China has a labor shortage

How can a nation with 1.4 billion people, 800 million of whom are still living in rural poverty, have a labor shortage? It may seem like an odd question, but it is becoming a reality in certain segments and regions. The reasons vary but can be traced to two main areas: a fast-growing economy that needs more professionals and technicians than it can supply and the cost/quality of living in the eastern urban areas that dominated the first two phases of China’s development.

China’s rapid growth

China’s rapid growth has been phenomenal but not without costs. One of those has been the inability of the educational system to provide the numbers and types of human resources needed by its rapidly expanding industries and businesses. Human resource development takes time, but China’s corporations need experienced and knowledgeable middle managers, entrepreneurs, technicians and inventors now, not five years from now. The country needs these types of resources to help it develop the world class products and services it feels it needs to stay competitive.

Ironically, thousands of Chinese college graduates and post-graduates are unable to find work because they lack the knowledge, skills and experience that industries need. The Chinese government is spending a considerable amount of time and effort trying to fine-tune the educational system to fit its development needs, but as we know from our own experience, educational systems and institutions are not easy to change. It is also difficult logistically to anticipate and change the policy and curriculum gears to fit future needs.

Three years ago, every Chinese student I talked to was hell bent on a career in investment banking, a lot less so today. At the time, the Chinese government supported the direction of these budding financial wizards hoping they could unlock the powerful magic wielded by our western financial institutions.

It does not help that like everywhere else, people tend to adopt their conventional wisdom from the circumstances around them, rather than the trends which are shaping the future. Combined, it has led to labor shortages in what the Chinese government views as strategically important areas. To address the issue, unable to satisfy the demand from within, China has instituted aggressive human resource recruitment polices which use direct and indirect incentives to attract desirable managers, entrepreneurs, technicians and inventors. Local governments have been encouraged to go after these new human resource assets as aggressively as they pursued foreign direct investment (FDI) in the past.

Ironically, “hot money” flows (investor money coming into the country), which used to be the Holy Grail of local governments, are now becoming a problem at the national level, as they contribute to real estate price increases and unsustainable business models. Due to the economic situations in the United States and Europe, investing in China looks desirable, but as always too much money chasing the same opportunity spells disaster, and it is not surprising that China is moving to be more selective about investments and projects.

Again, the difficulty is that many of the efforts lack finesse and are arbitrary in their impact. Many U.S. and European chambers are complaining that doing business in China has become much more difficult since the global meltdown. A lot of it is due to increasing Chinese confidence in their ability to set a new kind of economic course based on assumptions more closely linked to their ideological and social concerns. It seems that the meltdown of our investment banking institutions, which had seemed made of bedrock, until they either melted into thin air or seemed to be cannibalizing their clients, had a profound psychological as well as economic effect; an effect which will probably have more consequences over the long run than the economic woes they created.

Interestingly, it seems the only ones who seem impervious to this realization are those within the industry itself.

Getting back to local Chinese governments efforts; in terms of direct support they are providing million RMB relocation bonuses, housing subsidies and education benefits for children; in terms of indirect support, they are building and equipping research facilities and putting up angel, venture, mezzanine and equity capital into areas and companies they feel are promising. Interestingly the more successful they are at attracting who they are after the more they need more middle managers, technicians, entrepreneurs and other inventors. Some of the governments efforts are aimed at the millions of overseas Chinese whose western education, experience and eastern cultural familiarity with Chinese language and culture makes transitioning easier, if not always exactly smooth.

I constantly run into returning Chinese who are in reverse culture shock. The land and people they left 10 to 20 years ago have changed so dramatically they often feel as alien as they first did when they went overseas.

In looking at what the Chinese government is doing, the message is in the speed and directness of their approach as compared to western models. While I am not suggesting that we need to adopt their models, it is clear that to stay competitive in the future our government, education institutions and businesses need to focus and coordinate better than they have been.

Next issue part two: Self selectors and changing attitudes are affecting China’s manufacturing workforce.

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