Offshore Outsourcing: Engineering Goes Overseas

By Martyn Day, CADdigest.com, January 12, 2004

Moving jobs offshore is one of today’s hottest and most controversial trends. In what appears to be a free-for-all, corporations have been investing -- at a furious pace -- in setting up development centers in countries with cheap, well-educated labor, such as Russia, China, India, the Philippines and Eastern Europe.

Beginning in the 1980s, manufacturing jobs began a gradual move eastward, allowing European and American plant employees time to refine and redefine their job skills. With growing globalization, the spread of high-speed Internet connections (which has served to overcome former problems of geographical isolation) and the ever-increasing demands for higher corporate profitability a new employment dynamic has been born: “offshoring.”

No longer is it only manufacturing, data processing and call center jobs that are being moved overseas. A growing number of firms are now also moving high-tech engineering design and development work to these overseas countries.

Forget Silicon Valley; think Bangalore, New Delhi, Hyderabad, Bombay, Shanghai, Beijing, Manila, Budapest, Moscow and St. Petersburg. These cities are all becoming hotbeds for recruitment, with growing competition for the best engineering graduates.

India is currently the number one destination for Western companies as it has the second largest English speaking population outside of the USA, with 50% of its population estimated to be under 20 years old. It's estimated that India has over 520,000 qualified IT engineers, with world renowned universities such as the Indian Institute of Technology competing with institutions like Harvard, MIT, Oxford and Cambridge. The average annual salary for a software programmer in India is also around $10,000, compared to $60,000 for an equally qualified and experienced programmer in the U.S. Beyond software design, India has attracted all the computer processor developers, with 7,500 processor designers already working for 65 companies, earning an average of $8,000 to 10,000 a year. In the next four years, India expects to generate no less than 1 million jobs in the IT/services arena!

Nor can one ignore the vast resources of China. Out of a population of 1.3 billion, it has more than 17 million teenagers in college, of whom 37% (circa 2000) are studying an engineering-related topic. At Microsoft's Beijing research lab, 33% of the 180 programmers have PhDs from U.S. universities. For a country that's emerging from an economically disastrous political system, China is undergoing an economic miracle. Embracing high-tech fabrication, China is now responsible for turning out almost 40% of the world's mobile phones, 40% of all laptops, 50% of the world's cameras and 50% of the world's shoes -- its workers earning hourly rates four times lower than those of comparable workers in Mexico.

According to the U.S.-based business analysts, Forrester Research, in the next two years U.S. and European firms will spend up to 28% of their IT budgets setting up overseas; by 2015, Forrester predicts that up to 3.3 million high-tech and service jobs (representing $136 billion in wages) will be moved from the U.S. to overseas.

The news for U.S. and European IT professionals only gets worse. Another U.S. analyst firm, Gartner, has produced a report stating that 500,000 IT jobs will be taken offshore in the next 18 months and that "fewer than 4 out of 10 IT workers whose jobs go overseas will be redeployed by their own companies." The movement to offshoring is so strong, Gartner predicts that 40% of the US top 1,000 companies will have an overseas pilot project under way within the next two years, with over 80% having actively considered an offshore move.

In a joint study by an Indian association called Nasscom (the National Association of Software and Services Companies) and the analyst firm McKinsey & Co, it's estimated that four years from now India's IT and service exports will generate revenues of $57 billion, employ 4 million people, and account for 7% of India's gross domestic product. There is absolutely no mistaking that this is and will continue to be a key topic on the business agenda.

The new wave of jobs being outsourced overseas includes architectural design and drafting, multi-discipline engineering design and drafting, engineering drawing archival, process plant design and documentation, microprocessor development/research and design, technical support, software development, CAM processing, mobile phone design, medical research, jet engine research and development, accounting, banking/stock analysis, Web design…. the list goes on. The companies engaged in this move reads like a high-tech Who's Who: Philips, Texas Instruments, Intel, Microsoft, Oracle, Silicon Graphics, Adobe, SAP, Novel, Motorola, Siemens, General Electric (GE), Dell, Hewlett Packard, EDS and IBM, to name a just a few.

In the world of CAD, the majority of developers have software teams in India and/or Russia, working on research and development and support. However, I have to say that it's more than just a case of finding cheap labor; there are some exceptional programming teams available in these countries. The dark side of the deal is that these countries don't have particularly strong copyright laws and if they do they rarely enforce them. In a recent case, one company, Alibre, had severe offshore problems with a developer in Russia allegedly taking its source code and selling it over the Web under another name.

After manufacturing and production languished in the UK, the key job creator was probably the establishment of call centers. Here, in the UK, it's estimated that 790,000 people currently work in call centers. The accelerating trend is to move these overseas and particularly to India (e.g. BT), where employees are happy to work for £1,200 per year, as opposed to an average of £12,000 here in the UK. Although on the subject of call centers one could argue that there are better jobs to be had, with a recent Health and Safety report comparing some UK call centers to 'Victorian satanic mills', as the operators spend hours wired up to systems which give them barely 2 seconds grace between customer calls. It's expected that over 200,000 of these call-center jobs will move overseas in the next 5 years.

It's at this point I get to bemoan the state of engineering in the UK. To become a professional engineer requires the study of a particularly demanding degree program, the job opportunities are few, the pay is low, the job doesn't get the respect it deserves and to move up the greasy corporate pole, if only to get more money, usually involves moving into technical sales or marketing. I have no doubt that the education system here is being dumbed down and that the number of UK teenagers choosing engineering as a vocation is turning into a trickle, with many universities relying mainly on foreign students to make engineering courses viable. The death of the polytechnics and apprenticeship system has also added to the lack of core engineering skills.

That said, the UK can still take pride in its engineering design excellence, particularly in motor sport, aerospace and product design. However, with increased overseas competition, the question is, how long can this last? With an insatiable appetite for British degrees and education, countries like India, Malaysia and China have actively been sending thousands of students here to study engineering-related courses and even licensing our degree and masters courses to be offered in their own universities and colleges. So, apart from the financial persuasion for companies to go offshore, there's the fundamental issue of the UK's next generation's apathy and lack of interest in all things engineering. But it's a sad reality that those who do choose this path may face a rapidly changing employment market.

It seems that American programmers and IT specialists are literally at the cutting edge of this move. You hear many stories about employees having to train offshore staff, only to realize that they are training their own replacements. The speed of this move to offshore highly qualified staff is starting to cause waves in this U.S. presidential election year. While American corporate executives are usually only too happy to tell city analysts how they will be reducing costs and increasing profit by implementing certain strategies, it appears that mentioning going offshore is not a politically correct option to mention in analyst briefings. In fact, in India, some of the technology companies have recently adopted lower profiles, removing their names and logos from buildings and busses used to ferry in shift workers.

This raises important issues for subsequent generations of students who pay fees to study for professional qualifications (tens of thousands of dollars in the U.S. and now thousands here in the UK): as if there was not already a lack of incentive to study technology-related subjects! Some analysts have gone so far as to suggest that wages will have to come down in the West, in response to this mass corporate decision to move jobs abroad.

Perhaps the first signs of this are being picked up. In the recently published quarterly report, "Hot Technical Skills and Certification Pay Index," by the U.S.-based Foote Partners, it states that bonus pay for certain IT skills has dropped noticeably over the last nine months as the move to offshoring has increased. With stand-alone applications developers taking an 8.5% pay cut last year.

For me, this creates mixed feelings. On the one hand, all this is great for those developing countries that have invested in educating its people. On the other hand, the engineers who work in the West are experiencing social and economic challenges. They could learn new skills, but in what field? One analyst suggested the safe bets included jobs such as catering, health care, real estate, and … plumbing! It has been said that by using technology instead of people we can compete with low-cost labor countries but I don't think this holds true in a world where technology is a global commodity. Equipped with the same technology (e.g. a CAD system), it would be possible to hire five or more engineers in India for the same amount of money for one UK or U.S. engineer. The jobs that do seem safe in engineering and IT are those of the CEO, CTO and VP; you won't find any CEO announcing that his or her six-figure salary position needs to be downsized or outsourced.

Optimists on the subject of offshoring will say that new jobs will be created to replace those lost and that creating development and sales offices in developing countries will assist in these companies' ability to grow new markets. To a certain extent this is possible but the current rush to reduce wages and increase profits means jobs are being lost quicker than the current Western economies can replace them and the problem is accelerating.

The UK's call centers and financial institutions are leading the charge to offshore. In the U.S. it's the engineering IT sector that's focusing on geographical "redeployment." From what I can see, this is not a short-term phenomenon. In a few decades time, when India gets too expensive, there will always be the vast resources of China to tap. Many economists are unsure of what the impact will be, or where things will balance out. It's not a good scenario if Western consumers don't have jobs to buy goods, or if they're forced to accept lower wages, as lower tax revenues can't support an aging population.

Nick Ballard of the UK consultants, Cambashi, commented, "There is the argument that the West can do 'higher-value activities' to compensate for the loss of work being sent to India and China. Of course, this requires some planning and investment and this is where there's a problem. Investment in the UK is still far too low. We cannot simply move into higher-value work without investment in modern equipment and techniques. And even if we could, we do not have the trained staff to achieve that aim. In fact, with an aging population and fewer engineering graduates (and doctors, chemists and physicists, etc.), the UK (and the West in general) needs to increase the incentives to immigrate for these key workers, rather than deter them."

It seems the European Union is doing it's very best to increase our social costs and soften what little competitive edge we have. Perhaps ultimately the only way to stem the tide will be through more EU and U.S. governmental intervention, imposing punitive sanctions and tariffs on imports, or on companies that employ large numbers of offshore workers.

About the Author

Martyn Day is group editor of MCAD Magazine and AEC Magazine. For more information, visit the CADserver website.

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