Help Wanted: China's Labor Shortage

Although China’s factories and assembly lines are becoming an increasingly important part of the global supply chain, manufacturers must still overcome a major obstacle: finding enough skilled workers. Shortages of high-level human resources will be a key challenge for advancing China’s industries to the next stage. Strategic industries in the automotive, energy, and electronics sectors have blossomed in China over the past decade, and most international suppliers have invested in China to reduce their manufacturing costs and gain a local presence in the booming Asian market. But now investors are wary of a market that may not be able to back its large scale productive capacities with a cheap, consistent workforce.

The main advantages of locating in China are its low labor costs and the country’s immense local market. Historically, domestic industries have focused on low-end, high-volume products, as few supplies are capable of producing high-end parts that require innovative and dynamic technologies. Today, Chinese companies are catching up to their overseas competitors. They see that the demand from downstream manufacturers is essential for transitioning to high-tech production and are working to upgrade their capacity and efficiencies to produce more complicated devices. A number of Chinese Original Equipment Manufacturers (OEMs) are expanding their businesses to mobile phones and to communication devices that incorporate more advanced equipment to compete with Chinese/foreign joint ventures and wholly-owned overseas companies.

Meanwhile, although the manufacturing of low-end products continues to be transferred to China, this trend may be slowing. Producers are still increasing the volume of products they make, but revenue is not growing at the same rate, so average selling prices (ASPs) continue to decline. Rising production can eventually result in excess supply, which will spur further pricing drops. China’s most ambitious suppliers are aspiring to upgrade their product capabilities before the lower-end products they now make become commodities. To do this they are boosting their pay scales in order to attract more educated workers and investing in manufacturing capital.

Here’s where this disconnect is hindering growth. Companies developing advanced product lines are encountering tough obstacles in hiring highly skilled workers, simply because the services of those workers are in high demand and the supply is extremely limited. Regional governments are addressing these issues by collaborating with universities to train students in high growth industries. Since this problem will take years to correct, China’s factories should hire certain managers and arrange worker training first, before facilities are constructed. In many ways this is a good problem to have, at least domestically. It means that China’s manufacturers are making moves into more high tech, lucrative market segments. Slower progress may be good to prevent these industries from overheating, as many predict.

Photo Credit: Saad Akhtar