Globalization 5.0: Offshoring R&D to China, India

♠ Posted by Emmanuel in ,, at 12/03/2007 02:34:00 AM
This story brings two topics that I am reluctant to bring up but I'm sure will be of great interest to many. My caution over these topics arises from there being very little consensus over them. First, is there *really* a shortage of engineers Stateside? Second, is high-technology knowledge work *really* at risk given the rise of China and India as outsourcing destinations? Well-respected economist Alan Blinder has already gotten himself into a terrible bind over the second question [1, 2, 3] with the free trade crowd, so do read his earlier remarks if you've got the scratch.

Anyway, this recent article which appeared in (Chief Information Officer magazine) sheds some light on both these questions. The first part of the article cites Vivek Wadhwa who is also quoted in the link above on a shortage of American engineers. He says there is no shortage of engineers as many US firms claim; rather, engineers are plentiful but do not want to work at a "below market price." The implication he makes seems to be that these firms would like to open up immigration to foreign-born engineers given that they are willing to work at lower wages than their American counterparts:

As for the talent crunch argument that Bill Gates and others employ when lobbying for more foreign worker visas, Wadhwa also pushes back. He and his students surveyed 78 leaders at U.S. companies that were outsourcing high-tech work. The majority said they had trouble finding qualified candidates in the U.S. However those same respondents recorded job acceptance rates of greater than 60 percent, with those rates either remaining constant or increasing, and time to fill an open position of four months or less. There's a shortage all right, says Wadhwa, but it's "a shortage of engineers below market price that work day and night like slave labor."

As for the second part, it deals with the technological sophistication of Chinese and Indian engineers. Unless you're convinced that the Boeing 787 Dreamliner is an outdated jalopy, perhaps Americans should be worried as high-level engineering work on that airplane is being done in Uttar Pradesh by HCL. The old conception that only rote work is being sent abroad may be biting the dust. Scary stuff? It literally depends where you're coming from. The debate continues. (BTW, don't ask me about where I got rather misleading Globalization 5.0 title from since I can't tell you what the first four iterations of it were. Being a past marketing major, I decided to make a catchy title so I punched Globalization 2.0...3.0, etc. into the Google search but kept returning results until, you guessed it, Globalization 5.0.)

In spite of the survey respondents' praise of American workers, the offshoring of engineering and IT work to China and India continues for a variety of reasons, including the availability and cost of labor, and its proximity to new product markets.

BusinessWeek's Engardio described for the audience what he saw on his latest trips to Asia. Bangalore, the capital of India's IT industry, is home to Motorola's R&D lab, where employees designed 40 percent of the value of company's latest RAZR models. Next door at NXP (a company spun off from Philips Semiconductors), workers are designing the chip sets for high definition televisions. General Electric's campus, called the Jack Welch Technology Center, features lovely low-slung buildings, first-class gyms and food courts-and much of GE's product design work. Ten percent of GE's Indian researchers are working on products the company plans to introduce in the next six months, 70 percent are working on products to be released in three to five years and 20 percent are doing very early stage work on products that won't be released for more than a decade.

"When I talk to economists or I read a lot of the public discussion of outsourcing, they still draw a lot of distinctions between what's being done 'here' and what's being done 'there,'" says Engardio. "They'll say the high-end stuff is done here (in the U.S.). The low-end, repetitive stuff is done 'there.'" That's not true, says Engardio. GE and Motorola aren't just employing coders or call center workers abroad, "they're employing scientists."

North of Bangalore, Hyderabad has a booming biotech industrial zone, says Engardio, that stretches for miles, housing 37 contract research organizations. "Three years ago, you could not get a major pharmaceutical company to say they would shift R&D to India," Engardio says. "Today they're doing it. Big pharma is gearing up big time." The same day Wadhwa and Engardio conducted their seminar at Harvard, General Motors announced its plans to build an advanced research center in Shanghai to develop hybrid and other leading-edge car technologies. "There are great quantitative and qualitative leaps in what is being doing in Asia," Engardio says.

And it's not just massive multinational corporations setting up R&D shops in Asia. Top-tier Indian IT service providers, once known for pure software development, are going after R&D business too, says Engardio. Satyam has set up a huge, industrial engineering facility. HCL Technologies is doing avionics work for Boeing's 787 Dreamliner . Tata Consultancy Services actually designed a forklift for a U.S. company that was getting by its Japanese competitor and wanted to drastically reduce costs, says Engardio.

How is all this high-end work getting done if the vast majority of engineering undergraduates in India are indeed "unemployable" out of school and India produces fewer than 1,000 PhDs a year (compared to nearly 8,000 in the U.S.)?

For one thing, says Wadhwa, the multinationals and third-party contractors are more than happy to train local graduates who may not be ready to hit the ground running. Some have set up their own six-month "finishing schools" to do just that. The problem with post-graduate degree production in India is proving to be no barrier, says Wadhwa, because many of the researchers and scientists currently working there were educated in the U.S. Due to the difficulty of obtaining work visas or green cards in the United States, these workers have sought greener pastures in India, China and elsewhere, he says.

For its part, China is actually working on improving its educational system the way it improved its manufacturing processes over the last two decades, according to Wadhwa. But India doesn't have to produce its own post-graduate degrees, says Engardio. "We're talking about chemists and molecular biologists with master's degrees or PhDs coming from U.S. to India where it's not doom and gloom," Engardio says. "There's a lot of opportunity."

When you're talking about offshoring, Engardio says, the conversation is no longer just about costs. It's also about where talent and capabilities are available. Though cost-cutting remains the driver behind offshoring, Engardio says this work won't come back to the U.S. as India's wages or other costs rise. "The shift is permanent," Engardio says.

In other words, American workers may be terrific. But they're expensive. And there aren't enough of them, according to Engardio. If the U.S. held on to more of the foreign-born students awarded advanced degrees, there might not be as many of them available in India or China either, according to Wadhwa.

One of the drivers of this R&D shift overseas is the rise of virtual prototyping. That ability to design and test machines on a computer has made design work more mobile. And engineers trained in the necessary software are plentiful in India. That's good, says Engardio, because these companies need "lots and lots of engineers."

Also integral to the shift of product R&D offshore is the focus on embedded software. Fifty percent of the value in new cars, for example, is in the dashboard, Engardio says. "There's a tremendous need for engineering and software expertise," he says, "and the Indian IT services companies like Wipro and Tata have that. They are now the biggest industrial design companies in the world."

The dynamic turns R&D offshoring into a slightly different numbers game. "If you want to keep up and have to introduce this kind of innovation and the myriad services you need to offer, it would be very difficult to do in the U.S. just due to workforce capacity issues," Engardio says.

Then there's the other reason R&D is increasingly headquartered in India and China: proximity to emerging markets. Cisco now has 2,000 people doing R&D in India. "The head of that center sits in an office and looks like a modern day Pharaoh with the scale of building under way around him," says Engardio. "He says in five years, they will have 10,000 people. And by the way, I'm not looking for average engineers. I want innovators. These are no cheap bodies." Why? He's not looking at the U.S. as his major market for product sales. He's looking at emerging technology greenfields markets like Dubai in the United Arab Emirates and Saudi Arabia. "All the new developments outfitted with next generation telecom networks we'll never see in the U.S.," says Engardio. "The next generation of services is going to be in Asia." So Cisco is situating the design work in India. "Is it going to work out?" asks Engardio. "Who knows? But it seems like the right bet."

Anything that a company's customer touches and feels will remain harder to offshore to India, China or anywhere else, says Engardio. And perhaps, most important, so too the innovation itself. The product ideas happen at headquarters and are executed elsewhere. "The only thing (India) isn't doing is owning the intellectual property. The multinationals are pulling the strings and staying at the top of the food chain, which is why the debate over whether this is good or bad for the United States is very, very murky," says Engardio, "The American companies have India working for us, in a way."