While the Chinese Olympic team seems ready for competition, it’s the rest of the talent landscape that’s concerning business.

The talent shortage in China is well documented. In a recent attraction and retention survey conducted by Mercer, 72 per cent of respondents said the number one challenge in recruiting staff was a lack of qualified candidates in the Chinese market. But for most multinationals operating in the country, this is only the beginning of the relay.

Once the gun goes off, how do you keep staff engaged and motivated to cross the finish line? The ability to develop and keep the best and brightest stars, including an elusive cadre of current and emerging leaders, has surfaced as a key trouble spot for most multinationals.

In 2005, consulting firm McKinsey & Company said that “given the global aspirations of many Chinese companies, over the next 10-15 years they will need 75,000 leaders who can work effectively in global environments; today they have only 3,000-5,000.” It is debatable whether either multinationals or local Chinese companies have made much progress in this area. Many of them seem plagued by a lack of leaders capable of succeeding in increasingly complex, matrixed organisations where English is the lingua franca.

Current leaders, many of whom were born in the 1950s and early 1960s, were brought up during the Cultural Revolution, when education was sporadic and centralised planning was the norm. These leaders got to where they are today through hard work, tenacity and perseverance in the face of significant adversity.

In some cases, these leaders tend not to be strong strategists, innovators or problem-solvers and are more comfortable with an authoritarian, command-and-control style. Their strengths lie in weathering the storm, in building relationships and big-picture thinking versus details and execution. They engender commitment and deep loyalty from those who work with them. They are a fairly stable cadre of leaders with very low turnover. But there is a shortage of management talent suited to entrepreneurial enterprise in this generation.

Emerging or future leaders – say, those born in the late 1960s and throughout the 1970s – also share a similar experience with older leaders: uninterrupted economic growth and prosperity. This cadre of emerging leaders, like the generation before it, can lack business acumen, entrepreneurship, creativity and the capacity for execution, but also people management skills. The latter is a particular cause for concern in most multinationals, given their desperate need for staff development and engagement. Chinese middle managers believe their core strengths include team leadership, teamwork, organisation agility and relationship management.

This group is well educated, but has generally received little formal management training. They are driven to succeed – in your organisation or elsewhere. Promoting them before they are ready or losing them to a competitor is a risk. The younger members of this category (30-34 years) have fairly high turnover, hovering at about 25 per cent of the workforce in a given year. This turbulence has contributed to the lack of stability in the leadership pipeline.

With so much riding on China delivering results, what are organisations doing to address these challenges? Many organisations struggle to answer the “build versus buy” question. On the one hand, they continue to battle for a limited amount of resources in the labour market, often to lose out to, or pay too much against, those with deeper financial pockets.

On the other hand, building a leadership pipeline can take years of careful cultivation and a significant investment of time and money. Our experience in China suggests that many companies haven’t found the right balance yet between buying and building leaders.

While using expatriates in China for key leadership positions is thought to be reducing, it remains a prime tactic in filling the capability gap. And although the use of western expatriates remains stable, there has been an upward trend in mobility in the Asia-Pacific region. Equipped with the language skills that are so critical in China, managers from Hong Kong, Taiwan, Singapore and, more recently, Malaysia are being transferred or poached to fill key posts in China. Foreign-born Chinese people lured to the booming economy are also considered an attractive solution given their excellent education, western business style, and language capability.

This strategy may solve one short-term problem – filling talent gaps – but it creates two longer-term ones – a lack of “localisation” and a perceived glass ceiling for locally born Chinese.

Localisation, the process of “transitioning” a position from expat status to local status (which often involves grooming local Chinese talent for replacement), remains an elusive objective for many organisations. Those “buying” talent from either the internal or external labour market have relied on expensive expatriate packages to attract talent from outside the country, and this has resulted in significant internal inequity. And in China, benefits packages come in all shapes and sizes, from complete coverage – including housing, medical insurance, children’s education (which can be upwards of US$20,000 (£10,000) a year), car and driver, hardship allowances and tax equalisation – to “local plus” and “local plus, plus”, introduced to ease the transition and typically designed to reduce benefits over three years. The median cost for these packages can typically soar to over 200 per cent more than for a locally hired Chinese person in the same position at executive or function-head level.

Given the ongoing disparity between local and expatriate leaders, this has become a source of considerable frustration with few immediate solutions. A simple reduction or termination of benefits has led many locally hired foreigners who can easily move around the region to jump quickly to the next multinational willing to pick up where the previous unfortunate employer left off – very often receiving more pay and another lucrative benefits package.

Many multinationals will tell you that they have a localisation strategy but are dissatisfied with the pace of progress. Expats will tell you that they either don’t have the time to groom their successor or that it will take years to grow the necessary skills to operate in an increasingly complex business environment.

Consequently, what some local leaders experience is a revolving door of expatriates but little in the way of systematic, organisation-sponsored development. This cycle of reliance on expatriate talent has led some local managers to argue that there is an emerging glass ceiling in certain global corporations operating in China.

Given the shortage of up-and-coming local leadership, as well as the continuing cost of expatriate staff, a strategy based purely on buying in talent is not sustainable in the long term. But in our experience, many organisations in China have not implemented a comprehensive strategy for leadership development. There are a number of reasons for this, including a lack of deep HR management expertise in the field of talent development, insufficient executive-level attention, and inadequate planning and investment.

In a recent Mercer study, Staying Ahead of the Curve: Leadership Practices in China, leading organisations in the country reported that a lack of internal skills and knowledge about how and where to start was the single biggest barrier holding them back from achieving their leadership development goals. A total of 76 per cent of respondents said they did have a development strategy in place that defined how to identify, assess, develop, and retain current and future leaders. So it seems that execution is a significant obstacle to achieving longer-term development results.

However, some savvy organisations have taken a more proactive approach. Carol Shen, general manager of Estée Lauder China, identified future leaders as a key to sustaining the company’s success in the local market. In partnership with Mercer, Estée Lauder has designed a multi-pronged strategy for all middle managers that starts with an assessment against region-specific leadership behaviours, followed by a 12-month development programme that includes personalised feedback, participation in four experiential learning modules, action learning interventions, and a live business case that participants have to solve during the year.

What has made this programme successful and sets it apart from others delivered in China is the long-term commitment the senior leadership team has shown towards grooming local emerging leaders. All brand general managers as well as the executive committee act as facilitators, with the distinct purpose of grooming tomorrow’s leaders today.

Shen expects the current leaders not only to reinforce company-specific values but also to impart skills and knowledge through lessons learnt from experience. She says: “Organisations that take a long-term view about China have no choice but to continue to develop their people, transfer knowledge and create shared values among the team. Hopefully, all the developmental efforts will translate into higher retention ratios as well.”

What are other companies doing to groom current and future leaders? In Mercer’s recent study, organisations said that certain development interventions were more effective than others in building the leadership pipeline. It is interesting to note that the most commonly used intervention, classroom training, was reported to be one of the least effective methods.

Of the organisations studied, 43 per cent spent more than US$4,000 (£2,000) per participant each year on training and development for current senior leaders, yet only 5.5 per cent spent the same on current middle managers – in other words, tomorrow’s leaders. In terms of time spent, 53 per cent of respondents delivered between 11 and 20 days of training a year for senior and middle managers alike.

Despite this, experience suggests that not having a well-articulated leadership strategy has led organisations to over-rely on buying leadership talent from the market rather than grooming from within. While many multinationals report that they get significant value and peace of mind from having expatriate talent in China, a more cost-effective and sustainable strategy over the long-term would be to focus on systematically grooming tomorrow’s leaders.
There are five fundamental steps that HR professionals and business leaders can do to start and sustain the journey.

To be successful in China, organisations must ensure a steady flow of “ready now, ready soon, and ready later” leadership talent. This means articulating and then relentlessly executing these five key steps towards building an internal leadership pipeline. Using expatriates as part of this process is a winning combination.

The truth about Chinese managers
Chinese managers see themselves as customer-oriented, safety-focused and honest, according to research from the Institute of Leadership & Management (ILM), writes Jane Pickard.

This self-image, contradicting the stereotype of the manager from a communist background who doesn’t understand business, emerged from a survey of 327 managers from the UK, US, France and China.

The research, The Global Management Challenge, also showed that Chinese managers seemed more willing to learn than western ones. “Chinese managers are modest about what they know and have a hunger for learning,” the report says.

In contrast, some 65 per cent of western managers felt there were no management weaknesses in their business that could hold back development. The report added that Chinese managers were better educated to begin with and received more in-house training than their peers in the West.

The report, produced by ILM along with test publisher AQR, warns that the West underestimates Chinese managers, with western managers in the survey seeing them as driving their workers hard to get work done on time. It suggests that the strategies devised by western economies to compete with China may be wrong.

“Messages we traditionally receive about China portray an authoritarian, sweatshop economy that has scant regard for the environment or concepts such as corporate social responsibility. In contrast, the report reveals a more sophisticated picture of Chinese managers. They see themselves as having a high regard for rules, customer focus and their impact on the environment. They value wisdom and knowledge and, while willing to acknowledge weaknesses, are also determined to correct them,” says Penny de Valk, chief executive of ILM.

China’s employment law
China has a growing statute book of employment laws but enforcement is patchy, writes Jill Evans. Officially, people work a maximum of 40 hours a week, eight hours a day, with two rest days a week. In practice, workers often put in a 12-hour day, are required to do unpaid overtime and in busy periods work seven days a week.

All trade unions must belong to the All-China Federation of Trade Unions, run by the Communist Party. Unions have a statutory duty to protect employees’ rights and supervise employer compliance with labour contracts.

Employers can dismiss employees only in certain circumstances, such as for serious discipline breaches or causing substantial loss to the organisation. But employees can terminate their employment with 30 days’ notice – or, during probation, three days’.

In January this year the People’s Republic of China Labour Contract Law 2007 came into force. This requires all workers to have written contracts, gives unions new powers to negotiate at industry level, and introduces new rules on fixed-term contracts. Most employees are on such contracts and the rules are intended to force employers into more long-term arrangements. Employees are entitled to an open-ended contract if they have been with the same employer for 10 years or more, have worked for more than a year without a written contract, or completed two successive fixed-term contracts.

The new law also revises probationary periods. A contract of more than one year but less than three can have a probation of only two months. And the maximum period that a former employee is banned from working for a competitor after leaving their job is now two years rather than three.

Andrew Halper, head of law firm Eversheds’ China business group, says the new law is “designed to rectify some of the abuses that mark the labour scene”. He says that although most abuse has been “perpetrated by Chinese or foreign employers from elsewhere in Asia, the law will undoubtedly be applied to western investors. This underscores the need for more careful HR planning, and more comprehensive employment agreements to avoid falling foul of the law or unwittingly increasing labour costs.”

Five fundamentals to building a leadership pipeline
Step 1 - Define your leadership strategy and align it with business requirements
Working with the leadership team, articulate your unique leadership strategy containing the organisation’s philosophy and tactics around key features, including:
- leadership talent needs, now and in the future;
- approach to talent identification; 
- assessment approach and methods for determining strengths and development needs;
- process and methods for developing leaders;
- strategy for retaining and engaging current and future leaders;
- resources needed to deliver and support the leadership agenda;
- levels of investment required to build and retain leadership talent;
- clear metrics and reporting mechanisms for tracking the strategy’s progress.

Step 2 - Define your unique leadership success profile
This includes an agreed definition of the leadership requirements – capabilities, behaviours, attitudes and values – that leaders must exhibit to be successful in the organisation.

Step 3 - Assess the current and future pipeline of leadership talent
Using the success profile as a foundation, develop and conduct a leadership assessment exercise to determine the strengths and gaps of both your current and future leaders.

Step 4 - Build and implement a systematic development process
Based on the assessment results, determine organisation-wide development needs. Build individual development plans that can serve as learning roadmaps for current and future leaders. Key interventions should include:
- identifying and providing challenging opportunities for development;
- providing “break through coaching”;
- delivering action learning programmes;
- ensuring job rotation, including overseas assignments;
- defining career paths;
- delivering classroom experiences.

Step 5 - Measure progress along the way
Identify key metrics, measure progress and widely communicate effectiveness along the way to ensure that leadership development remains high on the agenda.