Transitioning to the Next Level

By Frank Mulligan, Talent Software

They are a day late and a dollar short, so to speak, but the New York Times has the first major article that I have seen on something that has been bubbling in China for a while now: the rising cost of doing business here and the effect that it has on the world economy.

Specifically they have identified the shortage of workers, coming of the back of strong economic growth, as a big challenge for China:

Persistent labor shortages at hundreds of Chinese factories have led experts to conclude that the economy is undergoing a profound change that will ripple through the global market for manufactured goods.

This ’profound change’ has the effect of raising prices for goods, and as China is the major source of many industrial goods, this feeds into inflation in many first world countries. So it affects everyone.

Responding to Change
The obvious response is that China moves up the economic ladder, and at some level it alway has been doing this since it opened up in 1979.

There are chip plants in the inner most provinces in China now, and mechanical component makers moved out of Shanghai and Shenzhen 2-3 years ago. (Not much point trying to manufacture steel bearings in the financial capital of the country.) The textile industry was moved out of Shanghai by the government almost a decade ago and China’s Silicon Valley was set up in the university zone in Beijing.

Another option is that improved conditions in factories will bring people back to the East coast where the jobs are. Right now the balance for many people is to stay at home because the farm incomes have improved and the treatment in some factories is less than stellar. Change the balance and you will get them back on board.

There are signs of this happening as well but the danger is that companies will go with the new paradigm which the NYT identifies as ’moving to Vietnam, India and Bangladesh’. If this becomes the narrative for the media generally then China will have its work cut out to counteract it. Narratives have a life of their own and are very difficult to counteract.

Finally, companies can, and are, moving entire factories to the inner provinces in China and thereby moving production to where the workers are. For a number of years now we have watched multinational companies skip the first-tier cities like Beijing, Shanghai and Shenzhen, in favor of second-tier locations such as Suzhou, Hangzhou and Wuxi.

These cities are now also more expensive
In recent times this movement has gone deeper into the inner provinces to cities like Chengdu, Chongqing and Hefei. There is also a nice secondary benefit from this of spreading the wealth and stabilizing the country.

Opposite Flows
This works well for production line staff but it goes against the flow for professional staff who have been moving from China’s West coast to China’s East coast for the last decade. Once a professional in the inner provinces passes his master’s degree or achieves a sufficient level of English, he will be on the internet, find a job, sign a job offer and be working in one of the main cities on the East coast in a month and a half.

China can handle this problem but maybe the days of unconstrained growth are over. For years China has been relying on the improvements that arise just by taking another restriction away from people. Economic growth by executive fiat.

So perhaps it won’t be enough to throw people at the problem any more, as they have done for the past two decades. Economic growth will have to come from fundamental changes in the way business is done in China. That’s the part that the NYT nailed on the head.

Hiring will have to change too.

Comments to: frank.mulligan@recruit-china.com