One Billion People and Still No One to Hire

by Angie Mak, 18 March 2010

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As early as 2002, China was already suffering from a shortage of factory workers. “Before, people talked about China’s unlimited labour supply,” Zhang Juwei, deputy director of the Institute of Population & Labour Economics at Beijing’s Chinese Academy of Social Sciences, observed four years later. “We should revise that: China is facing a limited supply of labour.”

But the shortage eased last year as orders for Chinese-made goods dried up because of the global economic crisis, putting an estimated 25 million workers out of work, according to Hong Kong’s South China Morning Post. Now that a moderate recovery has begun in the U.S. and growth is quickening in emerging markets, however, China’s factories are again feeling the pinch.

From textile and toy factories in the south to corporate headquarters and research labs in Shanghai and Beijing, businesses are finding that their number one challenge today is finding and keeping good workers. Hiring has become monumentally difficult, especially in the Pearl River Delta, and staff turnover rates have skyrocketed for several reasons.

It’s all a big headache for CFOs in China and those in Hong Kong, Taiwan, Korea, Singapore, Japan and other foreign companies that have manufacturing and other units in the mainland. They have already had to budget for higher wages after the 2008 Labour Contract Law came into force. It had caused a spike in labour costs by around 20% for many businesses, or at least those that fully adhere to the regulations.

With the latest shortage, finance managers are being forced to authorise even steeper raises. Some companies are claiming to have raised salaries by 30%, hoping to bring in more people. Is it working? A production executive at a printing business in Shenzhen, who has worked with staff development and production lines in China’s factories for a number of years, doesn’t think so.

“Those offers usually apply to seasonal jobs, not year-round ones,” he told CFO Innovation. “That’s why workers in the more remote provinces would rather stay in their home area, instead of coming out to Shenzhen or Dongguan.”

What Works

From his years managing factories in the mainland, this person has learned what works best in China when labour is short. The first recourse is to outsource part of production. “Even though all factories are short of staff now, there’s always a lull, when there are no orders of their own,” he points out. “If the manufacturing processes are the same, factories can offer to take some of the orders off other businesses’ hands.”

But there’s a strategy to choosing a partner factory, he warns. “We don’t work with anyone who can compete with us or steal our client.” That means either a smaller factory or one that doesn’t normally manufacture products in the same industry. Then there are factories that exist purely to piggyback on other manufacturers’ orders, usually sweatshop-style establishments. “Those are unlikely to become competitors because they don’t have R&D or customer service departments, just production lines.”

How is the profit margin affected if part of the order is farmed out? “Of course, we’d still want to earn our usual 10-20% profit, but it’s likely that the cost of outsourcing part of the order means we don’t earn anything at all for that entire bill,” he says. “But this is what we need to do or else we’ll lose the customer to a competitor.”

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