The Chinese labour market is a paradox of talent. Despite a large workforce there is a shortage of skills. The resulting excess demand for talent has created a seller’s market. Skilled locals have more employments options and are more likely to leave current employers if they feel dissatisfied. These employees seek career advancement, new challenges and opportunities. Employee retention poses a challenge to firms, with high turnover rate of around 20.8% and 21.8% in 2009 according to Hewitt China.

Market Trends

Overall, recruiting local or foreign educated Chinese is becoming increasingly popular due to their lower salaries and greater knowledge of the culture and language. In terms industry trends, the retail, sales and marketing sectors face the largest shortage of qualified workers especially those with the language skills to cater to growing cultural diversity in China.  The growing financial industry also showed healthy rates of recruitment. According to 2009 Hewitt HR Watch report, the average overall projected rate of salary increases was 6.8% across all industries. Figures from the latest Hudson Report affirm these high salary increases and suggest that they reflect the seller’s market.

Amidst repeated international calls for currency reform, China has decided to allow greater Yuan flexibility. The Yuan will be allowed greater freedom to fluctuate against a set basket of currencies, although Beijing has denied the immediate revaluation of the Yuan. Since Beijing’s announcement, the Yuan has risen to record highs against several major currencies.  The move has also being greeted with stock markets worldwide and cautious optimism from political and financial figures worldwide. Yet, the rate of appreciation and long term impact of the move remains unclear.

The widespread belief overseas is that China’s exports competitiveness results from the artificially low Yuan. Henceforth, a free floating Yuan would allow foreign exporters to become more competitive and greater demand for foreign imports. This would largely be driven by the increasing purchasing power of Chinese consumers. This may potentially lead to greater growth and job creation abroad.

This common notion is not a guarantee.  A decrease in Chinese exports may slow economic growth and decrease GDP. Should this be the case, Chinese import demand will decrease. This would negatively affect foreign economies given the size of China’s consuming market.

 A decrease in export demands may see a domestic industry shift. Manufacturing jobs would not be as widely available and workers may seek out other sectors for jobs.  Academics and Economists worldwide are considering the potential shift towards the service and value added goods production may also result and compete with international firms in these industries.

PTL Group was highly fortunate to have an opportunity to talk with Ilan Maimon, CEO of Sigma Group, an experienced industrial entrepreneur and multiple business owner in China. He is also a partner in PTL Group Industrial Project Management initiative. Ilan describes himself as a businessman, who is a mechanical and electrical engineer by profession.

Ilan: I am originally from Israel, where I was a partner in a software company. With the Dot-Com crisis in 2002, I decided to quit my current position and make a major change in my life. So I came to China.  I worked as a General Manager for a few companies while starting my own in parallel.

What are the areas/current projects you are working on? Tell me more about your business and what you do?

Ilan: I am currently doing business on two levels, trading (buying and selling goods after adding value) and manufacturing (coffee grinders).

I set up my first company, Sigma Group in 2003. Sigma Group manufactures goods for the Italian sports brand Paul & Shark. We also produce gifts, promotional items and accessories for companies including New Balance.

I then started Hey Cafe in 2005 with sales beginning 2006. Hey Cafe is still the only manufacturer of the coffee grinders, which are currently sold in over 20 countries. We have a big market in Asia with a growing market in the USA/Canada. Hey Cafe also has retail shops selling coffee located in Chongqing and Chengdu. Europe is perhaps our weakest market due to the number of competitors. I started my third company in 2008.

The task of building a factory becomes more complex in China. It is imperative to have the right skills, knowledge, experience regarding each stage in the process of setting up a new entity in order to obtain the best possible site and agreement.  Undertaking such a task in China requires an in-depth understanding of cultural differences, local regulations, negotiation processes and management strategies in addition to experience and connections in the local markets. The key to success of any industrial construction project lies in proper financial management, which should not be neglected.

Picking the right site for your business

Site location for the new factory is arguably the most important decision. Throughout China, many industrial parks compete for foreign investment.  It is important to locate those with the best reputation and benefits and a need for factories in the specific industry. Choosing to locate factory as close as possible to the potential market may allow secure more favorable shipping terms, whilst allowing the company to provide efficient service at all times.

Accessibility to such transport facilities is an advantage such as high-speed railways that allow cheaper second tier cities such as Wujin to substitute first tiers.  Easy access to raw materials may also be highly desirable. It is crucial that suitable workers and managers can be recruited in the area, with checks conducted into the local employment regulations and average wage costs.

China is making a significant commitment to the environment.   The recent growth of renewable energies and eco-industry reflect the sustainability trend.  Currently the largest global emitter, China aims to reduce emissions by 40-45% for every unit of GDP by 2050. Pollution and environmental issues have resulted in an economic loss of 10% of GDP reflecting the necessity of sustainability for long term economic success.  

Decreasing reliance on coal will be the key to success.  New Government statistics estimate by the end of 2010, over a quarter of electricity will be generated via renewable sources. The growth of this sector has outpaced that of the coal, and now account for over half of gross energy capacity. Among renewable energies, solar and wind energy are the two fastest growing.

One Man’s Trash:  China’s Growing Waste Problem

No nation has witnessed a growth in waste at the rate that China has seen in the past two decades. Industrialisation and an urban population explosion have propelled China to overtake the USA in waste generation in 2004. Urban areas alone generate 1.5 billion tons annually or 1kg per capita daily.

China’s Waste Management systems have failed to develop to manage the increasing amounts of waste. The domestic industry does not have the necessary infrastructures or expertise in efficient collection, treatment, disposal of waste nor designing and operating facilities.

A highly underdeveloped sector with good potential, Waste Management presents problems for China, but opportunities for foreign firms. Currently, only 70% of Municipal Solid Waste (MSW) generated is collected and only 60% is treated before disposal.  Domestic firms in the industry underperform due to inadequate financial capacity and technical expertise, with informal private players dominating certain sectors. The growth of the industry has also been stagnated by the lack of incentive for private investment.

Social security, also commonly referred to as mandatory benefits in China, is quite straightforward to explain as a concept; however, the calculations to arrive at the correct contribution to be made by the employer and each employee can be complex. This is especially true when employees come from different cities in China or have different working locations.

There are six categories of social security in China. They are:

- Pension
- Medical insurance
- Maternity insurance
- Unemployment insurance
- Accident insurance
- Critical illness insurance

As a general rule, employers should make a contribution to each of these types of social security on behalf of their employees. Employees are also required to make contributions to some of them. The contributions are set as a percentage of average monthly salary.

Because the funds are administered by divisions of local governments, the percentages that should be contributed by employee and employer differ depending on the city in which their employees reside. In China, this is known as the person's hukou. Therefore, the social security contribution that the employer should pay on behalf of two employees earning the same salary, one from Shanghai and one from neighboring Kunshan, Jiangsu Province for instance, can be quite different. Similarly, the amount of individual income tax paid by these two employees will also be different, as social security contributions made by the employee are deductible against tax (up to a certain limit).

Below is a selection of some of the questions many China operations teams are grappling with right now. As you read these, it is worth noting that the further you delve into any one of these issues, the more complex it becomes. In the end, the key to answering all of these questions is having the right people on the ground in China.

1. Does your company have a legal obligation to facilitate the organization of a local labor union in its China-based factories? What is the appropriate response to a visit from local union officials requesting unionization?

2. How are China's new policies that promote "indigenous innovation" affecting your industry? Are domestic competitors using these policies to gain an advantage in government procurement, funding for research and development (R&D), or tax breaks? And is application research done by Chinese scientists in your Shanghai R&D center considered "indigenous innovation"?

3. If a sub-contractor to one of your company's smaller suppliers is dumping untreated wastewater into Lake Tai, would your supply chain auditors, whether internal or third-party, detect this? If a Chinese media report appears detailing precisely this situation, what is your company's immediate response?

4. Do white-collar, salaried workers in China who work more than 40 hours per week require some form of overtime compensation? Is your company's comprehensive or flexible-time work-hour system approved by the local labor bureau ?

So, how do you choose your partner in China?

“Don’t be anybody’s first foreign client/partner in China” (Andrew Hupert, www.ChinaSolved.com)

Choosing a business partner in China is just like choosing a business partner anywhere else in the world. Don’t believe anyone who tells you that you cannot do the same kind of background check in China that you can do in other markets.

Here is a short list of things that needs to be done:

1. Reference checks are not only possible - they are a MUST. Check every company on your future partner’s CV and any foreign client he claims to have worked with. Call each one of them and don’t be shy about asking for any type of information. If you are afraid of hurting your future partner’s feelings – DON’T BE! Professionals with nothing to hide will not be offended. If he has something to hide and you don’t do a thorough background check, your feelings and pocket will be hurt badly! It is your business on the line, so don’t feel uncomfortable.

2. Check the business license of your future partner to find out if he is on any black lists of the tax bureau, banks, customs, trade office etc. If you feel that you cannot do it yourself, use professional help to do it for you. It is a worthwhile expense that might save you a lot of money and trouble in the future.