Mercer bdb doing_business_in_china_dec_2010


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Mercer bdb doing_business_in_china_dec_2010

  1. 1. Breaking Down BordersDoing business in ChinaGuo Xin
  2. 2. Today’s speaker Guo Xin is a Senior Partner and Managing Director for Mercer in Greater China. He is also the chairman for Marsh & McLennan Companies (MMC) in China which is the parent company for Mercer. During his career at Mercer, Guo Xin has held a variety of leadership positions, including Asia Pacific Human Capital business leader and Managing Director for China. Guo Xin has expertise in working with clients on developing strategic organization structure, business processes, and human resource systems. His clients include local private and listed companies, state-owned enterprises and multinational companies in and outside of China. Guo Xin has also worked in the US for 10 years, both as a consultant and a practitioner. He has extensive experience in business process improvement and re-engineering for clients covering forest products, logistic and distribution, chemical and fast moving consumer goods. Guo Xin is also a member of WorldatWork Global Advisory Board.Mercer 1
  3. 3. Topics for discussion 1 Setting the China scene 2 Attracting and retaining top talent 3 Ensuring compliance with local legislation 4 Moving critical staff / relocating expats to China 5 Ensuring success in your expansion: M&A in ChinaMercer 2
  4. 4. Setting the sceneChina
  5. 5. Setting the sceneGlobal financial crisis Today An enabling environment  One of the fastest growing  China has overtaken Japan as economies; 7 years of more the second largest economy than 9% GDP growth  Ever expanding middle class  Resilient economy – solid growth during the peak of the  Massive infrastructure global crisis expansion  Opening new sectors for – Linking East China with foreign investment Middle China  World’s largest population; – Improving economic Promising consumer markets efficiency & improving quality of life in developing  Significant investment in regions healthcare and infrastructureMercer 4
  6. 6. Setting the scenePacing ahead 18 GDP CPI (Inflation Rate) 16 Salary Increase 15.6 14.6 Staff Voluntary Turnover 13.5 14 12.8 13.4 12.2 13.0 11.2 11.3 12 11.9 11.6 10.4 10.5 9.3 10.1 9.6 10 9.0 9.1 Percentage 9.1 8.0 7.3 8.0 8 8.5 7.6 8.2 8.6 8.7 8.1 8.3 7.4 7.3 8.2 7.4 6 6.9 5.9 4 3.5 4.8 3.9 2 1.2 0.7 -0.8 2.7 0.4 1.8 -0.7 1.5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(E) 2011(F) -2Mercer 5
  7. 7. Rise of Chinese companies on a global scale:Powerful state-owned enterprises becoming major global players Chinese companies listed on Fortune 50060 5450 4340 35 3030 23 182010 0 2005 2006 2007 2008 2009 2010Source: Fortune 500 2005-2010Mercer 6
  8. 8. Setting the sceneBeyond the crisis Chinese economy coped well with the crisis; clear signs of recovery Revised government growth projection for 2010 at 10.5%; Q3 GDP growth at 9.3% – GDP forecast for 2011 is 9.6% – 2011-15 to be a year of economic tightening and inflation control; launch into the stable growth and the development of 2nd and 3rd tier cities China’s long-term promise still holds – Growth primarily driven by the strong domestic market – Workforce unrest is just one of a few of the challenges facing new entrants into the potentially lucrative Chinese market – China exports return to pre crisis levels; with expected slower annual growth as China moves to a consumer based economyMercer 7
  9. 9. Attracting and retaining talent
  10. 10. Voluntary turnover ratesQuick economic recovery and strong growth projected Due to a quick recovery of the China market, company’s are looking to Asia for growth opportunities – Strong consumer growth spending – Ministry officials predicted foreign direct investment (FDI) this year was set to "surpass $100 billion", compared to $90 billion last year The war for talent is the single biggest challenge for MNCs expanding into China Rapid business growth has resulted in a fierce competition for talent: – 2010 voluntary turnover forecasted to be 15 – 16%, returning to pre crisis numbers. – 41% companies indicate that they have high turnover of blue collar which is a significant symbol of local labor shortage.Mercer 9
  11. 11. Attracting and retaining top talentLocal SOEs and finding talent Local employers are competing by aligning employee’s personal career ambitions to the needs of the business SOEs are offering key positions within domestic organizations, with significant titles and benefits Foreign multinationals needs to offer a clearly mapped out career and development plan that is communicated to the employee English ability: while China graduates 5 million people each year, few have the ability to speak English. Those who can are from top schools and are recruited quickly An employee being asked to relocate will know there is a high likelihood of a similar job in the tier one city with a different employerMercer 10
  12. 12. China’s HR conundrum Talent challenges Weak Aging Changing Leadership Workforce Career Competition Bench Expectations for talent strength• Available jobs • Career • Lack of • Pressures on predicted to development leadership salaries outpace available drive choice capability • Short average workers • Development key impacts tenure• Slow take up of retention tool immediate the aging business results • Localize instead workforce of expatriates • Speed of change challenge – dynamic for leaders • Chinas gap in leadership ranksMercer 11
  13. 13. Attracting and Retaining TalentLack of dynamic leadership A strong demand but short supply has led to a war for talented leaders The leadership pipeline is also not running smoothly with talent, they’re not developing fast enough to keep pace with economic growth Not only MNCs, but also SOEs are searching for leadership talent as they expand globally As SOEs begin to expand overseas, they’re struggling with the right balance between bringing leaders from outside the country and building up its own leadership pipelineMercer 12
  14. 14. ComplianceThe ‘people’ dimension
  15. 15. Dimensions to governance:Ensuring compliance with local legislation Unions have an influence over workplace relations from levels of pay to employment (i.e. Summer 2010 strikes) In the past multinationals have been known for better pay and offering more training opportunities. This perception is changing, local Chinese firms are also catching up and offering more reimbursement options to lower tax liabilities, difficult for MNCs to offer such benefits China has a reputation for a high level of bureaucracy with many government agencies involved with different industry sectors. Expertise in navigating red tape is crucial for a foreign organization (many local deals are struck with regulators) The government provides pay-as-you-go pension benefits via an IRA. SOEs often provide Defined Benefit schemes to attract talent. MNC companies under pressure to follow suit.Mercer 14
  16. 16. Social and supplemental benefits overview Statutory Benefits Employer Sponsored Benefits (Mandatory) (Optional) Social security (including Supplementary Pension Pension Insurance, Medical Plan/ Enterprise Annuity Insurance, Maternity Supplementary Medical Insurance, Work-related Life InsuranceEmployee Injury Insurance, AD&D Insurance Unemployment Insurance, Benefits Housing Fund) Critical Illness Insurance Public Holiday (11 days) Supplementary Housing Savings Plan Other legal leaves (e.g.: Medical Treatment Period, Training and Education Marriage Leave, Maternity Assistance Leave, etc.) Work/Life Balance Plan Severance and Termination Stock Plan Benefits PerquisitesMercer 15
  17. 17. Statutory benefits requirementsExample: contributions in Shanghai As of July 2010 Employer Employee Minimum Maximum Contribution Contribution Contribution Contribution Social Benefits Wage Base as % of as % of Wage Wage wages wages Base* Base* Pension 22% 8% RMB2,140 RMB10,698 Medical 12% 2% RMB2,140 RMB10,698 Maternity 0.5% - Employee’s RMB2,140 RMB10,698 Last Year Work-related Average 0.5% - Monthly Salary RMB2,140 RMB10,698 Injury Unemployment 2% 1% RMB2,140 RMB10,698 Housing 7% 7% RMB2,140 RMB10,698• Maximum Contribution Base is equal to three times of employee’s last year’s average monthly salary• Minimum Contribution Base is equal to 60% of employee’s last year’s average monthly salaryMercer 16
  18. 18. Moving critical staff to China - Employee mobility - Challenges of expats into new regions
  19. 19. International assignment issues in ChinaGeographical arrangement Given China’s vast size there are many different cultures and dialects within the country. It’s cities are split into tiers, which are based on their stage of economic development – Tier 1 cities: Beijing, Shanghai, Guangzhou and Shenzhen – Tier 2 cities: include Chengdu, Dalian, Suzhou, Nanjing, Tianjin etc.  China has many large cities with industry clusters – for example: Chengdu and Dalian are know for outsourcing  Beijing and Shanghai are known for Research and Development centers and as common location for regional headquartersMercer 18
  20. 20. International assignment issues in ChinaEmployer perspective Talent readiness: Lack of skilled and readily employable talent in specialized roles requires companies to source expatriate talent Certain positions held by locals require pay equal to that of foreign talent, these positions are highly skilled Managing employee mobility costs e.g. housing, hardship allowance and travel. Could cause employee equity issuesMercer 19
  21. 21. International assignment issues in ChinaEmployee perspective  Safety  Medical care  Cost of living  Remote location  Inability to obtain certain goods  Benefits  Tax issues  Pollution  Work visas  Internet access  Quality of living  Logistics  SARS/Bird Flu/Pandemics  Schooling in rural areas  Hardship – developing cities  Housing costs and availability  Food  Cultural differences  Language barriers  Difficult living conditions  Health concernsMercer 20
  22. 22. Challenges of moving expats into new regions Many multinationals report that they get significant value from having expatriate talent in China. The cost is justified by focusing on grooming future local leaders. Drawbacks: – Once you factor in housing, salary, housing, education and transport allowance, the cost becomes significantly higher – Given the scarcity for globally focused experience leaders, they can easily move around the region to jump to competitors ie revolving door effect. This has a negative effects on staff morale and the long term strategy of the organizationMercer 21
  23. 23. Ensuring the success of your expansionM&A in China
  24. 24. Evolution of a TransactionHow M&A deals are done in China Highly regulated process – Separate local provincial-level regulatory bodies and processes – National-level regulatory agencies and processes  Ministry of Commerce (i.e. MOFCOM, NDRC, SASAC) – Anti-Monopoly Law (AML) – Industry specific laws (media companies governed by 10+ agencies) Deal environment unpredictable – Target companies experience varies significantly – Data/compliance issues – Documents exist only in Chinese – Unspoken/undocumented “local” deals People & their relationships drive most deal value – Retaining “pre-deal” relationships critical – Executives, key managers, suppliers, customers – Incentive-based approach vs. contract-based approachMercer 23
  25. 25. Challenging deal issues at each phaseTypical issues during transactions in China Due Doing Making the Diligence the Deal Deal Work Due Diligence Doing the Deal Making the Deal Work  Fraud  Valuation expectation  Unsophisticated local  Multiple sets of books  Deal financing management team  Local government “deals”  Paying the Chinese owner  Retaining pre-deal relationships  Compliance issues  Deal governed by 6 ministries  Unwinding improper sales  EHS, OSHA issues  Deal structure practices  Legacy issues from  Switching from APA to SPA  Install reporting & control state-owned enterprises  Indemnity considerations requirements (SOEs)  Escrow considerations  Conflict of interest with original  Land use rights owner’s “other” entities  “You don’t understand China”  Expectations of local employeesMercer 24
  26. 26. Summary of China issuesA few things to key in mind… SEVERANCE and RETENTION • Statutory severance payments HR ENVIRONMENT • Non-compliance on social security • Mandatory employment contracts contributions and overtime common • New ECL RETIREMENT & BENEFTS M&A ENVIRONMENT • Statutory social security contributions • M&A highly regulated • Supplemental retirement plans emerging • Supplemental benefits emerging in Chinese companies COMPENSATION COMMUNICATION • Highly competitive talent environment • Subtle; face-to-face • Use of tax efficiency plans common • Sales compensation compliance often an issue LEADERSHIP CULTURE • Build trust • National, geographic and • Negotiate interests & incentives organizational differences • Retention is keyMercer 25
  27. 27. Questions?
  28. 28. Questions & answers Please use the Q&A panel on the bottom right hand of your screen to type in your question To ask a question while in full screen mode, click on the question mark button on the floating panel at the bottom right hand side of your screen If there is not enough time to answer your question during the Q&A period, we will send you an answer by e-mailMercer 27
  29. 29. Additional informationWhere to go for help
  30. 30. For more information on regional strategiesRisks and opportunitiesVisit our Breaking Down Borderswebsite to access articles, points ofview, podcasts and more information oninvesting in 29
  31. 31. Future markets in the Breaking down Borders webcast series Doing business in India Held When: Webcasts will begin at Doing business in Japan the following times: Held Delhi – 11:30 am Doing business in China Bangkok – 1:00 pm 2 December Shanghai, Hong Kong, Singapore – 2:00 pm Doing business in Korea Seoul, Tokyo – 3:00 pm 16 December Sydney – 4:00 pmAdditional markets will be added in 30
  32. 32.