China's looming talent shortage

By Diana Farrell and Andrew Grant

With its huge supply of low-cost workers, China has fast become the world’s manufacturing workshop. Is China set to become a giant in offshore information technology and business-process services as well?

With its huge supply of low-cost workers, China has fast become the world's manufacturing workshop, supplying everything from textiles to toys and computer chips. Given the country's millions of university graduates, is it set to become a giant in offshore information technology and business-process services as well?

Our research suggests this is unlikely. The reason: Relatively few of the mainland's vast number of graduates are capable of working successfully in the services-export sector, and the fast-growing domestic economy absorbs most of those who could. Indeed, far from presaging a thriving offshore-services sector, our research points to a looming shortage of home-grown talent, with serious implications for the multinationals now in the mainland and for the growing number of Chinese companies with global ambitions.

The problem is that few of the mainland's graduates have the foreign language skills, cultural fit or practical education necessary to work in a multinational company. According to interviews with human-resources professionals involved with hiring local graduates in low-wage countries, fewer than 10 percent of mainland job candidates are suitable for work in a foreign company in occupations such as engineering, finance and accounting, quantitative analysis and support.

The specific reasons vary by occupation. Consider the mainland's 1.6 million young engineers. Their education is generally biased towards theory, and they get little practical experience in projects or teamwork. As a result, despite seeming so numerous, the mainland's pool of young engineers considered suitable for work in multinationals is just 160,000—no larger than Britain's. Hence the paradox of shortages amid plenty.

For jobs in the eight other occupations we studied, poor English was the main reason our interviewees gave for rejecting applicants from mainlanders. Overall communication style and cultural fit are also difficult hurdles.

Compounding the problem is the fact that half of all university graduates are beyond the reach of multinational employers. Just one-quarter of all mainland graduates live close to a major international airport—a requirement for most multinationals setting up offshore facilities—and only one-third would be willing to move to other provinces for work.

As a result, multinational companies already in China could soon face a talent shortage in key service professions and managerial occupations. This represents a major problem for multinationals in mainland China, for mainland companies and, indeed, for the nation's economic future if it aims to move beyond labour-intensive manufacturing and into higher-value service industries. To curb the threatened talent shortage, policymakers should consider three sets of actions.

First, Beijing must undertake a long-term effort to raise the quality of its graduates by changing the way it finances its universities.

Second, it must revamp curriculums to meet the needs of industry and, at the same time, improve the quality of English-language instruction.

Finally, policymakers should do more to woo home the many students who study abroad. The looming squeeze on graduate talent could stall not only the mainland's economic growth but also its evolution to a fully developed service economy. Educational reform, to stress practical and language skills, would help fill the professional talent gap.

Diana Farrell is the director of the McKinsey Global Institute, McKinsey's economics think-tank. Andrew Grant is a director in McKinsey's Shanghai Office.

This article originally appeared in the McKinsey Quarterly.

Article appeared in South China Morning Post, October 19, 2005

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