Chinese start-ups have realized that they need to recruit highly skilled and globally oriented general managers from foreign multinationals when they reach a critical size.
Many global pharmaceutical companies say their futures hinge on finding success in the world's emerging markets, particularly China. In 2011, the top 10 multinational pharmaceuticals selling in China generated well over $20 billion in local sales. Growth rates for the 10 ranged from 15 percent to 32 percent. Chris Lee, former managing director of Bayer HealthCare China, has been quoted as saying that China will overtake the United States as Bayer's largest pharmaceuticals market in the next seven to eight years.
Multinationals have also been adding global businesses and development functions to their China operations, which traditionally acted simply as commercial hubs with sales and marketing responsibilities. Many are building fully integrated operations in China. Against this backdrop, Bayer HealthCare relocated its general medicine headquarters to Beijing in 2011, considered by Industry watchers to be a ground-breaking move among international drugmakers. General Electric Co. has also announced that it is transferring its X-ray business headquarters to Beijing.
GE's move included the relocation of the unit's chief executive and members of its executive team to Beijing. They won't be the only foreign executives to be parachuted into China. Pfizer, Roche, and GSK have all relocated global leaders to China, particularly to Beijing and Shanghai.
But behind closed doors, international pharma company executives express concerns about the costs and benefits of operating in emerging markets like China, with issues ranging from intense competition to government efforts to promote domestic drug makers. In a white paper by PricewaterhouseCoopers that included interviews with decision-makers in nine Asian countries, both multinational and local pharma corporations feel that issues like intellectual property rights, corruption and price fixing are not being adequately addressed in Asian pharma markets.
Fueling these worries are recent patent rulings that have spooked international companies. China has revamped some of its intellectual property laws to allow Chinese pharma competitors to obtain compulsory licenses and make cheap copies of medicines still under patent protection. Recent policy changes have meant that differential pricing on approximately 100 drugs that multinationals have sold into China have evaporated.
While China is a source of talent in terms of its research and technical capabilities, there is still a significant gap in the number of qualified Chinese executives further up the organization with the capabilities to run complex pharmaceutical or healthcare operations. It is for this reason that many expatriates are still to be found at the top of corporate pyramid structures within Chinese businesses.
Local culture has a significant impact on how business leaders manage, communicate, coach, and lead their organizations on the ground. For this, foreign expatriates working in China require significant onboarding support on issues ranging from how to hand out name cards or address local officials, to identifying key competitors and the nuances of interacting with local managers. The ever-present danger of bringing in foreign managers is that they (and their families) are unable to adapt. There are a hundred different reasons why any overseas posting may fail and not all can be foreseen or controlled by the board or top management. Overall, the risk of failure tends to be higher in China.
Furthermore, there are signs that multinationals' perceived competitive advantages as "preferred employers" among local talent in China are already eroding. Three-quarters of the largest companies with global revenues of over $5 billion now feel that they do not have superior technology or a stronger brand in China, compared to their local competitors, according to a 2011 study by the Economist Intelligence Unit.
We have noticed that executive talent in China who do not get a clear sense of their career paths at their current employers will not hesitate to look for opportunities elsewhere—and new job offers will come swiftly. So while employee retention efforts such as offering competitive compensation, actively managing employees' career path, and providing development programs are important anywhere in the world, it is all the more critical in China.
Companies that are best at recruiting talent in China are also the best at retaining them. Such organizations make investments in their talent a top priority and move the quickest on people-related decisions and implementation of localized policies. This nimbleness is something global organizations with numerous reporting lines and global standards still find challenging in China's fast-paced talent market.
Already, there are signs that multinational are losing their top talent to local companies. Chinese start-ups realize that they need to recruit highly skilled and globally oriented general managers from foreign multinationals when they reach a critical size. And they are willing to pay competitive rates.
One example is Lifetech Scientific Corporation, a local developer, manufacturer and vendor of advanced minimally invasive medical devices. Founded in 1999, it has become the second largest provider of congenital heart defect occluders in the world, the largest provider to BRIC countries and the leading developer and manufacturer of minimally invasive medical devices in China. It is headed by CEO Michael Zhao, who previously held several senior management positions at J&J Medical's Cordis Corporation, including senior positions in the United States, Belgium, Australia, and China.
With so much hiring and demand in China, compensation levels have increased significantly in the last three years. Annual salary increases for executives hover between 12 percent and 15 percent each year. As a result, China's market has seen close to a 50 percent increase in the salaries for the same positions at the senior executive level in the last three years. Competitors, both multinational and local alike, are willing to pay attractive salary increases for senior managers willing to jump ship. Many multinationals are having to rethink their compensation cultures in order to continue to be attractive employers in China.
For all these reasons, having a well-rounded and strategically minded Chinese chief human resources officer (CHRO) is critical to business success. But herein lies another challenge. The HR function in China has historically not been viewed as critical or prestigious. As such, many HR leaders are very tactical in their capability and experience, preferring to take direction and execute within a more autocratic environment.
CHROs should be able to communicate with their business peers on how HR can positively affect the Chinese business portfolio within three- to five-year time frames. However, multinationals will find it challenging to land individuals who have both generalist and functional HR experience in China, and who have worked as credible business partners to senior global executives. Specifically, we have observed that the short listing for China-savvy CHRO candidates is a much more arduous process than other functional roles. For HR leaders, it may take 10 candidate reviews before even one can be short listed for consideration, compared to three out of 10 for sales leadership roles.
Research by PwC Saratoga on key human capital trends in Asia-Pacific suggest that most businesses invest in thorough market analysis when drawing up a business strategy, but neglect the strategic people plan required to drive it through. Currently, leading businesses are looking beyond the next budget round to plan talent needs.
As part of this effort, more CEOs are integrating HR with business planning at the highest levels of the company: 84 percent of CEOs in Asia-Pacific say that the CHRO, or equivalent, is one of their direct reports, compared to 77 percent of CEOs in Western Europe and 73 percent in North America. In highly competitive markets, such high level planning for recruitment and retention is absolutely critical to success.
Pharma CHROs who cover China should be provided with enough resources, training, and support to ensure that they are not trapped in a reactive and operational cycle as they operate in a fast-moving market, and are able to play a more strategic role. They need to be empowered to identify the needs of top talent and to ensure that they feel engaged and involved in key business decisions for their markets. Anywhere around the world, talented individuals want to work in organizations where they know that their ideas and opinions matter. They also seek personal and professional development. They will also expect salaries commensurate with their abilities as well as what the market is willing to pay. These are all important to retaining talent, many of whom receive attractive opportunities by other industry players almost on a weekly basis.
Gregory Lovas leads CTPartners' Life Sciences Practice in Asia Pacific, and has led many executive searches in China. He can be reached at www.ctnet.com