Why foreign firms in China need expats in key roles (video)

Management localisation, the practice of replacing expat managers with local talent, would not be the first leadership method to provide a great solution and then, when overdone, become the problem. Around the time I arrived in China in 2002, multinational firms were already buzzing with localisation plans. The PRC had just joined the World Trade Organisation (WTO), calling an end to the gold-rush mentality of the 1990s, where billion-dollar deals were finalised on cocktail napkins between investors and government officials. Operations would become (somewhat) more predictable and transparent. That meant that ruthless lone dealmakers would be replaced by teams. That meant costs per expat had to decline. In the early 2000s, I heard the same arguments for nurturing a new generation of globally capable Chinese managers at most multinationals I visited.

China is a difficult terrain: Local managers would already be familiar with its language, culture (cultures, rather, because China has many), business ways and politics, and make better decisions for the firm.
Success in China takes time: Local managers would not nurture plans of moving on a few years after taking their positions.
Expats are expensive: Passing management jobs to locals would free the multinationals from higher salaries, allowances for accommodation, travel, insurance, education and domestic staff.

Fast-forward to just before the pandemic, and localisation wasn’t a future vision anymore. I haven’t seen any reliable data on the ratio of former expat jobs localised, but I did get introduced to the local replacements of expat executives, trained and coached them in doing business in or with the West, and interviewed both sides for my book Dragon Suit. Localisation didn’t go as planned: Chinese managers found it harder to travel and communicate in foreign languages than expected, the income gap mostly vanished and local managers often moved on anyway, not to other countries but to other firms. But the people I interviewed listed benefits that weren’t so obvious from the beginning:

Removing a “glass ceiling” by allowing Chinese managers to become top executives at foreign firms added to their motivation to stay, I heard from Asia Managing Director for Hays Group Richard Eardley, and several ‘localised’ Chinese managers who appear in the book.
Companies whose market is heavily reliant on China, including automotive, pharmaceutical, luxury fashion and many others, must work with local executives and managers to maintain their touch with their primary market, China CEO author Laurie Underwood told me.
Finally, as China’s double-digit growth bonanza cooled off and politics became more restrictive, most foreigners wouldn’t want to stay on anyway, both foreign and local managers told me: who else would take their place?

But before bosses at international headquarters (whether in San Francisco, Helsinki or Seoul) can go to bed assured that local managers will serve the firm's best interest at China branches, they must heed advice from the same people about the possible risks of excessive localisation.

Being Chinese and a good manager is not enough, Dr Underwood cautions. In her follow-up book China CEO II she presents success stories of C-suite localisation, but those people were chosen and trained for their natural cultural agility and proven international track record, she says.
It takes courage to place the seals and passwords for hundred-million deals into local hands, said Kurt Yu, Regional President at Voith Group and himself the successor of expat executives at the firm. Once it’s done, localisation practically cannot be undone.
If China remains a healthy participant of global supply chains, the replacement of expats will never be complete anyway, Angelo Puglisi, Asia Pacific Head of HR for Benteler Automotive told me. US firms in Europe keep American decision-makers in key positions until today, and vice versa.

This is the discussion we continued at a recent East-West Leadership webinar with Sino-British College Lecturer Christian Göttker, who interviewed small and mid-sized German firms in China during the pandemic, and came to very similar conclusions. His presentation and the discussion afterwards added three important bullet points about mobility, communication and trust: check the video for details and join us next time.

Take the next step and join Gabor Holch’s East-West Leadership Coaching or Dragon Suit Coaching in a variety of formats, starting from 2 hours and up to 20-hour executive coaching programmes. Click here to find out more, ask questions and register: https://www.holch.biz/coach