paying attention to the local context beyond the day-to-day requirements to do business.

Despite the 2008 economic crisis, the job market for skilled professionals with experience remains vigorous, although there can be significant variation between geographic locations and functional disciplines. Some areas of the country such as Shenzhen even report labor shortages, although that is likely for unskilled and factory workers. The stories in the international press about low wages paid to Chinese staff usually refer to unskilled factory workers, farmers, or new university graduates. All are huge population groups, of course. However, in the major urban centers, significant anecdotal evidence suggests that Chinese salaries can approach salaries paid to foreign staff by foreign enterprises.

And as China moves away from low-cost manufacturing toward high tech products and design, the mix and capabilities of employees will also change. As employees upgrade, there will be increased pressure on managers to also upgrade. The management techniques which got your company to its current success level in China won’t necessarily get your company to the next level.

Summary

The police were eventually satisfied with that American company’s explanation of the situation with the difficult employee. The former employee took the matter to arbitration and lost. The matter was appealed to the local courts and the judge thus far has expressed skepticism of the employee’s version of events.

China’s labor market is quite dynamic. Employment laws are often vague, confusing, and differ between localities. Employee capabilities and understanding of what they’re allowed under the law are changing. Even the best employers need to upgrade management skills in such an environment.

Entering the Chinese market, competing for local talent, and then properly managing that talent is an enormous challenge on many levels: cultural, financial, and social. Foreign staff expatriated to China often need to make major adjustments in management style, handling staff relationships, understanding very different government and regulatory systems, and managing personal and family situations far from the home base. Selecting, retaining, and motivating local staff in a dynamic economy with significant job-hopping and training challenges are not tasks for the faint-of-heart.

And you’d be wise to avoid late night discussions with Chinese police officers. We’re here to help, but not with the police.