The effect of urbanisation on labour and skills — the largest threat to China’s aspirations for continued growth

The mass influx of people into China’s urban areas over the coming years raises an important question: where will they all work? Elisa Mallis, Head of Executive Coaching at Management Development Services (MDS) and Chair of the European Chamber’s HR Forum from 2011−2013, takes a look at the effect the phenomenon of rapid urbanisation will have on China’s workforce. While clearly a huge challenge, if dealt with correctly she says it will boost China’s economy and their ability to innovate.

They are coming, and they all need jobs

As the 17^th Party Congress in China made clear its aim to quadruple per capita GDP by 2020, urbanisation was chosen as both the vehicle and the driver that will deliver continued economic growth, not only for China but for the entire world. The planned urbanisation in China is unprecedented: 350 million people will be added to China’s urban population by 2025 — more than the entire population of the United States; and one billion people will be living in Chinese cities by the year 2030.

How will the enormous pressures of such rapid human migration play out? According to a recent report from the McKinsey Global Institute, Preparing for China’s Urban Million, these pressures can be grouped in four categories: land and spatial development; resources and pollution; labour and skills; and funding.  There are many reasons to believe that among these four the biggest threat to this process is, in fact, a human capital challenge — namely labour and skills.

This category raises three prominent challenges: an uneven spread of talent; a lack of practical skills required for higher-value jobs; and a lack of innovative potential and leadership. In 2011, human capital came up as the number one challenge for CEOs in China for the first time according to the Conference Board’s CEO Study.

If urbanisation is to drive growth the government will need to significantly increase the number of higher-level jobs available.  China’s number of university students will triple by 2025; however, they will be unevenly spread around the country, as many will continue to gravitate to top-tier cities. This will increase the difficulty of finding the right people with the right skills that are able to fill the higher-level vacancies in second- and third-tier cities.

When we consider the practical skills required for higher-value jobs in China it is important to consider that the average entry- to mid-level manager is on average 10 years younger in China than their European counterparts; the gap is not only due to lack of capability, it is due to a lack of practical experience too. Several studies show teamwork, taking responsibility and communication skills as lacking compared to global norms.

Another unique phenomenon contributing to this is a generation Y and Z consisting mainly of children who do not have siblings. As Generation Y and Z now make up over 60 per cent of the workforce, it’s important to understand the limitations of a very bright and highly ambitious generation who for the most part had several adults to help them solve minor day-to-day problems that other generations would have to work out on their own or with the help of a sibling.

As highlighted at the European Chamber’s Human Capital Conference in 2013, as China shifts from a manufacturing economy to a knowledge economy, a key leadership requirement is the ability to innovate. This year’s Organisation for Economic Cooperation and Development (OECD) report for China highlights that by 2010 China’s expenditure on research and development (R&D) more than doubled over the period 2005−2010 to USD 162 billion. This placed it only second to the United States and accounted for 1.8 per cent of GDP — slightly exceeding the OECD median. China’s expenditure on R&D is forecast to be at 2.2 per cent of GDP by 2020.

China also has the world’s largest pool of researchers, and rapid progress has been made in terms of education levels, especially among those who are 25 to 29 years old. So we should not underestimate the potential to innovate in China. However, the above metrics are all inputs to innovation and when we consider outputs we see that progress is uneven: with triadic patents quite low, industry and science relationships are underdeveloped, and innovative entrepreneurial activities remain constrained by restrictive regulations and administrative burdens.

A study from the Management Research Group that collected data from managers and leaders across a number of companies in China and examined 22 leadership practices found that Chinese leaders are persuasive, tactical and good at control and structuring. However, their ability to innovate is lacking.  And when we look at the supply of innovator talent in general in China, something that SHL’s 2012 Talent Report highlights, we see that there is certainly a gap behind mature economies and some other Asian countries.

Based on the current state of these three challenges to labour and skills it seems more likely that urbanisation will result in a saturated job market with greater unemployment, rather than the better and larger pool of job applicants that companies in China are hoping for. There are a few areas where more radical action is needed to address these challenges before it’s too late.

First, strategic initiatives to more evenly spread talent must be put in place. Government and business must come together to develop more programmes that will provide significant incentives for top talent to pursue jobs in second- and third-tier cities. A strategic assessment of which skills are available where can also help businesses to use reverse mobility, moving the work and the jobs to where the people are, rather than the other way around.

Looking ahead 10 years at the various urbanisation scenarios will be important in determining where R&D centres, knowledge and innovation hubs, and other business functions should be established. With the rapid acceleration of technology, remote and flexible working can also significantly alleviate mobility issues, requiring less travel and enabling workers with key skills to work from remote locations. At the moment remote and flexible working is significantly underused in China, especially within Chinese companies.

Both the practical skills and innovation that businesses need in their workforce must be instilled much earlier on. Again, government and businesses must come together so that more practical learning to develop these skills can be included early on within the education system. Multi-national, privately-owned Chinese companies and state-owned enterprises can be doing much more to offer early training programmes to university students that will serve as an apprenticeship to prepare them for the practical skills needed in the workplace.

Specifically programmes to boost innovator potential and a global mindset must be a requirement in school as well as in company learning and development programmes. To be effective these programmes can no longer rely on traditional training methods, but should leverage a blended learning approach, combining live and virtual training, coaching and ‘live’ project work.

Human resources departments also have a critical role to play in tackling these challenges. As they try to do their best to attract and retain the right people, they will need to stretch outside their comfort zone to accept and adapt to the needs of China’s Generations Y and Z. Many are expecting it to be the other way around, for Generations Y and Z to eventually adapt to the mindset of their generation.

However, the HR Directors and organisations that are ahead of the curve and step into the shoes of the 20-somethings are the ones who will win the war for talent in China. To get it right will require a balancing act, providing a great deal of support and guidance, along with a great deal of flexibility and no longer ‘telling people what to do’. Evidence shows that creating an innovative, enterprising and caring culture is what will raise both engagement and productivity.

Although the challenges are significant, we should not underestimate China’s potential to overcome them. As Professor Bruce McKern from CEIBS states, “Western firms’ preconceptions about China’s slowness in radical innovation are misplaced. They must prepare for a tsunami of competition from China-based multinationals, which increasingly see the markets of the developed world as their targets. Multinationals must actively participate in innovation in China with the aim of using China as a platform for global innovations.”

I believe the same is true when it comes to the upcoming pressures on labour and skills. The two important key questions for government and business to keep asking along the way are: “How can urbanisation help us to accelerate the development of the talent and skills we will need in 10 and 20 years time for continued growth?” while at the same time, “How can urbanisation lead to the improvement of people’s livelihoods?”  In the end, it’s all about people.

MDS is a leading training and coaching organisation specialising in large-scale and customised leadership and management development programmes since 1995. MDS has an outstanding team of highly experienced local and international coaches and trainers. Combining Western experience with the rich tradition of the Asian cultures in which we operate, we enable senior and middle managers all over the Asia Pacific Region to achieve their full leadership potential.