Managing Change in China

As the China landscape changes, CFOs see a rise in instability. 

The Asia CFOs’ Peer Group met in the Thomson Reuters Shanghai offices overlooking the Huangpu River. The group welcomed several new member companies to the discussion on Asia finance. With China’s economy evolving, technology support and people management are required to ensure the needed resources for managing the dynamics of an enormous and fluid economy. To do this, CFOs will continue to focus on the following:

1) Staying abreast of China’s many regulatory and economic variables. China may be doing better than some would have you believe, but there are a number of front-burner items to manage through.

2) Managing staff in a Tumultuous Environment. Members view retaining and developing high-potential employees — and weeding out others — as a perpetual priority.

Getting a Handle on China — Economic Review

With the China economy sputtering, it is difficult to predict what is in store over the next 12 months and beyond, particularly with the inability of government leaders to communicate and execute consistent and credible policy positions. Pete Sweeney, Reuters News Chief Correspondent for the China Economy and Markets, and Min Liu, Thomson Reuters Vice President, Strategy and Business Development in China, shared their broad and specific perspectives on the China economy.

Key Takeaways

1) Western journals over-hype the China story. Mr. Sweeney gave a generally upbeat view on the China economy and noted that what you read in Western periodicals is generally overblown. He proceeded to give his views, anchored in data, on the primary economic variables.

• Inflation is low, based on four years of PPI. The primary drivers are low commodity prices and “super competition by Chinese companies being subsidized by banks and the government.”
• Capital outflows panic has subsided. The dissonance in the offshore markets is disappearing. Pete believes the story was over-hyped. For the average Chinese person it is easiest to leave their money in China.
• The debt story is not so bad. Mr. Sweeney acknowledged that debt levels are high, but he noted that the high debt levels are offset by high savings rates. The big challenge for savers, however, is that there are not good products for long-term savings.

2) … But the capital markets are definitely a problem. Mr. Sweeney noted that the capital markets remain highly inefficient. “The fact that the Chinese stock market is a joke to most people is, in itself, an indication of inefficiency. The markets aren’t supporting innovation the way the government wants it to. The China economy, similar to other economies, has become hooked on the government stimulus drug rather than fostering innovation.”

3) Three key areas for CFOs to focus on. Ms. Liu drilled into a more micro view of the China economy and highlighted three areas where she believes CFOs should focus attention:

• China VAT reform requires intense preparation. China’s VAT reform will bring significant profit margin improvements for some; others are focused on the business process changes and the system infrastructure changes, as well as their associated costs, required to support this significant tax reform. Ms. Liu highly recommended companies have a VAT workflow management tool and review a VAT management framework.
• Global supply-chain management will get more difficult. Ms. Liu suggested that global trade is very fluid and will become increasingly so — and also more complex. One of the top challenges, based on Thomson Reuters research, is documentation complexity. There are more than 400 free trade agreements (FTAs), but they are minimally utilized because the regulatory requirements and documentation are too complex.

Outlook

In summary, the China economy is in better shape than the Western media indicate, but there are numerous issues such as trade and further asset inflation that could change that story. VAT reform is a major change financially, operationally and technologically that will require considerable focus as companies transition and as the government likely seeks to be tough on compliance early on.

Managing Staff in a Tumultuous Environment

Many MNCs are restructuring business organization and business models to better manage through turbulent economic times, while supporting growth in the future. Peer group members discussed ways they are managing talent through periods of significant disruption.

Key Takeaways

1) Reorganization and economic slowdown create instability. Several ACFO group members are undergoing significant changes in their organizations, including large restructurings, acquisitions, being acquired and divestitures. Indeed, nearly two thirds of members report internal reorganizations as the number-one source for staffing instability. Additionally, the general economic slowdown in China and corresponding business slowdown are creating challenges for companies and uncertainty for employees. Fifty-five percent of members report this as the second most common reason for staffing instability.

2) Solutions for compensating the right people at the right levels. Member company strategies run the gamut, including:

a. retention bonuses for HIPOs (high-potential employees);

b. investing in detailed career planning programs or offering job rotation to ensure that the appropriate skill-sets and experiences are attained to develop strong business acumen;

c. pay-to-stay bonuses to combat disparities created by the cost of acquiring new employees;

d. “stretching” employees, such as senior-staff in China who may be overpaid for the value they bring the company (as acknowledged by several group members), by giving them more responsibility;

e. using change as a catalyst to “clean house.”

3) Strategically managing people in a strategic shift. Some companies have little experience with reductions in force, but circumstances in China are changing that. Some members see such changes as an opportunity to right-size staffing and clean house. One CFO, however, described her company’s exit from manufacturing in China through a divestiture and the associated HR consequences. Following the divestiture, the company’s China workforce will go from 5,000 employees to 500. The buyer will retain most of the lower-level employees, but the higher-level ones are at risk. The buyer also has a different pay structure that will affect those employees it retains. The peer group member says her company has worked closely with the local labor bureau throughout the process and has provided a lot of career counseling to affected employees.

4) HR needs a seat at the strategy table. One member noted that his organization’s budget reviews include the CFO, business unit managing director and the HR head. He always likes to include HR in the strategic discussions so they can better appreciate and support the people management decisions that have to be made.

Outlook

There is no good season for managing people. When times are good, retention is tough because people leave quickly for the next opportunity. When times are bad, people have to be let go to maintain costs. Given this reality, members seem resolved to prioritize retaining and developing the best and brightest through compensation, job rotations and increasing responsibility.

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