Top 3 HR challenges when starting a business in China
As the fastest-growing major economy in the world, China continues to offer attractive investment and business opportunities for new ventures. However, doing business in China also means navigating through the complexities that arise from China’s unique historical, political, and cultural contexts. While there are several factors that are of major concern, such as the economic situation or the currency and financial risks, Human Resources management continues to top the list of business challenges for foreign companies doing business in China. In this article, we will outline some important HR challenges to consider when doing business in China.
Recruitment of qualified talent is one of the main functions of every HR department. Hiring in China is a delicate process, especially when it comes to hiring Managers and Executives. A quality HR department will ensure that its company has recruited the best out of the pool of available talent. In failing to do so, foreign companies could face one or more of the following challenges:
- Lack of references and background checks – obtaining references from previous employers is difficult and therefore not common practice.
- Shortage of talent – the imbalance between business opportunities in China and qualified talent is one of the biggest challenges that recruitment managers face.
- Legal Environment – foreign companies need to face tough and challenging regulations. For example, foreign representative offices, financial institutions, and economic organizations are not allowed to hire employees directly – they need to go through specially designated HR management agencies. While some Chinese SMEs can get away with minor infractions of the law, foreign-owned companies are usually held to a higher standard.
While hiring can be a tedious task considering the mistakes that can occur, it can highly affect the employment relationship. China has different laws and regulations concerning the hiring of employees.
The employment laws of China not only vary among other countries, they can vary by locale too. There are certain strict rules and regulations that a foreign company needs to comply with to fulfill the employment relationship before employing workers based in China. Failing to understand the available options of hiring a candidate can lead to all the confusion and the difficulty in getting things right for any foreign company.
The employer can even be hit with a violation fine and be ordered to bear all costs in connection with it. Therefore, it is necessary to get clarity about the hiring options that are available to foreign companies and to have stable and compliance employment relationships.
There are two Hiring Options for foreign companies:
- No legal entity/Representative Office (RO): Representative Office (RO) or foreign companies with no legal entity in China are not allowed to hire employees directly. This requires them to choose HR outsourcing as a cost-effective solution to hiring employees through PEO which is also called “talent dispatch service”.
- Talent Dispatch Services: This assists Representative Offices (RO) or foreign companies without a legal entity in China that needs to staff a short-term project within a demanding deadline, or one that needs temporary workers to support its business during start-up, hire employees and sign labor contracts. In this service, a hosting company hires workers from a dispatch work agency. While the dispatched laborers work for and are supervised by the host company, they are in fact employed by the dispatch work agency. The dispatch work agency is the legal entity responsible for the administrative management of the employees. These agencies have considerable experience and knowledge of hiring local workers, therefore, it is the only flexible, efficient, and cost-effective avenue to legally recruit local employees for foreign entities and Representative Offices (RO).
- Wholly Foreign Owned Entity (WFOE): A WFOE can manage its own human resources (without using a Chinese agency) and hire staff both locally and from overseas. Although companies having a legal entity in China can hire the staff directly, they still can have the following options to handle employee’s payroll and mandatory benefits:
- Through experienced HR: The company can choose to hire an experienced HR to handle all the administrative and compliance operations in the city where the company is established. Although this option seems to be simple, there are some problems associated with it. Firstly, the cost of hiring an experienced HR is generally high. Secondly, for all the startups and small companies, it will be very difficult to handle and manage all the statutory benefits and employee payroll if in case the HR decides to leave the organization. Another important point to think of while considering this option is that the company will have compliance issues if the HR is neither experienced enough nor well-versed with the latest policies and regulations of the government.
- Outsource payroll and benefits to a licensed HR Agency: It is highly recommended for foreign companies to outsource all of their administrative tasks including employment and dismissal, payroll and individual income tax administration, social insurance, housing fund administration, and personnel file management, as it saves a massive amount of money on overhead, even for a small company as well. Moreover, HR agencies are stable and therefore, reliable, so there is no need for clients to worry about any reliability issues at all. Also, not to forget that these HR agencies are highly experienced in their area so there will be no compliance issue that would arise for any foreign entity in the future. The only key point to consider by the entities while selecting the vendor is that it should be licensed and professional.
There is a substantial difference in the role of government in Chinese businesses when compared to Western countries or the rest of Asia.
To succeed in China, a company must realize that it cannot take the same business model, which may have served well in its own country, and simply apply it to the Chinese market. It will need to be flexible and adjust according to the “Chinese characteristics” deeply related to is traditions. Due to these differences, hiring talent and structuring the organization becomes very critical which a foreign HR firm/organization might not understand.
Moreover, within China, policies might vary from province to province, making the whole process even more complex and very much country oriented.
The foreign companies are indeed experiencing more restricted market access in several sectors, which in turn leads them to have a limited scope of business here in China. Therefore, for any foreign entity, it requires in-depth knowledge and understanding of all the laws and policies governing the business sector in China.
In order to avoid issues with all the government policy and business regulations in China, foreign companies can either hire an experienced HR who has intensive knowledge of all the laws and policies governing the Chinese market and who can assist with all the professional advice and help that is required. Another option to consider for the companies to outsource all its requirements to a professional licensed agency, thereby, avoiding any sort of legal risks associated with it.
Language & cultural difference
Cultural misunderstandings arising from miscommunication are one of the biggest challenges which foreign companies face in China. Although there is an increasing number of Chinese people highly proficient in English, it is uncommon to find someone who understands the subtleties of the language and possesses a strong enough understanding of both Chinese and western culture to navigate delicate business negotiations.
Therefore, language plays a vital role in the successful business establishment for any foreign company. Also, with very strict and isolated business etiquettes, the cultural difference becomes a very critical problem and sometimes a “bottleneck” for foreign companies setting operations in China.
The way Chinese carry out their business tends to differ from the foreigners. Hence cultural differences are always the root of conflicts and disagreements between the overseas companies and the locals.
One of the ways to overcome this barrier for any foreign company willing to open a business in China is to hire an interpreter who can give instructions or feedback in their local language. This will prevent any miscommunication.
This can be done through the Federation of Translators or American Translators Association. However, it is highly suggested to outsource the professional agency who will look after all the operations without any risk of conflict that could arise from communication or cultural differences.
China is not a simple market, but it is the most dynamic market in the world. Many foreign companies failed in China, even multinationals with large investment did not succeed because they struggled to adapt to the different market, faced fierce local competition and failed to understand the essence of running a business in China; Amazon VS Alibaba, Google VS Baidu, in both these cases the Chinese domestic competition won.
On the other hand, many companies are successful when they can adapt and tailor their proposition to the Chinese market in the right way.
With the right understanding of the working of the government policies, by incorporating the quality employees and with a greater understanding of the culture and language of the country, it is possible for a business to flourish successfully.
Businesses ultimately need to take more time and put in a great amount of effort to understand this market. This would be easy by hiring a professional HR company or outsourcing all the requirements to an agency that is experienced and understands the Chinese market closely.
The government may be on your side if your technology is needed. Therefore, it is of prime importance to keep this in mind when selecting a partner for cooperation or considering market entry.
Stay updated on China’s Latest HR & Employment Insights.