Dr. Kuang-Hua Lin

China continues to offer growth potential, even if economic growth is set to slow further according to forecasts from October 2015: growth levels are likely to fall from 6.8% in 2015 to 6.3% 2016.

However, despite the slowdown in growth, the key HR challenges for German companies operating in China remain unchanged, according to a recent survey by AHK, namely:

• soaring personnel costs;
• difficulties in recruiting personnel; and
• long-term employee retention.

Personnel costs

Due to current sluggish growth, the pressure of rising salaries on German companies in China will lessen. We expect that the annual increase in wages and salaries for German companies in China will fall from 8.1% in 2015 to 7% per year within the next three to five years (see Chart 1).

However, the average growth rate 
in fact reveals little with regard to individual occupational categories. Depending on income, actual growth rates can vary considerably. While minimum wages for unskilled labour are increasing by 10% to 20% annually, depending on the location, the income of highly paid expatriates and top managers in China has barely increased.

Despite this slowdown in growth in wages and salaries, regional and industrial differences in remuneration levels remain. 
The Shanghai region continues to be the most expensive location for German companies in China (see Chart 2). German companies operating in the chemicals and automotive industries in China currently pay the highest salaries (see Chart 3).

Almost every city in China regularly publishes local statistics for wages and salaries. However, we do not recommend using these administrative statistics as benchmarks for wages and salaries, because German companies place considerably higher demands on their own employees than Chinese companies and thus pay consequently higher wages and salaries compared to those indicated in the official statistics, which only reflect average salary levels.

Conversely, the figures from the compensation studies for China produced by the major international consulting companies are almost always considered too high – at least as far as medium-sized companies are concerned, as these compensation studies are essentially only valid for their clientele, which primarily comprise international groups (e.g. Fortune 500 companies).

The best figures for German companies to use as the basis for their salary benchmarking in China are therefore the statistics from the annual compensation studies on wages and salaries produced by AHK (the German Chambers of Commerce Worldwide Network) in China. These studies are conducted annually among all AHK members in China and published under the title “Labor Market and Salary Report”. Here, we have reproduced the figures from this report for the monthly gross salaries paid by German companies in China (see Table 1).

Pitfalls when calculating personnel costs in China

Almost all German companies that do not yet have a subsidiary in China wrongly assume that the social-security contributions will be comparable to those applicable in Germany and that the employer and employee contributions will be the same for both parties, leading to miscalculations in the ancillary wage costs.

In China, the approach adopted is quite different, as social security is organised locally. This means that each city has different contribution rates and different upper and lower assessment thresholds.

Employers normally pay around two thirds of social-security contributions, while employees pay the remaining third. When calculating monthly personnel costs, the different assessment thresholds and contribution rates for each individual location must be assessed and applied.

Recruitment

Many German companies are facing difficulties in attracting qualified specialists and senior executives in China. One of the main reasons for this is the low level of awareness of these companies in China. With the exception of a few large groups such as Siemens and BASF or consumer brands such as BMW and Zwilling, the Chinese are familiar with hardly any German companies. It is therefore all the more important that, when recruiting personnel in China, a German company consistently emphasizes that the company is German, as German companies enjoy a good reputation in China.

Despite this, even renowned German companies are having difficulties in attracting the best employees in China at the moment. A decisive factor here is the competitive remuneration model: an increasing number of Chinese companies are offering their top employees American-style shares or share options. Most German companies are not able, or do not wish, to issue shares or options to their employees in China. However, in order to face up to the competition, some are instead developing remuneration models that simulate shares or share options. Nevertheless, we are of the opinion that, in principle, there is no reason why German companies – family-owned businesses and medium-sized companies – shouldn’t list their subsidiaries in China on the Hong Kong Stock Exchange in order to be able to offer their employees in these subsidiaries shares or share options.

We expect that in the next two to three years, recruiting qualified specialists and senior executives in China will become more difficult owing to the current economic downturn, even if one might assume the opposite. Although it is true that demand – i.e. the number of vacancies – will decline during an economic downturn, the offer – i.e. the number of qualified employees searching for a job – will decrease even more quickly as employees see big risks in changing their jobs during an unfavourable economic cycle.

Many companies in China will turn to HR consultants when recruiting. In such cases, particular attention should be paid to ensuring that the consultant in question has good references, enjoys an excellent reputation with German companies, and does not headhunt for other clients. Many HR consultants in China will call back “their” candidates, whom they have placed previously, year after year and offer them new positions. Against this kind of procedure, contracts and agreements will be of no help; this is why the consultant’s good standing and flawless reputation are so important. Moreover, a fixed fee for the consultant, independent of the salary associated with the post to be filled, should absolutely be agreed upon beforehand, so that the consultant will not try to recommend the most expensive candidates.

Employee retention

Due to the declining number of job offers and the risk-avoidance behaviour mentioned above, the workforce turnover rate is currently falling in almost all German companies in China. However, at present, an increasing number of key employees are being lured away by Chinese competitors. In addition to the aforementioned shares and share options, Chinese companies offer switching bonuses that in some cases can be worth over a million renminbi. For example, one Chinese competitor offered a key account manager who was working for a German client in the automotive supply industry an apartment in Shanghai worth more than 3 million renminbi on condition that he changed job and stayed with them for at least three years.

An effective employee retention programme in China will therefore always consist of a “carrot and stick” approach, in the form of incentives and contracts. “Carrots” alone, however, can do little to counteract huge incentives such as shares and switching bonuses.

While optimum employee-retention measures essentially have to be tailored to each individual client, taking into account the specific characteristics of the company and local circumstances, there are a number of measures that we can recommend to all German companies in China.

Table 2: Social-security contribution rates in selected cities in China (2015)
First of all, high turnover among factory workers is often caused by migrant workers who go home annually for the Chinese New Year and do not return. The turnover rate can therefore be reduced considerably if companies refrain from employing migrant workers. Furthermore, the loyalty of those employees who live close to the company, thus avoiding long journeys to work, will, from experience, be much stronger. One recommendation would be to search for employees by putting up large signs directly in front of the factory gates, so as to attract applicants from the local area. Applicants approached via other recruitment channels, such as official local “job markets” and internet job fairs, often live far away from the workplaces advertised, but will apply for the jobs anyway because they are desperately looking for work at that moment. Many of them will leave the company as soon as they find a post closer to their home.

Second, good managers and supervisors who discuss careers and salaries with their employees on an annual basis and who objectively and comprehensibly evaluate their employees will help reduce the company’s staff turnover significantly. It is well known that salaries are no secret in China – there are few companies that can actually enforce confidentiality agreements regarding remuneration. It is therefore all the more important to give employees, at least once a year, some feedback with regard to their performance and reach an agreement on targets. Any bonuses and salary increases must then be conditional upon the achievement of these objectives. This way, employees feel fairly treated and valued, and will stay longer with the company. The difficulty in practice, however, is that the majority of Chinese managers shy away from conflict. This means that they like to praise their employees but do not address potential problems and may not express any criticisms, even if they know it is necessary. Employee assessments are reduced to absurdity by these managers, as almost all employees will receive top marks.

Obviously, long-term career prospects, as well as opportunities for training and qualifications, will help improve employee satisfaction and retention. However, offering training is a double-edged sword: in particular, certificates and references are used by employees for application purposes. We therefore recommend not issuing any certificates to employees. In addition, training agreements can be concluded with employees in China, whereby the employee promises to remain with the company for at least two or three years after receiving training.

Finally, what is known as the “post-contractual non-competition clause” has proved to be the most effective “stick”, as they oblige employees not to work for competitors for up to two years – this being the maximum duration permitted by law in China – after leaving the company. Just as in Germany, companies in China also have to pay compensation for these kinds of clauses, therefore such an agreement will only make sense for certain key roles.

Conclusion

China is no longer a low-wage country. Unit labour costs in China are now as high as in Mexico – American companies, for example, are massively curbing their capital expenditure in China as a result. It therefore doesn’t make sense anymore for German companies to use China merely as an extended workshop.

China has already become the world’s second-largest economy and will, in all probability, overtake the USA as the largest global economic power by 2025. For many German companies, China is therefore the most important growth market. In order to be able to sell there, many medium-sized German companies are building factories in China in order to meet customer demand in terms of shorter delivery times and local content.

In the coming years, the greatest challenges for German companies in China will therefore be the following:

• compensating increasing personnel costs by increases in productivity; and
• attracting the necessary qualified specialists and senior executives and retaining them on a long-term basis.

As far as the war for talent in China in concerned, Chinese companies have become a real threat for German companies, namely by issuing shares or share options, which German companies are unable (or unwilling) to offer their employees in China. We believe that the poaching of key employees by Chinese competitors, not just in sales and marketing (e.g. key account or sales managers) but also in technology/production and R&D, will become a massive problem in the coming years. To what extent German companies will be able to retain their key employees, despite headhunting attempts by Chinese competitors, will remain one of the major focus areas for German HR managers in China.

First published in:

ChinaContact Yearbook 2016

German title: Personalmanagement in China – Aktuelle Konzepte zum Finden und Halten von Mitarbeitern