Rising Tiger, Crouching Dragon

But the dragon’s worries don’t end here. Rising costs of manual labour and a severely limited pool of managerial talent, coupled with China’s rapidly greying demographic profile, constitute a fearsome challenge. For India, these are a precious window of opportunity.

The ‘‘China miracle’’ has largely been powered by a cheap, ostensibly bottomless pool of labour, making the price of ‘‘made in China’’ products unbeatable. In the past few years, however, the inconceivable appears to be happening. China is running out of cheap labour, and precisely in the area of maximum manufacturing demand: the Pearl River Delta (PRD).

The PRD encompasses Guangdong province and Hong Kong. It is the mainland’s weightiest economic powerhouse, churning out almost a third of the country’s exports. Packed with factories producing textiles, shoes, toys and other light industrial products, Guangdong province is currently experiencing a labour shortage of some two million workers, according to local media reports.

Comrade worker wants more
THE majority of employees in the PRD’s factories are migrants from China’s poorer interior provinces. They travel for days to find work along the coast. This extraordinary degree of mobility was a dream for businesses since it meant factories were able to cluster along the coast, surrounded by suppliers and near container ships that would take their goods abroad.

Through the 1990s, supply of migrant workers far exceeded jobs. Zhang Zhi Tao, director of the Labour Bureau in Dongguan (a city near Shenzhen), recalls the days when he had to go into the streets to persuade job seekers to return to their homes. There were simply not enough jobs to go around.

Since 2002, he says, the situation has dramatically reversed. It’s not that China has suddenly run out of workers. Rather, as Zhang explains, workers are no longer willing to sell themselves cheap and put up with sweatshop conditions.

With agricultural incomes rocketing — rural incomes rose by 16 per cent in the first half of 2004, compared to the same period in 2003 — many workers are choosing to stay at home. Incomes may still be lower than in the coastal cities, but so is cost of living.

In an effort to lure workers back to the factories, cities across the southern coast are raising minimum wages. Thus for example both Guangzhou, the capital of Guangdong, and the special economic zone of Shenzhen, recently pushed up their minimum wages by a third, to $ 83 per month.

THE upshot of the labour shortages is that while Chinese wages might remain low by western standards, other Asian countries, including India, are increasingly looking more cost-effective.

PRD manufacturers on the whole operate on thin profit margins. Rising salaries and the resultant increase in production costs could force them to either move operations to the interiors of the country, closer to workers’ homes, or alternatively move outside China to southeast Asia or India.

A move to the interiors would bump up costs of business substantially, since infrastructure is less developed and logistics more complicated away from the coast.

Relocating to other lower wage countries thus may prove to be an option. Dream International, the world’s largest maker of stuffed toys, recently announced it would hire 6,000 workers in Vietnam this year to fill expanded factories, but none in China. The company is operating at 80 per cent capacity in the mainland but it simply cannot find enough workers.

Minimum wages in India range from $ 1-2 a day, well below the equivalent wage level in China. Even in 2003, the average compensation per hour for a worker in heavy manufacturing was only $ 0.43 in India as opposed to $ 0.75 in China, according to the IMD competitiveness yearbook.

With the recent hikes in minimum wages in China, India’s competitiveness on labour costs becomes even stronger.

As the one-child society ages
GIVEN China’s population of 1.3 billion, the current labour shortages in the mainland are explained by reasons other than a fall in actual numbers. Looking 20 or 30 years ahead, demographers are predicting the supply of entry-level industrial workers will start to shrink, as a result of China’s one-child policy.

Dali Yang, professor of political science at Chicago University, calculated in a recent paper that over the next five years itself, the number of people in China aged 15-19 will shrink by 17 per cent.

According to United Nations data, China is on course to age faster than any other country in history, with the median age set to shoot up from around 32 today to at least 44 in 2040, unless there is a radical change in policy. For the mainland this means an array of age-related fiscal, social and productivity challenges.

‘‘We will soon have the social burdens of a developed country while our economic situation is still that of a developing country,’’ says Liu Hong Yen, director of the China Population and Development Research Centre. According to Liu, the one-child policy has contributed to the breaking up of traditional networks of support and caring for the elderly.

Now, faced with a situation where 400 million people will be over 60 by mid-century, the Chinese government has to create a social security umbrella. A task that is likely to prove difficult and expensive and may result in the reduction of several percentage points of its economic growth rate, beginning in the middle of the next decade.

BY contrast, India enjoys a greater demographic dividend, with the working age population expected to rise as a share of the total till 2050. According to Morgan Stanley, by 2020 the average Indian will be 29 years old compared to 37 for China.

Thus as the world’s richer nations and China confront the burden of caring for an army of retirees, India will continue to have more and more workers entering the highest producing /consuming phase of their lives. A report by Goldman Sachs forecasts that as a specific consequence of its growing population, India’s economy alone among the major economies will continue to grow at least five per cent a year for the next 50 years.

Quick, what’s MBA in Mandarin?
EVEN as the potential demographic time bomb facing China has Beijing racking its brains, the mainland is grappling with yet another labour-related lacuna. This one is on the other end of the value chain: middle and top management.

In China, Mao Zedong’s Cultural Revolution wiped out an entire generation of management potential. People currently in their late 40s and 50s grew up with an educational system in disarray and learnt that capitalism was evil. As a result, the middle kingdom is experiencing a huge shortfall in the supply of qualified and capable managers.

Foreign firms now invest some $ 1 billion a week in China. Ana Westlake, an HR consultant with 10 years experience in the mainland, points out that the majority of these are looking for top management aged around 45, with solid experience, a good education and fluent English.

The pool of talent matching these criteria is so limited, she says, that the salaries they are able to command often makes it cheaper for companies to hire expatriates, even though on the whole expats earn three to five times more than local hires.

According to HR consultancy Hewitt, senior managers in China now receive between $ 46,000 and $ 54,000 a year, while top executives can expect $ 80,000 to $ 90,000 or more.

Management consultancy McKinsey & Co estimates Chinese companies currently trying to expand abroad will need up to 75,000 internationally experienced leaders if they want to grow over the next 10-15 years. There are however only 3,000-5,000 such people available in China.

INDIA, by contrast, is an HR firm’s dream, given its ample supply of English-speaking, globe-trotting, western-style educated managers, with considerable experience in the private sector.

Harish Vasudevan, an Indian who worked as a senior level manager at the public relations firm Ogilvy’s Beijing office from 2002-04, explains managerial talent in India is better because of its longer history of private enterprise.

‘‘Private enterprise needs a return on equity,’’ he says, ‘‘this drives employees to focus on deliveries and customer satisfaction, making for better managers. India has been doing this for longer than China.’’

Moreover, although India lags behind China in basic education, it outperforms it in tertiary education. For example, China has only 95 MBA programmes, while India now has some 600 odd. According to the IMD World Competitiveness Yearbook for 2003, India ranks sixth among 30 nations in terms of its university educational system meeting the competitive needs of its economy. China ranks 25th.

Increasingly desperate for talent, even China’s state-owned enterprises (SOEs) are looking to recruit from abroad for top management positions. According to the China Daily newspaper, four of China’s biggest SOEs are currently seeking foreign talent for the positions of deputy general manager.

Westlake says she believes the problem of missing managers in China is a longterm one. ‘‘Business plans for China rarely reflect the cost and time involved in recruiting and retaining local staff. Work these in and the mainland is definitely not a cheap place to operate in,’’ she concludes.

CHINA’S challenges will not automatically translate into higher growth for India. To utilise the window of opportunity that has opened, India will require concerted policy efforts aimed at improving human capital, creating productive jobs as well as greater labour flexibility.

If India is successful in these, the dragon might finally have met its match.