Doing Business in China | Human Resource Strategy
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This document provides an overview of human resources strategy considerations for doing business in China. It discusses finding the right leadership candidates, which include Western expatriates, Asian Chinese, PRC returnees, and PRC locals. Strengths and weaknesses of each candidate type are analyzed. The document also discusses developing the PRC local executive pool, with areas of strengths and development outlined. It recommends HR strategies such as local recruitment, university relations, promoting employee growth, and maintaining a clear organizational structure.
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Doing Business in China | Human Resource Strategy
- 1. DOING BUSINESS IN CHINA HUMAN RESOURCES STRATEGY BY J|W|K CONSULTING NOVEMBER 30TH, 2011
- 2. AGENDA • About the Team • Project Objectives • Doing Business in China • Truck Market Analysis • Joint Venture Formation • Human Resource Management • Labor Contract Law • Wages and Executive Compensation • Labor Union • Recommendations J|W|K 2
- 3. ABOUT THE TEAM J|W|K Special thanks to: Dr. Kelle Franklin & Mr. Greg Scully of Seattle University. Mr. Daryl Simon & Mr. Matt Brynildson of PACCAR Inc. Anthony Jaya Tony Adiputra Wiharja Adi John Kuo John 3
- 4. To pave the way for PACCAR’s success by providing general reference on human resources and joint venture issues in China. J|W|K 4 PROJECT OBJECTIVES Confidentiality Agreement Letter of Intent Feasibility Study Government Approval JV Formation Production Start J|W|K
- 5. J|W|K 5 Know thy self, know thy enemy. A thousand battles, a thousand victories. -- Sun Tzu DOING BUSINESS IN CHINA
- 6. BUSINESS CLIMATE J|W|K Source: The Heritage Foundation DOING BUSINESS IN CHINA 6
- 7. J|W|K Source: The American Chamber of Commerce in China DOING BUSINESS IN CHINA 7 BUSINESS CLIMATE CONT’D • 2011 American Chamber of Commerce in China Survey • Profitability returns to pre-financial crisis level • 85% of respondents report increased revenue • 83% report planned investment increase next year
- 8. J|W|K Source: The American Chamber of Commerce in China DOING BUSINESS IN CHINA 8 • Risks • Slow down in Chinese economy • Sino-US tensions • Strengthening of Chinese currency (RMB) • Top Concerns • Bureaucracy • Management-level HR constraint • Unclear laws & regulations • IP infringement • Corruption • Licensing BUSINESS CLIMATE CONT’D
- 9. POLITICAL CLIMATE • One-party rule, authoritarian (central government), tightly controlled • Societal stability is priority • Non-existent freedom of the press • Zero-tolerance for anti-government communications • Unrests in autonomous regions J|W|K 9 DOING BUSINESS IN CHINA • Provincial Leaders • #1 Communist Party Chief (the Boss) • #2 Governor
- 10. • Xi Jinping (习近平 ) • China’s next leader in 2013 • 58 years old, Chemical Engineering & Law degree • Member of the “Shanghai Clique” • Reputation as efficient administrator and consensus builder • Tough crack down on Tibet • Joe Biden on Xi: “strong and pragmatic” J|W|K 10 DOING BUSINESS IN CHINA POLITICAL CLIMATE CONT’D
- 11. KEY TAKEAWAYS China scores “moderate” in economic freedom American companies optimistic about business in China Sino-US political tension & macroeconomic risks may be lurking Awareness and management of top business concerns China’s next leader, Xi Jinping, is business friendly but “strong” in dealing with issues J|W|K 11 DOING BUSINESS IN CHINA
- 12. Hofstede’s Five Cultural Dimensions J|W|K Source: www.clearlycultural.com 12 DOING BUSINESS IN CHINA 0 20 40 60 80 100 120 China US Japan CHINESE BUSINESS CULTURE
- 13. Transaction-Based (US) vs. Relationship-Based (China) J|W|K 13 DOING BUSINESS IN CHINA CHINESE BUSINESS CULTURE CONT’D
- 14. J|W|K 14 DOING BUSINESS IN CHINA A man's growth is seen in the successive choirs of his friends. Ralph Waldo Emerson Guanxi (关系): Connections and relationships • “It’s not what you know, it’s who you know” • Trust, loyalty, reciprocity • How to build it? • Socially • Be helpful either in personal or business capacity • Think win-win • Guanxi follows the person, not the firm CHINESE BUSINESS CULTURE CONT’D
- 15. Mianzi (面子): “Face” • Having face means having a high status in the eyes of one's peers, and is a mark of personal dignity • Worst case scenario: disrespect, embarrass, or criticize an individual in front of others • Watch your jokes • Do not put a person on the spot J|W|K 15 DOING BUSINESS IN CHINA Without the feelings of respect, what is there to distinguish men from beasts? -- Confucius CHINESE BUSINESS CULTURE CONT’D
- 16. J|W|K 16 DOING BUSINESS IN CHINA Do’s • Observe and respect seniority/rank/hierarchy • Address the person by title • Dress conservatively • Learn a few Chinese words • Bring lots of business cards • Receive offerings with both hands • Be active in social settings • Use an intermediary for introduction first • “When in Rome…” Don’ts • Use red ink • Split a check • Give clock as a gift (sounds like “funeral”) • Be late • Praise the Japanese • Open gifts when received in front of people • Talk business during social events • Show up unannounced (make appointment first) Know • Who’s in charge, the pecking order • The Chinese are non-confrontational • 8 is the lucky number (sounds like “fortune”, Boeing 787) • 4 is the unlucky number (sounds like “death”) Chinese Business Etiquette & Customs CHINESE BUSINESS CULTURE CONT’D
- 17. J|W|K Source: The Role of Business Groups in China’s Transition, Yu, van Ees, Lensink (2008 17 DOING BUSINESS IN CHINA QIYEJITUAN (企业集团) • Qiyejituan: “Business Groups” • National Statistic Bureau of China: “A business group consists of legally independent entities that are partly or wholly owned by a parent firm and registered as affiliated firms of that parent firm.” • The State Administration of Industry & Commerce: “To become a business group in China, the core company should have the register capital of over 50 million yuan (US$ 6 million) and at least 5 affiliated companies, and the total register capital of the core and other affiliated companies should be over 100 million yuan (US$12 million).” Country Type of Business Group Example Japan Keiretsu Sony Corp., Hitachi Ltd. Korea Chaebol Hyundai Corp., Samsung Corp. India Trading houses Tata Group, Reliance Industries
- 18. Business Groups *Sales *Assets **Employment Main Business Sinopec 664.76 620.25 779.56 Petrochemical CNPC 591.51 913.69 1039.20 Petrochemical SGCC 590.06 1111.54 684.92 Electric Power China Mobile 198.29 469.56 254.39 Communications China Telecom 182.30 540.73 259.72 Communications Sinochem 168.83 54.56 15.47 Chemical Baosteel 165.37 193.84 94.23 Steel CSPG 156.98 246.05 122.30 Electric Power China FAW 125.23 102.88 115.14 Auto COFCO 117.83 59.76 23.66 Trade China Minemetals 109.21 45.80 33.71 Mining Haier 101.63 32.88 51.00 Appliances SAIC 100.48 106.87 80.24 Auto DFIM 99.15 122.64 127.12 Auto J|W|K *Billion RMB **in thousands Source: The Role of Business Groups in China’s Transition, Yu, van Ees, Lensink (2008) 18 DOING BUSINESS IN CHINA QIYEJITUAN (企业集团) CONT’D
- 19. J|W|K Source: The Role of Business Groups in China’s Transition, Yu, van Ees, Lensink (2008) 19 DOING BUSINESS IN CHINA Three Characteristics 1. Member firms are legally independent 2. Member firms are connected through various relationships, e.g. shared goals or cross-share holding 3. Member firms operate together in more or less cohesive way Three Different Roles with Foreign Firms 1. Alliance partner 2. Acquisition target 3. Competitor QIYEJITUAN (企业集团) CONT’D
- 20. Business is relationship-based in China Recognize and adapt different cultural dimensions Seniority, seniority, seniority - hierarchy influences all aspects of Chinese life Know the do’s and don’ts before you go Guanxi is everything Face: give, save, keep, and don’t lose it Business is war – know your friends and foes Choose your alliance and acquisition target carefully J|W|K 20 DOING BUSINESS IN CHINA KEY TAKEAWAYS
- 21. J|W|K 21 TRUCK MARKET ANALYSIS Ability is nothing without opportunity. Napoleon Bonaparte
- 22. MARKET STRUCTURE J|W|K Source: IHS Automotive, Deutsche Bank Research, KPMG 22 TRUCK MARKET ANALYSIS
- 23. SALES BY BRAND 0 200 400 600 800 1000 1200 1400 2006 2007 2008 2009 2010 0 50 100 150 200 250 2006 2007 2008 2009 2010 Brand (Group) 2006 2007 2008 2009 2010 Wuling (SGMW/SAIC/GM) 420 520 610 1,005 1,150 Chang’an 344 363 383 705 899 Dongfeng 200 245 301 427 605 Foton (BAIC) 302 335 343 500 562 Jinbei (Brilliance-Jinbei) 113 138 146 169 263 Brand (Group) 2006 2007 2008 2009 2010 Dongfeng 145 180 175 193 299 FAW 130 164 157 181 273 CNHTC 54 85 96 116 200 Shaanxi Automotive (Torch) 43 68 55 62 113 Auman (Foton/BAIC) 36 63 60 85 104 LCV HCV J|W|K Source: IHS Automotive 23 TRUCK MARKET ANALYSIS
- 24. • Customer requirements • Low-cost > quality • Function (overload) • Increased customer sophistication • Total cost of ownership • Initial vs. lifecycle • Infrastructure expansion = demand increase J|W|K 24 MARKET CHARACTERISTICS TRUCK MARKET ANALYSIS
- 25. CHINA’S AUTOMOTIVE TREND J|W|K Source: Daimler in China 25 TRUCK MARKET ANALYSIS
- 26. HEAVY TRUCKS SALES TREND 881 1306 1170 1245 1145 1090 1192 0 200 400 600 800 1000 1200 1400 2009 2010 2011 2012 2013 2014 2015 J|W|K Source: PACCAR Research 26 TRUCK MARKET ANALYSIS
- 27. J|W|K 27 JOINT VENTURE FORMATION If we are together, nothing’s impossible. If we are divided, all will fail. Winston Churchill
- 28. WHY JOINT VENTURE? • Fewer restrictions on key industries • Gain access to restricted markets • Build capabilities • Market position • Leverage China’s products • Partner assistance J|W|K 28 JOINT VENTURE FORMATION
- 29. CHALLENGES TO JOINT VENTURE • Reliable Chinese partner • Baggage risk of partner • No unilateral control • Less control over corporate culture • Risk of IPR infringement J|W|K 29 JOINT VENTURE FORMATION
- 30. COOPERATIVE JV VS. EQUITY JV Cooperative Joint Venture Equity Joint Venture “Legal Person” Status Optional Required Division of Control More Flexibility Less Flexibility Profit Distribution Ratio ≠ shareholding ratio = shareholding ratio Registered Capital May be recovered/repatriated No recovery/repatriation Unilateral Termination Possible Not Possible J|W|K 30 JOINT VENTURE FORMATION
- 31. CASE STUDY: DAIMLER & FOTON Beijing Foton Daimler Auto DAIMLER FOTON Value to Daimler • Partnership with large local manufacturer • Expansion of Daimler’s global sales (lower priced product) Value to Foton • Global expansion – leverage technology and management expertise • Introduce Daimler’s diesel engine (Euro V emissions standards) • Technology center – R&D of chassis and key components JV Terms • Equity structure: 50-50 • RMB 6.35 billion ≈ US$1 billion • Daimler: cash, Foton: assets • operating center for global business: management support, R&D, manufacture, supply chain and sales mgmt • Next 5 yrs: other BRICs (regional prod. & sales center) Key Products: • Daimler’s Diesel Engine • Ouman trucks + Daimler Engine • Brand: Foton Ouman J|W|K Source: Literature search 31 JOINT VENTURE FORMATION
- 32. J|W|K 32 HUMAN RESOURCES MANAGEMENT Let the path be open to talent. Napoleon Bonaparte
- 33. FINDING THE RIGHT LEADER China Leaders Home-grown PRC Local PRC Returnee Western Expatriate (Chinese/Non- Chinese) Asian Chinese J|W|K 33 HUMAN RESOURCES MANAGEMENT
- 34. Western Expat Asian Chinese PRC Returnee PRC Local Strengths • Global connectivity • Solid management skills/function expert • Language capability • Good management skill/functional knowledge • International exposure • Generally good comm. skills • Strong cultural links to China • Good development potential • Good understanding of local market, knows how to get things done • Strong network • Driven, ambitious, willing to learn Weaknesses • Lack connectivity with locals • Low China knowledge/ex perience • High cost • Not always welcomed by locals • Real understanding of local culture not necessary there • May be costly • Catch up on market changes and rebuild connection and knowledge • Re-entry shock • Can be costly • Weak global exposure and connectivity • Lower EQ and ability to work in ambiguous • May be less mobile (family) Watch out • Developing local talent • Localization • Real connectivity with local customers/emplo yees • Real knowledge of local market • Adapting back into local environment • May be overpaid and/or under- experienced • Retain top talent CANDIDATE COMPARISON J|W|K 34 HUMAN RESOURCES MANAGEMENT
- 35. PRC LOCAL EXECUTIVE POOL 5% 65% 30% 60% 30% 10% PRC Chinese Non-PRC Chinese Others 1995 2009 Areas of Strengths Areas of Development • Highly motivated • Functional/Technical Skills • Action Oriented • Intellectual Horsepower • Perseverance • Drive for Results • Customer Focus • Entrepreneurial • Sophisticated Sales & Marketing Skills • Conflict Management • Strategic Agility • Creativity • Motivating Others • Dealing with Ambiguity • Developing Talent • Innovation Management • Managing Vision and Purpose J|W|K Source: UW Foster Business School 35 HUMAN RESOURCES MANAGEMENT
- 36. HR STRATEGIES • Recruitment • Hire locally + consulting company • University relations • Retention • Promote employee growth • Engagement • Organizational Structure • Need clear reporting line (hierarchy) • Avoid rotation of expat leadership J|W|K 36 HUMAN RESOURCES MANAGEMENT
- 37. University Status Partners Tsing Hua University • Top Engineering School • AACSB Accreditation • EFMD-EQUIS Peking University Top Business School • AACSB Accreditation CEIBS (China Europe International Business School) • Top MBA School • AACSB Accreditation • EFMD-EQUIS UNIVERSITY RELATIONS J|W|K Source: Respective school websites 37 HUMAN RESOURCES MANAGEMENT
- 38. KEY TAKEAWAYS 4 Main Candidate Pools • Western Expatriates • Asian Chinese • PRC Returnee • PRC Local Homegrown Executive Pool is Growing Fast J|W|K 38 HUMAN RESOURCES MANAGEMENT
- 39. J|W|K 39 LABOR CONTRACT LAW Obedience of the law is demanded; not asked as a favor. Theodore Roosevelt
- 40. OVERVIEW • Took into effect in January 1st, 2008 • A response to employees exploitation and harassment in companies across China. For ex: detaining employees’ properties is subject to RMB500 – RMB2000 per person • “…may add an extra 15% in labor costs to companies.” – China Stakes, 2010 • All labor contracts, other than part-time employment, must be in writing • Only the Chinese language version is legally binding LABOR CONTRACT LAW J|W|K 40
- 41. AREAS OF FOCUS 1. Written contract 2. Long-term labor relationship 3. Probationary period 4. Non-compete obligations 5. Employee Resignation 6. Contract dissolution 7. Layoff 8. Severance pay 9. Collective bargaining contract 10. Part-time employment LABOR CONTRACT LAW J|W|K 41
- 42. TYPES OF EMPLOYMENT • Full Time • Fixed-term: • Expiry date agreed upon at outset • Only 2 fixed term contracts are allowed • Typically 1 to 5 years • Open-ended: • No expiry date stipulated • Tenure status, termination difficult • Granted after 10 years or after 2 fixed terms • Project based • Part Time • Hourly basis remuneration • No probation period • Employment at will • No severance LABOR CONTRACT LAW J|W|K 42
- 43. WRITTEN CONTRACT • Written contract requirement • If no prior contract: • One month deadline • Over one month: • Double the salary until one year • Automatic open-ended contract • Probation period Contract Length Probation Period Less than 3 mo None 3 mo – 1 yr 1 month 1 yr – 3 yr 2 months 3 years or more 6 months J|W|K 43 LABOR CONTRACT LAW
- 44. NON-COMPETE OBLIGATIONS • Applicable only to pertinent personnel • Maximum 2 years after separation • Monthly compensation requirement • Violations: • Employer can claim damages LABOR CONTRACT LAW J|W|K 44
- 45. CONTRACT DISSOLUTION J|W|K 45 LABOR CONTRACT LAW Faulty Dissolution (no severance) Non-faulty Dissolution (severance) No Dissolution • Serious violation • Private benefits • Simultaneous relationship with another employer • Criminal liabilities • Must notify labor union • Justifiable reasons: • Illness/non-work related injury • Incompetence • Change of objective circumstances • 30 days notification • Must notify labor union • Occupational disease hazards • Work-related injury • Pregnancy • Nursing period • Confinement • More than 15 years of service and less than 5 years from legal retirement age
- 46. LAYOFF • Layoff is allowed for the following reasons: • Bankruptcy restructure • Serious difficulties in production /operations • Changes in production, technical innovation or adjustment of management operation style • Other major changes in economic circumstances • Large scale layoffs (>20 employees or <20 employees but accounts for 10%+ of the total employees) • 30 days notice • Consider trade union’s/employees’ opinions • Notify labor administration J|W|K 46 LABOR CONTRACT LAW
- 47. REALITY CHECK AND FUTURE OUTLOOK • Reality Check: • Lack of effective and meaningful law enforcement • 20% supplier wage compliance • 5% supplier workweek compliance • Future Outlook: • Increase workers protection social stability • Growing legal industry • Possible clarifications: • Fixed-term open-ended conversion • Severance pay calculation • Continuous improvement: • Social insurance law • Raising retirement age • Women’s protection • Education and training fund J|W|K 47 LABOR CONTRACT LAW
- 48. KEY TAKEAWAYS Retain local employment law specialist Longer contract means longer probation Flexible labor level adjustments Due diligence on suppliers J|W|K 48 LABOR CONTRACT LAW
- 49. J|W|K 49 WAGES AND EXECUTIVE COMPENSATION One great employee is worth three good ones. – Garrett Boone
- 50. WAGES • Minimum wage ≈ US$154/mo (Vary by province/municipality) • 13% yearly increase through 2015 0 1000 2000 3000 4000 5000 6000 7000 Wage Overheads in Emerging Asia Avg. minimum annual salary (worker, intl. dollar) Total labor cost (intl. dollar) J|W|K Source: IMF World Economic Outlook Database, October 2010 50 WAGES AND EXECUTIVE COMPENSATION
- 51. EXECUTIVE COMPENSATIONS • Executives in US earn ≈ 17x than Chinese counterparts • Chinese executive compensation (2008): $180,000 annual pay + $140,000 stock options • CEO cash compensation: • 2009 +5% • In 2010 +12% • Long-Term Incentive (LTI) plans are not commonly used J|W|K 51 WAGES AND EXECUTIVE COMPENSATION
- 52. • Double minimum wage between 2010 and 2015 • Balance between productivity and wage increase continues to be a challenge • Increased competition for executive talents higher compensation • LTI as executives retention tool J|W|K 52 WAGES AND EXECUTIVE COMPENSATION FUTURE OUTLOOK
- 53. KEY TAKEAWAYS Uptrend for wages and executive compensation Consider using LTI plans to retain executives J|W|K 53 WAGES AND EXECUTIVE COMPENSATION
- 55. TRADE UNION • All-China Federation of Trade Unions (ACFTU) • The only national trade union • Companies must contribute 2% of total payroll • No independent trade union • Union: 25 or more employees • Union priority: labor stability • Conflict of interest between local and central governments LABOR UNION J|W|K 55
- 56. REALITY CHECK LABOR UNION • Union’s role is to oversee workers • Union leaders are appointed by the management • Corruption is rampant to circumvent regulation J|W|K 56
- 57. DISPUTE RESOLUTIONS • Increased arbitration and court cases • Steps to dispute resolution: 1. Consultation 2. Mediation 3. Arbitration 4. Litigation LABOR UNION J|W|K 57
- 58. FUTURE OUTLOOK • ACFTU roles expansion • Increased monitoring and compliance • ACFTU emphasis on worker training and development LABOR UNION J|W|K 58
- 59. KEY TAKEAWAYS Union “works” for the company 2% payroll contribution ACFTU = government tool for labor stability Know the 4 steps of dispute resolution J|W|K 59 LABOR UNION
- 61. RECOMMENDATIONS Hire locally Engage local consulting company Build deeper relationship with community • Partner with universities • Maintain commitment Promote employee growth Retain local law specialists Verify supplier compliance status Create competitive compensation policies Allow employees to pick union leader Cultural training for expat staffs Research qiyejituan competitor and possible alliance partner