2005 Human Resources Trends in China

2005 Human Resources Trends in China
By Ames Gross and Loren Heinold
May 2005
Published in SHRM Global Forum

After more than a quarter century of economic reforms, China is still booming. But while China continues to experience rapid growth, it is a much different country than it was in the late 1970s. One area of substantial change has been China’s human resources market. As more foreign companies enter China, as Chinese state-owned enterprises privatize, and as China’s dynamic private sector catches up with the rest of the world, demand for Chinese workers is growing. While improvements in China’s higher education system have led to growing numbers of entry-level white-collar workers, there are continuing shortages of both mid-level and senior-level managers and increasing shortages of blue collar workers. The way in which these issues develop and are resolved will have a large impact on any firm looking to expand or get involved in China.

I. CHINA’S HR MARKET: WHITE COLLAR WORKERS

A. ENTRY-LEVEL WORKERS
For companies looking to hire entry-level white collar workers, China’s HR market is more promising than ever. The number of Chinese graduates from all fields of study entering the job market is skyrocketing, and fierce competition for jobs has led to flat wage levels. To be sure, there is a substantial difference in the prospects of graduates based on the university they attended, their English level, and the quality of their work experience (if any). However, the general trend is that that this group has been growing, keeping wages flat and providing employers with a large pool of talent.
China has traditionally had very low levels of higher education; 50 years ago, only two out of every 10,000 Chinese people received a college education. That percentage has increased substantially since then, more than doubling in the last decade alone. The class of 2005 is estimated to be 3.4 million, an increase of 600,000 from 2004. According to China’s Ministry of Education, the proportion of 18-22-year-olds attending Chinese universities last year was 15%, compared to 7% in 1995.
These increases mean that the Chinese workforce is significantly better educated than just a few years ago – but it also means that the competition for entry-level white collar jobs is much fiercer. China’s economy has been growing at a rapid pace for more than 20 years, but economic growth has been outstripped by the growth in higher education, and there are not enough jobs to go around.

According to Chinese government estimates, nearly 800,000 of the 2004 college graduates were still jobless in September 2004. There are some jobs available, but graduates expecting a fast track to riches and a comfortable life have turned down jobs they feel to be below them. A Chinese university survey estimated that more than half of the class of 2003 that was still unemployed at the end of the summer after graduation had been offered jobs but had refused them. College education used to mean a guaranteed high-level job after graduation in China, but the move to a market economy, the slimming-down of state-owned enterprises, and the swelling ranks of university graduates has made the job market much more competitive, despite China’s economic growth and the entrance of many foreign companies.

The expansion in higher education in China and the relative lack of jobs means that companies have a large pool of qualified entry-level candidates from which to choose – especially if companies need technical workers. Despite high levels of college enrollment in the US, there were less than 60,000 engineering graduates in 2002, or 5% of all college graduates. In contrast, China graduated 219,600 engineers in 2002, which represented 39% of all college graduates. Nearly 60% of all degrees awarded in China were in engineering and the physical sciences, compared with only 17% in the US. In 2004, 4.2 million new students enrolled at Chinese universities, as China surpassed the US in terms of total number of students enrolled. China is rapidly building up a large, well-educated technical workforce. However, China’s emphasis on technical skills and science degrees means that there is still a slight shortage for entry-level positions in areas such as sales and marketing.

B. MID-LEVEL MANAGERS
As the number of entry-level workers grows, the number of mid-level managers is growing quickly as well. In the 1990s, China experienced rapid growth in both higher education and foreign investment. Many Chinese graduates from the 1990s worked for foreign companies that had begun entering China, and now they have 5-10 years of quality work experience. But while this group continues to grow, increasing the number of mid-level managers, demand is still outstripping supply. As foreign companies enter and expand their operations in China, they need mid-level managers to run their offices and factories. Because of the high level of direct interaction with the local workers, local mid-level managers are ideal. Local Chinese now fill almost all mid-level white collar jobs – and some are now entering the upper mid-level. For the best mid-level managers (local Chinese from top universities with 5-10 years of work experience at leading foreign companies), there is still very stiff competition among companies. Five years from now, when the current group of college graduates gains significant work experience, competition for mid-level managers may ease.

C. SENIOR MANAGERS
China has dramatically improved the quality of its workforce, but it still lacks a large pool of very experienced senior managers. The sweeping changes China implemented in its reform of the higher education system have only been in place for a few years, and the beneficiaries are young graduates fighting for entry-level jobs, not senior-level employees with the requisite experience to be effective senior executives. According to a 2004 survey conducted by the American Chamber of Commerce in Shanghai, along with six other chambers of commerce, 40% of foreign companies report having trouble filling top managerial positions for their operations in China. The demographic most likely to serve as senior managers – Chinese in their late 40s and 50s – went through a severe interruption in their education during the Cultural Revolution from 1966-1976. Partly because of this, many lack the necessary education and training to serve as senior executives.

Many MNCs began by using expatriates as managers in China but are now trying to transition to local managers, returnees, or other overseas Chinese who provide good experience at a lower cost. This has led to stiff competition between firms for a limited number of top level Chinese executives, driving wages up to Western levels in some cases. Adding to the problem has been the entrance of local Chinese firms into the market for top management talent. A long-time victim of “brain drain”, as Chinese talent was poached by multinational firms, China is now beginning to enjoy a “reverse brain drain”, as some senior management executives are leaving their posts in foreign firms in China and switching over to Chinese firms that offer dynamic growth prospects, greater opportunities for advancement, and increased compensation. Firms looking to become involved in China should recognize that, while China has a huge population and an increasingly well-educated workforce, it is becoming more difficult – and more expensive – to attract top-level management. As China continues to develop, the composition of its workforce will no doubt adjust to meet the demands of the market, but currently China lacks the senior managerial talent necessary to lead the growing number of educated workers.

II. CHINA’S HR MARKET: BLUE COLLAR WORKERS

For foreign companies looking for cheap factory labor, they may be surprised to find that China may not retain its dominant position forever. Recently, companies in southern Guangdong province, a hotbed of foreign direct investment (FDI) and labor-intensive manufacturing, have complained of labor shortages. Despite China’s population of 1.3 billion, much of which remains underemployed in the agriculture sector (there are an estimated 170 million surplus workers out of the 800 million people in China’s rural areas), the appeal of becoming a migrant worker and traveling to find a job in a coastal city has dropped. According to a report from the Chinese policy research institute of Dongguan, a main manufacturing center and FDI recipient in Guangdong province, there is a shortage of nearly two million migrant workers in the Pearl River Delta region (the large manufacturing hub in southeastern China, directly north of Hong Kong) alone. While the region has long had a shortage of highly-skilled workers and managers, the shortage of manual workers has only emerged over the last several years.

While some claim that the shortage is specific to southeastern China, arguing that other regions such as Shanghai are still attracting large numbers of factory workers, others point to deeper structural problems. China’s implementation of special economic zones (SEZs) on its east coast in the early 1980s created an extremely successful system where workers traveled hundreds, sometimes thousands, of miles to get factory jobs. Now, economists are positing that this system may not be sustainable, and that factories may have to move to the regions where the workers are located, not vice versa.

Just how serious is the growing shortage of manual labor? According to the People’s Daily, China’s state-run newspaper, China now has 88 vacancies for every experienced skilled blue collar worker and 16 vacancies for every factory technician. This is leading to rapidly increasing wages on China’s East Coast, prompting some corporations to move to China’s cheaper inland regions or to Southeast Asia (especially Vietnam). As the expected demographic changes continue to unfold, the situation could worsen. The effects of China’s one-child family-planning policy, implemented in the late 1970s, are now being felt: the number of people between the ages of 15 and 19 is predicted to decline from 124 million to 103 million by 2010.

Multi-national corporations, with better reputations and better working conditions than local, Hong Kong, or Taiwanese companies, have been more successful in recruiting and retaining blue collar workers. And some MNCs have been successful in attracting these workers by offering perks and increasing worker satisfaction. But while China remains the “factory of the world”, labor shortages and rising wages – especially on the East Coast – will undoubtedly affect the strategies of firms looking to use China as a manufacturing base.

CONCLUSIONS

An examination of China’s job market reveals several unexpected developments. First, despite its status as a developing country, China is producing a surprising number of university graduates, especially in technical fields. These new graduates are flooding the market, making talent plentiful and cheap for a number of different industries. Second, although the number of experienced local mid-level managers is growing quickly, there is still a supply gap, as foreign companies’ demand increases. At the middle white collar levels, supply may catch up with demand when the current group of college students graduates and gains work experience, but this will take at least several years to happen. Third, despite its incredible economic success and substantial improvements in education and training, China still has a severe shortage of top-level managers. Finally, despite being the world’s largest country, with 1.3 billion people and nearly 200 million surplus workers, China is experiencing a shortage of manual laborers on the East Coast. This is affecting factories’ production, increasing their prices, and adding to the difficulty of doing business in China. In short, while China has been successful in educating the engineers to innovate and design new generations of high tech products, it soon may not have the workers needed to produce them or the managers needed to supervise the projects. While firms should not let these developments keep them from entering China, they should be aware of difficulties they may cause.