Executiveaction

series
No. 221 January 2007

Labor and Global Competitiveness…

Bridging China’s Talent Gap

by Judith Banister and David Learmond

Finding talented managers in China is difficult. Although the number

of young people earning undergraduate and graduate degrees is
increasing rapidly, these newcomers to the workforce often lack the
practical experience and softer creative and leadership skills required
in the business world. Making the talent search more difficult is the
fact that the more experienced managers are in short supply and
command high salaries. For multinationals, it is now a challenge not
only to recruit the best people, but also to develop and retain them.

Young Adult Population Shrinking

C
hina’s rapid economic growth—the fastest in the
world for the past quarter century—is fueling exten-
sive foreign investment, with many companies setting
up branch offices, regional headquarters, and factories in the
country. One effect of this economic transformation is that
demand for highly talented employees in China, especially
people with local and international managerial skills, now
exceeds supply, which is driving up compensation packages
to global levels in some cases.
The shift in China’s demographic trends from high birth
and death rates to low birth and death rates is changing the
country’s population age structure, reducing the number of
children (since the 1982 population census) both in absolute
terms and as a proportion of the population, and the number
of people in their 20s (since 1990) and 30s (since 2000).
At the same time, the number of older people of working
age is rising, as is the number of elderly people.1

Editor’s note: This report is based on presentations and

discussions by Judith Banister and David Learmond that took
place during the webcast “Competing for Talent in China,”
1 China National Bureau of Statistics, Population Censuses of 1982, 1990, and
organized by The Conference Board on September 13, 2006.
2000; 1% Population Sample Survey of 2005.
The presenters have first-hand experience living and working
in China. The views expressed here involving Unilever are
David’s personal observations.
 China’s population, including the labor force, is aging
rapidly, but the expanding number of people aged 40
and over is not well educated and does not constitute
an adequate pool of talent for companies. Of China’s
employed population aged 40-44, only 2.6 percent have
a university or higher degree, and the proportion is only
one percent of those in their late 40s and their 50s.2
Conversely, the number of people in their 20s and 30s is
shrinking over time, but this is the part of the population
where the talents are located in China today.
Fortunately, China’s steep fertility decline has been
accompanied by a sharp rise in the “quality” of children
in terms of improved health, chances of survival, and
levels of educational attainment. These young people are
often hungry for responsibility, position, and the trappings
of success in order to support not only themselves, but
also their aging and large extended families.
A lot of young Chinese managers bear this burden and
will readily move between employers in order to get
a bigger salary, more status, and more opportunities.
This is one of the reasons why staff turnover rates are
often very high in China.
Wages in China Rising Rapidly
Wages in China are still low by international standards,
partly due to the huge surplus labor force, but they are
rising rapidly, aided by increases in productivity in all
sectors of China's economy. But China’s top talents
aren’t the only ones receiving substantial wage increases.
Over the past five years, the real wages (after adjusting
for inflation) of the 29 million urban manufacturing
workers in China have increased by 9 to 14 percent a year.3
Another study by the consulting firm Watson Wyatt
2 6
China National Bureau of Statistics, China Labor Statistical Yearbook
2006, p. 65.
3 Erin Lett and Judith Banister, “Labor Compensation Costs of
Manufacturing Employees in China: An update to 2003-2004,”
Monthly Labor Review, Nov. 2006, pp. 40-45. www.bls.gov/
fls/#publications
2 executive action bridging china’s talent gap the conference board
found that employees in China’s leading cities received
annual wage increases of 6 to 8 percent between 2002
and 2005, while for managers and supervisors (who are
harder to replace) the increase was slightly higher at 7
to 10 percent per year.4 Hewitt Associates reported that
during 1999 through 2005, average salary increases were
8 percent in China’s first-tier cities such as Beijing and
Shanghai and 10 percent in the second-tier cities.5
Salaries all over the map
Salaries in China vary greatly. New MBA graduates
from China's top business schools typically receive an
annual starting base salary of RMB 115,000-200,000
(US$14,000-25,000) per year, though some earn much
more.6 Those with bachelors degrees working for multi-
national firms in China’s cities earn annual salaries of
RMB 55,000-85,000 (US$6,750-10,500), those with
masters degrees RMB 78,000-90,000 (US$9,750-11,250),
and Ph.D.s RMB 85,000-120,000 (US$10,500-15,000).7
However, total labor compensation per employee
(including social insurance payments) in the cities can
be from 1.3 times to twice the salary, so the total annual
labor compensation starts at about US$13,650-50,000
per highly educated employee.
As of 2003, senior executives at foreign firms in China’s
leading coastal cities received an average annual salary
of RMB 645,000 (US$77,700), mid-level executives
earned RMB 297,000 (US$35,780), and the typical
professional employee received RMB 100,000 (US$12,000),
according to a survey by Hewitt Associate Consulting
Corporation.8 Today, at senior management levels,
some Chinese employees command a base salary of
US$100,000-150,000 per year.
4 Jim Leininger, The HR Challenge in China: Keys to Fostering Employee
Commitment, Watson Wyatt Worldwide, 2005.
5 Chinabusinessreview.com, March-April 2006, pp. 26-28.
www.chinadaily.com.cn/english/doc/2004-
06/15/content_339630.htm
www.china.org.cn/english/Life/173321.htm
www.ceibs.edu/today/news/archive/5095.shtml
7 www.prnewswire.co.uk/cgi/news/release?id=130057
8 www.business-in-asia.com/china_wages.html
 However, the large group of new graduates from less
prestigious universities in China, whose education may
not prepare them for work in multinational companies,
command far lower salaries than those who can work for
foreign companies. These graduates with weak training
and poor foreign language skills are not in high demand
by global companies because they lack the basic skills
required. University graduates with a bachelors degree
working for domestic Chinese companies have been
stuck at a very low starting base wage during 2003-2006,
according to numerous sources; the recent glut of such
job candidates has kept their entry wage from rising. For
example, Beijing University conducted a seven-province
survey which showed that the average starting wage in
2004 for university graduates was only RMB 1,500 per
month or RMB 18,000 (US$2,175) per year.9
Pay premiums for expatriate managers?
Until recently, ethnic Chinese managers from Taiwan,
Hong Kong, and Singapore, who are highly desired in
China for their international experience, have commanded
pay premiums. Now, a debate is underway among
multinationals and leading domestic companies about
how much premium they want to pay for expatriates,
regardless of their country of origin. There’s a transition
toward localization.
Given the complexity and fragmentation of China’s
remuneration and benefits market, multinationals should
consider giving local HR managers in China more freedom
to decide on appropriate compensation packages for
expatriates, returnees, and ethnic Chinese managers
according to the market.

Employment of China’s University Graduates by Economic Sector, 2004

University graduates are spread throughout China’s economy, according to the 2004 Economic Census of the
non-agricultural economy of China:

Sector No. of Employees (million) University Graduates* (percent)

Science and technology R&D 3.3 32%

Education 15.2 28
IT 2.4 28
Culture and sports 1.5 20
Finance 3.7 19
Retail and wholesale 13.8 8
Construction 27.9 4
Manufacturing 83.9 3

*University graduates as a percent of total employees in each economic sector.

Source: China National Bureau of Statistics. China Economic Census Yearbook 2004, vol. 1, pp. 45-46, Table1-13.

9 Beijing University survey.

executive action bridging china’s talent gap the conference board 3

 At the same time, multinationals also appear to be
reconsidering the extent of the premiums they pay to
local talent, partly because they find it relatively easy to
attract people, particularly for lower-level positions.
Being multinationals, younger workers view them as
opportunities for learning and development, as well as
increasing their worth in the market. Even if it is only a
junior position, having the experience of working at a
multinational company can be very good for the next job.
Steep Rise in Graduate
and Postgraduate Numbers
In the late 1990s, China started establishing many new
universities and graduate programs and also expanded
the number of places in existing universities, giving
many more teenagers and young adults opportunities for
advanced education. This expansion has resulted in a
steep increase in the numbers of graduates from 2001
onward, reaching a record 4.13 million graduates in 2006
—a 22 percent increase from the year before, according
to a Xinhua News Agency report.10
The number of people with postgraduate degrees in
business-related fields is also fast increasing, in line with
the rapid expansion of MBA courses in China—there are
currently more than 230 MBA programs in China based
at more than 100 institutions in 35 locations.11 However,
in some cases, given the newness of the programs, the
quality of the education is not high.
China’s Educational System Is Still Evolving
The Chinese government knows it must increase the num-
ber of educated people if it is to compete economically.
However, while the number of people with advanced
degrees is growing quickly, the quality of their education
in general fails to meet business demands for talent.
10 Xinhua News Agency, National Development and Reform Commission
Report, May 7, 2006.
12 McKinsey Global Institute, The Emerging Global Labor Market, June 2005.
11 Jonathan Di Rollo, The China MBA Guide 2006. www.propathchina.com
4 executive action bridging china’s talent gap the conference board
A 2005 report by McKinsey Global Institute, The Emerging
Global Labor Market, found that global managers consider
only 3 percent of graduates in China with a general degree
to be employable.12 (A general degree is any degree that
is not related to business or economics or specific skills
like engineering or IT—such as liberal arts or languages).
One of the main problems with China’s educational
system is that it relies too heavily on memorization. But
companies also need people with creative writing and
speaking skills, teamwork skills, practical skills, and
leadership ability, which are not taught well in the great
majority of China’s universities and graduate programs.
Positive Qualities and Common Problems
of Educated Chinese Workers
In general, educated employees in China have the
following positive qualities and common problems,
according to the personal observations of the authors,
anecdotal reports by multinational employers, and
available published material.
Positive Qualities
• Young, bright, urban.
• Recently educated at university.
• Eager to work for multinationals or
for top domestic companies.
• Hard working, ambitious, and dedicated.
Common Problems
• Foreign-language skills, especially spoken English.
• Education often too theoretical rather than practical.
• Inexperienced, but expect good salaries
and rapid advancement.
• Frequent job-hopping (annual talent turnover
in some companies 10 to 30 percent).
• Severe scarcity at management level.
www.McKinsey.com/mgi/publications/emerginggloballabormarket.
Linking up with local universities
To help universities develop courses that are more
attuned to the needs of business, some multinationals are
now identifying good universities in the area in which
they operate and are working with them to devise courses
that are more relevant to their specific requirements. In
the past, these university-business links were often set up
by state-owned enterprises.
The fact that a lot of young people want to work for
multinationals — mainly because of the high status it
gives them — has persuaded some multinationals to
forge links with universities to bring about change
that otherwise might happen very slowly. In some
universities, this approach has been well-received and
multinationals are reporting success in getting whatever
skills they want.
It is an approach that should be mutually beneficial
because it allows students to be trained in a way that is
useful to the multinational. Those students then have a
Recruiting Graduates
“The annual Chinese graduate milkround continues to be
a drama of epic proportions. I remember traveling to a
new university campus 25 miles outside of Shanghai to
give a company recruitment presentation. With dire
warnings of the unpredictability of the traffic, I arrived
one hour early. I was staggered to see that the lecture
hall was already overflowing with over 300 students.
My suggestion that we start our presentation early was
politely rejected—this would be unfair to the hundred or
so who were yet to arrive and would have the presenta-
tion relayed to them outside.
13 Manpower, Talent Shortage Survey Global Results, 2006.
executive action
fast track into a job with that multinational when they
graduate. However, the practice sometimes falls short of
this expectation as there is still a strong tendency for the
university system to rely on “learn by rote” techniques.
Teamwork and creativity are qualities still in short supply
among Chinese managers.
Locating the Specialties Experiencing
Shortages of Talent
A survey of nearly 2,700 employers in China carried
out by Manpower in 2006 showed that three-quarters of
them have no difficulty filling positions.13 Of those that
do, the top ten positions that are most difficult to fill are:
production operators, sales representatives, highly skilled
technicians, management and executive-level people,
engineers, machinists, researchers (R&D), designers,
restaurant and hotel staff, and receptionists. Some of the
latter jobs are difficult to fill because these workers and
employees need to interact with foreigners on the job but
lack the necessary English language skills.
“Today, new technology is increasingly being deployed to
provide company information to the huge numbers of
applicants over a geographic area bigger and more
diverse than Europe. We used live webcasts and interac-
tive question-and-answer sessions with 10 company
executives answering queries simultaneously. It was a
bizarre mix between a recruitment call center and an
Internet chat room where students felt able to ask ques-
tions they would never dream of asking face-to-face.”
— David Learmond
bridging china’s talent gap the conference board 5
 International Assignments
Develop Management Skills
One way to improve managers’ international
management skills is to give them international postings.
The risk with this strategy is that Chinese managers in
these positions will either not wish to return to China
or that they will leave the company. It’s a mixed picture.
If people identify with your company and benefit from
their overseas experience, often they will remain with
the company and return to China.
Moreover, multinationals should develop a system of
short-term assignments for their Chinese managers,
rather than two- to three-year postings, or get them
involved in cross-cultural project teams with some
overseas travel and experience in other places.
To ensure that managers in China can perform not only
in the international market, but also in the vast and
rapidly changing Chinese market is a challenge that
Investing in Leadership Skills
“In China, multinational businesses need to put a lot
more effort into talent development than they would nor-
mally do in most other places in the world. In particular,
they need to focus on the “software” talent development
needs—such as coaching, leadership development, and
the ability to handle change.
“At Unilever, we developed a range of coaching programs.
Using web-based questionnaires, psychometric tests,
and feedback from subordinates, participants in the
programs received highly relevant and specific feedback
on their leadership styles and the climate they were
creating for their staff. Our Chinese managers discovered
that their predominant leadership style tended towards
“command and control” and that overusing this style was
having a negative effect on their people.
6 executive action bridging china’s talent gap the conference board
requires a mutual learning process. Expatriates need to
learn fast from their Chinese colleagues and employees
how to function because they rarely know China well
when they first arrive. At the same time, they need to
train their Chinese colleagues to international standards.
So it is a mutual training exercise.
Case Study: Unilever Breaks
Free of China’s Value Trap
In 2000, after 16 years competing in China’s fast-moving
consumer goods market, Unilever China was facing
financial losses and negligible growth. The company was
spending huge sums on marketing in one of the fiercest
competitive environments in the world, but it had an
ineffective sales and distribution model and an inefficient
manufacturing base. It also employed more than 100
expatriates in managerial positions and had a large local
talent gap. Staff turnover in key functions was high.
“This realization encouraged them to develop other styles
of leadership and learn how to deploy them to match the
wide range of situations they encountered in everyday
business. It was not always easy for managers to manage
in this way but most were encouraged when they found
that their staff responded enthusiastically. For managers, it
meant listening more, talking less, and generally being sup-
portive and questioning rather than directive. Staff had to
get used to using their bosses as sounding boards, taking
responsibility for their decisions, and learning from their
failures as well as their successes.
“The coaching initiative was one part of an overall strategy
aimed at establishing sound foundations for the business
and accelerating profitable growth. I have no doubts that
developing a coaching culture had a significant positive
impact on improving business results in recent years and
in building greater capability for the future.”
— David Learmond
 To address these issues, the company devised a talent
development strategy with several key goals, including
replacing expatriates with local managers, introducing
leadership coaching and a leadership forum, and
reengineering benefit and retention packages. The
company also set clear standards on performance and
business ethics, which meant that a large number of
people had to leave the business because they were not
suited to their jobs. Unilever was forced to do this even
though it was facing a very difficult business situation.
Best Practices for Hiring, Developing, and Retaining Employees
• Emphasize training and development of employees on
a continuing basis to encourage high morale and strong
identification with the company. This is essential because
new hires, although bright, highly motivated, and eager to
succeed, are often inexperienced and will require training
to meet business needs.
• Make employee satisfaction a high priority and
be willing to direct resources to achieving this goal.
• Build a coaching culture where employees have the
support and encouragement to try new things.
• Be aware of and adapt to the local environment, customary
business practices, and cultural factors in the workplace
in China, according to research by Manpower.*
• Develop the leadership skills of local managers by
increasing self-awareness and providing feedback on
how their style impacts their employees.
• Improve the English language skills of new hires; provide
short English language training courses geared to the
specific and targeted language needs of the company.
• Establish practical group projects, accompanied
by strong guidance and mentoring, to help overcome
the limited practical experience of new hires.
* Manpower, The China Talent Paradox. A Manpower China White Paper,
2006. www.manpower.co.uk
executive action
One of the factors that was critical to the success of the
strategy was identifying a group of about 50 local Chinese
managers in Unilever China’s operating companies who
were considered high-potential and fast-tracking their
development. Many of these managers tended to work
in functional silos. With very little cross-fertilization of
ideas, a lot of issues had to be solved by the operating
company board members.
• The Economist Intelligence Unit in its report The Great
Buy-out: M&A in China identifies several key issues
for retaining Chinese talent after a merger including:
use of performance-related pay, company image,
providing opportunities for training and development,
and providing opportunities for promotion.**
• Motorola requires expatriate managers to train their
local successors within two to three years, according
to research carried out by Manpower. Part of the
expatriate compensation package is based on their
success in replacing themselves.***
• Some companies in China are now collaborating
with local business schools or universities to help them
improve their curricula and develop better and more
relevant management training courses.
• Hire Chinese people—either returnees or Chinese people
from other parts of Asia—who are often very successful
in China.
• Aggressively train and promote middle and senior
managers from within.
** Cesar Bacani and Katherine Peavy Sima, Economist Intelligence Unit,
The Great Buy-out: M&A in China. An Economist Intelligence Unit
White Paper, 2006.
*** Manpower, The China Talent Paradox.
bridging china’s talent gap the conference board 7

To change this, the company organized regular business
strategy meetings for group members, as well as team
building exercises, which gradually gave them an
overview of the whole business. In addition, it started to
develop individuals’ self-awareness of their leadership
styles and the sort of environment they were creating for
employees. The combination of these two things made
people realize that they needed to operate in a different
way if they were going to progress in the business and
move to the next level. It represented a sea change in
the group’s development.
About the Authors
Judith Banister, Director of Global Demographics for
The Conference Board is based in Beijing. David Learmond,
Executive Fellow and Program Director for The Conference
Board Asia-Pacific Council on Talent, Leadership Development
and Organization Effectiveness, lived and worked in Shanghai
for five years as Senior Vice President and HR Director for
Unilever China. He is also Principal Industrial Fellow in the
Department of Engineering of the University of Cambridge
and a partner at Better Business Coaching LLP, an executive
coaching business.

The result of Unilever China’s various initiatives was

a profitable business in 2006, growing by more than
25 percent per year. This has been achieved through
business simplification, improved sales and distribu-
tion, relocation of manufacturing from Shanghai to less
expensive locations, recruitment of local Chinese board
directors to Unilever China’s operating companies, and
investing even more in marketing.

8 executive action bridging china’s talent gap the conference board