Chinese companies must focus on acquiring talent to stay ahead in the race

Since the reform and opening-up, Chinese enterprises have made several bold moves in expanding hard assets (size, capital, equipment, brand and business model), and achieved noteworthy results. Talent has for long been just an accessory for acquiring these hard assets.

There is a Chinese saying: "Fixed barrack, floating soldiers". What this means is that if there is a good business model, then the capital will take care of itself automatically and there is no need to make huge investments in acquiring talent. This disproportioned view has unfortunately become a staple for many entrepreneurs.

Today China has begun to gradually lose its advantages in labor costs. It will be difficult for the Chinese economy to sustain itself in the long run if it persists with the current economic model.

China's economy must change from a labor-intensive model to a high value-added one. Similarly, the growth engine for Chinese enterprises should be soft assets (talent) rather than hard assets.

Enterprises must increase their research and development outlays and put extra emphasis on fostering innovation so as to boost overall brand competitiveness. This is important, as failure to do so will see Chinese companies losing out to nations like India in the global industry chain.

If the transformation goes off well, China will either become the world's leading product innovator or the founder of a global brand. If China achieves both, it will undoubtedly be the global economic leader. If the transformation fails, then the Chinese economy cannot prevent spiraling downward.

Talent asset reserves should be an important determinant in China's industrial transformation efforts and its endeavor to occupy the top slot in global R&D and marketing. But China also cannot take too much of time to transform its industry. According to a Deutsche Bank report on China, India and the global talent shortage, China's labor force will peak at 998 million in 2040 and shrink after that. India's labor force will grow to 1.1 billion in 2040. The comparative labor advantage of Chinese enterprises will gradually be replaced by India, Vietnam and other nations.

China is a country with a large number of college graduates every year, but its education system still does not produce enough qualified talent to meet the needs of enterprise upgrades. Hence we can say that China is still not a talent-rich nation.

Global consultancy firm McKinsey's report on the talent in emerging markets shows that only 10 percent of China's engineering and financial graduates have the employment values required by global companies.

Chinese college students tend to have excessive theoretical knowledge but lack the ability to solve problems in a work environment, a trait that is not well regarded by employers. The number of MBA graduates from China who are capable of management functions is less than 20 percent.

Such an extreme talent shortage will pose serious impediments for development of high value-added industries.

Take the IT outsourcing services industry as an example. Chinese universities every year produce 160,000 technical talents who are capable of working in a globalized context. The lack of English proficiency and practical experience has made 90 percent of the engineering graduates incapable of working effectively for multinational IT companies.

Due to the talent shortage, high value-added multinational IT service revenue accounts for only 10 percent of the total revenue of China's IT services industry, while the rate is 75 percent in India. Sixty-five percent of China's multinational IT services are derived from low value-added markets like Japan, while India has a monopoly over the high value-added markets of Europe and the US.

According to KPMG, the total revenue of the global IT outsourcing industry will exceed $1 trillion this year. China takes up a mere 10 percent, while India's share exceeds 55 percent. Chinese enterprises must cultivate good talent assets, or they will not just lose global market share, but even their own domestic market. An example for this is Indian IT outsourcing giant Infosys' plan to hire more than 6,000 people in China over the next five years.

The trend of Chinese enterprises' chasing short-term profits has also led to a severe shortage of talent. Excessive liquidity without enough talent support will drive capital into speculative fields such as real estate, leading to serious economic leverages and bubbles.

If China is able to make a breakthrough on talent assets, its significance will be far greater than industrial structural upgrades. It will create a significant number of middle-class people who can stimulate domestic demand and reduce the income gap. The trickledown effect has been eroded by the income gap, such that China's domestic demand lags GDP growth. Building talent assets is often a fast-track route to prosperity.

Talent assets are the most powerful leverage for a company's sustainable development, and capital will not be needed to rely heavily on financial leverage. If a company is positioned well in talent assets, there will be fewer copycats, and its business model can survive even in an economic crisis.

The author is a researcher at the Beijing New Century Academy on Transnational Corporations.

(China Daily 08/31/2012 page7)