It comes as something of a paradox that the world's most populous nation is facing a human capital shortage that is not only casting doubt on its ability to move up the value chain but also threatening its ability to maintain its extraordinary growth.
There may be a graduate glut but the majority of these young people have neither the skills nor the experience to fill senior and middle management roles at major domestic and transnational corporations.
The reasons behind the dearth of suitably skilled talent are well-known: education and work opportunities of many now aged 50-60 were disrupted by the Cultural Revolution; the local talent pool was depleted by China's "brain drain" of the 1980s and 90s; and the education system still favors rote learning and suppresses individuality.
But with China's continued modernization now depending on the education, skills and experience of its people rather than simply their sweat, participants in the China story are busy searching for solutions.
Overworked and underskilled
China owes its position as the world's manufacturing workshop to its never-ending supply of low-cost workers. But as it prepares to make its next leap forward, it is realizing that the skills required to build a global corporation are very different to those required to build and maintain a television set.
A recent McKinsey report paints an alarming picture of major domestic and transnational corporations hunting frantically to find senior and middle managers to operate their global multi-million dollar operations. Most critically, the report estimates that China will need 75,000 top global managers in the next decade or two, but only 3,000 to 5,000 will fit the bill.
A 2005 survey by the American Chamber of Commerce in China shows the problem has already hit, and is expected to get worse. For the first time since the survey began in 1999, surveyed companies ranked management-level human resources as the number-one challenge. This came after a 2004 survey by seven foreign chambers of commerce found that 40% of foreign companies were having trouble filling their top managerial positions.
Jeffrey J. Fuller, the Shanghai manager for Mercer Human Resources Consulting, is engaged in the often fruitless hunt for first rate Chinese executives who speak English well. "The demand for managerial talent in China is huge and it has simply exceeded the supply," he said. "Not only for multinational firms, but increasingly for state-owned enterprises too."
The entry of local Chinese firms into the market for top management talent capable of operating on a global scale is set to exacerbate the problems. A long-time victim of brain drain, China is now beginning to enjoy the reverse effect as senior management executives move from foreign firms in China to domestic operations that offer better growth prospects and greater opportunities for advancement.
Meanwhile, record numbers of Chinese university graduates are creating an equal but opposite human resources dilemma. Ministry of Education figures show the proportion of 18- to 22-year-olds at universities in 2004 was 15%, compared to 7% in 1995. Ames Gross, president of the US-based HR consultancy, Pacific Bridge, puts the graduating class of 2005 at 3.4 million, an increase of 600,000 on 2004.
"These increases mean that the Chinese workforce is better educated than just a few years ago – but it also means that the competition for entry-level white collar jobs is much fiercer," said Gross.
In fact, the competition has become so fierce the National Development and Reform Commission has declared 2006 the country's "worst employment crisis ever," as some 25 million young people are expected to hit the job market to compete for only 11 million available positions.
But the quality of these jobseekers means the numbers mask but do not solve the problems faced by the big global companies. If demand from just the large foreign-owned companies and joint ventures continues at its current rate, 750,000 graduates will be required for service and managerial positions from 2003 through 2008.
However, China will only produce 1.2 million graduates suitable for employment in world-class service companies during that period. This means foreign multinationals and joint ventures alone will take up to 60% of China's suitable graduates before demand from smaller multinationals or Chinese companies enters the picture.
Worryingly, local talent already in the domestic job market is not likely to solve the problems of firms with global ambitions, according to the McKinsey report. China's talent pool contains more than 8.5 million young professional graduates with up to seven years' work experience and an additional 97 million people that would qualify for support-staff positions. But less than 10% of these job candidates are suitable for work in key roles at foreign companies.
Pacific Bridge's Gross said the composition of China's workforce will no doubt adjust to meet the demands of the market, but currently China lacks the managerial talent necessary to lead the growing number of educated workers. "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, there is still very stiff competition among companies."
A taste for local flavors
Localization is the new buzzword in China human resources as foreign firms slowly realize it takes local know-how to really create a business that can capture the attention of the discerning Chinese consumer.
Earlier this year, Eastman Kodak Chief Executive Antonio Perez called for a less "western-centric" approach to doing business in Asia after the New York-based company misread how quickly Chinese consumers would embrace digital technology.
"The majority of our customers will not be in the West any more, the majority are in Asia," Perez said. "You're not going to be able to service them from Rochester [New York], or London for that matter. You have to have a very significant presence in Asia if you want to be a worldwide leader in consumer electronics."
For Jeannie Chiu, general manager of UK-based global financial and business software company Systems Union, local staff are vital for commercial success in the domestic market. The company has established an entire R&D network in China, responsible for everything from product development to system architecture, coding and after-sales support.
"We are very interested in the Chinese market and that is why we are here; we want to get our products really localized and geared to Chinese requirements," she said.
Kodak and Systems Union are not alone. A 2005 survey by the American Chamber of Commerce in China showed 46% of companies had localization plans in place in 2005, up from 36% in 2004. But enacting localization plans is not easy and this is largely blamed on one thing: the Cultural Revolution of the 1960s and 70s. This event was responsible for destroying the schooling of people who are now in their late 40s and 50s, typically senior management age.
To Brian Schawarz, who teaches economics, finance, accounting and human resources at Shanghai's Telfort International Business Institute, the problem is more fundamental than graduate supply chains. He believes the Chinese education system, from the primary level right through university, is simply not focused on providing the creative thinkers foreign companies want.
"They focus on memorization and passing exams," he said. "In high school there are 40 to 50 students to one class – they do not get too much opportunity to express their opinion. The traditional learning style is to listen to the teacher, memorize what the teacher says and repeat it on the exam."
Yu Tingting, an accounting major at Shanghai University of Finance and Economics, was fortunate enough to attend one of the few elite schools where change is taking place. But she is also frustrated at the education system and believes the tight competition for places at top universities is to blame as it forces students to comply. "I don't think Chinese universities do much to prepare students to work in global companies," she said.
English ability is another factor holding back local talent. The Ministry of Education now requires all students to start learning English in third grade, but bloated class sizes means individual conversation skills receive little attention. Even those who leave university with strong English skills find themselves tripped up later due to limited opportunities to practice.
China-born Systems Union Projects Manager Wayne Zhang said that tight competition meant firms should concentrate on finding people with the skills they needed first and then worry about their fit to the western way of doing business.
With this in mind, Shi Bisset, who owns a team development and executive coaching company, believes that organizations must take responsibility for developing local staff. "If you are stuck with [the Chinese education system] as we are now, organizational change is needed. We are trying to get organizations to develop a mentoring practice, not just for the first year that people leave university and join them, but as an ongoing advancement process."
But Louise Goss-Custard, executive recruitment specialist at Russell Reynolds Associates, warned that, as fast as China could develop talent, the sheer pace of growth in the country means the day when expats are no longer needed is still a long way off.
"Although most companies here have it as their ultimate goal to localize, as they should do because you want people who are close to the market, I think the continued complexity and scale of operations here is going to mean that there will continue to be talent brought in from elsewhere around the world," she said.
The massive Chinese diaspora represents an attractive source of top level executive talent capable of speaking Chinese and running major domestic and transnational corporations. These are the ethnic Chinese living in Hong Kong, Singapore, and Taiwan, plus more recent ?migr?s who have gone abroad to study and work and – until now – have seen no reason or opportunity to return home.
China has long had a liberal policy toward its nationals going abroad, particularly to study. "Even if half of those sent abroad would not return, it is better than not sending or sending less," Deng Xiaopeng said as early as 1978. However, in the 1980s, most students became permanent ?migr?s, giving up citizenship in exchange for a foreign passport, and only a trickle of students returned.
The government today encourages returnees, offering tax incentives, preferential business loans, free office space, better housing and faster promotions. China has 110 special zones and industrial parks, employing some 15,000 returnees in over 6,000 enterprises. Returnees have founded nearly all the country's high-tech companies listed on NASDAQ and all 23 national chief scientists in China are returnees.
The incentives appear to be working. Now, approximately a third of those who go abroad are returning to China every year. As many as 7.5% of all American PhD holders in science and technology are PRC citizens, and 25% of them return, up from 15% in recent years.
Some of these "sea turtles" – a pun on the Mandarin word for "returnees" – are well known. One is Charles Zhang, founder and CEO of Sohu.com, China's premier online brand and Internet portal. Another is Edward Tian, head of China Netcom, the country's second-largest fixed-line carrier. There is also Robin Li, CEO of Baidu, the leading Chinese-language search engine.
"Returnees are a force to reckon with," said Jeff Huang, an entrepreneur who spent more than 10 years in the US before setting up his own cross-border merger and acquisitions advisory firm, Chisurf Ltd, in Beijing.
"Financial institutions, like the central bank and the financial regulators, are full of overseas-educated personnel. These people have practical experience in the US and they come back to try and shape the future system and policy here from within, bringing best practices with them."
But Shi Bisset, who owns a team development and executive coaching company, argues that returnees had their own problems, citing an HR director at a multinational who said it was more stressful dealing with returnee Chinese than local Chinese.
"On the management side they are no better," Bisset said. "They have more skills but have forgotten the Chinese side of working. Instead of nurturing [local staff] they go along saying we are better than you."