Professor Dingbo Xu of accounting at the China Europe International Business School speaks during the Advanced Business Reporting Program at the school's Beijng campus June 9. The special program for senior journalists both from Chinese and international media was held June 8-9. This was the second year that CEIBS had offered this free training course to reporters following the first event last year in the Shanghai campus. / Courtesy of CEIBS

By Jung Sung-ki
Korea Times correspondent

BEIJING ― Adapting to a fast-changing labor market environment in China is a key factor for achieving success for South Korean companies operating in the world’s No. 1 manufacturing powerhouse, according to a senior professor at the China Europe International Business School (CEIBS).

In an interview with Business Focus, a weekly publication of The Korea Times here on June 9, Prof. Dingbo Xu, associate dean of the school, outlined four challenges for Korean and other global firms in China to cope with.

They are influences of the central government, labor-related issues, a rapid rise of the Chinese middle-class, and securing intangible assets, such as corporate reputation, said the professor of financial accounting.

Of them, he noted, changes in the Chinese labor market, including demands for higher wages and a decline in the working-age population, are stumbling blocks to overcome.

“Labor costs are increasing very fast. Actually we’re one of the fastest increasing countries in the whole world,” Xu said, referring statistics pointing to a 15 to 20 percent increase in labor costs a year.

Xu’s remarks come as China’s low-cost manufacturers are grappling with the reality of the country’s deep and cheap labor pool beginning to dry up.

Labor dents

Almost every provincial government has increased its official minimum wage over the past year with hikes averaging 20.6 percent in the first three months of this year in 13 provinces, according to reports.

Some global enterprises are being forced to move to less expensive regions in China, and others are shifting production to Southeast Asia while some are shutting down altogether.

Between 2000 and 2010, the population growth rate has averaged 0.57 percent a year, down 0.5 percentage points from 1990-2000, census figures show. Experts have called this phenomenon a rapid decline.

The average age in China is rising at an increasing rate. People who've reached age 60 and over accounted for 13.26 percent of the population last November, a 2.93 percentage points increase since 2000. And those 65 and older accounted for 8.87 percent, up 1.91 percent percentage points.

According to a recent CEIBS survey titled “Challenges for Foreign Businesses in China,” a majority of foreign executives in China point out that the management of human resources is the most challenging part.

The survey of a total of 246 executives, including 117 CEOs, suggested foreign companies also have difficulties dealing with increasing cost levels, a growing number of Chinese competitors, and unclear, inconsistent regulations.

The respondents are from 33 different countries. The survey was done by a team of professors _ Professor Per Jenster, adjunct professor of strategic management of CEIBS in Shanghai; Professor Juan Antonio Fernandez of management at CEIBS in Shanghai; and Professor Robert loane, who is a Business Administration Lecturer at Dong Hua University in Shanghai.

Xu cites the emergence of labor unions in China as another problem that global companies are facing.

“Labor unions in the private sector were not problems in the past. The government now requires or at least encourages all companies to set up labor unions,” he said. “We may have a form of collective bargaining in a few years so you will feel more like you do in Korea. Labor unions will be more forceful and have more say.”

As for the influence of the central government, the professor said a total of 122 companies in China are owned by Beijing and they are crucial part of the country’s economy. So the relationship with those companies and adaptability to government policies and regulations, which change quite often, are keys to global companies’ success in China.

Also, a huge percentage of middle-class is emerging in China, which could either be a challenge or an opportunity for foreign businesses, said the scholar.

“I think if you can satisfy the needs of this segment of the economy, the strategy is working, as the number is getting bigger and bigger.”

Korean reputation

Maintaining and improving a firm’s reputation and brand value is important in order to win the hearts of Chinese consumers, who have become already “experienced” in selecting “reliable” products, according to Xu.

“Whether you would be trusted by the consumers or not is very important,” he said. “I think many companies like Korean firms have a pretty good reputation... This is a very important asset.”

He referred to Samsung and Hyundai as leading firms trusted by Chinese consumers.

“Quite a large number of Korean companies in China are trusted by consumers. For example, Samsung enjoys a very good reputation in China and so do many other companies,” he said.

On the other hand, Korea’s smaller companies have lots of work to do in terms of earning a good reputation and showing strong management skills because the general perception about those firms is that they are “easy and quick to locate in one place but also the first ones to move away.” Xu added.

Nevertheless, the professor said, Korean companies are in a favorable position to lead in the Chinese market because they have more advantages than other foreign entities in China.

“First, Korean firms have a lot of experience of dealing with labor unions. The second is because Korean firms enjoy a very good reputation among consumers of many countries. This is a huge advantage,” he said.

In addition, the facts that Korea and China share similar culture and many Koreans are studying in Chinese universities help Korean businesses achieve greater success in China, he added.

Hyundai Motor, South Korea’s largest automobile maker, set new sales record in China last year as its yearly sales surpassed 700,000. Hyundai’s car sales milestone is particularly meaningful because the Chinese market represents one of the most competitive vehicle markets in the world.

There are almost 50 automobile companies operating in China, including major international rivals Volkswagen, GM and Toyota. Combined with Kia Motors, Hyundai Motor Company sales in China hit 1.1 million new vehicles. This figure by the Hyundai-Kia Automotive Group became the second largest auto seller in China, trailing only Volkswagen Group.

In April, Hyundai signed an agreement with China’s Sichuan Nanjun Automobile Group to set up a joint venture. Under the deal, the two companies will invest a total of 600 billion won ($560 million) in the 50-50 joint venture, which will be called Sichuan Hyundai and be established later this year in Ziyang.

The new plant, Hyundai’s third in China, will roll out up to 150,000 trucks and 10,000 buses, starting from 2013.

On June 1, Hanwha Group, one of South Korea’s top 10 conglomerates, set up Hanwha Group China (HGC), which will control the group’s nine units and 10 branches in China.

As of 2010, the group’s Chinese operation generated more than 2 trillion won in sales, and the number of workers in China reached 15,000. The group says it is aiming to generate 10 trillion won in sales in China by 2020 by having its operations localized and developing new businesses aggressively.

‘Chinaflation’

Xu anticipated China’s runway inflation, which is mainly attributable to rising labor costs and a decrease in labor supply, would have an impact on South Korea’s economy but the scale of impact would be “modest.”

Economists predict that China’s inflation will likely peak in June at around 6 percent.

“I still believe labor costs will have an impact on (Chinese) price levels and also I think this will have an impact on Korean price levels, not seriously but in a modest manner.

“The changing labor market is the long-lasting factor here. Chinese labor supply has almost been exhausted,” the professor said, adding the working-age population in China is decreasing in just a few years.

Increasing labor productivity is key to resolving labor-related issues, he noted.

Xu predicted that China would maintain a growth rate of 7 to 8 percent for the next 10 years, and the figure would slip to 4 percent eventually.

Xu recieved a Ph. D. in accounting from the University of Minesota after earning an MA in management at Wuhan University.

He was assistant professor of accounting at the Hong Kong University of Science and Technology. He was a visiting professor at Peking University teaching MBA and EMBA courses and also taught for the University of Minnesota's China EMBA program.

Professor Xu is a financial management advisor to some local governments and several top Chinese and multinational corporations. He has designed and delivered company specific programs for a number of companies, such as GE, IBM, BMS, Lenovo, CATIC Group and Schneider Electric.