Relocating to China

Setting up Operations in China: a Huge Opportunity – Expensive Human Resources

China has a rapidly growing economy, focusing the attention of the global business community for over twenty years. According to a survey conducted in 2010, 95.6% of surveyed companies see China an important market in the company’s global strategy, and 63.8% of the companies indicated that the importance of this market is critical to their global strategy. Companies surveyed expected the rate of income from China –to shoot up by over 60% in five years.


These figures explain the importance that global companies attach to the Chinese market. Seemingly, “The sky is the limit”, but as history teaches us – the bigger the opportunity, the higher its price, and the lower its attractiveness. More and more signs indicate that the barrier to the development of global companies in China is the human resource. In the words of the CEO of a global company in China: “The challenge now is not due to a lack of opportunities, but the fact that we do not have enough qualified people to pounce on these opportunities, to implement our strategies and express our ideas.”


Shortage of skilled manpower

81% of global companies in China today report a lack of skilled manpower. The more significant shortage is for jobs of senior-level management, intermediate level management (mainly in project management and customer management) and professional staff (especially sales and marketing employees).


You can understand this lack by examining the Chinese education system, which is based traditionally on the scientific and engineering professions. Until a decade ago, universities in China had not offered any education in business administration and during the last ten years there were only 30,000 graduates in Business Administration (MBA) in Chinese universities. Today about 64 universities in China offer courses in business administration – but it still “a drop in the bucket”, far from being able to satisfy global companies’ need for managers and skilled workers.


The lack of professional managers and employees is felt today in every field in China. In Beijing only there is an estimated lack of 90,000 skilled workers. But the current lack pales in comparison to the expected lack in the upcoming years, as “the appetite” of global companies operating in China increases rapidly.

Systems company Accenture, for example, increased the number of employees in China from 150 two years ago to 1,000 employees today, and plans to increase its staff to 4,000 over the next two years. Tax consulting firm Deloitte & Touche currently has nine offices in China employing 3,000 people and its business plan for the next five years include opening 11 additional offices and an increase of the number of employees to 8,000 (with half of the new employees are supposed to be experienced professional employees). Although the company has budgeted more than – $150 million for education and training of personnel, it is not clear whether it will be successful in recruiting personnel for the planned training.


High Personnel Turnover

Personnel turnover rates in China are very high. The percentage of employee turnover at the managerial level and professional employees in the first year currently stands at about 34% (i.e. every third worker leaves his job during the first year of work). This is an amazing turnover rate by any standards. For comparison, the turnover rates in the region are about 13% in Hong Kong, 11% in Australia, 9% in Taiwan and 5% in Singapore.


This turnover rate further aggravates the shortage of skilled manpower, since a training period of 3-6 months is required in order to get a new employee to produce the desired output level. This means that about 20% of the personnel of companies in China are constantly in their training period and contribute only marginally to the company’s output (this is before we take into account the amount of management investment in resigning staff and recruitment of employees to replace them).


Wage Levels are on the Increase

Wage level in China are constantly increasing. In the past decade, wage levels increased by more than 250%, and in 2011 the rate of increase in the wage level was estimated at about 7%. The average salary of a Chinese intermediate level manager is already $97,000 per year. The average salary of a local company CEO is $270,000 per year.

It is estimated that within three years the wage level in China will exceed the wage level in Singapore (wages for senior positions in China and Singapore already are very close), and that within five years it will exceed even the wage level in Hong Kong.

No doubt increased competition for human resources means wage increases at a higher rate. China may continue to attract investment in cheap product lines, but its attractiveness for investments that require management and professional personnel is doubtful.


Workers from Foreign Countries (Expatriates)

The severe shortage of management and professional manpower in China forces many global companies to send employees on relocation missions in China. Although the potential number of workers from foreign countries does not depend on the condition of the labor market in China, the use of expatriates in China incurs a high price:

The “direct” price: the average total cost of salary and benefits packages of an expatriate in China is 4.5 times higher than the cost of a parallel local worker. The average cost of an expatriate for the company is about $310,000 per year. This high cost is mainly due to the need to pay rent in expensive residential areas and tuition for private schools.


The “indirect” price: the ability of an expatriate in a managerial and professional position to function requires multiple communication with employees, customers and local suppliers, and is limited by the language barrier and intercultural gaps. Many global companies have tried to overcome this problem by sending employees of Chinese origin (Chinese speaking) to work in China, but it turned out that the gaps between them and the local employees are difficult to bridge as well (as expressed by one of them “I understand what they say – but I do not understand why they say it”).

Another attempt was sending workers from Hong Kong to China. Here, too, it is not a simple option: Hong Kong employees are often not fluent in the Mandarin dialect (the dialect spoken in the relevant areas in China) and encountered opposition from the local employees (who feel an aversion to Hong Kong residents for not sharing their fate during the difficult years under the Communist regime).



An analysis of the Chinese labor market trends indicates a worsening lack of manpower in top management, managerial and professional positions. this is in addition to ever-increasing wage costs that will match the salary levels in Hong Kong and Singapore in a few years. The Chinese market is characterized by increasing competition for suitable manpower and the highest personnel turnover percentage, which damage the output of global companies and will require large investments in training and recruitment. This important data may be a key consideration in the decision of a company to establish operations in China in the coming years.


Sources: Cendant Mobility, HRBS, Hewitt