China's impending talent
shortage By Swati Lodh Kundu
BANGALORE - A labor shortage, with a
population of 1.3 billion? As unbelievable as it
may seem, this is precisely the situation China
now confronts.
With a huge supply of
low-cost workers, mainland China has fast become
the world's manufacturing workshop, supplying
everything from textiles to toys to computer
chips. Though China has a vast pool of unskilled
labor, firms in the south now complain that they
cannot recruit enough cheap factory and manual
workers. The market is even tighter for skilled
workers. As the economy grows and moves into
higher-value-added work, the challenge of
attracting and retaining staff is rising with the
skill level, as demand outstrips supply.
Only a few of China's vast number of
university graduates are
capable of working for a
multinational company, and the fast-growing
domestic economy absorbs most of those who could.
Indeed, China is facing a looming shortage of
home-grown talent, with serious implications not
only for multinationals now in China, but also for
the growing number of Chinese companies with
global ambitions.
To be sure, China's
potential talent pool is enormous. In 2003 China
had roughly 9.6 million young professional
graduates with up to seven years' work experience
and an additional 97 million people that would
qualify for support-staff positions. Despite this
apparently vast supply, multinational companies
are finding that few graduates have the necessary
skills for service occupations.
Though
developing economies often encounter talent
shortages as they start to grow, China's history
has left it with some peculiar deficits. Its
Confucian heritage, which emphasizes rote learning
and hierarchy, may partly explain why many
graduates, despite good paper qualifications and
English-language skills, are often cautious about
taking the initiative. Some firms complain that
China's one-child policy has made it harder for
them to find natural team players. That there are
few master's programs in business administration
in China may not help either.
Large parts
of China's economy remain in thrall to the state,
where loyalty to the Communist Party more than
business acumen drives career success. Chairman
Mao Zedong's Cultural Revolution of 1966-76 wiped
out an entire generation of potential managers, as
millions of Chinese were instructed that
capitalism was evil. After a lifetime under
socialism, many lack the mindset to adopt Western
working practices. In China, the talent pool
consists either of managers from state firms, who
are often too bureaucratic, or entrepreneurs who
have come up through the private sector and are
unconstrained by capital or the law.
Last
year, the McKinsey Global Institute (MGI)
conducted interviews with 83 human-resources (HR)
professionals involved with hiring local graduates
in low-wage countries. It was found that fewer
than 10% of Chinese job candidates, on average,
would be suitable for work in a foreign company in
the nine occupations the study focused on:
engineers, finance workers, accountants,
quantitative analysts, general service positions,
life-science researchers, doctors, nurses, and
support staff.
Consider engineers. China
has 1.6 million young engineers, more than any
other country the study examined. Indeed, 33% of
the university students in China study
engineering, compared with 20% in Germany and just
4% in India. But the main drawback of Chinese
applicants for engineering jobs is the educational
system's bias toward theory. Compared with
engineering graduates in Europe and North America,
who work in teams to achieve practical solutions,
Chinese students get little practical experience
in projects or teamwork. The result of these
differences is that China's pool of young
engineers considered suitable for work in
multinationals is just 160,000 - no larger than
Britain's, despite China's 22-fold advantage in
population. Hence the paradox of shortages amid
plenty.
For jobs in the eight other
occupations that the MGI studied, poor English was
the main reason interviewees gave for rejecting
Chinese applicants. Only 3% of them can be
considered for general service positions (those
that don't require a degree in any particular
subject).
Overall communication style and
cultural fit are also difficult hurdles. One
Chinese HR professional points out, for example,
that Chinese software engineers would find it hard
to draw up an information flow chart for an
international five-star hotel, not because they
don't understand flow charts, but because
state-run hotels in China - the only ones they
know - are so very different.
Some people
argue that a willingness to work long hours will
compensate for any deficiencies in the suitability
of China's talent. Although this may hold true to
some extent in manufacturing, it is likely to make
only a marginal difference in services because of
the specific skill deficiencies that come into
play.
On top of the generally low
suitability of Chinese graduates, they are widely
dispersed. Well over 1,500 colleges and
universities produced the 1.7 million students who
graduated in 2003, and likely fewer than one-third
of these had studied in any of the top 10
university cities. Just one-quarter of all Chinese
graduates live in a city or region close to a
major international airport - a requirement of
most multinationals setting up offshore
facilities. Compounding that problem is a lack of
mobility: only one-third of all Chinese graduates
move to other provinces for work. (By contrast,
almost half of all Indian students graduate close
to a major international hub, such as Bangalore,
Delhi, Hyderabad and Mumbai, and most are quite
willing to move.) As a result of these two
factors, world-class companies in China have
difficulty reaching as much as half of the total
pool of graduates.
Finally, companies that
wish to set up service-industry offshoring
operations in China face more competition for
talent than they would in other low-wage
locations. In India and the Philippines, for
example, the local economy is growing less
briskly, and working for a company that provides
offshore services is therefore a good option. In
China, domestic and multinational companies
serving the fast-growing domestic market already
provide attractive opportunities for suitable
graduates, and there are many more jobs in the
manufacturing export sector. As a result, it's
wrong to assume, as many companies do, that every
suitable young professional in China is available
for hire in the services offshoring sector.
According to the MGI, the demand for labor
from just the large foreign-owned companies and
joint ventures that now do business in China
highlights the problem. From 1998 to 2002,
employment in these two categories rose by 12% and
23% a year, respectively, to about 2.7 million
workers. Assuming that 30% of these workers must
have at least a college degree and that the labor
demands of such companies continue to grow at the
same rates, they will have to employ an additional
750,000 graduates from 2003 through 2008. The MGI
estimated that China will produce 1.2 million
graduates suitable for employment in world-class
service companies during that period. So large
foreign multinationals and joint ventures alone
will take up to 60% of China's suitable graduates
before demand from smaller multinationals or
Chinese companies even enters the picture.
The tremendous tightness in the high-end
labor market is confirmed by the unemployment
numbers: in 2003, just 1% of the country's
university graduates were unemployed. Unemployment
among the graduates of China's colleges is a bit
higher, at about 6%.
Foreign firms are now
investing some US$1 billion a week in China. As
they expand, they increasingly need workers able
to handle the complexities of multi-site
operations. Staff shortages threaten these plans.
In a recent speech, Arics Poon, managing director
of Oracle for South China and Hong Kong, said, "We need
a group of strong, professional managers or we may
fail to support our growth in China." Anthony Wu,
head of accounting firm Ernst & Young in Hong
Kong and China, admitted that "we have decided not
to tender for some major clients because we feel
we don't have the staff to service them".
Indeed, effective managers are in short
supply. According to the MGI's estimate, given the
global aspirations of many Chinese companies, over
the next 10-15 years they will need 75,000 leaders
who can work effectively in global environments;
today they have only 3,000-5,000. Management
talent generally comes from several sources -
offshoring enterprises that train lower-level
workers, industries that produce managers with
relevant skills, and expatriates who have worked
or studied in countries with developed economies.
But people from all of these sources are
scarce in China. Although multinational companies
there do currently train and promote managers from
entry-level positions, the process is
time-consuming and costly. Moreover, with levels
of foreign direct investment so high,
multinationals often resort to poaching from one
another. The problem is all the worse because not
many middle managers can be hired from Chinese
companies.
Fierce competition and a
limited supply of talent are resulting in high
turnover rates. One in 10 executives changed jobs
in the southern city of Shenzhen in 2004 and one
in 12 in Beijing, according to
research conducted by the HR consulting firm
Hewitt Associates. The same research points to a
nationwide employee turnover rate of 11.3% in
2004, up from 8.3% in 2001. Some smaller firms see
turnover as high as 30%, but leading global firms
are not immune. L'Oreal, with 3,000 people in
China, says that staff turnover in its marketing
department is nearly 15%.
As companies
compete for the best workers, pay and benefits are
soaring. A Chinese middle-level manager at a
foreign company in Beijing or Shanghai can now command
total annual cash compensation (salary plus bonus)
of $27,000-$32,000, says Hewitt - a remarkably
high figure given the country's 2005 per capita
GDP of only $1,703. Senior managers receive
between $46,000 and $54,000, and top executives
can expect $80,000 to $90,000 or more. While
underlying inflation in China is about 2%, average
annual salary increases for mid-level and senior
managers are now 6-10%.
Lai Kam-tong at
the Hong Kong Institute of Human Resource
Management says that accountants' salaries are
rising by 14% a year. Jurgen Viethen, general
manager for F&G China Electric, a small
Spanish-owned electrical-switchgear maker, is
offering key employees pay raises of up to 50% -
and still losing them.
Bonuses,
longer-term incentives, free housing and meals, a
mobile phone and a vehicle are becoming standard
perks. More than one-third of 1,600 multinational
firms surveyed by Hewitt now offer a company car.
More holidays, maternity and paternity leave, more
frequent job rotation and share options also now
feature. Add in the big contributions that
employers must make to China's
national-security-fund system and the total cost
of an employee can be double his or her base pay.
Lack of quality talent and rising pay have
not, as yet, slowed China's economic growth;
basing production in mainland China remains
cost-effective for most foreign firms. But the
growing shortage of executive talent may make the
growth assumptions written into many business
plans overly optimistic.
Swati Lodh
Kundu is a freelancer based in Bangalore,
India. She has a master's degree in economics from
the University of Calcutta.
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2006 Asia Times Online Ltd. All rights reserved.
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