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Firms in China Faced With Tight Supply of Skilled Labor

September 29, 2006
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In the three decades since it opened its doors to the West, China has risen to become the world’s fourth-largest economy and its leading manufacturing base. In recent years, the country has faced shortages of steel, concrete, oil and even water as it struggles to maintain its rapid pace of development.

    But China may now face one of the most unlikely problems for a country of 1.3 billion people: a labor shortage. As the economy evolves and the demand for skilled workers and business leaders increases, new growing pains in China’s labor market are setting in.

    Reports of labor shortages first surfaced a few years ago and came primarily from China’s southeastern provinces. The issue gained more attention early this year when millions of migrant workers failed to return to work after celebrating the Chinese New Year. Many of these workers remained in China’s countryside, better able to carve out a living after the Chinese government abolished agricultural taxes and further liberalized markets for agricultural products.

    Others decided to find work in factories closer to home. Government initiatives to develop the country’s central and western regions are showing signs of success, as more companies are willing to set up shop in inland areas. Local governments have also offered cheap land, tax benefits and other perks to attract investment. Migrant workers are now able to find better-paying jobs closer to home, and companies in the traditional manufacturing areas along China’s eastern coast are finding it more difficult to find and keep good workers.

    Most analysts agree, however, that the changes in China’s unskilled labor force do not really constitute a labor shortage. Economic growth and new government policies have given Chinese workers more options, and some companies have to pay more and offer better conditions to recruit and retain workers. But the unskilled labor supply is still ample to meet demand.

    "The government has been trying to raise agricultural living standards and developing inland areas, so pressure to migrate to cities on the east coast to find a job has lessened a bit. Plus, the pay in some of the factories has been so low that some people found they made more money with farming," explains Tamara Trinh, Deutsche Bank’s senior economist for Asia.

    "Some firms with relatively low pay in the Pearl River Delta region found themselves short of labor and had to raise their dirt-cheap wages and improve their working conditions somewhat. But with at least 150 million surplus laborers in the countryside and about 10 million new entrants into the labor market every year, I do not yet see the low-skilled labor market tightening significantly in the foreseeable future."

    But China still has serious labor problems, Trinh says. "The market for skilled labor is a totally different story," she says. "Skilled and experienced human resources are scarce for many industries and also in banking—especially experienced mana­gers. Those with experience working abroad are best but are also hard to find and expensive."

    Evidence of this skilled labor shortage is easy to find. In the annual member survey conducted by the American Chamber of Commerce-People’s Republic of China, human resources trumped corruption, government bureaucracy and intellectual property rights to rank as the No. 1 concern for American firms operating there. Respondents also generally felt the situation was getting worse, particularly in terms of retaining good managers. A survey conducted by HR consulting company Hewitt Associates places the 2005 turnover rate at 14 percent, up from 8.3 percent in 2001. Wages increased by 8.4 percent in 2005.

    "The market for labor is hot in China," says Jim Leininger, general manager of Watson Wyatt Worldwide in Beijing, "and it’s a seller’s market." The demand for good managers reflects China’s economic growth, and both foreign and domestic companies play important roles in that growth. "As everyone knows, China’s economy is developing quickly. A substantial part that development comes from foreign direct investment."

Driving up demand
   China Statistical Information & Consultant Center SSB, a division of China’s Statistics Ministry, estimates that almost 40,000 new foreign companies were set up in China in the first 11 months of 2005. These new foreign firms need managers and staff for their China operations. The new firms must compete with the tens of thousands of foreign companies already operating in China, as well as the increasingly competitive domestic firms, for many of the same job candidates.

    "At the same time that multinational companies are coming in, state-owned enterprises are reforming substantially, expanding overseas and listing on stock markets." Leininger explains. "Historically, state-owned enterprises and multinational companies attracted very different types of workers. Now these labor markets are merging. Whether it is a foreign company that is entering China or a first-tier domestic player, they are all looking for the same type of talent: someone who is proactive, a problem-solver, creative and has international experience."

    Finding that type of worker is not easy, despite the growing number of college graduates in China. The number of students in China’s universities has swelled in recent years, and many of the universities’ upcoming and recent graduates are still without jobs. Of the 4.1 million graduates this year, only 50 percent have signed contracts or agreed to take jobs. Another 27 percent are looking for jobs but have not found one yet. These students could seemingly provide a source of well-educated workers with management potential for Chinese and foreign companies.

    But the large numbers are misleading. Most of the recent graduates are not prepared for working in an international business environment. A gap exists in the skills demanded in the work environment and those taught in the country’s universities, according to Zhang Juwei, senior research fellow and professor at the Chinese Academy of Social Sciences.

    "Education and training are not meeting demand," he says. "But you have to look at the reality of China. Thirty years ago the country was completely closed off to the world. Now, our students have to learn management skills based on the market rather than a planned economy. The point is no longer just about what you learn, but also how you can use what you learn. We are making progress, but we are still in transition."

    Stella Hou, the Shanghai-based sales and accounts leader for Hewitt Asia Pacific, echoes Zhang’s comments.

    "China’s educational system focuses too intently on by-rote learning, rather than creative problem-solving," she says. "The system is not reforming quickly enough. The curriculum is very academic, and skills training is lacking."

Cultural conditions
   Historical and cultural factors further complicate China’s labor markets, according to Hou. In the 1960s and 1970s, many of China’s young people were sent to work in the countryside rather than attend university. The members of this group, sometimes referred to as China’s "lost generation," lack the skills required for business management positions.

    "China’s history has a big effect on the leadership shortage, because of the lost generation," Hou says. "The people of that age group generally learned Russian or languages other than English. Most did not go through university. So we don’t have the gray-haired business leadership that most countries do, and we can see the impact."

    The problem of leadership goes beyond just age and experience. It is also one of short supply. A report from the McKinsey Global Institute estimates that Chinese companies will need 75,000 leaders during the next 10 to 15 years. Currently, it is estimated there are only 3,000 to 5,000.

    China’s one-child policy, which has been in effect for more than 25 years, is another demographic trend with effects on the labor force. Most recent graduates were born after the policy took effect, meaning that China’s young business workforce consists almost entirely of only children.

    Hou believes that the one-child generation may present some challenges for employers.

    "For employers, the question ‘What’s in it for me?’ constantly needs to be answered. Also, because they have no siblings, it may be more of a challenge for them to work in teams," she says. "But they are very smart and quick to learn, and they are familiar with technology and the Internet. It will be a challenge for management to shift its paradigm, to understand how to cultivate and bring the strengths out of this one-child policy generation."

    Not all the news is bad for China’s labor market. The McKinsey report suggests even minor improvements in China’s education system could have significant benefits. If China could increase the number of its suitable graduates from 10 percent to 25 percent, as it is in India, they could meet demand by 2008. The report recommends more financing for China’s universities and a stronger emphasis on language training to realize such results.

    Companies can also take action to better recruit and retain good employees, according to Leininger of Watson Wyatt, which conducts WorkChina, the largest study of employee attitudes in China. The results of this survey demonstrate that the companies best at fostering commitment in employees do so by going beyond competitive pay. They also have inspired leadership, communicate well about company goals and personal work issues, encourage teamwork in smaller groups and across departments, and offer opportunities for employees to use and develop skills on the job.

Workforce Management, September 11, 2006, pp. 37-38 -- Subscribe Now!

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