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1 A n A n a l y s i s o f C u r r e n t a n d F u t u r e M o b i l i t y T r e n d s F r o m t h e C a r t u s C h i n a I n b o u n d P u l s e S u r v e y

2 P u r p o s e Why focus particularly on China? Although many developed countries, including the United States, have continued to feel the impact of the great recession, China s GDP faltered for only a short period. Moreover, despite some speculation as to whether China s economy is overheating, global economists still anticipate solid 2010 GDP growth. China has overtaken Japan to become the second largest economy of the world and is widely expected to take the top position from the United States by the 2020s. Continued growth and rapid recovery from the global recession make China a key business focus. Given a prospective market of more than a billion eager consumers and infrastructure projects and urbanization that continue unabated, multinational companies (MNCs) continue to seek a foothold in one of the most promising economies of the world. This report is based on findings from Cartus 2010 China pulse survey plus first-hand information obtained from MNCs by the company s consulting practice. Its goal is to provide insights into: Trends in demographics, relocation and policy types, and destination trends including Tier 2 and 3 cities; Some of the challenges involved in cross-border and intra-regional mobility; Intercultural influences and integration strategies; and Best practices in successfully managing China relocations C h a l l e n g e s U n i q u e t o C h i n a The key to pursuing an effective growth strategy for China is the development of an effective workforce that can execute a global corporate strategy in a China-based context. Thus, despite boasting one of the largest populations in the world, the country suffers from a significant lack of staff in China with the skill sets and experience required to work effectively in the business environment of a multinational corporation. The talent gap in China centers on business, not technical, skills and experience. The issue goes far beyond mere numbers, involving experience and cultural orientation as well. China produces an extraordinary number of highly educated graduates; however, the Chinese educational system has been less focused on developing the entrepreneurial hands on business acumen desired by MNCs, such as the business management skills they urgently seek. Many middle- and senior-level managers in China tend to be substantially younger and hence less experienced than their Western counterparts, driving MNCs to fill that need with non-chinese employees. H o w B i g I s t h e C h i n a I s s u e? In 2007, respondents to a Cartus survey predicted that China would be the Number 1 location for future assignments, a position that had consistently been held by the United States. Again in 2010, companies responding to our China survey overwhelmingly chose China as the most frequent destination for the next two years (see Chart 1). CHART 1. Ranking of Countries Named as Number 1 Assignment Destinations (% of respondents) China USA UK 9 Switzerland 5 Singapore UAE 4 4 Japan 3 P A G E 2 O F 1 1

3 C h i n a I n b o u n d P u l s e S u r v e y The 2010 Cartus China pulse survey incorporates responses from 68 global MNCs based in APAC, EMEA, and the Americas. The survey principally explored issues faced by companies relocating employees into China, both from an intra-regional (i.e., Asia including India but excluding Australia) and inter-regional perspective. 44 percent of survey respondents have been active in China for more than 15 years. Nearly 90% of these companies have been in China for more than five years and nearly one-half (44%) for more than 15 years, demonstrating their long-term commitment to business development in the country. The average inbound activity for these companies is 59 assignees. Companies moving employees into China employ a variety of policy types, which are important to define at the outset. As used in our surveys, the following policy types have been distinguished: A s s i g n m e n t Ty p e s Long-term: an assignment typically greater than 12 months and up to 3 to 5 years in duration Short-term: an assignment typically 4 to 12 months in duration Permanent One-way: a one-way relocation for an indefinite period Localization: transitioning to local status following a long-term assignment Commuter: working in one or more countries and traveling frequently to the home country Returnee: Chinese nationals who live and work abroad for an extended period of time and return to their location of origin Intra-Regional (referring to a location rather than an employee type): involving mobility within one region (in this case, APAC). Note: Intra-regional moves have become more prevalent in recent years, with companies seeking to offer packages different from their global policy approach to address regional or local nuances often with a reduced set of benefits. The relocation activity related to China continues to grow despite the global recession. To p E m e rg i n g Tre n d s Reflecting the dynamic balance between the competing pressures of cost and talent development, a number of trends are taking shape. The relocation activity related to China continues to grow despite the global recession. Assignment types are expanding in type and application. Companies are looking for talent closer to home. Thus, u Intra-Asia relocation into China is growing in momentum, and u There is a trend toward the utilization of non-traditional policy types and assignee profiles, including Chinese returnees. Companies are exploring business opportunities beyond Tier 1 and Tier 2 cities, prompting the use of domestic talent. Assignment failure in China continues to be an issue, driven primarily by challenges associated with adaptation of families. Each of these issues warrants an in-depth look. P A G E 3 O F 1 1

4 T h e C h i n a M a r k e t M a t u re s The lure of China as the world s largest export economy and fifth largest consumer market continues to attract global business. With a population approaching 1.4 billion that has been developing an increasing appetite for consumer products, China is no longer viewed purely as a cheap source for off-shore manufacturing but also as an attractive domestic market for goods and services. An emerging Chinese middle class has prompted MNCs to see the country as an attractive market in and of itself. Fueling this demand is an increasingly large and affluent Chinese middle class, which is widely expected to post dramatic growth numbers within the next 15 years. The past several years have seen China become the world s largest market for autos, TVs, and cell phones, and the second largest for luxury goods. Its growing significance within the Asia-Pacific region is demonstrated by the fact that 49% of survey respondents indicate that their regional headquarters is now in China. China-focused relocation volume underscores the fact that MNCs continue to be bullish on China. Despite global economic conditions, an astounding 96% of companies saw increased or stable assignment activity in the past two years. Almost one-third more companies expect activity to increase over the next two years compared to the last two years (see Chart 2). CHART 2. Assignment Activity into China - Past and Future (% of Respondents) Increase No Change Decrease Past 2 Years 38.5 % 57.5 % 4 % Next 2 Years A s s i g n m e n t Ty p e s R e f l e c t C o s t a n d Ta l e n t P re s s u re s Despite these pressures and efforts to reduce the duration and cost of assignments, most assignees in China are on traditional long-term assignments, whether they come from outside or inside the region (see Chart 3). The next most common forms of assignment in use are short-term and permanent oneway moves. In these two situations, for inter-regional moves (outside of Asia), short-term is the most common but for intra-regional moves (inside Asia), permanent one-way moves predominate. CHART 3. Average Assignment Volume By Type and Origin (2010) From outside APAC From inside APAC Assignment Volume Long-Term Short-Term Permanent One-Way Localized Returnees N/A Commuters P A G E 4 O F 1 1

5 Faced with increased activity and growing cost pressures, companies are looking at alternate policy types and assignee demographics, including returnees, intra-asian talent, and domestic China relocation all to expand their prospective assignee base. From a policy perspective, there has also been a greater emphasis on commuters, local and local plus assignments, intra-regional policies, and permanent one-way moves. Long-term assignments remain the most common policy type, but short-term assignments are expected to grow at the fastest rate. Respondents expect a slight rise in long-term assignments, but looking forward, the majority expect short-term moves to grow at the fastest rate: 74% said short-term growth from outside the region would grow, and somewhat fewer (59%) said it would increase from within the region. Growth in non-traditional mobility types, including permanent one-way moves, localizations, and returnees, is dramatic. Comparing the past two years to the next two, non-traditional types are expected to grow by more than twice (2.4 times) the rate of traditional types. See Charts 4 and 5 for detail on past and future move patterns by policy type. CHART 4. Activity Change into China from Outside the Asia-Pacific Region in the Past/Next 2 Years (% of respondents) Increased Past 2 Years No Real Change Decreased Increase Next 2 Years No Real Change Decrease Long-term assignments %57 % %29 % 14 % 60 % 27 % 13 % Short-term assignments Permanent one-way moves Localizations Returnees to China Total CHART 5. Activity Change into China from Inside the Asia-Pacific Region in the Past/Next 2 Years (% of respondents) Increased Past 2 Years No Real Change Decreased Increase Next 2 Years No Real Change Decrease Long-term assignments % 48 % 42 % % 9 % 52 % 38 % 10 % Short-term assignments Permanent one-way moves Localizations Returnees to China Commuters Total L o o k i n g f o r Ta l e n t C l o s e r t o H o m e As the demand for talent continues to grow in China, companies are no longer just focusing on moves from outside the APAC region but are also looking at intra-regional talent. This trend is illustrated by the fact that foreign nationals from the Asia-Pacific region were the most common category of employees relocated into China, equal to the United States as a source. P A G E 5 O F 1 1

6 Respondents were eager to harness intra-regional talent, anticipating not only cost savings but also a greater chance of success since assignees from Hong Kong, Singapore, and Taiwan who have Mandarin skills are believed to have a better understanding of Chinese cultural values and daily living expectations. Moreover, employees from the region are more anxious than ever to develop their careers by getting China work experience as assignees because they can see the opportunities from a career perspective. Language and cultural issues drive companies to seek assignees increasingly from within APAC. When asked to project activity in intra-regional moves, 46% expect volume to increase in the next two years (compared to 35% who saw an increase over the past two years). This growth closely mirrors the figures for moves from outside the region, which are expected to increase by 55% of respondents (compared to 42% who saw an increase in the past two years). While the majority of respondents (68%) had not yet created a formal policy for intra-regional moves, there was a definite interest in differentiating the benefits provided to assignees based on home location. In line with this trend, nearly one-fourth of companies (22%) do make downward adjustments to their global assignment policy for intra-regional moves, usually in the areas of hardship allowances, educational assistance, and language training. T i e r s 2 a n d 3 G a i n P ro m i n e n c e Expansion into new China s developing markets, commonly known as Tier 2 and Tier 3 cities, is a key influence driving business activity and, accordingly, relocation strategy. Shanghai, Beijing, and Guangzhou remain important, but both Chinese government attention and corporate opportunity are shifting to markets that are less saturated and where start-up and labor costs are lower. For example, under China s Go West policy, the city of Chongqing has been designated a business, manufacturing, and logistics hub at the center of a region with 15% annual growth and a population of 400 million. Elsewhere, Tier 2 cities can offer a lower cost of doing business, sometimes supplemented by tax incentives. A growing supply of white collar workers is moving to Tier 2 and even Tier 3 cities to escape the pressure, pollution, and high housing prices of Tier 1 cities, and bringing their skills and income with them. This combination makes the Tier 2 and 3 cities attractive to both the Chinese government and multinational companies. The following information related to corporate attitudes toward new markets comes from survey respondents. Tier 1 growth increases unabated (especially in Shanghai) 50% of respondents saw growth in the past two years and 60% expect growth in the next two years. Tier 1 is associated with regional headquarters and sales opportunities while Tiers 2 and 3 reflect low-cost manufacturing and mergers & acquisitions (with acquisition of local partners). Tiers 2 and 3 are expected to increase over the next two years, by 54% and 30% of companies, respectively. Respondents identified a total of 21 Tier 2 and 18 Tier 3 cities (see Chart 6). CHART 6. Volume Into Tier 2 and 3 Cities Tier 2 Cities Tier 3 Cities City Frequency City Frequency Suzhou % 21 % Jiangmen % 4 % Chongqing 13 Nanning 4 Qingdao 12 Xining 3 Chengdu 10 Yinchuan 3 Xi an 9 Zhengzhou 3 Xiamen 9 Urumiqi 2 P A G E 6 O F 1 1

7 Explosive growth in Tier 2 and 3 cities has overtaken companies ability to meet assignee needs, particularly for those from outside the APAC region. Expatriates face greater challenges in China s Tier 2 cities than in Tier 1, including such issues as a less developed expatriate infrastructure, evolving or opaque local business practices, difficult environmental factors, and obstacles related to education, health care, and housing (see Chart 7). Many of these factors can be broadly grouped under the heading family adjustment challenges and are often even more severe when combined with an inability to communicate in Mandarin. CHART 7. Top 3 Challenges for Relocating Employees into Tier 2 and Tier 3 Cities (% of respondents) Challenge Frequency Schooling 33 % Family adjustment 32 Health care 29 Cultural differences 21 Housing availability 20 Locating willing candidates 18 Quality of daily life 18 Adjusting to local business practices 15 Compensation and benefits 11 Locating qualified candidates 11 Language 8 Immigration 5 Security 0 Other 5 Though many Tier 2 cities are quickly developing a hard infrastructure (e.g., industrial parks, roads, energy sources, airports, etc. ), in many cases the soft infrastructure (appropriate housing, high-quality schooling, and health care) necessary to attract workers and their families still lags behind. This can influence an employee s willingness to relocate and the likelihood of the assignment succeeding if the employee does accept. Ta rg e t i n g C a n d i d a t e s f o r T i e r 2 a n d T i e r 3 C i t i e s One of the ways that corporations have attempted to address Tier 2 and 3 assignment challenges is to increase the number of intra-regional and domestic assignees. We have already noted that companies are selecting increased numbers of assignees from within the APAC region, but this trend is most pronounced with respect to Tier 2 and Tier 3 cities. Intra-regional assignees are most frequently selected from other Chinese-speaking locations (Hong Kong, Singapore, Taiwan). By focusing on these candidates, corporations anticipate a greater willingness to accept these assignments together with fewer cultural adaptation issues (including language). P A G E 7 O F 1 1

8 Policy benefits for Tier 2 and 3 cities lag behind despite the greater hardships assignees face there. Corporations have generally offered substantially reduced benefit packages for relocation into Tier 2 and 3 cities. Our survey validates a large discrepancy between policy benefits for relocation into Tier 1 cities (versus Tier 2 and 3 cities) for all categories (including housing, education, COLA, destination support, transportation, home leave, etc.). The only exception was rest and relocation allowance which not surprisingly was offered more frequently in Tier 2 and 3 cities. See Charts 8 and 9 for a breakdown of policy components for long- and short-term assignments into Tier 1 and Tier 2 and 3 cities. CHART 8. Long-Term Assignment Policy Elements Generally Applied to Moves Into Tier 1 and Tier 2/3 China Cities (% of Companies) Policy Elements Assignments into Tier 1 Cities Assignments into Tier 2/3 Cities Housing Allowance % 94 % % 63 % Goods & Services COLA Education Assistance Host Transportation Allowance Relocation / Misc. Expense Allowance Hardship Allowance Home Leave Rest and Relaxation Spouse Assistance Pre-move Trips / Destination Services Cross-Cultural Training Language Training Household Goods Shipment Host Car / Driver or Auto Lease Settling-In Assistance CHART 9. Short-Term Assignment Policy Elements Generally Applied to Moves Into Tier 1 and Tier 2/3 China Cities (% of Companies) Policy Elements Assignments into Tier 1 Cities Assignments into Tier 2/3 Cities Housing Allowance % 73 % % 47 % Goods & Services COLA Education Assistance Host Transportation Allowance Relocation / Misc. Expense Allowance Hardship Allowance Home Leave Rest and Relaxation 9 13 Spouse Assistance Pre-move Trips / Destination Services Cross-Cultural Training Language Training Household Goods Shipment Host Car / Driver or Auto Lease Settling-In Assistance P A G E 8 O F 1 1

9 While this benefit level disparity may seem incongruous, bearing in mind the additional challenges associated with living conditions in Tier 2 and Tier 3 cities, it can in some way be explained by the fact that most senior assignees relocating to China would be moved to Tier 1 cities. Most of the activity associated with the other tiers relates to the expansion of outsourcing and manufacturing operations. This kind of assignment objective requires middle management and operational expertise, which would typically not warrant a full expat package for a qualified employee. Intra-regional assignees may also elect to leave their families in the home location in order not to disrupt their children s schooling or family support. With this in mind, some companies provide housing for the assignee rather than a housing allowance. A G re a t e r F o c u s o n R e t u r n e e s The past several years have seen an increased focus on the Chinese returnee. Because this group speaks Chinese and has the experience of working in a Western environment, MNCs have relied increasingly on returnees to bridge the cultural divide, with mixed results. Returnees form an increasingly large segment of the relocating employee base. Though 27% of respondents reported that returnees had increased over the past two years (both intra- and interregionally), 35% expect returnees from inside the region to increase in the next two years, and a remarkable 47% expect increases in returnees from outside the region (versus decreases expected by only 2%). The challenges posed by returnees (cultural, re-adjustment, logistical) are sometimes underestimated and may well increase in importance over time. O u t b o u n d R e l o c a t i o n While considerable focus continues to apply to assignees being moved into China, it is worth noting that China outbound volume is also growing. Increases are expected in the next two years by 61% of respondents, versus 44% that saw increases in the past two years; 18% expect this demographic to increase significantly over the next 2 years. There is a considerable discrepancy between the business drivers associated with sending assignees to China versus those being sent from China to other locations worldwide, as demonstrated in Chart 10. CHART 10. Business Drivers for China Inbound and Outbound (% of respondents indicating; multiple responses possible) Into China Out of China Transfer skills/knowledge % 88 % Develop relocating employee % 62 % Start-up operations 71 Temporary project work 42 Temporary project work 61 Transferring skills/knowledge 35 Develop local employee 55 Develop local employees 24 Develop relocating employee 48 Start-up of operations 8 China outbound relocation focuses on employee development more than the tactical objectives of inbound assignments. While 88% of respondents see the transfer of skills and knowledge as a key driver for sending talent to China, only 35% elected this objective for outbound assignments. Further, 71% stated that working on a start-up operation in China was a key driver. This is not surprising considering the expansion of China business by most MNCs, including the expansion related to joint ventures and the focus on Tier 2 and 3 cities. It is interesting to note that 55% said that developing local employees was an important driver for inbound assignments. This seems to indicate the growing emphasis on succession planning, but anecdotally, most companies do not appear to set this as a measurable objective for the assignment! P A G E 9 O F 1 1

10 The top reason for sending Chinese nationals outbound on assignment was to develop the relocating employee (62% versus 48% for inbound into China). This indicates the growing focus on wanting to develop local talent for future business in China. A further 42% stated that temporary project work was a key factor for outbound China moves, indicating the technical expertise that can be found in China. C h a l l e n g e s a n d A s s i g n m e n t F a i l u re Anecdotal evidence continues to indicate that assignments in China are twice as likely to fail in comparison to most other locations globally. In reality, this number may be even higher, since most companies admit that they do not measure ROI on assignments or monitor attrition rates upon repatriation. (Source: Cartus 2010 Global Mobility Policy and Practices Survey.) MNCs should anticipate the potential for higher levels of assignment failure in China. Most MNCs recognize that cultural and language differences can make it very challenging for an assignee to successfully execute the company strategy in China and offer language (83%) and cross-cultural training (81%) within their long-term policies for Tier 1 cities. Many do not mandate this training despite understanding the value, however. Understanding that assignees moving to Tier 2 and 3 cities generally receive a lower level of benefits, it is nevertheless puzzling that far fewer are offered language (55%) and cross-cultural training (53%) in these less developed cities. Ironically, few companies offer these benefits for short-term assignees, even though they are the ones expected to hit the ground running and execute assignment goals within the shortest period of time. S t r a t e g i e s f o r S u c c e s s i n C h i n a What steps can companies take to increase the chances of assignment success? Taken as a whole or in part, the following strategies help build the foundation for mitigating the risk of visible failure, defined either by early return or compromised performance. Talent Pool Creation Almost all companies have a formal talent and performance review process, which can include steps to identify potential assignees such as questions about the willingness to go overseas and a self-assessment checklist. Selection Companies use a combination of self-assessment and third-party facilitated assessment programs to refine the candidate pool and select the right person for a specific assignment. Objective Setting Success is difficult to define if it is not clear what is to be achieved. (In practice, short-term assignments tend to show much clearer objective setting than traditional long-term assignments.) Focus on the Family An all-too-common reason for failure, family adjustment is pivotal to the success of the individual. Support Networks Mentors in home and host locations keep the assignee connected and able to navigate both the assignment and the repatriation. P A G E 1 0 O F 1 1

11 I s s u e s a n d C h a l l e n g e s Companies responding to the Cartus survey were given the chance to comment on additional issues and challenges they now face. A sampling of these comments illustrates the range of problems that are endemic to China, particularly in its less developed locations, but conclude with a note of optimism. A d d i t i o n a l I s s u e s a n d C h a l l e n g e s u Thus far, as much as possible, we relocate employees who are single or married without kids, but it is increasingly difficult. The cost of education and housing is high. u Finding adequate mold-free housing in Tier 3 cities has been a challenge as well as finding educational options that meet the standards for U.S./Western European children. u Cultural differences, housing, and driving are the biggest ones, plus environmental issues/pollution. u We have lots of issues with the employees China taxes and types of tax exemptions. u Medical support, language training for spouses u Children with special needs continue to be a challenge because China is not a location that can support these. Medical/health issues are also a major issue/cost driver. Other than that, most of our expatriates and families enjoy the experience, even in the more remote cities. TouchPoint For more information: us at consulting@cartus.com 2010 Cartus Corporation. All rights reserved. Cartus and the Cartus logo are pending or registered trademarks of Cartus Corporation. P A G E 1 1 O F 1 1