Don't Be Afraid of Offshoring

Diana Farrell of McKinsey Global Institute takes a close look at the workforce in China and India and says U.S. workers have little to fear

by Diana Farrell

Both India and China have profited handsomely from their young, able, and seemingly unlimited workforces over the past two decades. India has built itself into a global services powerhouse, moving from simple customer help lines to more complex tasks such as software design, investment banking research, and medical diagnosis. And while far more Chinese work in factories than services operations, a number of pharmaceutical companies and software houses have recently set up research operations on the mainland.

The legions of college grads in both countries suggests they can meet demand for services for years to come -- to the delight of multinationals wanting to buy those services, and to the alarm of white-collar workers in North America and Europe. But a closer look at the numbers tells a somewhat different story.

First, labor pools in China and India are not nearly as deep as they seem. Although policy changes in both countries could ensure they fill up faster, that shouldn't unduly worry workers in rich countries. Only a small percentage of jobs in many fields could possibly be performed overseas, and employers only plan to send a a fraction of those offshore. The upshot is that offshoring in Asia can continue, boosting Asian economies, while its effect on average wages and employment in high-wage countries remains negligible.

PAPER TIGERS.

Research carried out by the McKinsey Global Institute found that in 2003, China had roughly 9.6 million professional graduates with up to seven years work experience, and an additional 97 million people who would qualify for support staff positions.

On paper, they all look like strong candidates for jobs in the nine occupations we studied: engineering, finance, accounting, quantitative analysis, life-science research, medicine, nursing, and office support. But on average, fewer then 10% of these potential job candidates in China were suitable for work in a foreign company, according to our survey of 83 HR professionals.

China has 1.6 million young engineers, more than any other country. But we found that the pool of young engineers considered suitable for work in multinationals is just 160,000 -- no more than in Britain. The main drawback to Chinese engineers, our interviewees said, is the educational system's bias toward theory. Compared with engineering students in Europe and North America, who work in teams to solve practical problems, Chinese students get little experience working on real projects as teams.

HARD TO REACH.

For other occupations, poor English was the main reason our interviewees gave for rejecting Chinese applicants. Only 3% of them were considered suitable for generalist service positions. Overall communication style and cultural "fit" are also difficult hurdles.

Another, more practical complication is that it's hard for multinationals to reach Chinese graduates. Well over 1,500 colleges and universities produced the 1.7 million students who graduated in 2003. But fewer than a third of those have studied in any of the top 10 university cities. Just one quarter of all Chinese graduates live near a major international airport.

India's pool of young university graduates is deeper, but even so, shallower than it seems, and for similar reasons. Estimated at 14 million, India's supply of young professionals is 1.5 times the size of China's, almost twice that of the U. S., and topped up by 2.5 million new graduates every year. But our HR professionals judged that only between 10% and 25% of the country's graduates would be hired by multinationals, with the proportion varying by field of study.

TALENT SHORTAGE?

Only about 10% of Indian students with generalist degrees in the arts and humanities is suitable, compared with 25% of all Indian engineering graduates. The graduates' different levels of skill reflect the varying quality among India's universities. The best are superb, but many of the rest are indifferent, and the best graduates from the top schools often emigrate.

We have found that both countries already face a shortage of talent in certain key management occupations.