The Rise of Contracting in China PART I : Why the increase?
A Contractor Taxation Report
Contracting in China
Contractor usage increasing to meet skilled labor shortfalls
In China enormous shortages of skilled workers in areas such as accounting, legal, skilled technical, IT and management is driving enormous growth in salaries. There is no end in sight as the available pool of skilled workers is growing at a slower rate than needs are increasing. With this in mind, employers are looking outside traditional permanent employment in order to meet key business objectives. Use of skilled flexible labor is rising according to the latest Michael Page surveys. Developed employment markets are characterised by a significant usage of highly skilled fixed-term workers. Could it be a sign that the China labor market is maturing?
Labor shortages in China are well publicised. China needs more accountants (300 000 is the figure most often reported) than the total number practising in the UK. In technical skillsets the trends are the same. A Yale report found Shenzen alone had more than 120 000 unfilled technical positions in 2005.
These needs are unquestionable, But how to fill them?
In mature employment economies the use of specialists - people who perform a specific, critical, project based task - is widespread. Increasingly this is happening in China too. The Shanghai Daily recently reported a rise of over 1% in the number of contracted employees since 2007. Its easy to see why. For areas which require a high degree of specialist technical knowledge or cutting edge technology like telecommunications, IT or R&D the skills simply aren't available in China. External expertise is essential. A foreign specialist is sourced and engaged for the project duration. Just another one of the 200 million people internationally who are working outside their country of origin (according to the International Migration Group).
This mass of workers - who if they formed a country would be the 5th largest on the planet - are a unique talent pool. With experience of working internationally, an understanding of global business practice, the drive to seek out and be successful at opportunities far from their homeland and a readiness for flexible work they constitute an excellent resource for employers in China. But lets not get ahead of ourselves. We'll talk more about where skilled contractors can be found in Part Two.
Growth in demand outstripping labor supply
Needs are increasing
Costs are increasing
Contracting is the solution
“96% of the CEO’s of Deloitte’s Technology Fast 500 Index expect to add to their headcount this year.” Deloitte Tech Fast 500 report
“niche engineering roles... becoming more common as manufacturing processes increase in complexity and the pressure to decrease costs increases” Michael Page Survey 2008
"Having the flexibility in terms of managing resources, and at the same time fulfilling project timelines and requirements, is important for IBM as it allows us to maintain a core group of full-time employees and yet have the flexible staffing options with contract workers," IBM spokesman, Singapore
“98% of employers predicted staff levels to remain constant or increase over the next 12 months, a rise of 40% from 2007” Michael Page Salary Survey 2008
“63% of employers in China expected to pay salary increases of 8% or more over the next 12 months, a rise of 10% from 2007” Michael Page Salary Survey 2008
"We have already been seeing [more demand for contract roles] over the last three months." IT Director at Robert Walters 2008
Why are more employers choosing contractor workers?
Contractors have higher skill levels and greater experience. USA Bureau of Labor Statistics found that independent contractors are more likely than traditionally employed workers to be degree educated, 35 or older and be in management / business / financial role (2005). They are the most confident, skilled, and well rounded sector of the workforce. Because they have gathered their experience with multiple companies in many different environments they have unmatched knowledge of problems that may arise and solutions for overcoming these problems. Obviously theres also a tremendous opportunity for knowledge transfer whilst these specialists are on site.
An independent contractor is purely focussed on the tasks they are set. There is no obligation to train them or provide them with ancillary benefits. They don't concern themselves with promotions and are less likely to be drawn into political issues within the workplace. Performance and goal based incentives can be written into the contract - but generally its not required as their livelihood depends on achieving the right results. They will have trouble securing a new contract if the feedback on their last role isnt positive and so they are always highly motivated.
Contrary to common perception usage of contract workers is often cheaper than utilising permanent staff for the same task. According to an estimate in the Economist a general manager working for a multinational in Shanghai can earn 20% more than his US counterpart despite having only 75% of the skills. Then take into account the employer of contract labor is not responsible for social security costs, especially for foreign workers. Secondly you avoid many ancillary costs. Total the cost of hiring, administering, training and remunerating a white collar permanent employee. Then then bear in mind the Hudson report which suggested an average executive in China moves jobs every 18 months. This high churn rate makes for an even greater drain on resources.
In a nutshell flexible labor provides greater control over staffing numbers in times of uncertainty. Recent research from the London School of Economics shows that financially constrained firms utilise fixed-term employment contracts more intensely and make them absorb a larger fraction of total employment movement. This research was performed on the Italian labor market which, like the Chinese market, is heavily regulated. For permanent workers the obligations on the employer are substantial, especially with the recent changes to labor laws. These same changes emphasise there is no obligation for project based employees to be kept on staff after the project has finished. As Vicente Cuñat, finance lecturer at the London School of Economics and co-author of the paper said: "Financing constraints tilt the balance towards a higher use of fixed-term contracts."
A workforce composed solely of permanent workers requires a large financial commitment to maintain. Should a company run into liquidity issues they have limited options in terms of scaling back their costs. One of their papers more interesting findings was that utilising contract workers actually makes a firms permanent workforce more stable - because the fluctuations in the financial status of the firm can be better regulated through the temporary workforce. It also reduces firing costs - a major issue in China as per diagram below. Cuñat found that firms under financial constraint who use fixed-term and permanent workers reduced firing costs by 50% compared to those who used only permanent workers.
Which brings us to our final benefit:
Prudent managers use contractors to keep their headcount down during times of global hiring freezes whilst still accomplishing core objectives. Contractors are quicker to source and hire than permanent staff. They have no 3 month notice periods, they don't need a long selection process and their package negotiation is a simple matter. The administration of their pay is the responsibility of the Contractor Managing company who will sponsor the contractor, process their immigration papers, run their payroll, process their expenses and file their taxes.
Its essential that Chinese employers, whether local companies or MNC, increase the pool of available talent in order to meet essential business needs. As the labor market matures in China trends that are long established in the developed world, such as the use of flexible labor in skilled positions, are becoming more apparent. In fact for most employers turnover of skilled staff is a major concern and further hampers effective delivery. Additionally for companies operating in an unstable financial market reliance on flexible labor is long established and in fact necessary for prudent planning. Due to these factors it's expected that growth in the usage of flexible, skilled labor will rise even further over the next few years. We'll examine in Part II where independent contractors are currently being sourced and this will give a better idea of whether its a true indicator of a mature labor market.