China’s Tech Pivot (Part IV): Success Hinges on Tackling the Talent Conundrum

China’s tech pivot was years in the making, but the double shock of US-China tech competition and the domestic tech crackdown kicked it into another gear. It heralded the beginning of an arduous and grinding phase, because the main question guiding this process won’t be “how fast can we scale this?” Instead, the pivot’s success requires overcoming a litany of challenges, chief among them commercialization and talent.

These aren’t problems unique to China’s tech sector, but they are also uniquely Chinese problems because of the state’s role in both. In comparing the two challenges, commercialization will be easier to solve because financing isn’t scarce.

Whether it’s state financing or raising capital through new markets like the Shanghai Star Market or Beijing Stock Exchange, getting funding for Little Giant firms won’t be a major hurdle as abundant capital searches for scarcer opportunities.

Talent, on the other hand, is a thornier conundrum. In the bookend to this series, we will mainly elaborate on the human capital challenge because overcoming it will determine the success or failure of the pivot over the next decade.

“Getting to Hefei?”

Although financing alone won’t solve the entirety of the commercialization problem (see Part III of the series), it goes a long way toward getting startups across the “valley of death”. When it comes to human capital, however, the problem is both scarcity of talent and scarcity of opportunities.

The geographic mismatch between the supply and demand of talent highlighted in Part II of the series is only part of the story. For core innovation firms, highly specialized talent and STEM PhDs are needed. Yet Chinese STEM doctorates appear to have a strong preference for academia over industry, in contrast to the United States where a much larger proportion of PhDs enter the private sector (see Figure 1).

Figure 1. In Contrast to The US, Chinese PhDs Don’t Jump Ship into Private Sector
Note: Chinese data based on doctorates graduating between 2016 and 2020. “Other” includes administrative, government, and military jobs. US data is based on existing doctorates residing in the US as of 2019. “Other” includes government and nonprofit jobs, as well as self-employed.
Source: Ministry of Education; National Science Foundation Survey of Doctorate Recipients, 2019.

The Chinese government has attempted to ease this supply constraint by using talent subsidies targeted at postgraduates and tech workers. But these programs are left to the devices of local governments to implement, which has led to fierce competition across regions on talent subsidies (see Figure 2).

This creates a situation where most regions offer similar subsidies, even in those regions that don’t face talent bottlenecks. In effect, this means talent will continue to flow to areas that already have strong talent networks rather than to those that have a talent deficit, usually poorer provinces. Moreover, poorer provinces may not have sufficient resources to sustain these programs, further exacerbating the talent deficit.

Figure 2. Provincial Competition Can Undermine the Intent of Talent Subsidies
Note: Talent subsidies’ value is determined by subsidies in a province’s top five largest cities (districts in Beijing and Shanghai) across four categories: cash bonus, housing allowance, housing registration access, and family benefits such as children’s education and spouse work placement on a 0-20 scale. Also see Part II for geographic distribution of Little Giant firms.
Source: Chinese municipal government documents.

But Anhui province may offer another path to acquiring talent. Historically one of the poorest provinces, Anhui seems to have recognized that it couldn’t compete on talent subsidies against wealthier neighbors like Jiangsu and Zhejiang. So instead of attracting talent, Anhui decided to attract the companies that will demand the talent.

Its provincial capital Hefei has been a standout in attracting notable hardware and manufacturing firms like LCD panel giant BOE, memory chip champion Changxin, and electric vehicle (EV) startup Nio.

Indeed, the province’s hope that talent will follow the companies seem to have borne some fruit. Those investments in promising tech firms led to a boom in hiring. In fact, Hefei seems to aspire to become the “Detroit” of EV manufacturing, with BYD planning to open an EV plant and Nio aiming to double its annual production capacity to 240,000 vehicles.

Whether Anhui can sustain a solid record in attracting firms and the talent that comes with them remains to be seen. But such a demand-side approach to talent appears difficult to emulate, which gives provinces and cities that can properly execute such a strategy a leg up. For instance, Wuhan wanted to woo chip firms but lost billions to a fraudster posing as a startup founder. Cities in Jiangsu have also backed major flops in the EV industry.

A downside of local government activism on the tech pivot is that it could squeeze private capital. At a minimum, it appears that private capital, whether domestic or foreign, will be competing with state capital more fiercely as part of the tech pivot. This will be a different dynamic than during the heady days of the consumer internet, when global investors played a significant role in growing internet giants like Alibaba and Tencent.

This is not to say that private investment will be irrelevant, far from it. In fact, China’s entire tech investment community is grappling with how to ride the paradigm shift towards core innovation. And when the successful Little Giants go public or look for financing, new opportunities will emerge.

Their success, however, hinges on whether China can address key obstacles in talent. Relying on the inconsistent results of local governments probably won’t move the needle much on talent distribution. Meaningful change will require a longer-term shift in both economic geography and the right local incentives.

The silver lining is that China’s education system has doubled down on turning out STEM graduates. Meanwhile, both provincial governments and tech talent are starting to embrace core innovation companies as the sun sets on the golden days of the consumer internet.