Closing China's Supply Chain Talent Gap
China's explosive growth is placing new demands on the supply chains of companies doing business there. No longer is it enough to rely purely on the skills of expatriate supply chain managers. Nor is there a sufficient pool of in-country talent at this time to meet the demand. Executive search firm Spencer Stuart has conducted a detailed survey to learn more about the size of the talent gap and to find out what leading companies are doing to close it.
David MacEachern, Eric Melulis, Peter Roberts, and Jwee San Tan -- Supply Chain Management Review, 4/1/2005
Western business leaders could be forgiven for thinking that China's well-publicized shortages of management talent would be easing off by now. After all, the country's schools have been turning out graduates whose qualifications improve every year. Its local managers have had two decades of exposure to modern business methods. Many highly qualified Chinese expatriates are returning home. And there is no shortage of skilled managers from the United States and Europe as well as India and Australia who are up for the challenge of working in China.
But the talent gap still looms large. It creates problems for businesses in many sectors and many job categories—nowhere more so than in the supply chain. Companies that source from China, or have set up facilities there to serve the country's exploding markets, struggle with recruiting and retaining skilled managers in an environment more volatile than foreign employers are used to. It's a new environment for local employees, too, most of whom are accustomed to the more stable conditions of state-run enterprises.
Over the last two decades, we have seen significant shifts in the supply chain management function in China. In the course of conducting more than 250 supply chain assignments for executives who will oversee supply chains in China—either for companies in the Asia Pacific region or for North American- and European-based corporations—we have observed that the supply chain talent needs in the region have evolved through distinct phases. In the early days, supply chains in China, as well as in other parts of Asia Pacific, required local procurement and logistics expertise because the focus was primarily on sourcing clothing and electronic and computer equipment. In the 1990s, as manufacturing multinationals set up local factories to cater to China's fast-growing domestic markets, expatriates played more and more of the major supply chain roles because China lacked the necessary integrated supply chain skills.
Now that companies from across almost all industries have multiple ventures in China or are establishing global sourcing centers in the country, there is an even greater need for strategic supply chain leaders and heads of operations. And the questions abound: Just how critical are the talent shortages, and where are the needs most acute? Can companies increase their recruiting locally, or must they continue to hire expatriates? What recruiting strategies are most appropriate for which types of functions?
In an attempt to answer these questions and to sketch out guidelines for building supply chain management talent in China, Spencer Stuart launched a comprehensive survey in September 2004. For the survey, we polled 700 supply chain professionals from a wide range of industry sectors and followed up with detailed interviews. (See sidebar on "Research Methodology.") We found substantial reinforcement for many of our assumptions as well as some surprising insights into best recruiting practices—insights that we hope will help business leaders make the right decisions about leadership staffing in China.
The China ChallengeA few statistics help explain the increasing urgency for top-notch supply chain talent in this part of the world. According to Deloitte research, close to 60 percent of North American producers already source from China; by 2006, 58 percent will either start or expand Chinese sourcing. More than 30 percent of European manufacturers indicate that they will locate or expand factories in China over the next few years.1 McKinsey & Co. says that by 2008, China will be the world's third-largest exporter. In its 2004 "China Today" report, The McKinsey Quarterly notes that both Ford and General Motors say they expect to source many more Chinese-made parts. Similarly, Wal-Mart, which bought more than $10 billion in goods from China in 2003, wants to come close to doubling those volumes by 2007.2
Companies from almost all industries now have multiple ventures in China, ranging from sourcing offices to logistics operations to joint ventures and wholly owned subsidiaries. In keeping with the obligations of its World Trade Organization membership, China is easing up on the need for state ownership of business and is permitting more foreign ownership. More companies are even relocating their Asia Pacific headquarters there. McKinsey reports that $1 billion in foreign direct investment now arrives in China each week.
The staffing challenges flowing from these developments are considerable. For a start, they are different in China's much more rural interior than in the coastal cities such as Shanghai and Hong Kong. They differ by age and experience, too. Many traditional managers, steeped in the top-down practices of China's state-owned enterprises, are much less able to understand or embrace modern business norms such as demonstrating flexibility and taking the initiative.
There is surprisingly high job turnover, too. Consultancy Hewitt & Associates reports that companies in China have annual turnover of nearly 13 percent—two to three times the global average.3 While pay is low compared to Western rates, it is escalating rapidly; overall compensation packages are more complex because companies often help with housing costs, for example. At the same time, many highly qualified Chinese managers are returning from the United States, Canada, and Europe. Hewitt reports that from 1978 to 2002, more than half a million Chinese went abroad, and almost a third of that number have returned.
Meanwhile, China's universities are producing many more graduates—3.4 million are expected to join the job market this year compared to 2.8 million last summer, according to China's Ministry of Education.4
However, few of those shifts have made much of an impression on those responsible for hiring and retaining qualified managers there. Our study found that nearly 50 percent of respondents said that "lack of available talent" is the greatest challenge to effectively managing their supply chain in China. Nearly two-thirds indicated that they have a "very strong" need for effective supply chain talent. (See Exhibit 1.)
The talent gap is not the only supply chain challenge, of course. Executives responded that China's government policies ranked a close second in terms of challenges to the supply chain, and cultural differences were not far behind. Other significant challenges included technology limitations, inadequate transportation, product quality, retention of talent, infrastructure, and communication issues such as language and time-zone differences.
Our survey confirmed that the increasing complexity and rapid growth of China's supply chain activities require more seasoned supply chain professionals than are readily available, despite the abundance of generally qualified managers. "The demand for talent definitely outweighs the supply," said Reuben Slone, former vice president of global supply chain for appliance maker Whirlpool and now executive vice president of supply chain for office-products retailer OfficeMax. "For example, there is currently a huge shortage of people for manufacturing positions. In certain parts of the country, this is a direct result of the government trying to maintain a healthy balance between agriculture and manufacturing by paying farmers to stay on their lands and not work in the plants."
We also discovered that our clients' supply chain needs differ based on their specific business needs and on their level of maturity within the region. The needs for a company that simply has a global-sourcing base in the country will differ from a company that is using China as an operations headquarters. For example, plant managers who are very familiar with the company's industry are critical for new entrants into the country. More established companies are focused more on finding local talent for new supply chain roles or for senior-management succession planning.
Interestingly, respondents who have been in China for 10 years or more ranked inadequate transportation and government policies as the greatest challenges, at 47 percent each. Lack of available talent was the second greatest challenge, at 42 percent. In comparison, those with no more than three years in China ranked government policies, inadequate transportation, and cultural differences as equivalent to the challenge of hiring exceptional people.
"Our greatest challenge in managing the supply chains is controlling the accelerated growth rate," said John Carr, president of BAX Global Supply Chain, which runs 16 offices in China, handling both transportation and logistics needs for global corporations such as HP, Dell, and Motorola. "Even before we entered China, our Asian business was growing in double digits. However, because we're a service organization, if we do not have the people resources in China that we need, we will not pursue certain business opportunities. This is why the company's growth strategy is directly linked to our ability to hire and retain the right people."
Talent "Wish Lists" vs. RealityExecutives are very clear about the ideal supply chain candidate for China—and about the difficulty of finding one. He or she must be a good English speaker, educated in the United States or in Europe, well-connected throughout China, and able to adapt to a fast-growth environment. "We want local talent that has multinational experience, an international background, can manage complexity, and an extraordinarily positive attitude," said Neil Sutton, general manager of the supply chain in Asia for ICI Paints, a decorative-paint business whose supply chain is mainly within the country.
Our research separated the "wish lists" from the practical requirements, turning up two types of supply chain talent needs. The first type concerns senior-level executives who can drive the overall supply chain management strategy but who do not have to be on the ground day-to-day in China. While these individuals may not be headquartered in the region or have the hands-on experience in China, they do need to have a considerable understanding of the country. In addition, they must be capable of managing workforces from great distances. For example, when we placed the vice president of global supply chain for a top publisher of educational materials, we looked for someone who had knowledge of the China marketplace and its key manufacturers and who had experience managing an international workforce.
As China becomes a larger part of a company's supply chain, it may become more difficult to manage operations in China from outside China. Multinationals with offices in Hong Kong or Singapore have often stumbled by believing they can work with China from "next door."5 They have proceeded on two core assumptions: (1) that expatriates would be more willing to relocate to those Westernized locations, and (2) that local candidates in Hong Kong or Singapore will speak better English and better understand Western business practices than mainland Chinese hires. But expats and non-mainland Chinese are generally not well-connected with the business culture of the People's Republic. They lack key contacts, and it is far harder for them to build trust with Chinese business partners and employees.
Similarly, Western business leaders are often surprised by the extent to which they or their representatives must be physically present at their Chinese suppliers, according to McKinsey's Jim Hexter.6 Hexter, a partner in the firm's Greater Beijing office, cautions that it's risky for expatriate supply chain leaders to assume that they can delegate control as they would at home. Specifically, they may more easily settle for weak capability assessments and due diligence on potential suppliers or partners.
The second need is for local market expertise, either from Chinese nationals or long-time expatriates with first-hand experience of working in China. Companies are looking for skilled local supply chain professionals with first-hand experience and knowledge of China's business culture to handle the day-to-day operations. This involves understanding the ins and outs of government policies, infrastructure, and culture. More importantly, these individuals must know how to execute within this complex environment. When we placed the regional vice president of supply chain for a major cosmetics manufacturer, for example, it was imperative that this person not only be based in the region and possess the requisite direct operational experience but also could work effectively within China.
So what are companies doing to address the talent shortfall? And given such high turnover, what are the best ways of retaining skilled personnel? There are no easy answers—but plenty of concern. First, the talent landscape in China is extremely competitive across all functions. The country has not yet developed an adequate supply of experienced senior and middle supply chain managers who have the skill sets or characteristics to perform well enough in an open-market global economy. And while companies that have invested in local talent have been able to reap some rewards, they also have become training grounds for their competitors.
Second, the Spencer Stuart survey notes that despite concerns about recruitment and retention, nearly 60 percent of respondents said that they did not have an effective recruitment strategy in place to meet their current supply chain needs. For companies in China less than three years, that number jumps to 70 percent.
However, there is positive news on two fronts. First, we learned from our survey and follow-up interviews that the business skills and experiences required of supply chain executives in China are similar to those required in other parts of the world. That means that companies can pursue similar hiring practices and policies. Second, the raw talent is available in-country. "The real challenge is specifically identifying who those individuals are," said ICI's Sutton. Language skills, both written and verbal, can be a limitation. Yet Sutton believes Chinese managers are such fast learners that this issue will quickly diminish.
Recruiting the Best Talent
Traditionally, companies entering China relied on expatriates to manage local operations. The expats brought a strong understanding of the organization's culture and in-depth management skills. The Spencer Stuart survey shows that 35 percent of respondents are still hiring mostly managers from the United States and Western Europe. (See Exhibit 2.) But we are beginning to see a shift to more local hiring—23 percent of respondents are following this model. Key factors behind this shift are the increasing costs of employing expatriates, the growing need for deeper understanding of local markets and cultures, and the need for better market coverage to meet consumer demand and language capabilities. ICI's Sutton reports that when his company opened in China, there were four nonlocals on the management team. Now there is only one.
Whirlpool offers another good example of this shift. After years of relying primarily on expatriates, the appliance maker's senior management realized that those foreign-born managers, though talented and experienced, lacked the necessary local knowledge and networks the company needed for its next phases of expansion in China. The company eventually hired a Chinese national as executive vice president of its Asian operations—an M.B.A. graduate who, at the time, was working at a leading multinational company. The executive had both the experience and the local market connections to effectively run the operation. But more than that, he had the pedigree to help Whirlpool attract more local supply chain talent. The ability to seed the organization with other talented nationals is of the utmost value in China.
A growing approach—one taken by roughly 20 percent of our respondents—is to hire a combination of expatriates and local Chinese talent. In the short-term, companies find that blending local talent with U.S. and Western European expatriates, in particular, is the most effective human capital strategy in the face of high demand and low supply.
Just 9 percent of respondents stated that they are relying on internal development—a long-term investment, but one that can be effective. BAX Global Supply Chain president John Carr reported that his company has developed in-depth training programs as part of its succession planning in China. "When we bring someone into our organization, either through executive recruiters or university recruiting, we often run them through our internal development programs. The programs move high-potential people through various parts of our organization as a means to round out their education," he explained. "While training alone will not solve all of the talent challenges, it increases our odds of having the right people in place."
The Retention ChallengeThe long-term plan for nearly all companies is to create and retain a local workforce to run operations in China. But another challenge is the alarmingly high turnover there. In the Spencer Stuart study, more than half of all respondents said they were "strongly concerned" about the retention of supply chain talent. (See Exhibit 3.)
Their fears are well grounded. "Our competition is willing to pay for the experience," said Carr, "which means we need to attract new talent, while retaining our current talent in different ways. This includes creating a great culture and showing our people the long-term opportunity for career growth with us. Our headquarters has placed a lot of emphasis on both the operations and the people of China, and this has helped instill confidence and loyalty for what we're doing."
Spencer Stuart's research has discovered that companies are able to attract and hold onto supply chain talent by offering them increased responsibility and accountability at a younger age. Such retention tactics work best with Chinese nationals. Whirlpool's approach of presenting a significant promotion to its native-Chinese candidate for executive vice president of Asia has paid off: The supply chain executive has been with the appliance maker for seven years now. In another country, such an executive might be labeled a "stretch candidate"—someone who possesses many, but not all, of the requirements for the job.
For ICI Paints, the foremost element in addressing retention is the expansion of jobs, both inside and outside of the supply chain function. "People should be stretched and stimulated, which encourages them to stay," said Sutton. "Compensation is only one component; it's more important to sell growth for both the individual and the company. In China, one of the most important things to do is to build on people's job repertoires to offer challenge, excitement, and change to keep them interested in the business."
At the same time, retention can be damaged by cultural gaffes. By now, there are abundant examples of Westerners inadvertently offending Chinese nationals—from being too directly confrontational in front of the person's peers to stereotyping behaviors or characteristics. Similarly, Westerners need to understand what's uniquely important in this culture. In some circumstances, for example, it's appropriate and appreciated to acknowledge the Chinese person's parents, note some observers.7
Looking AheadOur core conclusion is that improving both recruitment and retention has to be a priority from the outset—a vital element of the strategic planning for successful supply chain operations in China. ICI's Asia supply chain chief Sutton gives a hint of what it takes: "We've been successful with recruiting not only because our own brand is a benefit but also because our managers go to great pains to engage with the candidates and attract them to our business. In fact, we put up to 40 percent of performance-management evaluation on how each manager recruits, develops, and retains people." Success begets success: The company's evident growth and financial performance enable Sutton and his team to attract people into the organization at all levels and in all functions. "Nevertheless, the availability of talent is still a big issue and it takes time, energy, and a real focus to bring great supply chain talent into our organization," he said.
Another Western company that is having good success with recruitment in China is Philips Consumer Electronics.8 One report notes that in July 2003, Philips ran a nationwide labor-market survey to better understand what China's college graduates were looking for. Next, the company polled 2,000 students from China's top 11 universities, asking questions such as "What are your criteria for selecting an employer?" Consequently, Philips' HR managers in China have been able to fine-tune their hiring approaches—developing programs such as on-campus and online "career chats," for example. Philips says it now ranks as a "Top 10" employer among China's engineering, science, and business graduates.
Ultimately, the balance between hiring local Chinese and bringing in expatriates will depend on a range of factors: the specific business requirements, the relationship between the Chinese operations and headquarters, how long the organization has been in the country, compensation constraints, and the company's reputation in the local market. It is Spencer Stuart's strong recommendation that companies eager to upgrade their Chinese supply chain operations craft a clear leadership-development strategy that maps to the company's business objectives. The strategy calls for a deep understanding of the China marketplace and of the shifting political and legal structures. And it demands the kind of close interaction that companies like Philips have benefited from.
The strategy must emphasize retention just as much as recruitment of Chinese nationals. The company must invest in—and be seen to invest in—the skills and career development of its new supply chain leaders. Motorola does an exemplary job here; its famed Motorola University runs a short session called the China Accelerated Management Program specifically to develop the leadership skills of its new Chinese national managers. There are growing numbers of executive MBA programs available in China. According to the China Business Review, such programs didn't officially arrive in the country until 2002, when the State Council's academic degree committee approved 30 programs, but they are gathering momentum.
Our research confirms that China's supply chain talent gap won't disappear any time soon. The nation's supply chains are growing in complexity and changing faster than China's universities can turn out qualified graduates—and more quickly than returning Chinese professionals can jump on planes from the United States or Europe. And allied employment problems—such as intellectual-property piracy and Beijing's currency policy—won't fade away easily either.
Based on our research and follow-up interviews, however, we are confident that smart business leaders will find solutions that suit the requirements of their China operations. There is clearly no one answer to China's supply chain talent challenges. But already there are plenty of examples of innovative solutions.
The authors are veteran consultants with the global executive search firm Spencer Stuart.
| Footnotes: |
| 1 Deloitte Consulting, Mastering Complexity in Global Manufacturing (Deloitte, Oct. 2003). |
| 2 The McKinsey Quarterly, 2004 Special Edition: China Today. |
| 3 "Salaries Starting to Rise in Asia Pacific, Hewitt Annual Study Finds," Hewitt & Associates press release, Nov. 8, 2004. |
| 4 "University Grads Help Create 'Job-Hunting Economy,'" People's Daily Online, Jan. 28, 2004: english.people.com.cn/200401/28/eng20040128_133399.shtml |
| 5 John Kerr, "Beware of the China Syndromes," Supply Chain Management Review, October 2004: pp. 13–14. |
| 6 Kerr, 13–14. |
| 7 Traci Purdum, "China Checklist," IndustryWeek, Feb. 1, 2005: www.industryweek.com/ReadArticle.aspx?ArticleID=9668 |
| 8 Cindy Waxer, "Challenges in China," Human Resource Executive, Jan. 27, 2005: www.workindex.com/editorial/hre/hre0501-19.asp |
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