Chinese companies need to prepare for a shrinking talent pool

China’s population is shrinking faster than expected. The long-anticipated population decline will start in 2027, according to the Chinese Academy of Social Sciences. That’s three years earlier than most predictions.

Among the biggest implications of the coming drop in population is the end of plentiful labour. Over the past 40 years, companies benefited from the seemingly endless scale of the Chinese workforce. Now, that era is drawing to a close, and companies need to prepare.

In addition to the effects of China’s decades-long low birth rate, due to the one-child policy, the number of people entering retirement will swell. By 2027, an estimated 324 million people in China will be over the age of 60, or 22% of the population, according to the World Economic Forum's report, 'Future of Consumption in Fast-Growth Consumer Markets: China'. There simply will not be enough new workers entering the workforce to replace them.

To address the situation, Chinese companies are making significant investments in automation. This will help ease the problem for some segments of the workforce. Automation will create jobs in the short term to build automated equipment and introduce new job functions in supervision and monitoring.

However, it ultimately will result in job loss (and wage suppression) across industries. Automation has already replaced the jobs of up to 40% of workers in some Chinese industrial companies.

The problem is, automation will primarily reduce the need for middle and lower-income employees. The major concern for companies will be finding and retaining top talent in professional roles.

The pace at which displaced workers retrain and migrate towards higher-skilled jobs will likely be too slow to alleviate shortages, according to research conducted for Bain’s report, ‘Labor 2030: The Collision of Demographics, Automation and Inequality’.

The challenge for companies will be attracting, growing and retaining highly skilled talent and maximizing worker productivity by rethinking how their businesses are structured.

The situation will be more vexing as the requirements for top talent change in the decades ahead. For example, the fast and frequent transformation of the consumer market in China over the next decade will pose a great challenge to companies’ talent strategies. Businesses will need to find talent with the appropriate hard skills, such as data science.

Yet, that may be the easy part. The harder task will be finding talent with the fundamental soft skills of self-motivation, entrepreneurship, creativity and an eagerness for lifelong learning.

The hardest part is that businesses will not only need to find best-in-class talent in an ever-changing landscape of evolving talent needs, but will also need to retain them, reskill them as required, and keep them motivated. The best companies will rethink their talent strategy through the entire process, from requirement definition to recruiting, and from role allocation to talent retention.

There is a huge case to be made for investing more in people. In fact, our research found that companies could improve productivity if they stopped systematically underinvesting in human capital. The most direct and obvious investment is increased wages, which can help companies reduce employee and customer churn, and correspondingly lower employee hiring and customer acquisition costs. The compounding effects of increasing customer and employee advocacy more than offset the higher cost of wages.

However, that is just the start. Beyond wages, other forms of investment in human capital include education and training, improved healthcare, and other less obvious investments, such as the time and space to explore new ideas and professional development opportunities.

In researching material for their book, Time, Talent, Energy, my colleagues Michael Mankins and Eric Garton found that such investments do indeed pay off: the top-quartile companies in the study unlocked 40% more productive power in their workforce through better practices in time, talent and energy management.

Chinese companies need to start now by upping their game in how they attract their highly skilled human capital across their time (hours worked), talent (skills and capabilities they bring), and energy (engagement and passion). We know that great ideas that drive breakthroughs in productivity come from people with the time, talent and energy to innovate.

While the path to employee inspiration requires multiple dimensions, let’s look at the important role that senior executives and the HR team can play by taking three immediate actions that would make a material difference:

⦁ Systematically eradicate the factors that steal time from employees and make it harder for them to do their jobs (e.g., zero-base time budget, simplify the organization). Companies should seek to eliminate organizational drag – all the internal complexity that leads to inefficient and ineffective interactions. Giving managers more time to do deep thinking can unlock innovations that can have a significant impact on productivity.

⦁ Redefine ways of working and build a working environment that thoughtfully balances the twin performance-enhancing goals of accountability and autonomy.

⦁ Help employees link their roles to the broader company’s insurgent customer mission, one that is espoused and modelled by inspirational leaders. We believe that inspirational leadership is within the reach of all management and can be learned and developed.

Perhaps the most transformational thing a company can do for its workforce is to invest in creating jobs and working environments that unleash intrinsic inspiration. This is the gateway to the discretionary energy that multiplies labour productivity.

An inspired employee is more than twice as productive as a satisfied employee and more than three times as productive as a dissatisfied employee. Yet, only one in eight employees are inspired. We measure organizational energy through employee engagement, and despite decades of investment in engagement programmes in some markets, levels of engagement remain systemically and stubbornly low.

Also, advancing amid a shrinking pool of top talent means the organization will need to change; the new structure must allow for seamless coordination among functions, which is something that traditional organizations rarely accommodate.

Today, many companies are organized around function-specific key performance indicators, and their reporting lines do not support the cross-functional work required by digital advances in marketing, sales, consumer services, R&D and the supply chain.

Properly designing and resourcing mission-critical roles will change the rest of the organization. Budgeting and planning will need to be revamped. Firms will not need as many professional managers as they commonly have today. Managerial spans will widen considerably as more information flows become peer-to-peer rather than hub-and-spoke.

The definition of leadership will change, with multiple tracks available. Some tracks will recognize and reward the efficient management of routine processes, while others, just as highly prized, will value the coaching and development of apprentices as they migrate from one role to another.

As competition grows for scarce talent, leading companies will invest more to attract, grow and retain high-end talent and ensure that their workforce is as productive as possible. It is never too early to begin solving China’s worsening talent shortage.