But a new report from McKinsey questions the common assumption that China's manufacturing dominance will inevitably lead to dominance in other areas. It says that in 2003 China had roughly 9.6 million young professional graduates with up to seven years' experience and an additional 97 million people that would qualify for support staff positions - a phenomenal workforce.
But despite this, multinational companies are finding that few of China's graduates have the necessary skills for services occupations, the report says. It cites interviews with 83 human resources professionals involved with hiring local graduates in low-wage countries, who report that fewer than 10% of Chinese job candidates, on average, would be suitable for work in a foreign company in nine core occupations, including engineers, finance workers, accountants, quantitative analysts, life science researchers, doctors and support staff.
China has 1.6 million young engineers, and the profession comprises 33% of the country's university population. Yet Chinese applicants for engineering jobs face a drawback because of the bias of the country's educational system towards theory. While engineering graduates in Europe and North America work in teams to achieve practical solutions, Chinese students get little practical experience in projects or teamwork, according to the report. As a result, its pool of young engineers considered suitable for work in multinationals is just 160,000 - no bigger than the UK's.
In other occupations, poor English remains the biggest reason Chinese applicants are rejected, the report says: only 3% of them have English skills good enough to make them candidates for general services positions. Cultural differences between China and other countries exacerbate the problem even further. And while a willingness to work long hours will compensate for deficiencies in the suitability of China's talent in manufacturing, it is only likely to make a marginal difference in the service industry, the report says.
In addition to the shortage of suitable candidates, companies wishing to set up offshoring operations in China face more competition for talent than in other low-wage economies. While in India and the Phillipines, working for companies that provide off-shore services is regarded as a good option, the fast-growing Chinese domestic market is providing attractive opportunities for suitable graduates, further shrinking the available talent pool. This applies to managerial occupations as well as skilled non-managerial jobs, the report claims.
If China wants to achieve its goal of becoming a consumer-oriented service economy, it must raise the quality of its graduates. This can partly be achieved by changing the way China finances university education to focus more on quality than quantity, the report argues. Significant improvements to the quality of English language instruction would also make a big difference.
But responsibility for improving the quality of the Chinese workforce does not just lie with the Chinese government, according to the report: foreign companies locating in China could also invest more in training and developing the talent they need. It cites the example of Microsoft, which outsourced part of its web-based technical support to Shanghai Wicresoft, a 400-employee joint venture with the Shanghai municipal government. It hired ten native US English speakers to teach their Chinese co-workers about US protocol and writing style. Other foreign companies are developing management training courses, sometimes in collaboration with local business schools, to upgrade the skills of existing middle and top managers.
The report urges companies to work with Chinese policymakers and university leaders to bring university curriculums more in line with industry. Microsoft has already formed partnerships with four universities in China to establish software labs where students learn practical software development skills.
If such efforts are replicated by all foreign firms operating in China, and matched by genuine reform of the country's educational system, China's looming labour shortage could be averted, according to the report. This will enable it to fulfil its economic growth through a steady migration of employment up the value chain, it says.
China's Looming Talent Shortage
Diana Farrell and Andrew J Grant
Review: Nick Loney