Chapter 4 – Hospitality services

[Note: below is Chapter 4 from Great Wall of Numbers]

What I should have done when I first flew into Shanghai four years ago was take the high-speed maglev from the airport into the city.  Instead I was sweet-talked by a suave salesman outside the arrival gate’s entrance into taking a luxury sedan.  500 RMB?  No problem, no way is that expensive – after all it is the same rate that other companies nearby were charging.  The shiny new black Buick was driven by a young college graduate who had studied international trade in Australia.  Throughout the nearly hour long drive along one of the many highways that bisect the metro, Johnny, as he called himself explained what there was to do in each district we were passing through.  In crisp English he answered all of my questions and delivered me at the foot of the hotel my travel agent had previously booked.  And during my stay, the bellhop and front desk staff greeted me in pleasant hellos and how-do-you-dos.  My image of China – my first impression was immediately biased because despite the 300 million English learners in China (see Chapter 9), the stark reality is outside of large metros, English dissipates into the wind.

And this presents an opportunity to any number of educational providers (discussed in Chapter 9) and hospitality training firms.  For example, according to the World Tourism Organization, in 2011 there were 57.58 million inbound overnight tourists that spent $48.5 billion on the mainland.1 Since 2000, the number of foreign visitors to the country has increased 10 percent annually.2 Five out of the top six source countries for inbound tourism in China speak native English at home.3 And in my own anecdotal experience, while cities like Guangzhou and Shanghai are relatively easy to navigate – with their helter skelter smattering of English on highway signs and subway stations – I am still accosted by bewildered tourists wanting to know how to get to Jing’an Temple in Changning, Shanghai.  In fact, China is now globally the third largest inbound tourist destination (after France and the US) and as I note later in Chapter 11, it is one of the largest outbound as well (in 2012, 82 million Chinese traveled overseas).

In February 2013 I spoke with Shaun Rein, the author of “The End of Cheap China” and an expert on Chinese consumer behavior.4 According to Rein, “a lot of commentary has been made regarding retail sales, which only grew 14.7% last month [January 2013].5 This is not to say that Chinese consumption has stopped, rather consumers are moving away from status items.  Instead of buying Louis Vuitton bags to show off, they are now buying lifestyle experiences such as trips overseas.  In short, they are changing habits which is bad for certain segments such as footwear and apparel brands.”

This kind of lifestyle experience and “genre tourism” caters to those wanting to have first-hand exposure to authentic conditions (e.g., ruggedness, safari) and as The Wall Street Journal recently pointed out, is increasingly popular with affluent Chinese in particular.  For example, more than 60,000 Chinese nationals visited South Africa in the first half of 2012, “a 68% jump from the same period a year earlier.”6 And those that visit these locales are “more likely to get private tours and embrace the safari opportunities.”  Consequently, traveling in general is no longer relegated to the top outlier either.  For instance, according to Li Yianqin a professor at Minzu University in China, in terms of tourism economic theory, “when a nation’s per capita gross domestic product exceeds $5,000, foreign travel grows rapidly.”7 And by one estimate from the World Bank, China’s gross national income per capita reached $4,940 in 2011.

Where do these tourists stay?  How can you and your company capitalize on either of these growth trends?

According to the China National Tourism Association in 2009 there were roughly 300,000 hotels on the mainland.8 The 21st Century Business Herald estimates that in 2011 there were 2 million hotel rooms on the mainland, a number that is expected to increase to 5 million by 2016.9 In fact, according to the Boston Consulting Group, “China’s combined domestic and international tourism revenue is expected to increase 14% annually for the next nine years.”10 This would create an estimated $838 billion tourism market.  For comparison, as of 2011 there were more than 4.8 million guest rooms at hotels in the US that generated $137.5 billion in sales.1112

While you may think you could squeeze the margins at the low-end in hospitality with relatively cheaper labor, there are already several domestic hostel and motel chains such as Motel168, Home Inn and 7 Days Inn (all three of which I have stayed in and I recommend) that create a highly competitive environment.13 Rather it is at the top end that has larger margins to work with and is currently comprised of the usual coterie of global hotel chains including Hyatt, Hilton, Marriott and Howard Johnson.14

Howard Johnson is a luxury brand

As I note later in Chapter 11, the management team at Coach handbags has repositioned their products – typically considered mid-level in the US – and through market perception campaigns has moved the handbags towards the higher-end market segment in China.  Their efforts have resulted in large sales growth, which in Q1 2012 increased 40% on the mainland.15 Similarly, Howard Johnson which is considered a mid-level hotel experience in the US is also now repositioned at the top-end of the hotel experience in China (in Chapter 16 I discuss KFC which has benefited from perception marketing as well).  Howard Johnson entered the Chinese market in 1999 and has since expanded across the mainland where it now operates 46 hotels in 29 cities.

Is it too late to enter the market?  Probably not.  In fact, in March 2012, Intercontinental (the biggest hotel company in the world) announced that it would begin rolling out a new brand of hotels in China called Hualuxe to cater to the top-end of the domestic market.  And by establishing a Chinese-focused luxury hotel chain on the mainland, Intercontinental hopes to later roll out similar chains in other countries that are popular destinations for Chinese tourists.  Their plan, which could certainly be emulated in a variety of service industries (e.g., restaurants in Chapter 6), is to build a reputable, trusted brand at home and use a loyalty program to bring back repeat visitors when they are abroad.1617 Furthermore the new Peninsula Shanghai hotel was named the top 5 global hotel for business in 2012 illustrating that there is still room for potential new entrants in this segment.1819

Visa changes and HR challenges

Beginning on January 1, 2013 both Beijing and Shanghai now allow for 72-hour visa free access to their metropolises by tourists connecting to other countries.20 Beijing usually receives 5 million foreign tourists a year and its international airport (北京首都国际机场) was the 2nd busiest globally in 2012 (behind Atlanta’s).  Thus because foreigners typically spend twice as much as local at tourist destinations ($1,000), it is thought that the amount of tourists that are estimated to pass through on this new program will double over the next three years.  Yet expectations should be tempered as previous visa free stays (such as Shanghai’s 48-hour policy) only netted an additional 3,000 visits in 2010.21

With these large tourist numbers, what are the potential issues in moving into the hospitality industry?  What are some of the challenges in setting up a hotel chain?

As I noted above and discuss later in Chapter 15, staffing sticks out towards the top of issues.  For instance, according to a 2008 report by Emmanuel Hemmerle, “there are less than 40 local professionals with proven experience in the Development function within the hotel industry in the whole of China, of which only 10 have over five years experience in the field.”22

You might be thinking that your hospitality company can merely start small and build up slowly from their footholds.  This might be possible but could be problematic in this specific industry.  For example, while those low numbers – 40 local professionals – have probably changed considerably since the Beijing Olympics another concern that Hemmerle’s report touches on is retention.  What happens to competent productive managers in the hospitality industry in China?  According to Rene Schmitt, president of Kempinski Hotels, “[m]y one greatest, and constant, challenge of operating over the past 15 years in China has been to attract and retain staff. We are constantly building and rebuilding our leadership across all the cities in which we operate. You train them, and then you lose them to other hotels or airlines.”23  Kempinksi is a German-based luxury hotel company that operates 14 five-star hotels on the mainland.

Yet with these challenges come opportunities to foreign firms that specialize in training hospitality-related services.  For example, Les Roches is a Swiss-based hotel management school (one of the largest in the world) that teaches all of its courses exclusively in English.  It has teamed up with a local college called Jin Jiang in Shanghai to create a joint international hospitality management training program.  Together they are already partnered with many of the hotel chains – both foreign and domestic – across China.  Can your company provide similar training services?

Hotels Rising

In January 2013 I spoke with Fred Xu, a native of Shenyang who is completing his MBA at a university in Switzerland.  He previously worked for the luxury hotelier, Shangri-La, based in its flagship Shanghai location.24 According to him, “the hospitality industry on the mainland still has large swings in seasonal volatility and a lot of traffic actually depends on the location of the hotel.  For example, China has two “Golden Weeks for Tourism” (黄金周) – May 1st and October 1st.  These peak seasons unsurprisingly bring a large amount of travelers and tourists from across the country which dramatically affects the occupancy of hotels.  In recent years, the gap between slack seasons and peak seasons has diminished.  This is largely because China itself has attracted more and more international travelers throughout the year.  And as a long term consequence, due to the process of ‘reform and opening up’ and globalization in general, the hospitality industry continues to develop and the trend is now towards catering to both business travelers and tourists alike.”

One of the HR challenges for all hotel management according to Xu is that, “traditionally speaking, Chinese people typically do not think the hospitality industry is an ideal career.  Simultaneously, because of the intense competition between graduates and non-graduates alike, people who choose hospitality usually receive a lower salary [e.g., limited supply of positions, large supply of potential employees].  And as a consequence, individuals with less educational background actually prefer to have this job due to its upward promotion mobility despite its initial low salary.  The dilemma facing managers however is that they prefer skilled people, especially those with language skills irrespective of educational attainment.  In their mind, they think it is a waste of resources to cultivate highly educated yet unskilled employees yet in the long-run this has caused a serious outflow of talent as skilled workers can easily move to competing chains.”

In January 2013 I also spoke with Xuerong Su, a native of Sichuan and six-year veteran who is a manager at Mind Group, a real estate company that builds hotels and luxury apartments.25 Her most recent project is developing the new Mandarin Oriental Hotel in Chengdu.  According to Su, “in my opinion, Chengdu is one of the best locations for projects because of its winding mountainous scenery, home of the panda, its incredibly long [2000 years of] history, famous rivers nearby and a well-known culinary culture.  And despite the recent governmental policies that place pressure on housing prices [see Chapter 10] many large luxury projects have been largely unaffected thus far, especially those catering to an affluent demographic.  As a consequence I think there are continued opportunities to build and manage five-star facilities across the mainland, especially in larger cities inland such as Chengdu.”

One of the challenges that Su thinks others should be cognizant of is that “acquiring the necessary technology to build luxury hotels and apartments can be quite cost prohibitive.  Because when you build the tallest building in a city like Chengdu, it will ultimately become a landmark and in fact, most of our projects are landmarks.  Thus to maintain our brand and image we buy the best technology from around the world, hire the most experienced consultants around the world (all of them are from some of the most famous companies in the world) and as a consequence this can be very expensive.  Yet this is a cost of doing business in our industry and something that customers have come to expect.  They want the best and demand it.”  However one challenge that should be acknowledged, although perhaps temporary, is the crackdown on government-financed “extravagant” galas and banquets that have taken place at hotels over the past decade.  As a consequence many hotels have faced a rash of cancelations due to the austerity and “anti-corruption” policies currently being implemented.26

Real estate and marriage

As I mention later in several other chapters, following the 4 trillion RMB stimulus (扩大内需十项措施) enacted in 2008 by the Central People’s Government, there was subsequently a large real-estate bubble that grew across the entire country (fáng dìchǎn pàomò).  As a consequence policy makers have attempted to cool it down, to create a soft landing.27  While the efficacies of these efforts are debatable, there are still opportunities and demand for firms that specialize in high-end condos and townhouses.

In fact, while I touch on it in Chapter 15, the relatively expensive property is one area that is sometimes ignored when recruiting talent from abroad (e.g., paying for expat lodging).  For example, while the residential real-estate bubble is largely considered “plateaued” relative to 2-3 years ago, the most expensive property ever sold in China was recently acquired in Shanghai at a price ($8,000/ m²) that most locals and expats alike typically could not afford (the average salary in Shanghai is roughly $9,000 a year).  Yet there is still continual demand for domestic investment opportunities due to a close capital account (see Chapter 5).28 Furthermore, land sales in Shanghai and Beijing continue to reach new highs due to this issue.  For example, at a recent auction in November 2012, one parcel of land sold for $5,431/m² in Beijing.29 And this phenomenon is not relegated to houses and apartments on the mainland as Hong Kong is now home to the most expensive parking spot globally which costs $82,600.30

One of the reasons that these prices may continue to stay at these relatively high levels in larger Tier 1 cities is that migration to these cities continues from around the country side (roughly 48% of the population still lives in rural areas).  And in order to get married, many would-be brides (and their families) require that the groom provide fully paid for apartments and homes to live in.  As a consequence, the groom and his family pool their savings together to purchase these homes, all in the hopes of marketing their sons as attractive mates (over 60% of home purchases are made with “significant backing from the parents”).3132 One reason why this is important is that due to the gender imbalance (approximately 117 males are born for every 100 females) over the coming decade, there will be 40 million men who will be unable to find a mate.33 Thus women (and their families) are increasingly picky and unsurprisingly demanding when it comes to finding life partners.

With the largest population is it unsurprising that China is the largest wedding market.  According to one estimate 13 million couples got married in 2012 and the wedding industry has grown 10-12% a year over the past three years.34 At $9 billion in purchases during 2011, China became the 2nd largest consumer of diamonds (behind the US, overtaking India) and 4 out of 5 couples in Beijing and Shanghai bought engagement rings in 2012.35 Simultaneously 200 million RMB ($32 million) was spent on wedding dresses (4.77 million sets) in 2011.36 As a consequence, as of 2010 the wedding industry was worth $57 billion and the average wedding now costs 200,000 RMB ($32,000).37 This relatively high price tag relative to annual salaries (the average salary in Tier 1 cities is less than $9,000 a year) is feasible due again to the pooling of family resources (e.g., since many families only have one child, the parents will only host one wedding and can therefore spend more on it).  And it provides opportunities for wedding planners and photographers, perhaps even your firm.

In addition, Christine Ng of Bartle Bogle Hegarty (BBH) recently noted that some of the new management offices in hotels are positions such as “director of wedding” primarily because nearly all weddings are held in hotels.38  This is one additional revenue stream that could be tapped into by the hospitality industry.  And with weddings often times comes babies.  And as a result there are business opportunities for those in the maternity industry.  For example, Gome, one of the largest appliance retailers in China is now investing $150 million in a new maternity-focused e-commerce site. 3940

Takeaway:  As China’s infrastructure and cities develop, more travelers – both domestic and international – will visit and tour regions of the mainland.  The hospitality industry, while filled with both local and foreign incumbents, still has potential room for growth and more competition especially at the top-end.


Endnotes:

  1. Tourism Development in China (2011) from the UN World Tourism Organization []
  2. Plan to reduce minimum stay for foreign workers from Shanghai Daily []
  3. The top 10 tourist source countries to China are: the US, Australia, Singapore, the UK, Malaysia, Canada, India, Germany, Indonesia and France. See China Tourism from TravelChinaGuide []
  4. Shaun Rein is the founder of China Market Research Group and the author of “The End of Cheap China.” []
  5. China Lunar New Year Festival Retail Sales Gain 14.7% from Bloomberg []
  6. For Affluent Asians, Africa’s Appeal from The Wall Street Journal []
  7. Chinese rush overseas for holiday from China Daily []
  8. Building boom in hotel industry from China Daily []
  9. Luxury hotel boom leads to oversupply in China from Want China Times []
  10. Meet Hualuxe, China’s Newest Upscale Hotel Brand from The Wall Street Journal []
  11. 2011 At-a-Glance Statistical figures from the American Hotel & Lodging Association []
  12. According to STR Global as of February 2012, globally there are 13.4 million hotel rooms.  See Reader quiz: 16% guess worldwide hotel room count correctly from USA Today []
  13. 7 Days Inn was recently acquired by Carlyle Group for $688 million.  See Carlyle-Led Group Buys China Hotel Chain for $688 Million from Bloomberg []
  14. Hilton is the parent company of DoubleTree and operates more than 30 hotels in China. Marriott is the parent company of Ritz-Carlton.  Marriott operates 56 hotels on the mainland and has another 44 being built.  See Marriott International Announces its 100th Hotel in China from Marriott []
  15. Strong overseas, US sales lift Coach 1Q profit from BusinessWeek []
  16. Meet Hualuxe, China’s Newest Upscale Hotel Brand from The Wall Street Journal []
  17. If your firm is looking to cater to Chinese tourists you may be interested in learning from the mistakes of previous companies that have used stereotypes and clichés to conduct business so as to avoid their pitfalls.  See The cultural cliches the travel industry uses for Chinese tourists from Skift []
  18. The Peninsula Shanghai is Acclaimed as the World’s Best Business Hotel by Travel + Leisure Magazine from PRNewswire []
  19. Another Shanghai hotel recently received an international award for its interior design and decoration.  See The Swatch Art Peach Hotel Shanghai wins prestigious prize for daring design at the Tatler Travel Awards 2013 from Travel Daily News []
  20. See Beijing to offer 72-hour visa-free stay for foreign visitors in 2013 from People’s Daily and 45 countries listed for 72-hour visa-free stay in Shanghai from Global Times []
  21. Coming Soon, Visa-Free Beijing Visits from The Wall Street Journal []
  22. Leadership in China’s Hopsitality Industry Begins at the Head Office from Heidrick & Struggles []
  23. Ibid []
  24. Shangri-La will open its 71st hotel this year.  Headquartered in Hong Kong, these are all high-end 5-star accommodations.  See Billionaire Kuok Says His Empire Can Last ’Generations’ from Bloomberg []
  25. Mind Group []
  26. Hotels feel the pinch as banquet business slumps from Xinhua []
  27. While a lot of focus from journalists (both foreign and domestic) has been on real estate prices in Tier 1 cities, bubbles formed in other tertiary cities as well, such as Yingkou in Liaoning province.  See Beijing issues new rules to limit house purchase from China Daily,王安顺:北京房地产调控决不动摇from Yicai and Real Estate Bubble Expands to Third and Fourth Tier Cities from The Economic Observer []
  28. This is not to say that these properties will lay dormant, especially as the middle class grows and rural migrants continue to move to Tier 1 cities.  See Who Says China is Building Too Much? from The Wall Street Journal Shanghai Sells Year’s Most Expensive Land as Market Recovers from Bloomberg []
  29. See Shanghai property sold for US$35,000 per square meter from Want China Times, Average salaries rise by 10.9% from Shanghai Daily, Land price at record high in Beijing, Shanghai from China Daily and Four Land Parcels in Beijing Sold for CNY 3 Bn from ChinaScope Financial []
  30. The $640,000 parking space from CNNMoney and Hong Kong Parking Costs $387,000 as Cash Moves From Homes from Bloomberg []
  31. In terms of average age for first-time home buyers, at 27 years old, Beijing actually has the lowest average in the world, due in part to parents and relatives pooling savings together.  See First-time house buyers are youngest in China: survey from Want China Times []
  32. China’s Hot Real Estate Market Takes Broad Toll from NPR []
  33. See China’s gender imbalance alleviates but still grave from China Daily, The Plight of China’s Favored Sons from The New York Times and Bride Shortage in China from Facts and Details []
  34. In 2009 there were 11.45 million marriages and increased to 13 million in 2012.  See China reports more divorces, marriages in 2009 from Confucius Institute and Loving China: Romance, Dating & Weddings from Thoughtful China []
  35. See China to overtake U.S. in diamond consumption from Xinhua and Diamond Demand Slows in China from The Wall Street Journal []
  36. Profound Evaluation and Development Trend Forecast of China’s Wedding Dress Market, 2011 to 2015 from Huidian Research []
  37. Loving China: Romance, Dating & Weddings from Thoughtful China []
  38. Ibid []
  39. China’s Gome Invests CNY1 Billion In Maternity E-commerce Website from China Tech News []
  40. Dating sites are also increasingly popular for a variety of reasons and by 2014 these sites are expected to generate an estimated $318 million in revenue.  The largest, Jiayun, has 68 million registered users.  Yet another area that may be relatively untapped is the divorce app market.  For example, more than 5,000 couples divorce each day in China.  Roughly 1.96 million couples got divorced in 2009; in 2011 2.9 million couples got divorced.  In fact, the divorce rate has doubled over the past decade in Beijing and Shanghai and is now nearly 40% (for comparison the national divorce rate is 2.29%).  To be even handed, some of these divorces may be related to avoiding regulations on buying 2nd or 3rd homes.  Yet just like in the West, when children are involved, the custody issues require communication between exes.  Thus online communication through apps may be a potential market.  See Ensuring a long marriage with insurance from China Daily, Joint Custody From A Distance from The New York Times, Divorce: Why the big breakup in China? from CNN, China’s Hot Real Estate Market Takes Broad Toll from NPR, China’s divorce rule dubbed ‘Law that makes men laugh and women cry’ from The Telegraph, Over 5,000 couples divorce each day in China during first quarter from People’s Daily, Divorce rate exceeds one third in Beijing and Shanghai from SINA, Shanghai has 2nd highest divorce rate in China from People’s Daily and Divorce app could help couples decide if their marriage has a future from The Guardian.  See also Why China’s Internet Dating Sites Are Booming from Worldcrunch and Dating in a Digital World: Trends in 21st Century China from Knowledge@Wharton []
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Chapter 15 – Human resource and infrastructure challenges

[Note: below is Chapter 15 from Great Wall of Numbers]

Consulting firms in China are abundant and usually just a stone’s throw away.  The primary reason has to do with China’s developmental status: China currently lacks expertise and experience in several fields.  As a consequence many domestic companies are willing and increasingly have the funds to hire foreign experts to guide, manage and even direct operations at companies.  To paint a clearer picture of the situation, according to Chen Yuyu, associate professor at Peking University, “[h]igh-end jobs that should have been produced by industrialization, including research, marketing and accounting etc., have been left in the West.”1 As a consequence, because they are faced with dilemma of working in low-skilled, low-waged professions, a recent survey found that “among people in their early 20s, those with a college degree were four times as likely to be unemployed as those with only an elementary school education.”2

At the same time, it is advised that rosy enthusiasm – get-rich-quick in China – be tempered with a dose of reality.  For example, the Wall Street journal ran a piece in March 2012 which details the gradual shift away from recruiting expats at all corporate levels.3 This is due in part to increasingly expensive compensation packages needed to lure experienced expats and because of a growing talent pool of educated Chinese returning from overseas dubbed “sea-turtles” (hǎiguī). This changing outlook is best summed up by hedge fund manager Mark DeWeaver who recently told me in an interview,

I don’t think immigrating to China would be a logical choice for most foreigners.  There just wouldn’t be that many job opportunities for them, particularly if they don’t speak the language.  They would also be competing with the many Chinese graduates of US colleges that return home after graduating.4

Between 2000-2009, more than 630,000 Chinese-born immigrants received US green cards.5 Over the past 30 years more than 1.2 million Chinese studied abroad, approximately 20% of who matriculated to US schools and institutions.678 During the 2012-2013 school year, more than 190,000 Chinese students studied at US schools (up from 160,000 the year before) – they also comprise a quarter of all international students in the US.910 In fact, 37% of all international graduate students in the US now are Chinese nationals.11  While there is some overlap between the two groups and some manage to stay and attain green cards, some of the remaining – well-trained and educated – return home to join the Chinese workforce.12

According to the Ministry of Education, due in part to the incentives mentioned above in Chapter 9 (“1,000 Talents”) approximately 186,000 overseas Chinese returned to China in 2011, an increase of nearly 40%.1314 While some do move back to the West again, others stay.  For example, Kevin Woo is a Shanghai native who received an LL.M. from the University of Wisconsin yet works as an auditor for a large Chinese real-estate firm.  He returned to Shanghai in part due to the soft labor market in the US.  Anthony Wang received his bachelor’s and master’s from the University of Waikato and now works at his family-owned factory in Anhui.  Tony Wu received his bachelor’s from the University of Stirling and now works for AMER International Group, a large Chinese resource company in Shanghai.

So before packing your bags and flying out to China to open an office, you and your company need to answer the following questions: are you really a foreign expert?  Make a list of things you can do comparatively better than your Chinese counterpart.  What is your marginal productive value and what is the typical salary an expat with your skill set makes in China?  What are the advantages and disadvantages of opening an office overseas headed by a foreigner?

If you hesitated to answer at least one of these questions, remember that you and your company can always hire Western educated local Chinese who understand not only the complex culture of China but also can usually communicate effectively in English and understand many aspects of the West as well.

With that said, there are still a large number of multinationals that have moved in and set up shop on the mainland, recruiting both locals and expats alike.  Some notable examples in Shanghai are Indianapolis-based Eli Lilly which manages about 2,000 in the Pudong and Xintiandi districts; Sunnyvalle-based Intel which operates a 2,000 person division in Minhang, Shanghai, and another smaller office in Beijing of less than 1,000 workers (less than 5% are foreigners) both divisions focus on software development of chipset drivers; English First (EF), a Lucerne-based Swedish company which is the world’s biggest EFL training company and employs more than 2,100 full-time employees in the Shanghai metro alone, approximately 15% of which are expats.  In contrast, BP’s Pudong office has 200 employees, 10 of whom are foreigners; AIA’s Shanghai office only has about 150 non-sales employees; and Geneva-based Mercuria – a $75 billion resource multinational company (MNC) – operates a small corporate office of about 25 people also in Pudong.15

Some other auxiliary issues to consider before opening an office in China: according to the 2012 Expat Explorer survey, half of the expats recruited expect not only to earn more money upon relocation to China but also perks.16 For perspective consider that according to one October 2012 estimate that the per capita income of Tier 1 cities such as Guangzhou ($9200), Beijing ($8980) and Shanghai ($8325) are significantly higher than the average urban annual salary ($3,430).1718 For comparison according to the Social Security Administration the national average wage in the US in 2011 was $42,979.19 Yet Mercer’s 2012 ranking report on the most expensive cities notes that the cost of living for expats in China is disproportionally higher in these same cities: (being closer to 1st means more expensive) Shanghai is 16th, Beijing is 17th and  Guangzhou is 31st.2021 Similarly, an ECA International cost-of-living survey published in December 2012 found that Beijing is the 22nd and Shanghai is the 26th most expensive cities globally for expats.22 Why?  Because according to Lee Quane of ECA, “[e]ssentially what’s happening in China is that prices are rising at a faster rate than they are in the West, and that’s caused Beijing to leapfrog all those other locations in the rankings.”23 Or in other words, make sure to get firm budgetary numbers for the costs of: expat compensation packages (transportation costs, hardship perks, recruiting bonus) and rental property expenditures.

How large are these mainland cities?  Shanghai is the largest, with 23 million permanent residents, Beijing is slightly smaller with 20 million residents and Guangzhou has 16 million.24 Furthermore in terms of internet penetration rates across the country, Shenzhen has the highest (76.8%) followed by Guangzhou (72.9%), Beijing (70.3%) and Shanghai (66.2%).25 In contrast, Hong Kong is 68.7% and Singapore is 77.2%.  In terms of foreigners, despite the fact that more than 57 million inbound tourists visited the mainland in 2011 (see Chapter 4) there are only 600,000 foreigners who are permanent residents and 220,000 foreigners legally working on the mainland.26 Shanghai itself is home to the most foreign residents (200,000), roughly a third of all foreign residents on the mainland (in contrast Hong Kong has about 400,000 foreign residents).27

What city should you set up your first office and hire local labor from?  In addition to doing your due diligence regarding business licenses, you and your company should perform a cost-benefit analysis of mainland cities.  While labor costs are significantly cheaper in Tier 2 & 3 cities, salaries in Tier 1 cities also varied.  For example, the average monthly salary for an internet censor in Beijing is $653 whereas a similar censor in Tianjin is paid $480 a month.28 Similarly while land rental rates may be cheaper inland, larger metros like Shanghai, Guangzhou and Beijing typically have modern infrastructure (e.g., subways, well-maintained highways) which in turn attracts multinational corporations (MNCs).  Shanghai, which was according to a recent Forbes report is the best city for business on the mainland, itself has roughly 60 MNCs – more than any other city on the mainland.2930 This is due in part to subsidies and duty-free policies.  For example, a MNC can now receive an 8 million RMB ($1.3 million) subsidy for 3 years plus duty-free imports at facilities by setting up an office in Shanghai.31

Attracting, retaining and discovering talent and connections

Another seemingly mundane recruitment issue facing foreign and domestic companies alike is the labor hiring cycle.  Simply put, some recruiting months are not the same as others.  While most firms in large cities use the Gregorian calendar year for GAAP accounting, nearly every domestic firm celebrates holidays based on the traditional lunar calendar.  The biggest holiday of the year is Spring Festival or Chinese New Year, typically at the end of January to beginning of February.  Like their Japanese counterparts, it is customary for domestic companies to award significant bonuses – 20-50% of a month’s salary and even higher – to each employee just before Spring Festival.32 As a consequence, it becomes increasingly difficult to hire qualified workers after Mid-Autumn festival (also called Moon festival which is usually held in September) because employees not only would lose their potential bonus at the first, current company but would only be eligible to receive a reduced bonus at the new company.  This is just one more cultural issue US firms should be aware of before starting up a domestic office.

How hard is it to hire expats?  I posed this question to nearly every person I interviewed and the answer was unsurprisingly the same as it would be in other countries: compensation packages are usually the top priority.  And specifically, full medical insurance with coverage and reimbursements to private hospitals (see Chapter 19).  One of the reasons why this was important is that in the eyes of these managers, directors and CEOs, expats typically feel more comfortable in a foreign country if they knew they could have access to doctors and medical providers that spoke their native language.  As a consequence, firms looking to attract overseas talent may need to factor in the costs of medical reimbursements which can run up to 20,000 RMB ($3200) a night at some of the foreign owned and operated medical facilities.

Natalia Shuman, the new COO of Kelly Services’ in China mentioned in a recent interview that the top challenge in China for 2013 is,

I think retention and hiring talent are still going to be challenging.  More multinational companies are expanding their Chinese operations.  And the war for talent continues.  From the staffing and recruitment industry prospective, the operating environment here in China is tough: the competition is strong, limited collaboration between players, not enough regulations from the staffing associations, quality issues, cost pressures and price wars.33

In terms of retaining employees, in November 2012 I spoke with one foreign executive at a technology company in Shanghai who has employed a unique strategy in an attempt to kill two birds with one stone: retaining skilled employees and maintaining information integrity.  After losing several key staff to competitors, instead liquidating his assets he decided to go a different path, a “hollowed castle” route based on a strategy from Zhuge Liang in Romance of the Three Kingdoms (三国演义).

In a nutshell, there was a volatile period two thousand years ago when what we now know as China was divided into three warring states (三国时代).  One of the states (Shu) had its capital in Chengdu, in the contemporary western province of Sichuan.  This kingdom was ruled by a calculating leader named Liu Bei who had under his command an able minister and war general, Zhuge Liang.  At one point in this time period Liang had ordered all of his troops to leave the city and engage the enemy (Wei) capital of Chang’an (now Xi’an) to the north.  Yet his enemy took a different route avoiding a clash with the Shu, moving rapidly towards Chengdu whereupon they began preparations to lay siege to the Shu castle.  Liang, with little recourse attempted an unusual tactic: he opened the castle doors, disguised the remaining soldiers as civilians and played music from the top gates.  The leader of the opposing forces, Sima Yi, knew that Liang was a shrewd and calculating opponent and thus came to the conclusion that this ploy must be a trap.  So Yi withdrew his forces.  This type of reverse psychology is termed the Empty Fort Strategy (空城计).  Similarly this executive has since brought his subsequent teams into the fold, explicitly imparting the knowledge that they alone hold the key to their own long-term success – and that they could walk away at any time.  His staff turnover was subsequently lower largely due to what he considers from this frankness towards future revenue generation and employee trust.

In terms of specific retention examples in the service industry, when I spoke with both Scott Freeman and Richard Qi (see Chapter 13) they both noted that based on their experiences in the domestic IT industry there is a usually a dividing line of 1985.  That is to say, that the turnover rate is substantially higher for those born post-1985 (50-60%) than those born before it (20%).  Or in other words, the younger the employee, the riskier they may be – yet simultaneously, the younger the employee the more familiar they may be with new ways of thinking differently.  And it is a conundrum that is not endemic to China.

Another way to utilize and attract talent is a method used at Motion Global (MG).  Nira Binderer is an HR manager at MG in Shanghai and noted in our May 2012 interview that MG unequivocally sees China as the long-term home for its future base of operations.34 While it is no secret that from a wage and salary perspective it may make financial sense to hire local talent (e.g.,Chinese graduates from lesser known schools earn less than $350 a month at their first job35 ), Binderer said that MG had a unique external hiring strategy: hire expats as interns.  According to her, MG will give each intern a small stipend each month, but requires the interns to pay their own way (flights, accommodation, food) to show just how dedicated and genuine they are regarding SEO (search-engine optimization) and internet marketing.  After a two-month probation, their salaries increase proportionally to the success of their SEO campaigns (judged by analytic tools measuring click through rates, bounce rates, etc).  When I visited their Shanghai headquarters in May, more than two dozen foreigners (typically recent college graduates) were working side by side with local Chinese.  I spoke with one former intern, Miles Vaughn – now in Florida, who noted that he learned more in the months he was at MG than in any classroom.  In his words, “I hit the ground running and had a chance to not only learn as I went but each week we had a chance to talk with SEO teams from other companies including Google.”

While it would be difficult to convince the average expat to pay his or her own way just to be an intern at your new China office, hiring interns in general could help tide your firm over during cyclical periods such as the post-Mid-Autumn holiday (when fewer workers are willing to leave their employers due to bonus incentives).  Interns can also be viewed as an ongoing-asset.  After all your firm has invested both time and money in them, perhaps they can eventually be promoted to a permanent position in the future.

As mentioned several times previously as well as in Chapter 13, one of the problems that Larry Chang specifically faced when setting up shop in Shanghai five years ago was a lack of local contacts.  He did not know any businessmen or government employees and the locals were unfamiliar with him because he did not go to school with any of their colleagues, teachers or family members.  Thus building his guanxi (social, business, personal connections) was a challenge that required significant attention – one that he still focuses on.  In Chang’s words, “SMEs cannot make their own guanxi over night.”  One way he has successfully gotten his foot into the door is by meeting with consultants who act as his ‘air force’ – while he trains a figurative army of software designers, he relies on consultant connections to help put him into contact with suppliers, vendors and other contacts.  After years of meetings, this has enabled his firm to grow 30% annually.  Thus entrepreneurs should be cognizant of this all-encompassing cultural trait that Matt Garner described in Chapter 1 as “relationship focused” – in contrast to the “results focused” in the West.

Telecom infrastructure

ClarkMorgan runs a very tight ship in Shanghai’s Changning district, next to Jing’an Temple.36 Founded more than a decade ago by Australian Andy Clark and Briton Morry Morgan, it is primarily known as a firm specializing in corporate training, yet I would argue it publishes one of the top quarterly magazines on HR-related issues in China.  When I visited their office in May 2012, I had a chance to see firsthand the typical workday in which expat and local employees worked side by side, sometimes even sharing the same scarce tables.  The Shanghai office is staffed by approximately 20 full time employees (half expats) and as Gary Isse explained to me in an interview, “one of the challenges we continually face is maintaining a reliable network connections both internally and externally.”

This is one of the struggles that all potential firms wanting to move to China will face: how to deal with a relatively static telecom industry within each city.  While China is home to state-of-the-art telecom gear manufacturers such as Huawei and ZTE who produce modern equipment, its domestic broadband build-out is lagging neighboring peers such as Japan and Korea in part because its internal telecom infrastructure is organized into two disparate tiers.

In October 2012 I spoke with Scott Freeman, CEO of ITBN, a private internet service provider (ISP) that provides broadband connectivity solutions in Beijing and Shanghai.37 ITBN was founded in 2000 and offers a range of connections from dedicated ISDN lines to full fiber connections.  While ITBN charges a premium for their services, they also provide something that these SOEs cannot: reliability and bi-lingual telephone support and thus have captured a significant percent of the urban market share.

While much speculation exists about the telecom infrastructure in China, Freeman described the seemingly complicated national network thusly, “there are hundreds of licensed and probably thousands of unlicensed ISPs in China. Some have national licenses (like we do); others have only provincial licenses. Many more operate without licenses. The official differentiation between ISPs like us and the big state-run ones is that we are called “second-tier” ISPs, whereas they are called “first-tier” ones.  Theoretically the first-tier telcos are supposed to control all of the physical connections in and out of the country.  Other than that it’s not so clear what else differentiates them on the ground, other than the fact that the big state-run telcos have a lot more money and the extra job of content monitoring.”

As Freeman noted, aside from a few licensed private firms such as ITBN, there are essentially only three tier 1 ISPs in the whole country (China Telecom, Unicom and Mobile) all of whom are state-owned enterprises.38 In fact, on a user basis China Telecom and China Unicom (both SOEs) are the largest ISPs in the world.39 And while there may be developmental reasons for relatively slower bandwidth speeds (compared with their neighbors), in terms of throughput, according to their Q3 2012 speed survey, ChinaCache noted that while the overall speeds are a little slower than previous speed rankings, Shanghai currently leads the country in average speeds at roughly 3.44 Mb/s and Beijing is 10th at around 2.5 Mb/s.40

While the quality of wireless telephony signals between the US and China is debatable, the Ministry of Industry and Information Technology announced in September 2012 that it plans to being issuing 4G licenses within the following year.41 Thus while Western countries are finishing rolling out 4G networks, aside from a pilot roll-out in a dozen cities such as Chengdu, Hangzhou and Wenzhou (from China Mobile), the majority of Chinese users unfortunately have another couple of years before 4G becomes an installed reality.42 And in the case of ClarkMorgan, there just are not many broadband packages that fit their needs at the prices expat managers are accustomed to (e.g., choice between a relatively inexpensive 5 mb/s DSL versus an expensive dedicated T1).

Takeaway: before opening up a Chinese branch for your company be sure to research the costs of living, property rental prices and telecom infrastructure availability in the area.  In addition, paying attention to hiring cycles, offering internships and recruiting hǎiguī may also give your company a significant advantage over your competition that fails to do so.



Endnotes:

  1. See China’s Graduates Face Glut from The Wall Street Journal and University Graduates Have Hard Time Finding Job, Initial Survey Finds from Caixin []
  2. In other words, many college graduates are typically uninterested in low-wage, low-skilled factory work.  See Chinese Graduates Say No Thanks to Factory Jobs from The New York Times []
  3. Asia’s Endangered Species: The Expat from The Wall Street Journal []
  4. Animal Spirits with Chinese Characteristics: An Interview with Mark DeWeaver from The Libertarian Standard []
  5. Legal and Unauthorized Chinese Immigrant Population from Migration Policy Institute []
  6. According to a 2008 report from Reuters, “Of the 1.2 million Chinese people who have gone abroad to study in the past 30 years, only one fourth of them have returned, according to the Chinese government.”  In addition to Chapter 19, see China’s Brain Drain at the High End by Cong Cao, China’s Brain Drain Dilemma: Elite Emigration from The Jamestown Foundation and China fears brain drain as its overseas students stay put from The Guardian and China goes on the road to lure “sea turtles” home from Reuters []
  7. Unrealistic U.S. Immigration Policies Push Away China’s Best And Brightest by Forbes []
  8. An Export of Students: Where Are China’s Ultra-Rich Sending Their Children to Study? from Good Infographics []
  9. In 2011, the US embassy in China issued more than 160,000 student visas for Chinese students to study at American schools.  Yet a November 2012 report from Open Doors notes that the actual number is even higher, 194,029.  See Ten Years of Rapid Development of China-US Relations from Xinhua and Students from China add $5b to US economy from China Daily []
  10. Spreading their wings early from China Daily []
  11. U.S. a Hot Spot for Chinese Grad Students from The Wall Street Journal []
  12. Tough US job market sends Chinese students home from China Daily []
  13. Reverse brain drain: China engineers incentives for “brain gain” from The Christian Science Monitor []
  14. Is overseas returnee working as driver a waste of talents? from People’s Daily []
  15. It should also be noted that due in part to an economic slow-down on the mainland and because of political tensions, numerous Japanese firms are purportedly considering relocating elsewhere.  According to Reuters a “quarter of Japanese manufacturers are rethinking their investment plans in China and some may shift future production elsewhere.”  For perspective, since 1990, Japanese firms have invested almost $1 trillion the mainland.  And despite these tensions, in 2012, “Chinese consumers bought nearly 3 million Japanese cars and trucks.”  See As China tensions simmer, Japan pulls back from “world’s factory” from Reuters and Five Predictions for China’s Auto Industry in the Year of the Snake from The Wall Street Journal []
  16. Expat preference for the growing Chinese economy is apparent from HSBC []
  17. Other estimates such as the National Bureau of Statistics put the per capita averages higher:  (~$13,000/capita), Beijing (~$12,500) and Guangzhou (~$13,000).  The reason for the disparity involves not just sample size but also what geographic districts are included or excluded (e.g., in the NBS case they divided total GDP by population in the region).  See Guangzhou has highest average salaries for cities in mainland China from South China Morning Post []
  18. Charting China’s Family Value from The Wall Street Journal []
  19. National Average Wage Index from Social Security Administration []
  20. Modern China: A tale of luxury villas and displaced villagers from McClatchy []
  21. Worldwide Cost of Living Survey 2012 from Mercer []
  22. Beijing, Shanghai Cost-of-Living Leaps from The Wall Street Journal []
  23. Ibid []
  24. See The Current Demographic Profiles of Shanghai (2011) from Shanghai Municipal Population and Family Planning Commission, Beijing’s temporary population fell in 2011 from China Daily and Guangzhou seeks opinions on population draft from China Daily []
  25. Shenzhen Has the Highest Weibo Penetration Rate in China from China Internet Watch []
  26. See 593,832 foreigners live on Chinese mainland: census data from Xinhua and Plan to reduce minimum stay for foreign workers from Shanghai Daily []
  27. Shanghai’s foreign population above 200,000 from Want China Times []
  28. Wages have also decreased for certain professions over time.  For example, in 2000 a computer science graduate could earn $725 a month in Shenzhen, a wage that has decreased to $550 a month due to more competition from graduates.  See China’s ‘Manhattan’ becomes censorship capital from Financial Times and Chinese Graduates Say No Thanks to Factory Jobs from The New York Times []
  29. See Shanghai tops China’s “best city for business” from Sina and Top 10 best cities for business in China 2012 from China.org.cn []
  30. Another estimate puts the number of Asia-Pacific headquarters in Shanghai at 393.  See Almost 400 MNCs have their Asia HQs in Shanghai from IANS and Shanghai tops China in attracting multinational headquarters from Xinhua []
  31. Shanghai policies woo multinational headquarters from Xinhua []
  32. This is different than shūshin koyō (employment for life).  For a dated yet clear explanation of the Japanese bonus system see Bonuses and Employment in Japan from Journal of the Japanese and International Economies, 1987 []
  33. Developing a Competitive Edge from Insight []
  34. Motion Global []
  35. China’s Graduates Face Glut from The Wall Street Journal []
  36. Clark Morgan []
  37. ITBN and ITR []
  38. While there are a few large, private, independent ISPs on the mainland such as 263.net (网络通信) and Great Wall Broadband (recently acquired in Q4 2012 by Chengdu-based Dr. Peng Telecom, 成都鹏博士电信传媒集团股份有限公司) nearly all traffic is still routed through the three SOE tier 1 backbone monopolies.  China Tietong Telecommunications (中国铁通集团有限公司) which used to be China Railcom, merged with China Mobile in May 2008.  China Netcom (CNC) merged with China Unicom in October 2008.  See Users angry at slow Internet speeds from Global Times []
  39. Just two Chinese ISPs serve 20% of the world broadband users from ArsTechnica []
  40. ChinaCache Releases Third Quarter 2012 China Internet Connection Speed Rankings from China Web Report []
  41. China 4G licenses to be issues in 2013 from ZDNet []
  42. See China Mobile Network Costs Mean First Net Drop Since ’99 from Bloomberg, China Mobile Builds First 4G Base Station In Chengdu from China Tech News and China Unicom Books 50% Net Profit Growth In 2012 from China Tech News []
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