China is changing fast, and in ways that will challenge business as usual. For one thing, demographic trends mean that the absolute number of workers is beginning to decline – by more than 3 million people in 2012. And migration will not entirely fill the gap: so many people have already moved from farms to cities that the current flow is unsustainable. Also, places like Vietnam and Cambodia are beginning to compete with China on lower-value manufacturing, as wages rise sharply. In the Pearl River Delta, for example, manufacturing-labor costs rose 11 percent in 2011 and almost 8 percent last year. This is, in many ways, a good thing; indeed, China wants to move up the value chain, which is how living standards rise. But there are consequences, both intended (richer workers) and unintended (skills shortages).
At the high end of the labor market, despite the remarkable increase in the number of tertiary graduates in the last decade, the demand for skilled labor is likely to outstrip the supply by 24 million people in 2020 (8 million university graduates and 16 million vocational). McKinsey estimates that if China does not bridge this gap, the opportunity costs could be more than $250 billion (about 2.3 percent of GDP).
China knows it has a problem and has outlined ambitious plans to raise skills. Those doing business in China, however, cannot wait. Companies need to take action themselves, but often do not know how to do so. McKinsey recently completed research on the transition from education to employment involving 100 case studies in 25 countries. Based on our work, both globally and in China itself, this article details successful programs and sets out several key principles for companies to follow.