China’s Tech Pivot (Part II): STEM Talent Shortage Stymies Core Innovation?

Now that China’s tech pivot to enhance the real economy and to master foundational technologies is under way, standing in the way of that pivot is a talent bottleneck.

Yet despite having the world’s most STEM graduates, China surprisingly suffers from talent shortages in areas key to the pivot.

For instance, China is currently facing a shortage of five million AI talents, according to a white paper from Baidu and Zhejiang University. In addition, more than half of the Chinese chipmakers surveyed have not fulfilled 60% of their autumn season recruiting objectives in 2021, according to a report from recruitment platform 51job.com, China’s version of Glassdoor.

Indeed, this next phase of China’s technology development will require putting a premium on human capital over financial capital. Not to say money won’t matter. But pumping capital into scaling business models won’t generate the technological breakthroughs that Beijing wants. China’s chip industry is a case in point.

That’s because the talent needed for areas like advanced manufacturing, biotech, artificial intelligence (AI), and chips is qualitatively different from the consumer internet industry that rose over the last decade.

Instead of hordes of app developers and energetic business and marketing associates onboarding vendors to platforms, the pivot requires specialized and highly trained talent to work in the labs and push the frontiers of basic and applied research. These sorts of highly technical innovations require patience more than speed and scale.

Scarcity of the right type of talent combined with the geographic imbalance of talent distribution will exacerbate this supply constraint in the near term. In Part 2 of this series, we pick up where we left off, using quick studies of the Little Giants and the biopharmaceuticals sector to illustrate how the talent problem could throw sand into the gears of the tech pivot.

Talent Demand and Supply Mismatch: The Case of Little Giants

Beijing may have pinned some of its hope on the Little Giants program to lead the pivot, but many of the enterprises face an even larger deficit in talent than your average tech firm, as their verticals require sophisticated expertise blended with industrial knowledge.

Of the nearly 50,000 STEM doctorates Chinese universities graduated in 2019, only 349 (<1%) were hired by Little Giant enterprises. In fact, although Little Giant enterprises racked up headcount significantly in 2021, the proportion of post-graduate talent actually declined to just under 4%, implying their struggles in attracting top-level talent (see Figure 1).

Figure 1. Headcount Expands, but Not of The Right TypeNote: Recruitment data from the 4,672 national-level Little Giant enterprises designated by the Ministry of Industry and Information Technology as of December 2021.
Source: CCID Consulting.

Part of this scarcity of qualified talent can be attributed to the imbalance in human capital distribution. In other words, there’s a mismatch between where postgraduates are concentrated—in superstar cities like Shanghai and Beijing—and the distribution of Little Giant enterprises across China (see Figure 2).

Figure 2. Surplus of Postgraduates in Superstar Cities, Dearth in Other RegionsNote: LGs = Little Giants; PGs = Postgraduates.
Source: China Statistical Yearbook 2021.

This asymmetry in talent and opportunity distribution is a difficult challenge to overcome. In general, highly educated workers that already live in or near tier-one cities tend to want to stay put rather than move to another province with fewer opportunities.

That’s not great for the 57% of Little Giant firms that are located outside of China’s three major economic clusters—defined as the Yangtze and Pearl River Deltas and the “Jing-Jin-Ji” (the Beijing-Tianjin-Hebei triangle). They will struggle to persuade China’s best and brightest to relocate.

To deal with the talent pipeline issue, some Little Giant enterprises have resorted to sharing engineers and allowing employees to work for multiple startups. That could provide more financial incentives for high-quality talent to live in a city with a lower cost of living. But it’s unclear whether these stop-gap measures will be sustainable or lead to a meaningful redistribution of talent.

Talent Imbalance Shows Up in Firm Performance

The talent gap between economic clusters and the rest of China appears to also manifest in firm performance in terms of the bottom line and innovation. Although far from conclusive, some preliminary evidence in the biopharmaceuticals sector—a vital area of China’s tech pivot—can illustrate this discrepancy.

While only 37.4% of biopharma companies are located inside clusters, this cohort accounted for more than half of the industry’s total profits and 44% of total invention patents in 2020 (see Figure 3). In other words, biopharma firms inside clusters appear to be punching above their weight.

Figure 3. Biopharma Firms Inside Clusters Outperformed Those in Other RegionsNote: IC = inside clusters; OC = outside clusters.
Source: China High-Tech Industry Statistical Yearbook 2021.

This is further corroborated by the fact that compared to other firms, biopharma companies inside clusters boast stronger profits per researcher, while also generating more innovation patents per 100 researchers (see Figure 4).

Figure 4. Biopharma Firms Inside Clusters Generate More Per TalentNote: “Inside clusters” includes data from Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, and Guangdong.
Source: China High-Tech Industry Statistical Yearbook 2021.

If this pattern of high-quality talent raising firm performance holds in other tech sectors, then it will likely lead to uneven growth across regions, despite a host of government policies and subsidies. The intensification of competition for scarce technical talent inevitably means that many tech firms and startups will struggle to innovate.

But the human capital constraint isn’t the only thing standing in the way of the pivot. This generation of core innovation startups needs to also create new enterprise-facing commercial strategies and pioneer new business models to succeed. That will be the subject in Part 3 of this series.