By Joab Meyer
While Corporate Social Responsibility may be criticized by some as clever cause marketing or passed off as simply community service, leading Information Technology firms are finding it actually makes good business sense.
Hypercompetition in Chinese IT
In Hypercompetition, Richard D'Aveni argues companies have entered "a state in which sustainable advantages are no longer possible" that forces "firms to race up the escalation ladders" in all aspects of competition. He observes these shifts have been driven by forces such as "changing technology…and globalized competitors." These factors are clearly observed in the rapidly changing and thoroughly globalized Chinese IT industry.
In fact in 2004, a Mergent Industry Report says China was the largest exporter of Information and Communications Technology goods in the world with ICT exports totaling US$180 billion. Additionally, between January and August of 2006 the export value of high tech products was US$170 billion, which is over a 30% year-on-year increase .
The Environmental Fall Out
Though such rapid ICT export growth brings increased sales for industry producers and valuable products for its customers, it also creates a gargantuan amount of electronic waste. In fact, recent estimates from CNET.com indicate between 20 million and 50 million tons of e-waste is produced worldwide annually. This problem has sprouted a significant e-waste processing industry that has largely migrated to low-cost, lightly regulated markets such as India and China.
Recently, the pressure for ICT firms to respond to the e-waste problem has arisen from government legislation and activist organizations. In January 2007 the Chinese government began drafting rules that will reportedly lead to the creation of a producer-oriented system for collecting and recycling waste electronic equipment before the end of the year. Not only are a significant number of electronic devices discarded annually in China but, according to the State Environmental Protection Administration, 70% of the electronic waste in the world is imported into China each year. The community impact is significant as a recent Greenpeace study of dust, soil, river sediment and ground water in communities with e-waste facilities found elevated levels of heavy metals such as lead, tin, copper, cadmium and antimony.
The Hot Human Capital Market
As a result of the hypercompetitive forces of globalized competitors on the IT industry in China, it is challenging to retain top talent. The problem begins with China's education system where only 5.2% of the population has a college education and according to a recent McKinsey survey only 160,000 of the annual 3.1 million engineering graduates are fit to work in multinational firms. Older managers largely lack the education and training necessary to assume senior executive roles. Furthermore, reports show the majority of Chinese employees have low levels of English language fluency and, coming from state-owned enterprises with traditional values, have not had insights into Western systems and culture.
When this largely ill-equipped and scarce skilled labor pool is placed in the context of China's hypercompetitive IT industry the results are disastrous for IT firms. In high growth industries such as IT, most company turnover rates hover around 15%. These rates, which are largely driven by aggressive staff poaching practices, induce annual wage increases of as much as 15%. The job hopping is especially severe among what headhunting firms label "talented managers" who are reported to change jobs every 15 months. To make matters worse, rising wages often aren't enough to convince high performers to stay as they leave to develop their own business or have a role in the next high tech IPO.
The talent retention problem goes deeper than one-time costs or short-term losses, however. When companies struggle to keep their best and brightest, their ability to compete is compromised in the following ways: a limited ability to nimbly react to growth opportunities, loss of precious organizational intellectual capital and a distraction from their core business. What's more, the actual cost of replacement metrics reportedly show an average-performing staff member costs about 90% of their salary to replace.
CSR Can Make a Difference
In this cut throat environment where firms must deal with the environmental impact of their products and top quality talent is difficult to retain, CSR strategies are a source of process innovation, which provides firms competitive advantages. The second piece in this series will examine how properly implemented CSR strategies not only address the electronic waste issue, but also serve to increase operational efficiency.
This first installment in a four part series examines the environmental and human capital challenges faced by firms in China's hypercompetitive IT market. CSR initiatives can enable these firms to establish competitive advantages in this challenging environment, if they are treated as process innovation that impacts business operations, rather than merely an after thought unconnected for the firm's value proposition.
About the author:
Joab Meyer has a B.A. in East Asian Studies from the University of Minnesota and is a May 2007 MBA graduate from Thunderbird School of Global Management. Joab had the opportunity to gather data on CSR activities in China while participating in the Beijing AmCham CSR committee and working in Beijing in 2006. He would welcome comments on this article at [email protected]