China's looming talent shortage

Why fix the problem?

A shortage of world-class university graduates in key occupations such as finance, accounting, engineering, and business represents a major problem for multinationals in China, for Chinese companies, and for the country's policy makers. Companies need these graduates to improve their marketing and product-development efforts, to understand consumer tastes, to develop customer service and after-sales-service operations, and to raise their local financial and accounting standards. In the longer term, China's economy as a whole needs more such graduates if it is to compete in the world beyond the simpler, labor-intensive manufacturing areas in which it is now the global leader.

As economies develop, they shift from labor-intensive manufacturing to higher-value areas, notably marketing, product design, and the manufacture of sophisticated intermediate inputs. Northern Italy's textile and apparel industry, for example, has moved most garment production to lower-cost locations, but employment remains stable because companies have put more resources into tasks such as designing clothes and coordinating global production networks. Similarly, in the US automotive industry, imports of finished cars from Mexico increased rapidly after the North American Free Trade Agreement took effect, but at the same time exports of US auto parts to Mexico have quadrupled, allowing much of the more capital-intensive work-and many of the higher-paid jobs-to remain in the United States.

With an estimated 150 million surplus unskilled rural workers, who can be hired mainly by manufacturers, China is decades away from developing a consumer-oriented service economy. But policy makers must make that their ultimate aspiration. No nation will remain the world's low-cost manufacturer forever, and if it were to try to do so, its living standards would stagnate at today's levels-or even decline. Today China's economy is greatly tilted toward manufacturing, and the services sector is notably underdeveloped (Exhibit 3). But in China, as in all economies, services will be the future engine of job growth. According to Alliance Capital Management, the country's manufacturing sector shed 15 million jobs from 1995 to 2002, when large state-owned factories restructured their operations. As manufacturing productivity rises, still more jobs will be lost.

Creating the conditions that attract offshore services operations will help China move up the ladder. The country does have some strong advantages in this arena, notably low labor costs, an enormous domestic market, and a relatively high-quality infrastructure. Offshore services activities are often developed from existing operations, so China's services offshoring sector is most likely to arise as an offshoot of the activities of companies that are already there.

China is not the only country facing an impending talent shortage. See "Ensuring India's offshoring future."

Pharmaceutical and software companies will probably take the lead, for in these industries some multinationals have already set up Chinese R&D operations to customize products for local needs. Several players now use incremental capacity in their Chinese R&D facilities to serve overseas markets too. Pharma companies can also run bigger, and therefore faster, clinical trials in China more cheaply, thereby cutting overall product-development costs as well as approval and release times. In addition, mainland China could emerge as a base for business process offshoring by multinationals that serve Chinese-speaking populations elsewhere-such as Hong Kong, Singapore, and Taiwan-if the country solves its looming shortage of qualified labor.

Page 1, Page 2, Page 3, Page 4