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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications Executive Summary Spurred in part by a decades-long decline in manufacturing employment, the implications of globalization for the United States are a source of considerable debate. The emergence of “offshoring”—the transfer of work from the United States to affiliated and unaffiliated entities abroad—has raised additional concerns about the impacts of globalization. Among the occupations subject to offshoring are highly paid professions, including engineering, that are essential to U.S. technological progress, economic growth, and national security. The National Academy of Engineering (NAE) recognizes that offshoring raises significant challenges not only for engineers themselves, but also for industry, educational institutions, government, and professional societies. Many engineering tasks can now be performed anywhere in the world by qualified professionals with access to appropriate connectivity. To sustain and strengthen U.S. engineering capabilities in this new environment, the United States may need to consider new approaches to education, career development, management, and policy, and make changes where appropriate. NAE launched this project in 2006 with support from the National Science Foundation, United Engineering Foundation, and internal NAE funds. In the preliminary discussions, it became clear that developing policy recommendations would not be possible based on available data and information in the literature. Therefore, a major goal of this study is to assess the knowledge base and identify gaps, data needs, and areas for future study. The focus of the project was a public workshop featuring the discussion of commissioned papers on the offshoring of engineering in six industry sectors—software development, semiconductors, personal computer (PC) manufacturing, automobiles, construction engineering and services, and pharmaceuticals—and presentations by experts on engineering education and management, the engineering workforce, and the engineering profession. The study committee is aware that not all industries or aspects of engineering were included. OFFSHORING OF ENGINEERING: TRENDS AND IMPACTS FINDING 1. The offshoring of engineering, an inevitable aspect of globalization, has significantly impacted the U.S. engineering enterprise. However, the effects of globalization and offshoring have been uneven, and disparities among industry sectors and engineering sectors are likely to continue. One area of rapid increase in offshoring has been in information-technology (IT)-related industries, such as software development, semiconductors, and PC manufacturing. Today both established U.S.-based firms and start-ups are locating at least some engineering work in India or China. In fact, this offshoring is now taken for granted, and reportedly is even required, by some venture capitalists (Hira, 2005). Employment and exports in the Indian software-services industry have grown at annual rates of 30 to 40 percent over the past decade. In the semiconductor industry, 18 of the top 20 U.S.-based companies have opened design centers in India, nine of them since 2004. In the PC industry, much of the product design and engineering work is done by original design manufacturers based mainly in Taiwan; manufacturing is increasingly being done in China.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications In the automotive and construction engineering and services industries, engineering activity has long been internationalized. However, in the automotive industry today, engineering workforces are increasingly being configured to develop global platforms, rather than to work on products targeting local markets. Construction engineering and services firms that operate globally have always required engineering help in the countries where projects are located. Today, overseas engineers are increasingly performing tasks related to U.S. projects. In general, offshoring of less complex engineering work is increasing in both the automotive and construction industries. Finally, offshoring of research and development (R&D) to developing and emerging economies such as China and India is increasing rapidly in pharmaceuticals and some other industries. More than half of more than 200 U.S.- and Europe-based companies that responded to a recent survey anticipate that their technical workforces in China, India, and other parts of Asia will increase in the next three years (Thursby and Thursby, 2006). FINDING 2. More and better data on offshoring and other issues discussed in this report, such as the effects on the engineering workforce and engineering education, are necessary for discerning overall trends. As has been pointed out in other recent reports, better U.S. and international statistics on trade in services and employment would give us a much better grasp of basic trends. With the emergence of offshoring, a growing portion of the U.S. workforce, including engineers and many other services professionals, have become subject to international competition. For the United States to adopt policies that support continued economic vitality and ensure that the United States remains a premier location for engineering work, policy makers must have a good understanding of changes in comparative salaries, education levels, language skills, productivity and other trends, and the causes of those trends. Unfortunately, current published estimates and projections on offshoring of engineering include significant uncertainties. McKinsey Global Institute (2005), for example, estimates that more than half of engineering jobs in the industries it analyzed could be performed anywhere in the world. However, it would be wrong to conclude that half of the 1.5 to 2 million U.S. engineers are in danger of losing their jobs in the next few years. Indeed, the U.S. engineering workforce is expected to grow by 13 percent between 2004 and 2014 (CPST, 2006), a substantial increase although smaller than the expected increase in the workforce as a whole. In addition, there are limits to how quickly India and China can improve the quality and increase the quantity of their engineering graduates. Significant data gaps have prevented policy makers and the public from getting an accurate read on trade in services and offshoring (GAO, 2005a,b; NAPA, 2006; Sturgeon, 2006; etc.), and it may be some time before the most glaring deficiencies are addressed. One difficulty is that offshoring within companies is difficult to track through trade statistics. Another difficulty is that companies are reluctant to make information about their offshoring practices public. Thus industry-specific analyses will continue to be important sources of information but can only provide a snapshot of a rapidly changing phenomenon. FINDING 3. Offshoring appears to have contributed to the competitive advantage of U.S.-based firms in a variety of industries, and the negative impacts of offshoring on U.S. engineering appear to have been relatively modest to date. However, the negative effects have been much more severe in some industry sectors and for some jobs than others. Global disaggregation, a long-standing aspect of business models in several U.S. industries, has enabled U.S.-based companies in the semiconductor and PC industries to establish and retain global leadership. The key to long-term success for companies that offshore engineering activities is protecting the interface with customers and the resulting information flow, which feeds into product definition, high-level design, and sophisticated engineering tasks. Cutting costs was the initial motivation for offshoring of services, including engineering, especially in IT-related industries. However, a major factor in the offshoring of R&D facilities to emerging economies, such as China, is the desire to establish a full-spectrum presence in a rapidly growing market. On the flip side, there has been significant “onshoring” of R&D and other engineering work in some industries as multinational companies based in Europe and Asia establish or acquire operations in the United States. Even some companies based in India and China are investing in R&D in the United States, mainly through acquisitions (see Cooney, this volume). Although the inadequacy of available data makes it difficult to measure the negative impacts of offshoring on engineering jobs and salaries, we can say that the negative impacts have not been evenly distributed. It is logical to infer that, when certain types of routine engineering tasks are sourced in India or China, the U.S. engineers who performed that work lose their jobs. Even though new jobs may be created for U.S. engineers who perform higher level tasks and those who can move to other sectors, those new jobs do not replace the jobs that were lost. The negative individual and social impacts of mass layoffs in general, not necessarily in engineering, are described by Uchitelle (2006). IMPLICATIONS FOR ENGINEERING EDUCATION FINDING 4. Engineering education at the undergraduate and graduate levels has been a major source of strength for the U.S. engineering enterprise. Even today, engineers
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications educated in the United States remain among the best trained and most flexible in the world. At a time when other nations are making significant efforts to upgrade their engineering education capabilities, the United States will be challenged to sustain engineering education as a national asset. It was clear from the workshop discussions that participants from both industry and academia consider U.S. engineering education a valuable asset. It is also clear that other countries and regions, most prominently China and India, are working hard to upgrade their engineering education capabilities. In addition, large numbers of students from China and India continue to come to the United States for graduate engineering education. Workshop participants repeatedly stressed that U.S. engineers will need better management and communications skills and that engineers who master the principles of business and management will be rewarded with leadership positions. The same needs have been stressed in reports and statements by professional societies and reports from the NAE Engineer of 2020 Project (NAE, 2004, 2005). FINDING 5. Although individual engineers must ultimately take responsibility for their own careers, industry, government, universities, professional societies, and other groups with a stake in the U.S. engineering enterprise should consider supporting programs and other approaches to helping engineers manage their careers, renew and update their skills, and sustain their capacity to innovate, create, and compete. A continuing theme in the workshop discussions was the effect of offshoring on engineers whose jobs are vulnerable, even though their wages may be increasing. For example, in the semiconductor industry, wages are increasing, but very slowly (see Brown and Linden, this volume). The environment for engineering work has changed significantly as organizations grow and shrink and jobs are gained and lost. Some engineers who are proactive in keeping their skills up to date and are able to take advantage of the trend toward more frequent job and career shifts are adapting well. But many workshop participants called for renewed efforts on the part of all stakeholders in U.S. engineering—educators, government, professional societies, and employers—to address the needs of mid-career engineers who need help developing new skills and abilities for a constantly changing job market. In addition to educational approaches to ameliorating the effects of offshoring, many have called for direct assistance to engineers and other service workers whose jobs are displaced. Approaches that have been discussed include (1) expanding eligibility for Trade Adjustment Assistance to include engineers and other service-industry workers and (2) providing some form of wage insurance to help displaced workers who are forced to take lower paying jobs. FINDING 6. Over the past several decades, engineering has become less attractive to U.S. students as a field of study and as a career compared to some other professions. Although it is widely assumed that globalization and offshoring are contributing to this relative decline in popularity, it is impossible to know how important globalization is compared to other factors. A great deal more needs to be understood about the relationship between offshoring and the attractiveness of engineering as a career. Concerns were raised repeatedly about whether offshoring is negatively affecting the public perception of engineering and whether this perception has led (and will lead) to fewer talented U.S. students choosing to pursue careers in engineering. We do not have enough data at this point either to support or allay these concerns. We do know, however, that over the past several decades, the relative popularity of engineering as a major has declined in comparison with other fields that have experienced strong long-term growth. The committee believes that this issue should be thoroughly investigated. IMPLICATIONS FOR POLICY FINDING 7. For the United States, attracting and retaining world-class engineering activities in an increasingly competitive global environment will require that core U.S. strengths be sustained. Perhaps the most critical task in doing so will be to avoid complacency. Workshop participants pointed out the strengths of the United States and argued that the biggest risk to future success is complacency. Public and private efforts to tackle large-scale problems, for example in energy and transportation, could lead to the creation of entirely new industries and would go a long way toward creating new opportunities for engineers. FINDING 8. Plausible scenarios have been developed showing that offshoring either helps, is neutral, or hurts engineering in the United States. Only continued discussions and further studies will lead to a thorough understanding of the potential benefits and costs of offshoring. Offshoring in general, and offshoring of engineering in particular, has both costs and benefits, although we cannot paint a clear picture of these based on available data. Nevertheless, the workshop did provide a basis for making general statements about the costs and benefits so far. On the benefit side, offshoring appears to be adding to the competitiveness and profitability of the U.S.-based companies that manage it effectively. In addition, it has long been assumed that globalization and trade in services will ultimately yield net benefits for the U.S. economy. If offshoring is like other forms of trade in this respect, it too
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications should deliver net economic benefits. However, some questions have been raised about whether this will be the case. Offshoring is proving to be a boon to several emerging economies, particularly India and China, and long-term U.S. interests will be served by these countries and other developing economies becoming integrated into the global economy and raising their standards of living. Inevitably, this will also lead to improved engineering capabilities in these countries relative to the United States. If America maintains its engineering capability, and if the emerging global networks are open to participation by Americans and American organizations, this might then be a “win-win” situation, because U.S. companies would also benefit directly through expanded markets for their products. But what of the possible downsides? It has been argued that offshoring and other forms of trade can be harmful to the U.S. economy and U.S. national interests. For example, even if offshoring brings short-term economic benefits to the United States in the form of gains to companies and consumers, it could eventually undermine America’s ability to innovate. In addition, some prominent economists are concerned that the distributional impacts of offshoring on engineers and other service-sector workers in the United States will pose serious challenges to freer trade. They argue that offshoring could lead to the degradation of overall engineering capability in the United States. Thus, even if the U.S. engineering enterprise and economy as a whole are better off with offshoring, those who are most vulnerable to competition might suffer severe hardships. The question is how we should address these distributional issues. FINDING 9. As the debate about offshoring continues, it will be important to determine whether current U.S. policies, including immigration policies, provide artificial advantages or incentives for offshoring. Although a detailed examination of immigration policies is beyond the scope of this study, immigration issues are closely related to offshoring. The immigration of scientists and engineers, the training of foreign students, and the overall openness of the United States to foreign talent have clearly been a boon to U.S. engineering activities and the U.S. economy. But some argue that the current H-1B and L-1 visa programs facilitate offshoring. Policies that, in effect, subsidize or provide artificial incentives for the offshoring of engineering, they say, are just as counterproductive and market-distorting as artificial barriers or penalties for offshoring would be. Future studies should investigate the interactions between immigration policies and offshoring, particularly in engineering. FINDING 10. Security concerns related to the offshoring of engineering have been raised, specifically for the information technology and construction industries. Finally, national security concerns have been raised that offshoring in the construction engineering and services industry might lead to detailed plans and other information about U.S. buildings and infrastructure, as well as geospatial data, falling into the wrong hands. Relevant professional societies are already working to ensure that sensitive information can be protected within the existing legal framework. Concerns have also been raised about whether the globalization of software development could pose a serious threat to national security. For example, accidental defects or maliciously placed code might compromise the security of Department of Defense networks. The Defense Science Board is examining those concerns. REFERENCES CPST (Commission on Professionals in Science and Technology). 2006. STEM Employment Forecasts and Distributions among Employment Sector: STEM Workforce Data Project: Report No. 7. Washington, D.C.: CPST. Available online at www.cpst.org. GAO (Government Accountability Office). 2005a. International Trade: U.S. and India Data on Offshoring Show Significant Differences. GAO-06-116. Washington, D.C.: GAO. GAO. 2005b. Offshoring of Services: An Overview of the Issues. GAO-06-5. Washington, D.C.: GAO. Available online at www.gao.gov/new.items/d065.pdf. Hira, R. 2005. Impacts and trends of offshoring engineering tasks and jobs. The Bridge 35(3): 22–27. McKinsey Global Institute. 2005. The Emerging Global Labor Market. New York: McKinsey & Company. Available online at www.mckinsey.com/mgi/publications/emerginggloballabormarket/index.asp. NAE (National Academy of Engineering). 2004. The Engineer of 2020: Visions of Engineering in the New Century. Washington, D.C.: The National Academies Press. Available online at http://newton.nap.edu/catalog/10999.html. NAE. 2005. Educating the Engineer of 2020: Adapting Engineering Education to the New Century. Washington, D.C.: The National Academies Press. Available online at http://newton.nap.edu/catalog/11338.html. NAPA (National Academy of Public Administration). 2006. Off-shoring: An Elusive Phenomenon. Washington, D.C.: NAPA. Sturgeon, T.J. 2006. Services Offshoring Working Group Final Report. Cambridge, Mass.: MIT Industrial Performance Center. Available online at http://web.mit.edu/ipc/publications/pdf/06-006.pdf. Thursby, J., and M. Thursby. 2006. Here or There? A Survey on the Factors in Multinational R&D Location. Washington, D.C.: The National Academies Press. Available online at http://www.nap.edu/catalog/11675.html. Uchitelle, L. 2006. The Disposable American. New York: Alfred A. Knopf.