U.S. Competitiveness, Offshoring & Technology Policy

Ron Hira, Ph.D., P.E., Senior Member

Vice President, Career Activities

March 12th, 2005

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

Country Purchasing Power Parity

(PPP)

Salary

U.S. 1.0 * $70k $70,000

Hungary 0.367 * $70k $25,690

China 0.216 * $70k $15,120

Russia 0.206 * $70k $14,420

India 0.194 * $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 IBM Hewlett PackardIntel CSCAOL Texas InstrumentsUnisys Siemens

• ‘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 SaturationJust the Beginning

2005

TIME

Sat

urat

ion

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 MNC’s? • 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 China’s

development makes US standard of living go down

– Gomory & Baumol show this mathematically

• Jagdish Bhagwati, Columbia– Samuelson is misunderstanding outsourcing

Jobs Moving OverseasIdeal 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 OverseasPredicted Impacts

• Job Dislocation– Hope for quick re-employment

• Change in Mix of Domestic Occupations– US workers will shift to non-tradable jobs

• Can’t compete on price

– Will the new mix be better than the old one?

Jobs Moving OverseasPredicted 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)

OccupationEmployed

(000’s)2003

Unemployment

All Managers 14,468 2.9%

Computer & Information Systems Mgrs 347 5.0%

Engineering Managers 77 3.6%

Computer Scientists & Sys Analysts 722 5.2%

Computer Software Engineers 758 5.2%

Computer Programmers 563 6.4%

Computer Support Specialists 330 5.4%

Computer Hardware Engineers 99 7.0%

Electrical & Electronics Engineers 363 6.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

1983 1987 1991 1995 1999 2003

All Workers Managers & Profs Electrical Engineers Computer Scientists

1983-2003 Tech Unemployment Rates

Job Dislocation During Low Job CreationNonfarm payroll employment (seasonaly adjusted) - Updated Nov 04

90,000

95,000

100,000

105,000

110,000

115,000

120,000

125,000

130,000

135,000

Oct-83 Nov-87 Dec-91 Feb-96 Mar-00 Apr-04

Em

plo

ymen

t (0

00's

)

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– CRA’s 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

Ticker Name HQ Market CapTTMSales Employees

INFY Infosys India $ 12,135 $ 1,164 25,700

WIT Wipro India $ 10,512 $ 1,395 32,000

EDS Electronic Data Sys US $ 8,633 $ 21,834 132,000

CSC Computer Sciences US $ 8,107 $ 14,949 90,000

ACS Affiliated Computer US $ 6,404 $ 4,106 40,000

CTSH Cognizant US $ 3,215 $ 465 5,600

SAY Satyam India $ 2,892 $ 620 9,532

PER Perot Systems US $ 1,431 $ 1,618 13,500

Retrieved from Reuters.com on August 13, 2004 – Analysis by Ron Hira, RIT

Dollar figures in millions

Name Price to Sales

Sales Growth % 1 Year

P/E Ratio TTM

Net Profit Margin 5 Yr Avg %

Effective Tax Rate 5 Yr Avg

Infosys 10.42 40.96 42.38 28.7 14.01

Wipro 7.53 36.37 42.96 19.5 13.42

EDS 0.40 0.55 NM 3.6 35.87

CSC 0.54 30.15 15.82 3.4 30.55

ACS 1.56 8.43 12.81 8.2 38.64

Cognizant 6.92 60.74 44.92 13.7 31.23

Satyam 4.67 23.34 24.53 2.7 14.02

Perot Systems 0.88 9.65 19.4 4.2 54.37

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 bookavailable in April ’05Published by the American Management Association