China has become a "must win" market for nearly any company operating on an international scale. However, for all of its attractiveness to foreign investors, China is by no means an easy win - there are at least as many hazards as there are opportunities.

Many foreign firms actually struggle to succeed in China's fiercely competitive business environment. Apart from intensified competition among global players - especially since China joined the World Trade Organisation in 2001 - domestic firms are becoming increasingly competitive and internationally focused. These companies are fighting not only for market share but also for resources, particularly local human resources.

Paradoxically, despite China's huge population of more than 1.3 billion people, only a small percentage of candidates is sufficiently qualified to work at an international company. On the demand side, Chinese firms are moving steadily upmarket and towards international standards, meaning that English-speaking and practically educated candidates are no longer sought after only by foreign firms. On the supply side, China's higher education system has expanded at a rate that has outpaced the country's economic growth. As a result, there are plenty of graduates available, but most of them do not have the necessary skills to work in an international context. They often lack practical knowledge, language proficiency, holistic thinking, creativity and result orientation.

As demand for qualified labour outstrips supply, China is facing a battle for brainpower that is characterised by a severe skill shortage, spiralling salary inflation and excessive staff turnover. In view of this situation, the issues of how to attract, engage, develop and retain local talent have become make-or-break matters not only for HR practitioners but also for CEOs of multinational companies in China. Without enough of the right people, companies simply cannot realise their growth strategies for the Chinese market.

A recent survey of 70 German multinational companies in China conducted by Watson Wyatt confirms that human resources represents by far the most serious business challenge for them in the Chinese market: 88 percent of the respondents suggested this is the greatest limiting factor for their operations in China (see table). Other pressing issues include bureaucracy and administrative hurdles (52 percent), IPR protection (47 percent), legal certainty (40 percent) and a lack of market information (40 percent). Within the field of human resources, attraction (82 percent), retention (72 percent), leadership/management effectiveness (65 percent) and employee commitment (48 percent) are the major concerns.

Considering the high employee turnover rates in China, Watson Wyatt asked German companies for their opinions regarding the "push" and "pull" factors that cause local talent to join a company, or switch to another employer (see charts on page 58). In general, talented people join a company for reasons of compensation (78 percent), company/brand reputation (72 percent) and career opportunities (67 percent). The most important reasons for switching jobs are career opportunities (68 percent), compensation (62 percent) and position title (46 percent).

Titles and face

While these results are basically in line with the research findings that Watson Wyatt has generated from both employees and graduates, there is one aspect which stands out: job titles. Many German companies are rather conservative when it comes to titles. However, in line with the concept of face, job titles are very important for Chinese employees. If a company fails to provide compelling titles to its staff, it runs the risk of losing them to the competition in the course of "title-hopping". In order to address this issue, companies increasingly put in place separate geographical, as well as internal and external, title structures.

In order to respond to HR challenges, the surveyed German companies are taking action in the most pressing areas. They focus their efforts on measures such as compensation, training, position titling and performance management. These actions are predominantly short-term-oriented and transactional in nature. More importantly, they do not help them to achieve their ends. For instance, by trying to outbid the competition with ever-increasing hiring bonuses, employers send the wrong signals to their existing employees. These indicate that if they also want to get a similar pay rise, they need to leave the company. Employers help to legitimise job-hopping.

Watson Wyatt's consulting experience has been that while pay remains a popular and effective lever for attracting and retaining premium talent, the greatest potential lies in alternative attraction and retention measures not related to pay. Therefore, in order to enter into a phase of sustained business growth, multinational companies increasingly try to supplement their current activities by strategic long-term measures comprising aspects such as talent development, cultural alignment, work-life balance and employer branding.

Investment in talent can yield high value as people are arguably a company's greatest assets. However, due to the fast pace of the Chinese environment as well as high turnover rates, respondents have found little time to deploy talent programs. Instead, they have pragmatically focused on succession planning and training rather than systematic competency development. In order to achieve their growth targets, they internally promoted or externally hired candidates into positions, whether or not they are qualified. As a consequence, performance, employee and customer satisfaction may suffer and the damage caused is often far higher than if the position had been kept vacant. In view of this, companies should take a step back and form strategies on the organisational capabilities they need to achieve sustainable business growth in China. Based on these reflections, they make targeted investments in talent development, including competency build-up, development plans, career paths, on-boarding and coaching. In addition, they adapt existing company-wide programs and utilise them as competitive differentiators in the labour market.

Getting the culture right

Ninety percent of the surveyed German firms are currently in a growth or start-up phase. In view of their growth orientation and the high staff turnover rates, many companies suffer from a dilution of their corporate values. As the newly hired people come from widely different backgrounds, they often have little alignment with a shared reference framework. Consequently, they cannot live and represent certain corporate values. Foreign companies often trust that their company's strong central culture, as seen from headquarters, automatically translates into a compelling local culture. However, local employees hardly feel this culture on the ground in China. Culturally speaking, it makes no difference to them which employer they work for. For the employers, this means that they become easily interchangeable. In this context, a locally specified company culture based on the overall company values and strategies has been proven most meaningful for local staff and therefore suitable to attract and retain them.

For Chinese employees, the compatibility of professional and private interests is a high priority. A comparison of the results of a separate study by Watson Wyatt on employer attractiveness for Chinese employees has shown that an adequate work-life balance had highest importance for 73 percent of respondents in 2003 and 87 percent of respondents in 2007. In terms of retention, work-life balance conflicts have been widely underestimated. Employers have long been unaware that many high-performing employees resign from their jobs due to family conflicts.

In order to recognise these needs, companies may want to offer provisions such as flexible working arrangements and delegation of increased authority to employees for their work schedules. Commuting in most Chinese cities is a great hassle, especially for those who cannot live near their workplace. Most Chinese employees are willing to make a 90-minute trip, but satisfaction levels correlate inversely with daily commuting time. White-collar commuters in particular are prone to being poached by competitors with more favourable locations. In addition, Chinese staff attribute high importance to social events (eg team-building exercises and outings) and a general openness of the company to family issues. Many employees explicitly select their employer according to family-friendliness, and whether the employer allows them to juggle their multiple responsibilities. As balance can mean different things to different people, companies may want to further explore employees' work-life balance needs, for example through employee opinion surveys.

Making a name for yourself

Marketing is of crucial importance when it comes to building an attractive employer brand. Of course, the HR infrastructure needs to be sound in the first place, or else a good employer image would not be credible. Conversely, establishing state-of-the-art systems may not automatically translate into high employer attractiveness if both external candidates and existing employees have not heard about them. A third of the surveyed German firms confirmed that they already focus on employer branding activities, following the theme of "doing good and talking about it". Offering a compelling value proposition can help these firms reduce voluntary turnover and attract more applications, allowing them to systematically profile potential employees and identify those who are more likely to stay longer. Some effective ways of putting out a favourable product image into a positive employer brand include having recruitment booths at industry fairs and getting early and preferred access to candidates through professors, career officers, alumni networks, internships and career counsellors.

In China, even more so than in many other parts of the world, business success and failure is largely linked to a company's HR capabilities. Multinational firms may wish to review their people strategies for China with respect to long-term sustainability. In many cases, this necessitates a departure from a short-lived elimination of symptoms towards a systematic addressing of the underlying causes of their personnel woes. By focusing not only on the obvious challenges but on the less visible but nevertheless fundamentally important issues, companies can develop effective human capital management programs that go beyond pay and generate high employee engagement through non-monetary incentives. Companies embarking on a sustainable long-term people strategy are well-positioned to maximise the returns on their investments, achieve both their human capital and financial objectives, and drive sustained business growth.