China's Talent War

Wang Yinhong is a China CEO's dream. He is also a China CEO's nightmare. Trained at one of the country's most elite universities, the 30-year-old Shanghai native has a degree in chemical engineering and an M.B.A. He is a bright, hardworking young employee — the kind of guy companies in any number of industries would die for. And the problem is, Wang knows it. He's with his fourth company in seven years. "I keep getting better and better job offers, so I keep accepting new jobs," says Wang, now working in Shanghai for a research-intensive biotech firm that just got an injection of venture capital. "I've gotten more money and more responsibility at each stop."

Previous economic miracles in East Asia — Japan in the 1960s and South Korea in the 1980s — were built in part on corporate loyalty. Workers from top to bottom stayed put, and companies tried for decades to more or less guarantee a job for life. In China it couldn't be more different. Except in the most hidebound state-owned enterprises, corporate loyalty barely exists. A job-hopping melee — in particular for the best and the brightest — does.

Doing business in China has never been easy; never mind how swiftly the country has been growing. Legal and regulatory environments are anything but settled. Intellectual-property protection is still a mess. Corruption is ever present. But for companies across industries, what should be a simple bread-and-butter issue — retaining skilled employees like Wang — is possibly the biggest headache they have. "It's a huge issue," says Rajeev Singh-Molares, the Shanghai-based Asia Pacific president for telecom giant Alcatel-Lucent. "We spend an inordinate amount of time around here trying to deal with it. We spend time and money trying to recruit and train the best people we can find in a very competitive market — investing in them in a serious way — and then, after a few years, some of them get poached. It's incredibly frustrating."

Part of the frustration is rooted in a basic if counterintuitive reality: China may be the world's most populous nation, churning out roughly 7 million college graduates every year, but elite companies — whether high-profile domestic firms or multinationals — find the pool of talent to be thin. In fact, large numbers of new graduates from second- and third-tier universities often struggle to get a job at all. Those that do, top executives say, often don't show much initiative and have no idea how to think for themselves. The Chinese government is well aware that its educational system has to change, but that's a slow-motion process. That's why the competition for the top 10% of graduates coming out of China's top schools is so intense and why it's so aggravating for executives like Singh-Molares when so many of their of best and brightest depart after a few years on the job.

The problem doesn't confront just foreign multinationals — far from it. "China's talent wars," says Wayne Wang, chairman and CEO of CDP Group, a Shanghai-based human-resources consultancy, "don't discriminate on the basis of [corporate] nationality or by industry. The war for talent is everywhere. High-tech, low-tech, new industries, old industries. It's an absolute free-for-all."

Consider the Internet space: social media, e-commerce, online gaming, search. In survey after survey of new college graduates in China, it's always viewed as one of the most attractive potential industries in which to work. And because it's an industry largely off-limits to foreign competitors, it's dominated by homegrown companies. But while firms such as Baidu, 360buy and Youku (the YouTube of China) get their share of the best engineers and computer scientists, hanging on to them is another story. The HR manager at one Beijing tech firm pegs the industry-wide annual turnover rate at 35% — a stunningly high figure. Of course, some people just don't work out, but that's not the main issue; poaching is. At some companies, in industries such as biotech and pharmaceuticals, HR executives say turnover rates among managers and skilled employees approach 50%. "It's insane," says Wang.

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So prevalent is the problem that some CEOs more or less throw up their hands and acknowledge this as a market reality that companies simply have to accept rather than try to change. "Look, the reality is that this is a seller's market. If someone has basic technical skills and a willingness to work their tail off, they can continue to jump from job to job for the first 10 to 12 years of their career, gaining experience and salary bumps along the way. Though we managers hate it, to be honest, if I were in their position, I'd do the same thing," says Kent Kedl, managing director of China and North Asia for Control Risks, a global risk consultancy. But the consequences in China of not trying to retain talent can be severe. Not only, as Alcatel-Lucent's Singh-Molares says, is it "deeply disruptive" to an organization to have to constantly retrain new people, but the issue can also have a competitive impact far beyond that. Intellectual-property protection in China remains porous: a survey for the American Chamber of Commerce in Shanghai released earlier this spring showed a vast majority of respondents saying there had been "no change" in intellectual-property-rights enforcement in the past year, despite repeated assurances by the central government in Beijing that China would crack down on piracy. The same survey ranked retention of talent far and away as the biggest human-resources challenge that companies face.