China's looming talent shortage

To make the move from manufacturing to services, China must raise the quality of its university graduates.

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 less than one-third of them had studied in any of the top ten university cities (Exhibit 1). 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 that want to hire service labor in China have difficulty reaching as much as half of the total pool of graduates.

Finally, companies that wish to set up services 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.

The looming war for talent

More crucially, companies that are already in China and serve its fast-growing domestic market will also, our research shows, have difficulty finding enough suitable employees in key service and managerial occupations.

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 percent a year, respectively, to about 2,700,000 workers. Assuming that 30 percent 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. China, we estimate, will produce 1,200,000 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 percent of China's suitable graduates before demand from smaller multinationals or Chinese companies even enters the picture (Exhibit 2).

If these numbers suggest fierce competition for China's best graduates, unemployment statistics confirm that impression. In 2003 just 1 percent of the country's university graduates were unemployed-an almost negligible rate. Unemployment among the graduates of China's colleges is a bit higher, at about 6 percent.

Effective managers are in short supply as well. We estimate that given the global aspirations of many Chinese companies, over the next 10 to 15 years they will need 75,000 leaders who can work effectively in global environments; today they have only 3,000 to 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 each other. The problem is all the worse because not many middle managers can be hired from Chinese companies; only people employed by very high-performing ones (such as the consumer electronics company TCL) have the skills and cultural attributes needed to work for the multinationals. A more plentiful source of middle-management talent is the large number of ethnic Chinese who fill management roles for companies in Hong Kong, Singapore, and Taiwan. These people can be recruited to mainland China but often require "local-plus" packages: wages and benefits above what the locals receive, though less than the full expatriate package.

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