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Breaking Down Borders Doing business in China

Guo Xin

1Mercer

Guo Xin is a Senior Partner and Managing Director for Mercer in Greater China. He is also the chairman for Marsh & McLennan Companies (MMC) in China which is the parent company for Mercer. During his career at Mercer, Guo Xin has held a variety of leadership positions, including Asia Pacific Human Capital business leader and Managing Director for China.

Guo Xin has expertise in working with clients on developing strategic organization structure, business processes, and human resource systems. His clients include local private and listed companies, state-owned enterprises and multinational companies in and outside of China. Guo Xin has also worked in the US for 10 years, both as a consultant and a practitioner. He has extensive experience in business process improvement and re-engineering for clients covering forest products, logistic and distribution, chemical and fast moving consumer goods.

Guo Xin is also a member of WorldatWork Global Advisory Board.

Today’s speaker

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Ensuring compliance with local legislation

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Topics for discussion

Attracting and retaining top talent

Setting the China scene

Moving critical staff / relocating expats to China

5 Ensuring success in your expansion: M&A in China

Setting the scene China

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One of the fastest growing economies; 7 years of more than 9% GDP growth

Resilient economy – solid growth during the peak of the global crisis

Opening new sectors for foreign investment

World’s largest population; Promising consumer markets

Significant investment in healthcare and infrastructure

Today

China has overtaken Japan as the second largest economy

Ever expanding middle class

Massive infrastructure expansion

– Linking East China with Middle China

– Improving economic efficiency & improving quality of life in developing regions

An enabling environment

Setting the scene Global financial crisis

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Setting the scene Pacing ahead

9.1

10.59.6

9.18.08.0 7.3

10.1 10.411.6

13.0

9.0

15.6

11.9

2.7

3.5

-0.7

5.94.8

1.51.8

3.91.2

-0.80.70.4

8.17.46.98.78.68.28.27.37.47.68.38.5

11.3

13.4

14.613.5

11.212.8 12.2

9.3

-2

0

2

4

6

8

10

12

14

16

18

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(E) 2011(F)

Perc

enta

ge

GDPCPI (Inflation Rate)Salary IncreaseStaff Voluntary Turnover

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Rise of Chinese companies on a global scale: Powerful state-owned enterprises becoming major global players

Chinese companies listed on Fortune 500

54

43

3530

2318

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010

Source: Fortune 500 2005-2010

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Setting the scene Beyond the crisis

Chinese economy coped well with the crisis; clear signs of recovery

Revised government growth projection for 2010 at 10.5%; Q3 GDP growth at 9.3%– GDP forecast for 2011 is 9.6%– 2011-15 to be a year of economic tightening and inflation control;

launch into the stable growth and the development of 2nd and 3rd tier cities

China’s long-term promise still holds– Growth primarily driven by the strong domestic market– Workforce unrest is just one of a few of the challenges facing new

entrants into the potentially lucrative Chinese market– China exports return to pre crisis levels; with expected slower annual

growth as China moves to a consumer based economy

Attracting and retaining talent

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Voluntary turnover rates Quick economic recovery and strong growth projected

Due to a quick recovery of the China market, company’s are looking to Asia for growth opportunities– Strong consumer growth spending– Ministry officials predicted foreign direct investment (FDI) this year

was set to "surpass $100 billion", compared to $90 billion last year

The war for talent is the single biggest challenge for MNCs expanding into China

Rapid business growth has resulted in a fierce competition for talent: – 2010 voluntary turnover forecasted to be 15 – 16%, returning to pre

crisis numbers. – 41% companies indicate that they have high turnover of blue collar

which is a significant symbol of local labor shortage.

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Attracting and retaining top talent Local SOEs and finding talent

Local employers are competing by aligning employee’s personal career ambitions to the needs of the business

SOEs are offering key positions within domestic organizations, with significant titles and benefits

Foreign multinationals needs to offer a clearly mapped out career and development plan that is communicated to the employee

English ability: while China graduates 5 million people each year, few have the ability to speak English. Those who can are from top schools and are recruited quickly

An employee being asked to relocate will know there is a high likelihood of a similar job in the tier one city with a different employer

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China’s HR conundrum

• Career development drive choice

• Development key retention tool

• Localize instead of expatriates

• Available jobs predicted to outpace available workers

• Slow take up of the aging workforce challenge

• Lack of leadership capability impacts immediate business results

• Speed of change – dynamic for leaders

• China's gap in leadership ranks

• Pressures on salaries

• Short average tenure

Competition for talent

Competition for talent

ChangingCareer

Expectations

ChangingCareer

Expectations

WeakLeadership

Benchstrength

WeakLeadership

Benchstrength

Aging Workforce

Aging Workforce

Talent challenges

Talent challenges

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Attracting and Retaining Talent Lack of dynamic leadership

A strong demand but short supply has led to a war for talented leaders

The leadership pipeline is also not running smoothly with talent, they’re not developing fast enough to keep pace with economic growth

Not only MNCs, but also SOEs are searching for leadership talent as they expand globally

As SOEs begin to expand overseas, they’re struggling with the right balance between bringing leaders from outside the country and building up its own leadership pipeline

Compliance The ‘people’ dimension

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Dimensions to governance: Ensuring compliance with local legislation

Unions have an influence over workplace relations from levels of pay to employment (i.e. Summer 2010 strikes)

In the past multinationals have been known for better pay and offering more training opportunities. This perception is changing, local Chinese firms are also catching up and offering more reimbursement options to lower tax liabilities, difficult for MNCs to offer such benefits

China has a reputation for a high level of bureaucracy with many government agencies involved with different industry sectors. Expertise in navigating red tape is crucial for a foreign organization (many local deals are struck with regulators)

The government provides pay-as-you-go pension benefits via an IRA. SOEs often provide Defined Benefit schemes to attract talent. MNC companies under pressure to follow suit.

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Statutory Benefits(Mandatory)

Social security (including Pension Insurance, Medical Insurance, Maternity Insurance, Work-related Injury Insurance, Unemployment Insurance, Housing Fund)Public Holiday (11 days)Other legal leaves (e.g.: Medical Treatment Period, Marriage Leave, Maternity Leave, etc.)Severance and Termination Benefits

Employer Sponsored Benefits(Optional)

Supplementary Pension Plan/ Enterprise Annuity Supplementary Medical Life InsuranceAD&D InsuranceCritical Illness InsuranceSupplementary Housing Savings PlanTraining and Education AssistanceWork/Life Balance PlanStock PlanPerquisites

Employee Benefits

Social and supplemental benefits overview

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Social Benefits

EmployerContribution

as % of wages

EmployeeContribution

as % of wages

Wage Base

Minimum Contribution

WageBase*

MaximumContribution

WageBase*

Pension 22% 8%

Employee’s Last Year Average

Monthly Salary

RMB2,140 RMB10,698

Medical 12% 2% RMB2,140 RMB10,698

Maternity 0.5% - RMB2,140 RMB10,698

Work-related Injury 0.5% - RMB2,140 RMB10,698

Unemployment 2% 1% RMB2,140 RMB10,698

Housing 7% 7% RMB2,140 RMB10,698

• Maximum Contribution Base is equal to three times of employee’s last year’s average monthly salary • Minimum Contribution Base is equal to 60% of employee’s last year’s average monthly salary

As of July 2010

Statutory benefits requirements Example: contributions in Shanghai

Moving critical staff to China - Employee mobility - Challenges of expats into new regions

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International assignment issues in China Geographical arrangement

Given China’s vast size there are many different cultures and dialects within the country. It’s cities are split into tiers, which are based on their stage of economic development– Tier 1 cities: Beijing, Shanghai, Guangzhou and Shenzhen– Tier 2 cities: include Chengdu, Dalian, Suzhou, Nanjing, Tianjin

etc.

China has many large cities with industry clusters – for example: Chengdu and Dalian are know for outsourcing

Beijing and Shanghai are known for Research and Development centers and as common location for regional headquarters

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International assignment issues in China Employer perspective

Talent readiness: Lack of skilled and readily employable talent in specialized roles requires companies to source expatriate talent

Certain positions held by locals require pay equal to that of foreign talent, these positions are highly skilled

Managing employee mobility costs e.g. housing, hardship allowance and travel. Could cause employee equity issues

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International assignment issues in China Employee perspective

Safety

Cost of living

Inability to obtain certain goods

Tax issues

Work visas

Quality of living

SARS/Bird Flu/Pandemics

Hardship – developing cities

Food

Language barriers

Health concerns

Medical care

Remote location

Benefits

Pollution

Internet access

Logistics

Schooling in rural areas

Housing costs and availability

Cultural differences

Difficult living conditions

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Challenges of moving expats into new regions

Many multinationals report that they get significant value from having expatriate talent in China.

The cost is justified by focusing on grooming future local leaders.

Drawbacks: – Once you factor in housing, salary, housing, education and

transport allowance, the cost becomes significantly higher – Given the scarcity for globally focused experience leaders, they can

easily move around the region to jump to competitors ie revolving door effect. This has a negative effects on staff morale and the long term strategy of the organization

Ensuring the success of your expansion M&A in China

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Evolution of a Transaction How M&A deals are done in China

Highly regulated process– Separate local provincial-level regulatory bodies and processes – National-level regulatory agencies and processes

Ministry of Commerce (i.e. MOFCOM, NDRC, SASAC)– Anti-Monopoly Law (AML)– Industry specific laws (media companies governed by 10+ agencies)

Deal environment unpredictable– Target companies experience varies significantly– Data/compliance issues– Documents exist only in Chinese– Unspoken/undocumented “local” deals

People & their relationships drive most deal value – Retaining “pre-deal” relationships critical– Executives, key managers, suppliers, customers– Incentive-based approach vs. contract-based approach

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Challenging deal issues at each phase Typical issues during transactions in China

Due Diligence Doing the Deal Making the Deal Work

Fraud

Multiple sets of books

Local government “deals”

Compliance issues

EHS, OSHA issues

Legacy issues from state-owned enterprises (SOEs)

Land use rights

Valuation expectation

Deal financing

Paying the Chinese owner

Deal governed by 6 ministries

Deal structure

Switching from APA to SPA

Indemnity considerations

Escrow considerations

Unsophisticated local management team

Retaining pre-deal relationships

Unwinding improper sales practices

Install reporting & control requirements

Conflict of interest with original owner’s “other” entities

“You don’t understand China”

Expectations of local employees

Making the Deal Work

Doing the Deal

Due Diligence

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Summary of China issues A few things to key in mind…

HR ENVIRONMENT

• Mandatory employment contracts

M&A ENVIRONMENT

• M&A highly regulated

SEVERANCE and RETENTION

RETIREMENT & BENEFTS

COMMUNICATION

• Subtle; face-to-face

CULTURE

• National, geographic and organizational differences

COMPENSATION

• Statutory severance payments

• Non-compliance on social security contributions and overtime common

• New ECL

• Highly competitive talent environment

• Use of tax efficiency plans common

• Sales compensation compliance often an issue

• Build trust

• Negotiate interests & incentives

• Retention is key

LEADERSHIP

• Statutory social security contributions

• Supplemental retirement plans emerging

• Supplemental benefits emerging in Chinese companies

Questions?

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Questions & answers

Additional information Where to go for help

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For more information on regional strategies Risks and opportunities

Visit our Breaking Down Borders website to access articles, points of view, podcasts and more information on investing in China

www.mercer.com/breakingdownborders

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Future markets in the Breaking down Borders webcast series

When: Webcasts will begin at the following times:

Delhi – 11:30 am Bangkok – 1:00 pm Shanghai, Hong Kong, Singapore – 2:00 pm Seoul, Tokyo – 3:00 pm Sydney – 4:00 pm

www.mercer.com/breakingdownborders

Doing business in India Held

Doing business in Japan Held

Doing business in China 2 December

Doing business in Korea 16 December

Additional markets will be added in 2011

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