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As companies move westward into China, HR executives need to help expats cope with fewer amenities and more difficult living conditions.
Companies now attempting to move into China are experiencing serious sticker shock. The mega-cities that welcomed Western businesses during China’s first wave of economic expansion, which began in the 1980s, have become unaffordable for many Western firms. The cost of doing business in Beijing, Shanghai and Guangzhou—labor, housing and taxes—has risen dramatically.
The enormous gap between the rich coastal cities and the poor inland cities “is one of the toughest issues facing China today,” says William B. Riley, professor of finance and director of the Center for Chinese Business at West Virginia University in Morgantown. While the middle and upper classes are thriving on the coast, “in the interior you still have 700 million people living on less than $1,000 a year.” At the same time, the coastal mega-cities now suffer traffic gridlock, high costs of living and pollution that can make life there miserable.
To alleviate these growing environmental and economic problems, the Chinese government is attempting to distribute its fortunes more evenly, offering incentives for both Chinese and foreign businesses to set up farther inland. This high-visibility “Great Western Development” campaign is attracting billions in foreign direct investment to second-tier cities like Chengdu, Hefei, Changsha, Nanchang, Wuhan and Chongqing. (See the map.) A 2005 survey by the American Chamber of Commerce in China found that half of its 900 members planned to shift investments inland in the next few years.
As a result, a U.S. expatriate is now becoming as likely to be relocated to one of these smaller—but still immense—metropolises as to the coastal cities. And that is bringing challenges for both employees and relocation professionals.
Growth is progressing extremely rapidly in China’s second-tier cities, says Eric Drummond, GPHR, vice president of global human resources for The Linde Group, a Munich-based global supplier of industrial gases. He has spent more than a decade working in China in large coastal cities as well as inland locations such as Xi’an, Kumming, Chongqing, and Taiyuan.
Drummond has seen changes that go beyond breathtaking. “It’s like being in America in the late 1800s—the exuberance of westward expansion and the sense that anything’s possible. China is that for the 21st century. There’s electricity in the air; you can feel it the minute you get off the plane.”
There’s also something else noticeable once you move from Shanghai, Beijing or Guangzhou inward: Poverty, farmland and the lack of basic services like banks, paved roads, hospitals and schools are also conspicuous. HR executives in charge of placing expatriates in an interior city in China will have to look for the right individuals and offer the best support and incentives.
Employees moving to second- and third-tier Chinese cities are in for both good and bad news, says Riley, who spends up to two months each year in China researching the business climate. “On one hand, the more remote cities are somewhat cleaner. They still burn a lot of coal, so there is still air pollution from factories and houses, but there is not as much traffic—for now.”
In addition, costs for housing, goods and services tend to be lower.
On the other hand, Riley points out, it is harder in smaller cities to find the same standards of health care, schools and the availability of Western goods as in the big coastal cities. Amenities drop off quickly the farther west into China one moves. “That is going to be a big issue for expat families,” he says.
SIRVA Inc., a global relocation services provider, released the findings last September of its China Urban Index, a study of the suitability of first- and second-tier cities for business operations and expatriate relocation. The index rated the quality-of-life factors having the greatest impact on an expatriate’s ability to adapt to life in China. Hong Kong came in on top with a quality-of-life rating of 71, followed by Beijing (54) and Shanghai (50). Second-tier cities of the interior currently attracting large numbers of foreign businesses unsurprisingly ranked lower: Hangzhou scored a 44, Chengdu a 42 and Wuhan a 37.
The study concluded that expatriates relocating to a second-tier city will likely perceive a significant impact to their quality of life.
Lack of Amenities
One thing that expatriates moving into second-tier cities will quickly discover is that “everything takes twice as long as you’d expect,” says Riley. “Even getting your electricity turned on can take weeks. If you are buying a new apartment, it will be an empty box, with no flooring, wall coverings, heating units or appliances.” This austerity will need to be factored into an employee’s relocation costs and the time it takes to settle in. He also advises that Western food may be hard to come by in the markets, “like cheese products and peanut butter.” And virtually no one will speak English.
Finding a level of domestic comfort may be hard on many newcomers, especially the trailing spouse. “Kids tend to adapt pretty easily to other cultures,” Riley points out. “They are used to going into situations they don’t understand and watching to see how things are done. Adults tend to find it hard to depart from preconceived notions.”
Expatriate families with children will have immediate issues with schooling, says Drummond. There are few, if any, international schools in the smaller cities, and parents may face the choice of sending children to international boarding schools, home schooling, or even settling the family in Shanghai or Beijing while the employee commutes weekly to work hundreds of miles away. Still, “things are changing so fast that by the time people read this, a new school will have sprung up somewhere,” he says.
Western medical care may also be in short supply. And if anyone in the family has respiratory issues, the air pollution is such that even in the smaller cities, relocating may be impossible for health reasons.
Another issue will be the traffic. Car ownership in China has exploded in recent years, while the infrastructure lags centuries behind, particularly in the interior. “Most expatriates don’t drive,” says Drummond. “There will be a car and driver provided for you.” Relying on someone else for transportation may take some getting used to. “But it’s not a perk—it’s there for your safety,” he says. With the boom in first-time car owners comes less-than-disciplined driving habits: “People just don’t use their lanes.”
Select and Support
For these and other reasons, China as a whole is among the hardest places for expatriate executives to succeed, according to more than 140 international recruiters surveyed by the global talent management consulting firm Korn/Ferry International. The most common reason for assignments to fail, according to more than half of the respondents, is a lack of cultural fit. (For more on cultural fit, see “Grasping Guanxi.”) Family and personal issues came next, cited by 23 percent of the respondents.
Selecting the right person for the assignment is key, as is giving them the support they need to complete it. If HR has to replace the expat with another one, the assignment has failed, says Drummond, and the cost of having an employee in China can be up to three times their base salary.
To make sure the investment of relocating a manager to China pays off, companies often want a commitment from expats of at least three years, Drummond adds.
That’s a daunting challenge for assignments in interior China. Dealing with those cities’ quality of life and business challenges requires HR to get three things exactly right:
“Some companies do it well,” says Riley. “Nike does it pretty well; Motorola does it well. They give expats a lot of cross-cultural training. Nike even assigns a cultural trainer to remain in contact with the employee and the family throughout their stay in China.”
Other companies “seem to just parachute people in with the assumption that if you are good at marketing or production in the United States, you will be good in China, and the rest you will figure out on your own,” Riley says. “But assignments fail when there is no consideration of cultural adaptability in the relocation candidate or the family.”
Ideal candidates “will have a sense of adventure, an openness to change, a high tolerance for ambiguity—they don’t have to know everything that’s going to happen—and confidence in their survival skills,” says Douglas Stuart, training manager and intercultural coach for IOR Global Services, which runs cross-cultural and other programs for relocating executives and business groups dealing with China. He notes that “training is not particularly effective for many analytical types; you are looking for those who show curiosity.” That’s why he recommends that an expatriate assignment to China’s interior “should be a self-selection process.”
But even with the proper mind-set, cross-cultural training is essential for both the candidate and the family. Riley recommends that any training program cover the following:
Finally, the expatriate family needs ongoing support throughout the assignment. “Expect to pay an international premium of at least 30 percent of base pay on a net basis, grossing up for taxes,” says Drummond. And the farther expats go into mainland China, the more they need a package that includes supports like emergency medical evacuation and a generous R&R allowance. “Typically expats get ‘home leave’ once a year, but you may also need to give them more opportunities to take a break.”
Living in any Chinese city is stressful, he says. “They are very industrial, with lots of concrete, traffic, noise and pollution. There is very little green space for taking a walk,” even in the smaller cities of the interior. And rather than being an adaptation of existing relocation packages, Drummond says, Chinese assignments “should be individually tailored to each employee’s needs.” Both the family and the location need careful consideration. “Find their hot buttons, be it schools, the spouse’s career or other individual concerns.”
“It’s so terribly expensive to keep an expat in China,” Riley concludes. “Today, a huge company like Motorola will only relocate five or six employees to run a huge factory. Cisco doesn’t have any.” But when the assignment is handled wisely, it can be money well spent. “I question companies who are a little shortsighted and don’t spend enough money at the front end to select and train the right people.”
Martha Frase is a freelance writer based in Martinsburg, W.V.
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Wooing Western companies farther inland is a priority for the Chinese government. It is enthusiastically meeting demand in smaller cities by setting up industry-specific investment zones, which offer companies tax and tariff incentives, less red tape and established telecommunications lines. Similar industries are clustered together in these zones, and the government is working to upgrade infrastructure with the speed and efficiency only a collective society can muster. It will even go so far as to tell foreign companies where to set up in order to realize its redistribution goals.
Chongqing is becoming a mecca for automobile manufacturing, with America’s Big Three automakers setting up manufacturing plants there recently. Chengdu is becoming known as the high-tech capital of Western China, with Motorola, IBM, Microsoft and, most recently, SAP locating there. And Wuhan is at the center of what’s being called the “Optics Valley of China,” with U.S. companies such as Silicon Valley’s Opstronix opening manufacturing plants in its enterprise zone.
Foreign companies are not typically setting up to be exporters or outsourcers, says William B. Riley, professor of finance and director of the Center for Chinese Business at West Virginia University in Morgantown. “American Chamber of Commerce data show that 86 percent of foreign companies are in [interior] China to take advantage of the huge market there.”
The trend of companies selecting China’s second-tier cities to set up shop shows no sign of decelerating, according to Eric Drummond, GPHR, vice president of global human resources for The Linde Group, a Munich-based global supplier of industrial gases.
“Right now, the sky is the limit,” says Drummond, who has spent a decade working in China.
“It’s still a totalitarian country,” he cautions, “where there’s a risk of the government nationalizing industries, but now there’s too much momentum. The train has left the station. There is no way [the government] can shut down what’s going on, so they are trying to steer it, applying the brakes to keep it manageable.”
Douglas Stuart, training manager and intercultural coach for IOR Global Services, which runs cross-cultural and other programs for relocating executives and business groups dealing with China, agrees: “This movement will continue because it’s getting too expensive to do business in the coastal cities, and it won’t slow down unless it’s interrupted by some serious problem, like political unrest. But I don’t see that happening.”
The Chinese government will continue to encourage business development by setting up investment zones in second- and third-tier cities, “and Westerners will be right there,” he asserts.
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