Why Do Companies Utilize Overseas Technology Talent? Cost – An Imperative Exceptional Talent? Politics & Access to the Local Market –Trade, e.g., China & Russia – Boeing engineers Developing Countries Strategy –Tax Holidays & Incentives 24/7 Capabilities Collaborative Engineering Technology Companies Aware Of Possibility & Believe It Helps Their Performance – Trigger Fate Of US Workers No Longer Figures Into Corporate Decisions
Overseas Engineers Can Afford To Be Paid Less CountryPurchasing Power Parity (PPP) Salary U.S.1.0 * $70k$70,000 Hungary0.367 * $70k$25,690 China0.216 * $70k$15,120 Russia0.206 * $70k$14,420 India0.194 * $70k$13,580
Substituting Labor: Expansion Abroad & US Layoffs Substitution not Additive or Complementary India Most Mentioned Destination Companies Are Re-balancing Workforce in Favor of Offshore Share EDS – 20k US layoffs & 20k offshore hires IBMHewlett Packard IntelCSC AOLTexas Instruments UnisysSiemens Knowledge Transfer – Knowledge Extraction –Forcing US workers to train foreign replacements
How Much Work Has Moved Offshore? No One Knows –No one in government is collecting data Commerce Department has pilot study of $335k complete GAO survey concludes current government data provide limited insight. $2million study underway by NAPA Companies are reluctant to reveal their plans Some High Skill/High Wage Work Is Moving We Do Know It Is Accelerating –Driven by top level management
Outsourcing Saturation Just the Beginning 2005 TIME Saturation
Wide Variety of Jobs Have Moved Offshore Any Task That Can Be Sent Down A Wire Accounting Programming and Software News Reporting & Editing Legal Architecture VC Firms Pushing Engineering Design Insurance Claims Processing Radiology Call Centers Financial Analysis
Developing Countries Target R&D Singapore - $2billion Biopolis - Biotech –Also targeting Optoelectronics – HP & Agilent China – –Requires high-level tech transfer as part of investment –Attracting recent PhD grads of US universities –Companies locate R&D closer to production India – –Wants to be the Global R&D Hub –Drug Discovery and IT R&D Google, Microsoft, Texas Instruments, Intel, GM, etc. etc.
Just Low Level Work? Sample Intel India Job Ad RF Simulation Engineer (Job# 274125) In this position you will build various antenna, RF channel and PHY/MAC models for various RF technologies; and simulate platform noise impact. You will also interact closely with internal wireless product groups to develop solutions to enhance RF performance in notebooks. This position requires a M.S. or Ph.D. in Electrical Engineering with experience in mobile notebooks, WPAN, WLAN, WMAN, WWAN and platform noise. You must also possess: - Experience building various antenna, channel, PHY/MAC models, prototypes, test systems; and simulating the impact of multiple radios that are integrated into notebooks Go to: www.monsterindia.com
Both Positive & Negative Impacts US & Developing Countries –Both gain and lose from offshoring Net effects are impossible to determine
U.S. Impacts + Lift U.S. Economic Development –Lower costs Open New Markets Lift Economic Development Abroad –Geopolitical and security advantages
U.S. Impacts ? U.S. Competitiveness/ Innovation System U.S. Workforce – –Displace Workers –Downward Wage Pressure –Change in Mix of Occupations Military Capacity – Access & Assimilation Homeland Defense - Critical Data Brain Circulation vs. Brain Drain Intellectual Property
Developing Country Impacts + Best Path to Growth? –Comparative advantage is low cost skilled labor Spillover Benefits –Movement up the ladder of innovation –Learning western business practices Macroeconomic Advantages Utilize Idle Labor Force
Developing Country Impacts ? Best and Brightest Supply External Markets Versus Domestic Problems Loss of Sovereignty to MNCs? Proper Use of Scarce Resources –Work on male baldness rather than on malaria –Help Indian urban in lieu of rural Race to the Bottom? –Potential for Smokestack Chasing –Mexican Maquiladoras and China
Economists Debate Trade Theory Nobel Laureate Paul Samuelson, MIT –Bhagwati and Irwin are promoting polemical untruths –Plausible scenarios when Chinas development makes US standard of living go down –Gomory & Baumol show this mathematically Jagdish Bhagwati, Columbia –Samuelson is misunderstanding outsourcing
Jobs Moving Overseas Ideal Scenario Before Offshoring US Workers do –A, B, C Offshore Workers are –Idle After Offshoring US Workers do –B, C, D Offshore Workers do –A and some of B
Jobs Moving Overseas Predicted Impacts Job Dislocation –Hope for quick re-employment Change in Mix of Domestic Occupations –US workers will shift to non-tradable jobs Cant compete on price –Will the new mix be better than the old one?
Jobs Moving Overseas Predicted Impacts Downward Pressure on US Wages for Tradable Occupations –Silver lining according to some industry reps –US IEEE members experienced decline in wages from 2002 to 2003 for the first time since surveys began in 1973 No One Can Predict Future –Creating future competitors?
Domestic IT Labor Market Record Unemployment (source: IEEE-USA from BLS) Occupation Employed (000s) 2003 Unemployment All Managers14,4682.9% Computer & Information Systems Mgrs3475.0% Engineering Managers773.6% Computer Scientists & Sys Analysts7225.2% Computer Software Engineers7585.2% Computer Programmers5636.4% Computer Support Specialists3305.4% Computer Hardware Engineers997.0% Electrical & Electronics Engineers3636.2%
IT Job Dislocations Immediate Impacts US IT jobs are going to Bangalore –No job creation means no reabsorption –No practical advice on what they should do Downward Wage Pressure Already Apparent Future Generation Receiving a Signal –CRAs survey showed a 23% drop in BS enrollments in 2003 in Computer Science –MIS dept enrollments down substantially
Unpredictable Longer-term Impacts on Innovation & Security What Will Be New Occupational Mix For US? –Will the best & brightest pursue these technology professions? –Where will future technology leaders be developed? –Who captures the wealth & jobs created by the next big thing? Impacts on Military Superiority & Homeland Security? –Can economic studies predict this?
Emerging Global IT Services Business Model Indian-Based IT Companies Trying To Capture US Customers – Not US Workers –Infosys has 3,700 H-1B & L-1 foreign workers in US US Visa Policies Give Comparative Advantage To Indian Companies –Cheap offshore labor PLUS Cheap on-site labor: foreign workers on H-1B & L-1 visas
Emerging Global IT Services Business Model TickerNameHQMarket Cap TTM SalesEmployees INFYInfosysIndia $ 12,135 $ 1,164 25,700 WITWiproIndia $ 10,512 $ 1,395 32,000 EDSElectronic Data SysUS $ 8,633 $ 21,834 132,000 CSCComputer SciencesUS $ 8,107 $ 14,949 90,000 ACSAffiliated ComputerUS $ 6,404 $ 4,106 40,000 CTSHCognizantUS $ 3,215 $ 465 5,600 SAYSatyamIndia $ 2,892 $ 620 9,532 PERPerot SystemsUS $ 1,431 $ 1,618 13,500 Retrieved from Reuters.com on August 13, 2004 – Analysis by Ron Hira, RIT Dollar figures in millions
NamePrice to Sales Sales Growth % 1 Year P/E Ratio TTM Net Profit Margin 5 Yr Avg % Effective Tax Rate 5 Yr Avg Infosys10.4240.9642.3828.714.01 Wipro7.5336.3742.9619.513.42 EDS0.400.55NM3.635.87 CSC0.5430.1515.823.430.55 ACS1.568.4312.818.238.64 Cognizant6.9260.7444.9213.731.23 Satyam4.6723.3424.532.714.02 Perot Systems0.889.65220.127.116.11 Retrieved from Reuters.com on August 13, 2004 – Analysis by Ron Hira, RIT
Offshore Outsourcing Firms Hiring Briskly Hughes Software Systems (HSS) –Double staff over next 6 quarters by adding 2,500 Tata Consultancy Services –Revenues up 44% & Profits up 51% –Added a net 3,974 employees in the quarter and has now expanded staff by 7,000 this year Infosys –Profits up 49% –To meet vigorous demand for outsourcing, Infosys hired 5,010 people during the quarter, slightly less than 5,100 hired in the whole of the last fiscal year. Plans to hire up to 4,500 more in the next six months.
Who Wins? Who Loses? Winners –Shareholders –Company executives –Consumers –Some existing employees? –Countries getting those jobs
Who Wins? Who Loses? Losers –Displaced workers –Existing employees subject to the threat of being offshored US overall? –Depends on re-employment of displaced workers –Future technological innovation –National security
Spate of Industry Sponsored Studies Economic Studies Capture Economic Efficiency Argument But Miss Other Important Elements –Technological Innovation –Security Even Independent Studies Are Funded by Industry –McKinsey & Dr. Catherine Mann (IIE)
What You Can Do 1.Meet with your Congressperson in his/her district office 2.Go to IEEE-USA Legislative Action Center website and write to your legislators Respond to an Action Alert Russ Harrison, IEEE-USA staffer, can help 3.Write to state legislators
What You Can Do 4.Enlist members of Regions/Sections/Chapters/PACE To be effective, we need large numbers 5.Spread the word amongst colleagues, family and friends 6.Provide IEEE-USA with individual stories We want to better understand the situation of members Back up the statistics with individualized stories to get an effective message out
Look for my book available in April 05 Published by the American Management Association