In this article Moving from Beijing to Wuhan Anything else? Contact

By Alan Pang, Director, Global Research Center

"According to Xinhua News Agency, one Zhengzhou municipal government speaker said on Tuesday (June 29) that Hon Hai Precision Industry Co. Ltd. was establishing a new plant in the capital city of Henan….With regard to the incidents that took place on the FoxConn campus in Shenzhen, the organization resorted to wage increases as a cure. Yet the increased labor cost has become another issue that needs immediate solution…as a result, the company is active in relocating its processing facilities to non-coastal cities in China."¹

History often repeats itself. Starting from the 1980s, Johor Bahru, Malaysia, with its short distance to Singapore and inexpensive labor force, attracted a large number of high-tech manufacturing businesses. "A number of labor-intensive firms continued to relocate in…the early 1990s, only to discover the lack of labor supply. Nevertheless, by the mid-1990s, soaring production costs and the exhaustion of labor reserves—without much upgrading—drove out consumer and industrial peripherals such as disk drive electronics from Malaysia to China…"² 

By the middle of the first decade of 2000, companies were considering moves to new locations. An appreciating Chinese yuan, increasing wages, and skyrocketing raw material prices, pushed many labor-intensive processing businesses to leave China and relocate to Vietnam.³ 
In 2007, Texas Instruments chose the Philippines over China to set up a new test and assembly facility, which would eventually employ 3,000 workers.⁴ When the calendar flipped to February 2009, Intel announced its plan to move its test and assembly plant in Pudong, Shanghai into its facility in Chengdu.⁵ 

Industry relocation is not a new concept. Instead, it is a trend that virtually all industries and locations have experienced or are experiencing. But what are the factors that human resource professionals need to look at when a relocation is being considered? The immediate answer, to most of us, would be people cost.

Moving from Beijing to Wuhan

Let's put forward a simple example. Assume a high-tech non-manufacturing multinational company is considering a move from Beijing (coastal China) to Wuhan (hinterland China). The consecutive double-digit growth of compensation in China over the past decade has made people cost one of the most critical factors in determining where to relocate the business.

With reference to the high-tech industry global compensation data collected and analyzed by Radford of Aon Hewitt, we know that, based on Mid-Level Professional's annual total cash, high-tech professionals are the highest paid across all the industries in different locations. As far as the Chinese mainland is concerned, Wuhan is an ideal destination for that particular industry, as its pay level for Middle-Level Professionals is only 50% of that of Beijing (Figure 1).

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Anything else?

However, in reality, the basic salary cost comparison illustrated above is far too simple. So what are the "real-world" factors which counterbalance people cost? And, how do these additional factors impact the decision-making process? In particular, what about the quantity and quality of staff capabilities, and the convertibility of such capabilities into business results, as well as the uncertainty and volatility involved in securing these capabilities? In other words, what about the workforce risk?

First of all, there is the workforce risk associated with hiring people: the risk of not finding qualified candidates; the risk of hiring people that do not fit the organization's culture; and the risk of hiring people who do not have relevant experience or capabilities.

Secondly, additional risks are associated with employing people: the risk of losing people the company wants to keep; the risk of paying too much, too little or for the wrong things; and the risk of creating employment rigidities that stifle the business.

Lastly, there are also risk-sources associated with redeploying or letting people go:  the risk of moving people into new jobs, new organizations or new locations; the risk of layoffs, terminations, or restructuring; the risk of incurring additional costs after people are gone.

Chinese Mainland cities' workforce risk ranking

Aon Hewitt's research team has identified 25 factors which contribute to workforce or people risk in order to create the People Risk Index. Furthermore, we have grouped these 25 contributing factors into five categories:

Based on Aon's assessment and analysis of the 25 factors spread across these five risk categories, we have derived a workforce risk ranking for 100 cities worldwide (including 14 cities in China).

Location decision for industries based on workforce risk ratings

When workforce risk assessment results are combined with current compensation data, the ensuing combined risk-cost information enables companies to make more skillful and cogent comparisons of the cities under review.

In order to further refine our analysis of the target industry in our example, we assign weightings to the 25 risk factors based on our understanding of the industry's qualities. Once we arrive at the Workforce Risk Ratings for high-tech non-manufacturing across the cities, we then apply the benchmark (Middle-Level Professional of high-tech non-manufacturing industry) annual total cash compensation data and construct Figure 2 to flesh out the workforce risk and compensation cost comparison. The solid line in the middle is the regression line of Workforce Risk Ratings and compensation cost.

Hong Kong, Seoul, and Hanoi are above the line, which indicates that the compensation cost in these cities is comparatively higher than their peer cities at the same level of workforce risk. In contrast, Taipei, Kuala Lumpur, and Manila are below the line, which signifies that these cities have comparatively lower compensation cost relative to workforce risk.

Similarly, Beijing sits right above the line while Wuhan is sitting below the line at quite a distance.  This leads to the observation that, with regard to the high-tech non-manufacturing industry, Wuhan's workforce risk-cost combination is more reasonable than Beijing's. 

However, due to the low cost advantage Wuhan has, the businesses competing for talents there most likely would not be confined to high-tech non-manufacturing only. Therefore, we have duplicated the workforce risk-cost comparison for high-tech manufacturing, medical device, pharmaceutical, retail, and fast moving consumer goods (FMCG).

The observation then shows that Beijing maintains a reasonable workforce risk-cost combination for high-tech non-manufacturing and medical device, while Wuhan does so for high-tech non-manufacturing and FMCG. Since there is not much overlap between high-tech non-manufacturing and FMCG as far as their overall talent demands are concerned as well as the fact that Wuhan does have a better workforce risk-cost combination than Beijing for high-tech non-manufacturing, it is not that difficult to conclude that Wuhan is a good relocation destination for the company in this example.
 

Making location decisions based on workforce risk ratings

So, at this juncture, the relocation decision has been made in the context of workforce risk-cost comparison at the industry level. But now, how about a micro issue — the location decision in terms of the different functions, job levels and job groups?

As our first step, we adjust the weightings of the 25 factors in the Workforce Risk Ratings for General Support, Middle-Level Professional, and Management positions in the high-tech non-manufacturing industry based on each job groups' specific characteristics. Figure 3 shows the result of the workforce risk ratings across them. As shown in the chart, the highest risk in Beijing is for Management positions. As for Wuhan, its highest workforce risk resides with Middle-Level Professional positions.
 
Here again, let's apply the benchmark (this time, General Support of high-tech non-manufacturing industry) annual total cash data and build Figure 4 to show the workforce risk and cost comparison. Assisted by the regression line of Workforce Risk Ratings and compensation cost, we find that both Beijing and Wuhan are below the line with Beijing's distance from the line larger than Wuhan's. This leads us to the assessment that, in the high-tech non-manufacturing industry, there is no compelling reason to move General Support positions from Beijing to Wuhan, as Wuhan does not have an obvious advantage over Beijing.

When a similar analysis is applied to Middle-Level Professional and Management positions, Beijing doesn't provide much advantage either with regard to the workforce risk-cost combination. Thus, based on this analysis, the rationale for relocating to Wuhan based on risk and cost is not compelling. 

What do workforce risk ratings tell us about implementation?

A close look at this hypothetical case study in the context of a high-tech non-manufacturing industry would indicate that, at the industry level, moving from Beijing to Wuhan would require the business to devise countermeasures to address problems of high emigration, low availability of recruiting service, underdeveloped leadership programs, and limited foreign language capabilities.  On the other hand, the move to Wuhan affords our hypothetical company some improvement with regard to workforce risk. Comparatively speaking, Wuhan has a lower staff turnover rate. With a lower cost-of-living and a younger population, the city offers a less risky outlook for its mandatory retirement benefit obligation.

With such analysis, no matter which decision is ultimately taken — to stay in Beijing, immediately move to Wuhan, or relocate to Wuhan at a later date – HR would be far better equipped  to reengineer company policies and systems to support such strategic changes. HR would be able to effect these changes far more skillfully and confidently than before.

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Contact

Alan Pang is Director of Aon Hewitt's Global Research Center, which is based in Singapore. Please contact Alan Pang at alan.pang@aon.com for further information about Aon Hewitt's People Risk Index and how it can help your company make wise decisions.

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