The High Cost of Cheap Chinese Labor

by: Shaun Rein

The following letter of mine, addressing human resources problems among Chinese corporations, was published today in the Harvard Business Review:

The High Cost of Cheap Chinese Labor

Dear Editor:

Paul W. Beamish’s June 2006 Forethought article “The High Cost of Cheap Chinese Labor” correctly points out that recruiting and retaining white-collar workers in China is difficult. But his analysis of China’s HR problem is far too simplistic. Indeed, the issue of retaining talent in China is not so much the fault of multinational corporations like GE and L’Oréal as of workers themselves and general market conditions.

Consider the following: Organizations in China—the small and midsize enterprises as well as the Fortune 500 companies—are actually overpaying university graduates right now. The first job out of university for many Chinese grads is with a multinational. That’s because the graduates’ parents, most of whom were raised in the state-run era, want their kids to find stable, prestigious work in big companies. When the grads leave their first big jobs, they become more independent; they do more of what they want and thus join smaller firms. To get the right talent for their teams, foreign companies are regularly doling out 20% increases in salaries to junior workers to poach them from other companies.

The Chinese markets are obviously electric. A few years ago, it took earnings of only $6 million for an individual to make it on the Forbes “China’s 100 Richest” list; now a person needs nearly $100 million in total assets. Many graduates from Chinese universities see and hear about people making fortunes running their own businesses. They feel left behind if they stay in stable but stodgy MNCs. Moreover, it’s almost passé for 20- and 30-year-olds in China to stay with the same firm for more than a few years. Peer pressure to change jobs is huge; if you don’t, it’s almost as if there is something wrong with you.

MNCs shouldn’t be blamed for being too cheap to pay good salaries. They just haven’t established good retention programs and practices. Multinationals should launch more training programs and clarify the paths for promotion and advancement. Many MNCs don’t want to do this, however. They’re afraid that once they train their employees, they’ll jump ship. It is a catch-22: Train now, and hopefully keep your best employees—but understand that you also run the risk that your current trainees will eventually become your future competitors.

Shaun Rein
Managing Director
China Market Research Group
Shanghai, China