Developing the Chinese market is a top priority for many multinational companies.

Across industry sectors, however, they face a common obstacle -- attracting, developing and retaining the local Chinese talent.

In a recent interview with The Wall Street Journal, Pierre Cohade, the Asia-Pacific president of Goodyear, confirmed that the number one challenge in China òis absolutely the fight for talent.

Goodyear is hardly alone: Over the past 13 years, the American Chamber of Commerce has conducted annual surveys of US companies in China and frequently cites management-level human resource constraints as the top business challenge.

Global companies are driven to hire staff from within each target market primarily to gain access to knowledge of new regions. Successful practices abroad may not transfer well: Companies that lead in other markets, including Best Buy and The Home Depot, have floundered in China due to an insufficient understanding of Chinese consumer habits and local conditions.

Although lower labor costs are commonly cited as a benefit of staff localization, this is often true only for entry- and mid-level roles. At Procter & Gamble, for example, one executive indicated that a local Chinese hire typically represents only one-third the cost of an expatriate.

Supply paradox

However, following the rise in average income and the appreciation in the Chinese currency, this gap has begun to close. With the competition for top local talent intensifying, the best Chinese managers may eventually become just as expensive as their foreign counterparts.

Despite acknowledging the clear need to localize, multinationals struggle to achieve this due to a shortage of qualified labor. McKinsey, a management consultancy, recently referred to this as the supply paradoxó because it is difficult to find acceptable hires despite having so many college-educated applicants.

Recruiting is difficult because some find that the best students do not always make the best employees. As John Holden, former president of the National Committee for United States-China Relations, has noted, Some MNCs prefer not to hire recent graduates from the elite Chinese universities, electing to go with candidates from second-tier and regional universities who have more real-life experience and, perhaps, ambition.

The competition for top talent is not simply a battle fought among multinationals. Both state-owned and private Chinese enterprises are snapping up a greater share of the top talent pool by means of compelling offerings, often at the expense of multinationals. The latter's traditional advantages in attracting talent -- prestigious brands, higher compensation and career-development opportunities -- are eroding.

According to a survey of Chinese job seekers conducted in 2010 by Manpower, a human-resource consultancy, the number of respondents identifying Chinese privately owned companies as their primary choice is up by 5 percent, with foreign companies down 10 percent, compared to four years earlier.

Frustrations

The attractiveness of outside opportunities is exacerbated by the frustrations that Chinese employees sometimes feel while working for a multinational.

Given that they are often reporting to foreign managers of regional or global business units who are less familiar with the rapid changes and business practices in the Chinese market, local employees feel much of their time is spent òtranslatingó for foreigners.

An executive education program director at a leading Chinese business school frames this challenge another way: The fundamental issue is trust; does the headquarters trust you? When the local employees don't see that trust, they will leave. The problem with many multinationals is that systems to promote locals are still ad hoc. Without a formal support system in place, the process of identifying one or two top candidates a year, sending them abroad and hoping that they can build the necessary trust doesn?t work.

As a result, local employees may at times see a glass ceiling that restricts their promotion opportunities within a multinational. Along with the increasing competition for top local talent, these issues of trust, communication, work style and career trajectory are major challenges in trying to build a strong local management team.