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Impact of Globalization and Offshoring on Engineering Employment in the Personal Computing Industry1

Jason Dedrick and Kenneth L. Kraemer2

University of California, Irvine

EXECUTIVE SUMMARY

Globalization has changed the nature, organization, and location of engineering work in the personal computing industry. As a consequence, lower skilled and lower paid engineering jobs that might have been created in the United States are instead being created overseas, while higher skilled and higher paid jobs remain in the United States. The engineering work that remains in the United States requires skills in traditional engineering disciplines, as well as in the intersection of engineering and computer science and new specialties, such as small form-factor design, communications and networking, software engineering, and the interfaces between these. Software engineering in particular is becoming more important in engineering for innovative new products, such as smart phones and handheld devices that add functionality through tightly integrated hardware and software. For personal computers (PCs) and components, embedded software enables large-scale, low-cost production of standard products that can be provided with different features, tailored to particular markets, and continually updated to extend product life.

Work done by branded PC makers has changed from physical engineering concerned with building, testing, and mass production, to conceptual design, planning, and product management. Physical engineering is now done largely outside the branded firms. PC firms initially performed all phases of new-product development in house, but they subsequently outsourced the manufacturing of desktops to contract manufacturers (CMs) in various regions of the world and outsourced the development and manufacturing of notebooks to original-design manufacturers (ODMs), mainly in Taiwan. Today, much desktop development is also being handed off to ODMs.

As production and development were outsourced, the location of engineering jobs also shifted. For instance, notebook development and manufacturing were originally done mostly in Japan, and in some cases in the United States, but these activities have moved steadily to Taiwan, which developed the required skills and had lower costs. Recently, Taiwanese ODMs have begun moving engineering work to mainland China where costs are even lower and manufacturing facilities are nearby.

Interviews with executives in charge of new-product development in branded PC firms indicate that relatively few jobs remain in the United States, and those jobs require highly skilled, innovative people with considerable experience. Thus salaries for U.S. engineers have increased steadily to be commensurate with their skill, experience, and productivity.

Historical data and national statistics on the entire com-

1

This report is based on research conducted by the authors over a 15-year period on the PC industry. They have interviewed more than 200 individuals from 25 companies in the Americas, Europe, and the Asia-Pacific region, including PC makers, contract manufacturers, original-design manufacturers, suppliers, and distributors. For this report specifically, they conducted eight interviews and a small survey of five U.S. companies in the summer of 2006 to collect primary data and gain insight into globalization and its impacts on the engineering workforce in the PC industry. In addition, secondary data were collected on the industry and on engineering employment from government statistics, private research companies, and articles in business and professional trade publications.

2

The authors gratefully acknowledge the assistance of the National Academy of Engineering in arranging for interviews with senior executives and the insights provided by those executives.



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impact of globalization and offshoring on engineering employment in the Personal Computing industry1 Jason Dedrick and Kenneth L. Kraemer2 University of California, Irvine eXeCUtiVe sUmmArY of standard products that can be provided with different fea- tures, tailored to particular markets, and continually updated Globalization has changed the nature, organization, and to extend product life. location of engineering work in the personal computing Work done by branded PC makers has changed from industry. As a consequence, lower skilled and lower paid physical engineering concerned with building, testing, and engineering jobs that might have been created in the United mass production, to conceptual design, planning, and prod- States are instead being created overseas, while higher uct management. Physical engineering is now done largely skilled and higher paid jobs remain in the United States. The outside the branded firms. PC firms initially performed engineering work that remains in the United States requires all phases of new-product development in house, but they skills in traditional engineering disciplines, as well as in the subsequently outsourced the manufacturing of desktops intersection of engineering and computer science and new to contract manufacturers (CMs) in various regions of the specialties, such as small form-factor design, communica- world and outsourced the development and manufacturing of tions and networking, software engineering, and the inter- notebooks to original-design manufacturers (ODMs), mainly faces between these. Software engineering in particular is in Taiwan. Today, much desktop development is also being becoming more important in engineering for innovative new handed off to ODMs. products, such as smart phones and handheld devices that As production and development were outsourced, the add functionality through tightly integrated hardware and location of engineering jobs also shifted. For instance, note- software. For personal computers (PCs) and components, book development and manufacturing were originally done embedded software enables large-scale, low-cost production mostly in Japan, and in some cases in the United States, but these activities have moved steadily to Taiwan, which developed the required skills and had lower costs. Recently, 1This report is based on research conducted by the authors over a 15-year Taiwanese ODMs have begun moving engineering work to period on the PC industry. They have interviewed more than 200 individuals mainland China where costs are even lower and manufactur- from 25 companies in the Americas, Europe, and the Asia-Pacific region, in- cluding PC makers, contract manufacturers, original-design manufacturers, ing facilities are nearby. suppliers, and distributors. For this report specifically, they conducted eight Interviews with executives in charge of new-product interviews and a small survey of five U.S. companies in the summer of 2006 development in branded PC firms indicate that relatively to collect primary data and gain insight into globalization and its impacts few jobs remain in the United States, and those jobs re- on the engineering workforce in the PC industry. In addition, secondary quire highly skilled, innovative people with considerable data were collected on the industry and on engineering employment from government statistics, private research companies, and articles in business experience. Thus salaries for U.S. engineers have increased and professional trade publications. steadily to be commensurate with their skill, experience, and 2The authors gratefully acknowledge the assistance of the National Acad- productivity. emy of Engineering in arranging for interviews with senior executives and Historical data and national statistics on the entire com- the insights provided by those executives. 15

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16 THE OFFSHORING OF ENGINEERING puter industry show no significant change in the number of mation technology (IT) services and other hardware, such engineers since 2002. There are no comparable data for the as storage, peripherals, and networking equipment (IDC, PC industry, per se. However, although the PC industry con- 2006a). tinues to grow in scale and PCs increase in complexity, thus In 2005, more than 200 million PCs were shipped increasing the need for engineering work, there appears to be worldwide, including 135 million desktops and 65 million little or no increase in engineering jobs in the United States. notebooks (IDC, 2006b). The United States has the largest This can be explained partly by the increasing productivity PC market (61 million units shipped), followed by Western of engineers, but mostly by a large increase in engineering Europe (47 million units), Asia-Pacific (40 million units), jobs in CMs and ODMs, especially in Taiwan and China. Japan (14 million), and the rest of the world (38 million). Engineering work that remains in the United States is be- The United States is not only the leading market but is also ing tailored to the needs of newer, smaller personal comput- home to the top two PC vendors, HP and Dell, as well as ing products, such as wireless notebooks, tablet notebooks, Microsoft and Intel, which continue to set the key technology PDAs, MP3 players, and smart phones. This work requires standards for the global industry. However, competition is not only knowledge of engineering design for small form fac- becoming increasingly global, with non-U.S. firms holding tor, but also new engineering specialties related to commu- the next five spots (Table 1) since IBM’s PC division was nications, networking, embedded software, and particularly acquired by China’s Lenovo in 2004. the interfaces between these and hardware engineering. As the cost of displays and other key technologies has Interviewees in PC companies said that generally there fallen and as customer demand for mobile products has was a good balance between the supply and demand for increased, notebooks and various handheld devices have engineers in the United States, but noted shortages in expe- become the fastest growing product categories. These rienced managers (product managers, engineering-discipline products are less standardized than desktop PCs and require managers, project managers, high-level design mangers) and, more engineering in the new-product development phase. In particularly, in the engineering subdisciplines mentioned addition, PC models and form factors have proliferated as in the body of this report. A few firms carefully develop vendors try to provide customers with more choices, which engineers by hiring graduates of elite engineering schools, also increases the engineering requirements of the industry. but most PC firms prefer to hire experienced engineers from Finally, PC-based servers account for the largest and fastest other firms. growing share of the server market, also requiring more en- All of the firms we interviewed hire at least some engi- gineering effort to develop cheaper hardware that can handle neers outside of the United States, some primarily to reduce the work formerly done by expensive proprietary systems. cost, others for their specialized knowledge. In some cases, Unlike the mainframe computer industry, which consisted companies hire engineers working in offshore facilities, of vertically integrated firms, the structure of the PC industry but more often they hire foreign-born engineers to work in is based on specialization, with most firms concentrating on the United States, often from U.S. universities. All of the one segment, such as components, systems, software, distri- executives considered U.S. immigration policies flawed for bution, or services. Most PC makers today have focused their failing to consider industry needs, treating all engineering efforts even further by outsourcing manufacturing, logistics, jobs/levels alike, and making it difficult for graduates to stay and other functions and concentrating their own efforts on in the United States. They also faulted limits on the number high-level design, marketing, and branding. Subassembly of visas. At the same time, most executives believe that the and final assembly have been outsourced to CMs since the offshoring of lower skilled engineering jobs was inevitable and that the United States should concentrate on maximizing its strengths in the dynamic and analytical skills necessary to retain its leadership in the development and commercializa- TABLE 1 Worldwide PC Market Share, 2005 tion of innovation. Company Market Share (%) introDUCtion Della 18.2 HPa 15.7 The personal computing (PC) industry includes desktop Lenovo 6.3 and notebook PCs, PC-based servers, and various handheld Acer 4.7 Fujitsu/Fujitsu Siemens 4.1 computing devices, such as PDAs, personal music players, Toshiba 3.5 and smart phones. Worldwide revenues for the industry to- NEC 2.9 taled $235 billion in 2005, including $191 billion in desktop Applea 2.3 and portable PCs, $28 billion in PC servers, and $16 billion Gatewaya 2.2 in smart handheld devices. In addition, PC software accounts Sony 1.6 for a large share of the packaged-software industry, which aU.S. companies. had sales of $225 billion, and PC use drives sales of infor- Source: Adapted from IDC, 2006b.

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17 IMPACT OF GLOBALIZATION AND OFFSHORING ON ENGINEERING EMPLOYMENT IN THE PERSONAL COMPUTING INDUSTRY early 1990s. Some parts of the product-development process development, and production. Each of these phases is fur- for notebook PCs were outsourced to Taiwanese ODMs. ther divided into specific activities, with outputs and gates PC makers that produce industry standard, or “Wintel” that must be passed before the next phase can begin. Design PCs, based on the Windows operating systems and Intel- refers to envisioning and defining a new product based on compatible microprocessors, do not require much innova- outside innovations and on customer needs. Development tion. These products are based on hardware and software is the making and testing of a working product based on interface standards set by Microsoft and Intel, and all of the the design. Production is the building and shipping of the necessary components are available from outside suppliers. product, which involves knowledge of process engineering, Thus most of the R&D in the industry is done by makers of cost-reduction measures, logistics, and so on. software and components, such as semiconductors, displays, hard drives, and storage. Product Development for Desktop PCs Nevertheless, although PC makers do not generally create new technologies, they play a critical role in their integra- Although product development processes have been stan- tion and adoption. PC makers decide which technologies dardized in the industry, the nature of the engineering varies are brought to market, in which combinations, and at what significantly by product category. Developing a desktop price. Although they have little choice in operating systems product is primarily a problem of system integration (i.e., (Microsoft dominates here), PC makers make critical choices incorporating new technologies into products and ensur- about which innovations to integrate and which standard to ing that they work together). In terms of physical design, support (when multiple standards are being promoted, as is most desktop models are still based on industry standard often the case). To make these choices and to develop and form factors, such as the bulky but flexible midtower chas- produce successful products, PC companies must have a sis. Standard motherboard designs are available from Intel combination of technical and market knowledge. and various third-party manufacturers. Other components, such as drives and add-on cards are built to fit into standard enclosures. engineering WorK in the PC inDUstrY For desktop PCs, the emphasis is on the development of a Most engineers in the PC industry are involved in new- new chassis as a basis for multiple models, or stock-keeping product development rather than R&D. Spending on R&D by units (SKUs), which can be designed for different markets Dell is just 0.9 percent of revenues. HP spends more for R&D and with different configurations. A PC company executive as a company, but much of it is concentrated on HP’s print- explained that the design of a new chassis takes about nine ing business. Even companies such as Apple or Palm, which months, but a new model based on an existing chassis can spend proportionately more on R&D, are engaged more in be built and tested in as little as two weeks. One vendor in- product development and the integration of new technologies troduces as many as 1,000 different consumer desktop SKUs than in research. Most core innovations in the industry are in one year. made at the component level for semiconductors, displays, and hard drives. R&D in the PC industry is focused more on Development Processes for Notebook PCs systems engineering, power management, heat dissipation, software tools, and security and data protection (e.g., locking Notebook PCs have different characteristics that add the hard drive if a notebook PC is dropped). complexity to the design and development process. Note- The emphasis has shifted over the past decade as outside books must be able to run on batteries; the display must be suppliers have provided standardized chip sets, integrated incorporated into the unit; the product must be lightweight more functionality into microprocessors, and developed stan- yet very sturdy; and the product must be appealing visually. dard motherboard designs. In the past, some PC companies Components must be packaged very tightly into a product were involved in the design of application-specific integrated that is small, thin, light, portable, durable, and energy ef- circuits (ASICs), but today these firms either use standard ficient, and that does not become too hot to handle from the chip sets or work with chip-design companies to customize heat generated by its operation. Notebook developers must ASICs for their products. PC companies also used to do make choices and trade-offs to optimize a number of fac- their own board layouts, but now they mostly use standard tors (a bigger battery will run longer but add weight; more motherboards for desktops and outsource board layout for memory will improve performance but increase cost; a faster notebooks. Most engineering work in the industry today processor will increase speed but produce more heat). involves new-product development for desktop and notebook New-product development involves solving problems as PCs; work on new products, such as tablet PCs, blade servers, new technologies are added or new form factors are intro- and smart handheld devices is also increasing. duced. Figure 1 illustrates the product development process Product development in the industry has become quite for notebook PCs. standardized. As outlined by Wheelwright and Clark (1992), Manufacturability is a major issue for notebooks because most product development consists of three phases: design, they must be produced in high volume and at low cost. There-

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18 THE OFFSHORING OF ENGINEERING Design Development Production Product Design Prototype Concept Pilot Mass Sustaining review build design planning production production support • Analyze need • Business case • Mock- ups • Commercial • Production • Ramp up- • Speed bump • Create concept • Specifications • Electrical test samples process design • Volume • Component • Set brand image • Industrial design • DVT • Integrated • Pilot assembly production replacement • Sourcing strategy system test • PVT • Production • Technical support testing • EVT • Warranty support • Global distribution FIguRE 1 Product-development cycle for notebook PCs. fore, the final assembly must be a relatively simple process moved into product management from other engineering in which packing components and subassemblies can be jobs, must be able to talk to marketing people and understand Dedrick Kraemer Figure 1demand and technology trends converge. - put into a very tight space quickly and with a high level of how customer reliability. These individuals generally have both experience and ad- One of the most significant costs for notebooks can be vanced degrees. warranteed repairs. Industry sources estimate that as many The teams that develop new-product concepts and man- as 25 percent of notebooks require a warranteed repair dur- age them through to fruition often include a software engi- ing the first year after purchase. A dramatic example was neer, a cost engineer, and a technical product manager, as the recall of millions of notebooks in 2006 because of faulty well as a general project manager and people with business Sony batteries. Both Sony and the notebook vendors who skills, such as finance and marketing. Another key skill at had to deal with the recalls and resulting consumer concerns the design stage is industrial design, which is taught in uni- incurred significant costs. versities but requires a strong sense of the aesthetic tastes of customers in a particular market. A variety of engineering skills are required at the devel- Product Development for Newer Products opment stage, primarily in mechanical, electronic and elec- No dominant technology architecture is available for trical engineering, PCB layout, and software engineering. smart phones, iPods, PDAs, and other newer products, most For notebook PCs, specialized skills are required in thermal of which are unique to particular companies. Therefore, dissipation, EMI, acoustics, shock and vibration, power product development requires more fundamental design management, materials, and radio frequency. For com- choices, such as the selection of core components and oper- munications products, such as smart phones, critical skills ating systems and knowledge is more tacit. In addition, col- include radio frequency and software control of telephonic laboration across engineering disciplines is more important, components. These skills require a combination of formal especially for convergence products, such as smart phones training and experience working in a particular specialty. and other mobile devices. Product development for a new At the production stage, the necessary skills are mainly device can take as long as 12 to 18 months. industrial engineering, quality assurance, manufacturing management, and logistics. In addition, this phase requires sustaining engineering, that is, support for products after they skill requirements are in high-volume production to handle midlife upgrades, Different skills are required for each stage of product de- such as the addition of a faster processor, end-of-life com- velopment (Figure 2). The design stage requires knowledge ponents, or problems that show up in the field. of markets and customer demand, as well as an understand- In addition to technical skills, firms want engineers who ing of technology trends. Engineers, usually those who have can work in teams that may include people from different R&D NEW PRODUCT DEVELOPMENT Design Development Production Function Engineering Materials Industrial design Hardware Industrial engineering Electrical Hardware Mechanical Quality skills Electronic Software Electrical Manufacturing management Software Product management Electronic Software Technical management FIguRE 2 Engineering skills for new-product development. Dedrick -Kraemer Figure 2

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19 IMPACT OF GLOBALIZATION AND OFFSHORING ON ENGINEERING EMPLOYMENT IN THE PERSONAL COMPUTING INDUSTRY engineering disciplines, as well as marketing people, product ODMs and component suppliers). According to one execu- managers, and other non-engineering professionals. Non- tive, “They have to be able to whip people into order.” engineers are particularly important during the design stage, but also throughout development for new product categories Changing requirements for which there are no road maps. Development of these products requires a mix of art and science, what one company The firms we interviewed reported that the share of jobs in refers to as the “Zen” of design, an intuitive understanding software engineering is increasing. This trend is not obvious gained by working closely in teams led by “Zen masters” in government employment data for the computer industry who have a sense of the features that should be included and (Table 2) but is evident in survey data of PC firms (Table 3). the ones that should be left out. More software engineers are needed because functionality in many products is being added through software rather than hardware. This is true for smart phones, music players, and experience requirements even hard-disk drives that can be customized for specific Some firms look primarily for experienced engineers as a clients. way of (1) avoiding the cost of training and (2) immediately Interviewees described a need for people with both soft- increasing productivity. One executive said, “Over the last ware and hardware skills, especially for emerging products 15 years, the industry has become so competitive that we that involve close integration of software and hardware func- have to hire mostly experienced people; we can’t wait for tions, such as smart phones and other handheld devices with junior engineers to learn. We still recruit at colleges but not communications capabilities. A smart phone, for example, as much as in the past. It used to be 10 to 15 new hires a year. may support multiple radio frequencies (e.g., GSM, CDMA, Now it is more like two per year. Nowadays, engineers get WiFi) and a number of applications, such as e-mail, instant into the field and keep moving around in order to learn.” messaging, and Web browsing. The formatting of the bit Not everyone agrees, however. An executive from a nearby structure from the applications is different for each radio competitor said he liked to hire engineers right out of college protocol. Thus software for many products must be written and had set up an internship program with six universities to fit and run on specific integrated circuits, unlike PCs, in so students could get experience during summer breaks. In- which software applications can run on any Intel-compatible terns in the program become part of core design teams right hardware running Windows via Windows application pro- away, and after a few years are “very self-assured.” Most of gramming interfaces. For PCs, software development is these students spend two or three summers working with the largely independent of specific hardware configurations. company. More than half of the interns are offered jobs after Examples of requirements include software engineers graduation. Nearly all students accept, unless they are going who understand telephony and how communication net- on to graduate school. works function or electrical engineers who know how soft- A similar opinion of the value of new graduates was ware controls telephony functions on a smart phone or en- expressed by an executive at a component-making firm who runs an R&D organization. Most of his new hires, he said, are new Ph.D.s in their first jobs. He prefers to hire people TABLE 2 Employment Levels for Selected Engineering without experience in manufacturing or development be- Occupations in the Computer Industry, 2002–2005a cause they “don’t know that some things can’t be done.” If they go into manufacturing or development first, they often 2002 2003 2004 2005 “learn” that some things can’t be done. His company wants Computer software engineers- 10,250 9,890 12,110 12,800 people who are not “burdened by experience.” applications (15-1031) At the other end of the spectrum, there is a shortage in Computer software engineers-systems 18,809 18,148 19,430 18,240 the United States of experienced engineering managers to software (15-1032) Computer hardware engineers 11,140 12,030 11,880 12,940 run projects and departments. Interviewees reported that the (17-2061) shortage is even more acute outside the United States. They Electrical engineers (17-2071) 4,580 4,020 3,200 2,900 defined two types of engineering managers—(1) engineering Electronics engineers, excluding 4,360 4,030 3,490 3,710 supervisors who manage engineering teams and (2) techni- computers (17-2072) cal program managers responsible for getting products to Industrial engineers (17-2112) 3,520 3,640 3,570 3,430 Mechanical engineers (17-2140) 2,100 2,470 2,160 2,280 market. The latter do not necessarily have deep technical Engineering managers (11-9041) 5,270 5,460 5,690 5,630 knowledge, but they are good planners and organizers. The Industrial designers (27-1021) 260 290 190 180 very best of them have a deep understanding of the technol- Totals 60,289 59,978 61,720 62,110 ogy or of how a product will perform in a market. Engineer- aThe computer industry is defined as NAICS 334100 (Computer and ing managers must see that various internal organizations Peripheral Equipment Manufacturing). Data for years prior to 2002 are (e.g., engineering, manufacturing, product managers) work based on SIC code 357 (Computer and Office Equipment). together on a product and work with outside firms (e.g., Source: Bureau of Labor Statistics, 2005.

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130 THE OFFSHORING OF ENGINEERING TABLE 3 Survey Results by Job Category (for 5 companies interviewed) Availability Availability Demand for in the United in Other Cost and Quality Locationsa (relative to U.S.)a Engineering Job Category Major Activity Engineers States Engineering managers R&D, design, development Stable or growing Tight Tight or enough Lower cost, lower quality Engineering product managers Design, development Stable Tight or enough Tight or enough Lower cost, same quality Hardware engineers Design, development Stable Tight or enough Enough Lower cost, same or lower quality Electrical engineers R&D, design, development Falling or growing Tight or enough Enough Lower cost, same or lower quality Electronic engineers Development Falling Tight or enough Enough Lower cost, same or lower quality Mechanical engineers R&D, design, development Stable or growing Tight or enough Enough Lower cost, same or lower quality Software engineers R&D, design, development Growing Tight Tight or enough Lower cost, same or lower quality n/ab n/ab Industrial engineers Manufacturing Enough Lower cost, same quality Industrial designers Design Stable Enough Enough Lower cost, lower quality Note: Names of firms are confidential. Four were personal computing companies, and one was a component supplier. aResponses regarding availability, cost, and quality for some skills in other locations vary by firm, depending on where these activities are located. We report one response when there was general consensus, more than one if there were different responses. Other locations included Singapore, Taiwan, Malaysia, and Ireland. bFirms interviewed had no manufacturing in the United States, so demand and availability of industrial engineers were not relevant. gineers who can program a microprocessor to communicate increasingly outsourced to CMs and ODMs. Time-critical, with a network. These skills are currently being taught on build-to-order production is located in regional markets, and the job, because few universities have programs that combine less time-sensitive, build-to-forecast production is located training in computer science and electrical engineering. mostly in China. U.S. PC makers began moving notebook production off- shore in the early 1990s. Taiwan developed a homegrown Productivity and Demand for engineers industry focused on notebook PC production, led by a group The productivity of engineers has increased steadily, so of ODMs, such as Quanta and Compal, that developed spe- fewer engineering resources are required per model/SKU cialized technical knowledge in issues critical to notebook (number of engineers/SKU is used as a productivity mea- performance, such as battery life, heat dispersion, rugged sure by some PC makers). However, because of the growth mechanicals, and electromagnetic interference. Notebooks of the industry and the proliferation of SKUs, the overall were produced in Taiwan or Southeast Asia, but as pricing demand for engineers has grown. For instance, 10 years ago pressure on ODMs increased, the Taiwanese government one PC company reported having 50 engineers shipping removed restrictions on manufacturing notebooks in China, 50 to 75 SKUs per year in consumer desktops. Today, the and the Taiwanese notebook industry moved en masse to company has 165 engineers shipping 1,000 to 1,200 SKUs the Shanghai/Suzhou area of eastern China. By 2005, more per year. The increase in productivity is partly due to the than 80 percent of the notebook computers in the world use of CAD tools, but it also reflects the outsourcing of were produced by Taiwanese firms, almost entirely in China development to ODMs. (DigiTimes, 2006). gLoBALiZAtion of the inDUstrY offshoring and outsourcing of new-Product Development The PC industry is highly globalized. Final assembly is Branded U.S. PC makers kept product development in being done in dozens of countries, but manufacturing is in- house and onshore in the 1980s, but in the notebook market creasingly concentrated in the Asia-Pacific region (Figure 3). they fell behind Japanese competitors who had superior skills The globalization of the PC industry was present almost from in miniaturizing components and developing small, light, its inception in the late 1970s, as early PC makers imported thin products. IBM reacted to Japanese competition by mov- a number of components from Asian suppliers. In the 1980s, ing notebook development to its subsidiary in Japan, which leading PC makers, such as IBM, Compaq, Apple, and Dell, came up with the very successful Thinkpad design. Compaq set up assembly operations for desktops and notebooks off- worked with Citizen Watch Company in Japan to engineer its shore, with production in all major world regions (Ireland, notebooks and produce key subassemblies. Apple contracted Scotland, and France in Europe; Malaysia and Singapore in with Sony for one of the original Powerbook models (Busi- the Asia-Pacific region; and Mexico in the Americas). ness Week, 1991). Subassemblies, such as motherboards and base units, In time, however, most PC makers turned to Taiwanese were produced by Asian suppliers or U.S. CMs who located ODMs for manufacturing, not only to reduce costs, but also production near major vendors. Final assembly also has been to avoid becoming dependent on Japanese partners who

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131 IMPACT OF GLOBALIZATION AND OFFSHORING ON ENGINEERING EMPLOYMENT IN THE PERSONAL COMPUTING INDUSTRY 200,000 180,000 The Americas 160,000 EMEA 140,000 Asia Pacific 120,000 US$ Millions 100,000 80,000 60,000 40,000 20,000 0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 FIguRE 3 Computer hardware production by region. Source: Reed Electronics Research, 2005. Dedrick- Kraemer Figure 3 could become competitors. Gradually, Taiwanese ODMs government provides incentives to attract design centers and developed specialized engineering skills and began to take strengthen ties to U.S. high-tech companies. For instance, over product development as well. Companies such as Dell the Industrial Technology Research Institute set up by the and Gateway were able to enter the notebook market by Taiwanese government established an incubator in San Jose, working with ODMs on design and development, taking California, to link Taiwanese venture capitalists and tech advantage of capabilities nurtured by their competitors. suppliers with entrepreneurs in Silicon Valley (Boudreau, A major factor influencing the outsourcing of product 2006). development was a “pull” from ODMs. Taiwanese ODMs At the same time, Taiwanese ODMs have been mov- often did not charge explicitly for product development, ing engineering work, as well as manufacturing, to China. which they did to win production contracts (according to ODM design teams in Taiwan are still responsible for the interviews in Taiwan and China). In addition, once an ODM development of advanced technologies and new products had a contract, the PC maker had incentives to work with that provide competitive advantage. As products mature, the same ODM for future upgrades and enhancements to its however, the development of product variations, incremental products. A great deal of tacit knowledge, known only by improvements, and life-cycle support has moved to China, the ODM, was created in the development process. Also, the where they are close to manufacturing and can take advan- close linkage of development activities and manufacturing tage of lower costs. and the feedback to design from manufacturing and sus- As Figure 4 shows, notebook PC makers and ODMs taining support, created linkages that favored a continuing have also shifted new-product development activities from relationship with that ODM to reduce costs and improve Taiwan to China, a trend driven by the lower cost of engi- quality. neers in China and the proximity to manufacturing facilities. In addition to the pull from ODMs, there was a “push” Lu and Liu (2004) found that, after access to engineers, by PC vendors. In recent years, some PC makers (notably the second major factor for locating development activities Dell and HP) have set up their own design centers in Taiwan, is proximity to the manufacturing site. For notebooks and thus offshoring some detailed system design, while keep- other products for which design-for-manufacturability is ing concept design and system architecture in house. The very important, it is valuable for a company to be able to companies had several motivations—lower cost engineers build and test prototypes on the actual final assembly line. and programmers, faster development because test facilities Also, the time frame for ramping up to mass production were nearby, availability of experienced engineers, govern- has been cut dramatically, as have overall product cycles as ment tax incentives, and proximity to emerging markets in firms try to introduce new technologies quickly and avoid Asia. Also, proximity to ODMs made it possible for a design product obsolescence. If critical manufacturing processes center to send personnel to its ODM for problem solving and and equipment (particularly tooling equipment) are in place to use the ODM’s testing facilities. Taiwan also has a pool at the manufacturing site, high-volume production can begin of skilled, experienced engineers who are less expensive almost immediately after a design is finalized. ODMs save than their U.S. counterparts. In addition, the Taiwanese time and money by having both pilot and mass production

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13 THE OFFSHORING OF ENGINEERING Design Development Production Prototype Concept Product Design Pilot Mass Sustained planning review production production support 2003 United States Japan Taiwan China Prototype Concept Product Design Pilot Mass Sustained planning review production production support 2006 United States Japan Taiwan China FIguRE 4 Shifting location of product development for notebook PCs. Source: Market Intelligence Center, Institute for Information Industry, Taiwan. Based on figure provided to authors. in China. Once the crucial decision to move expensive test- for notebooks, but most is still concentrated in the United ing equipment to China has been made, it is cost Dedrick -Kraemer Figure 4 makers, such as Lenovo, Acer, Fujitsu, effective States. Foreign PC to move more development there as well, even if this means and Toshiba design products in their home countries (e.g., bringing in experienced engineers from Taiwan for a year or China, Taiwan, Japan). However, Lenovo, which acquired more to lead development teams. IBM’s PC business, has left concept design and product The shift of product development to Taiwan and China planning for the global Thinkpad line in North Carolina, and depends not only on the stage of the activity but also on the most development in Japan. maturity of the product. The Taiwan design centers of U.S. PC makers are mostly involved in developing new models U.s. engineering WorKforCe based on existing product platforms. The development of in the PC inDUstrY new form factors or the incorporation of new technologies is still led by teams in the United States. Taiwanese ODMs Based on data from the U.S. government, the engineering tend to keep the development of the newest product genera- workforce for the entire computer industry remained at about tions in Taiwan, where they have close working relationships 60,000 from 2002 to 2005 (Table 2). Before 2002, employ- with key component suppliers such as Intel. They are more ment numbers were based on Bureau of Labor Statistics data likely to move the development of more mature products for the broader category, Computers and Office Equipment. to China. Thus the numbers are not comparable in absolute terms. The activities that are still being done in the United States, However, employment levels remained stable from 1999 which do not appear likely to be moved in the near future, to 2001. About half of the engineers in the industry are em- include R&D, concept design, and product planning. All ployed in the two categories of computer software engineers companies, whether American, Japanese, Korean, or other, (applications and system software). The most growth took tend to concentrate R&D in their home countries. Product place in applications engineering, from 10,250 to 12,800. design benefits from proximity to leading markets where new The biggest losses have been in electrical and electronics innovations are first adopted. As long as the United States engineering, where a combined 2,500 jobs were lost. These remains the leading market for innovations in the PC indus- changes may reflect a shift in focus from hardware to soft- try and U.S. companies remain leaders in the industry, it is ware reported by interviewees. likely that these functions will remain mostly in the United In the United States, salaries in the computer industry States. have risen in every engineering occupation (Table 4) since Although R&D activity in the PC industry is limited, de- 2002, a pattern also seen in the broader industry category for sign and product planning continue to expand as the market 1999 to 2001. In the PC industry, our interviews suggest that grows and rapid innovation in upstream technologies con- engineering salaries increased rapidly during the dot-com tinues. Some of this work is moving to Taiwan, especially boom of the late-1990s, then stagnated, and now are rising

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133 IMPACT OF GLOBALIZATION AND OFFSHORING ON ENGINEERING EMPLOYMENT IN THE PERSONAL COMPUTING INDUSTRY TABLE 4 Mean Annual Wages for Selected Engineering Occupations in the Computer Industry, 1999–2005 a 1999 2000 2001 2002 2003 2004 2005 Computer software engineers-applications $70,630 $74,350 $78,240 $81,270 $85,570 $95,180 $94,760 Computer software engineers-systems software $70,150 $76,130 $81,180 $91,430 $92,030 Computer hardware engineers $74,880 $78,760 $83,940 $82,820 $96,540 $96,980 $94,690 Electrical engineers $67,030 $71,870 $73,210 $75,490 $80,180 $82,810 $84,820 Electronics engineers, excluding computers $68,920 $70,940 $75,580 $76,930 $81,320 $85,270 $86,330 Industrial engineers $61,660 $64,070 $68,910 $73,330 $76,210 $77,480 $77,710 Mechanical engineers $59,830 $64,810 $67,310 $68,460 $73,620 $77,250 $78,740 Engineering managers $97,380 $104,550 $107,290 $125,080 $128,470 $129,450 $130,020 Industrial designers $59,570 $63,480 $65,180 $66,070 $80,280 $91,850 $94,800 aComputer industry is defined as SIC 357 (Computer and Office Equipment) for 1999–2001; NAICS 334100 (Computer and Peripheral Equipment Manu- facturing) for 2002, November 2003, and November 2004. Although industry definitions differ, occupational definitions do not. Therefore we include data from the entire 1999–2005 period to show trends in salaries. Source: Bureau of Labor Statistics, 2005. again. Overall, engineering salaries in the computer industry Taiwanese firms compete with domestic companies for tal- rose from $61,030 in 1999 to $78,210 in 2005, an increase ent. The willingness of MNCs to pay higher salaries gives of 28.1 percent, which compares to a 20.1 percent increase them access to more experienced engineers and graduates of in the consumer price index for the same period (http://data. top universities, but turnover rates are high. bls.gov/cgi-bin/cpicalc.pl). These data suggest that foreign competition is not driving down salaries in the United States, sKiLL AVAiLABiLitY in the UniteD as had been feared. They may also show that U.S. engineer- stAtes AnD other CoUntries ing resources are being shifted to higher value activities and that engineers are in fact becoming more productive, both Limited national data have been collected on production of which would support higher salaries. and the availability of engineers in different countries. A Compared to salaries in other major computer-producing Duke University study of engineering graduates in the Unit- countries, salaries for U.S. engineers are very high. For all ed States, China, and India showed that even for these data, engineering categories, including technicians, the average definitions are often incompatible (Gereffi and Wadhwa, salary is $78,210 (Bureau of Labor Statistics, 2005). Salaries 2005). We could find no international data at all on the avail- for engineering professions that require four-year degrees ability of engineers with skills in specific specialties, such as average more than $90,000 (Table 4). electrical, mechanical, industrial, or software engineers, so The average salary for electronics engineers in all in- we must rely on interviews, our small survey of companies, dustries in the United States is about $80,000, compared to and other qualitative information. $60,000 in Japan, $20,000 in Taiwan, and less than $10,000 Gereffi and Wadhwa distinguish between dynamic and in China (Tables 5 and 6). However, engineering salaries transactional engineers, a classification we found useful are reportedly rising fast in China, especially in industry for characterizing engineering workforces in different clusters, such as the Shanghai/Suzhou area, as MNCs and countries based on our interviews. Dynamic engineers are TABLE 5 Comparative Salaries for Electronics Engineers TABLE 6 Engineering Salaries in China, by Home Base by Location of Notebook PC Companies Average Base Salary Company Home Base Base Salaries Paid in China United States $78,000 Japan $63,000 United States $15,000 (6–7 years experience) Taiwan $20,000 $7500 (new graduates) China $10,000 Japan or Europe Similar to U.S. companies Taiwan $5,000 (new graduates) Sources: For U.S., Bureau of Labor Statistics Occupational Employment Sta- China $5,000 (new graduates) tistics. For Japan, Quan (2002). For Taiwan, EE Times (2003) and interviews with ODMs in Taiwan. For China, PR Newswire (2004) and interviews with Source: Interviews with PC makers and ODMs in China, Taiwan, and PC makers and ODMs in Taiwan and China. Japan.

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134 THE OFFSHORING OF ENGINEERING capable of abstract thinking and high-level problem solv- ates of Taiwanese universities are said to lack the analytical ing using scientific knowledge, are able to work in teams, skills of their U.S. counterparts—skills that are important and are able to work with people from other countries and for working with key component suppliers to define new cultures. Dynamic engineers have at least four-year degrees product architectures. They also have a poor understanding in engineering and are leaders in innovation. Transactional of international markets and generally lack the ability to engineers have learned engineering fundamentals but can design successful products on their own. Nevertheless, some not apply this knowledge to solving large problems. Most Taiwanese engineers are strong managers and team leaders transactional engineers, who do not have four-year degrees, who can manage their own parts of a project and work ef- are responsible for rote engineering tasks. fectively with PC makers. United states China In our interviews, engineering managers and executives Most Chinese engineers, even those with four-year de- of U.S. companies described engineers in the United States grees, fit the definition of transactional engineers. According and elsewhere in words very much like those of Gereffi and to one interviewee, Chinese engineers “work perfectly at Wadhwa, with some additional country-level distinctions. In doing what they have been told but cannot think about what general, U.S. engineers are more dynamic and analytical than needs to be done; they lack both creativity and motivation. their international counterparts, and they have the ability to They are good at legacy systems, but not new things; they lead the innovation process. can’t handle ‘what if’ situations.” The team culture in most firms means that most U.S. Chinese mechanical and electronic design engineers are engineers understand working in cross-functional teams and well trained but lack the hands-on skills that come with project management. Even new U.S. graduates have been experience. However, they are gaining this experience and trained to work in teams as part of their university education. receiving significant training on the job from both multina- Also, many U.S. engineers have gained some international tional and Taiwanese employers. One major ODM offers experience as members of engineering teems sent to Asia to free training courses to engineers and brings in Taiwanese work with local development teams, sometimes for weeks engineers to teach them. ODMs also work with local uni- or months at a time. versities to develop courses in the skills they need. In the In addition, a large number of immigrants have earned words of an ODM manager, “China is a gold mine of human degrees in the United States and then remained in the coun- resources, but if you don’t train them, you won’t be able to try to work for U.S. firms. Because these individuals have take advantage of it.” An American executive was equally knowledge of their home countries, they are often chosen to enthusiastic, “The average might not be high, but there work with engineering teams in those countries. As part of are so many that the cream of the crop must be very good. the entrepreneurial culture in the United States, many U.S. Chinese engineers feel ownership of the product, pride in it. engineers have gained business experience by working on American engineers will work their tails off on a project if product-development teams or by being involved in start-up they believe in it passionately, then will want to take off to companies. Entrepreneurial skills are critical in the early go skiing or something. The Chinese will just move on to design process when technology road maps must be matched the next project.” with market demand to develop new products. These skills Chinese engineers do not have strong design skills or cannot be easily learned in less entrepreneurial environments marketing knowledge, especially for foreign markets, but farther from leading markets. domestic Chinese companies are trying to develop those skills to create products for the fast-growing Chinese market. One interviewee noted that Taiwanese companies are mak- taiwan ing long-term investments in training Chinese engineers and Taiwan has a mix of dynamic and transactional engineers, other professionals, and he expected that his U.S. company including many mechanical and electrical engineers with would move some of its product development to China as strong hands-on experience. Taiwan has the deepest pool of those skills were developed. notebook PC developers in the world, as well as engineers with extensive experience developing other products, such as Japan PC motherboards, optical drives, low-end network devices, and add-on cards. In addition, some Taiwanese ODMs are Industrial designers in Japan are not only very good at moving into the mobile phone business. designing for the Japanese market, but can also create prod- Taiwanese engineers learn mostly on the job and develop ucts for the U.S. market if they work with U.S. design and great depth in specific disciplines such as EMI, board layout, marketing people. Good examples are the IBM Thinkpad and thermal and power management. Engineering gradu- line and the successful Toshiba and Sony notebook products.

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135 IMPACT OF GLOBALIZATION AND OFFSHORING ON ENGINEERING EMPLOYMENT IN THE PERSONAL COMPUTING INDUSTRY Notebooks account for more than 50 percent of Japan’s PC industry. One interviewee at a U.S. PC maker estimated market, and many products are developed specifically for that the ratio of in-house engineers to ODM engineers on its that demanding market. As a result, Japanese design and development projects is about 1:3 for consumer desktops, development teams have great depth of skills in all design but closer to 1:1 for notebooks and commercial desktops. and development areas. They also are very strong in design- A smaller PC maker, by contrast, had only 50 engineers for-manufacturability, because most Japanese firms do their overseeing its ODMs, which develop all of its products. own design, development, and manufacturing (although Most of the work that has moved offshore is transactional lower value PCs and other products are increasingly being engineering, including board layout, tooling, electrical and outsourced to Taiwanese companies). mechanical engineering, and software testing. These jobs require engineering skills and experience in specific areas, such as power management, EMI, and heat dispersion. imPACts of offshoring on Most engineering work related to manufacturing has U.s. engineering emPLoYment also been moved offshore, although there are enough high- Engineering employment in the U.S. PC industry has level industrial and process engineers in the United States to remained stable in recent years in spite of some offshor- oversee manufacturing in both places and travel to Asia to ing of new-product development. One interpretation is that troubleshoot when necessary. These jobs do not require great offshoring may have been well established by the late 1990s analytical skills, but because a large share of the engineering and has not greatly affected U.S. engineering employment work required for new-product development falls into the since then. By 2000, U.S. PC makers had either outsourced transactional category, the number of engineers offshore can development and manufacturing to ODMs or, in the case of be very high. IBM, had assigned development to teams in Japan and had For instance, the world’s largest CM, Foxconn, is said offshored manufacturing. As a result, much of the hardware, to have 10,000 tooling engineers, including 2,000 design- mechanical, electrical, and electronics engineering required ers (Datamonitor, 2005). Many of these may be technicians for product development was already offshore, as was the with less than a four-year degree. Nevertheless, this example industrial engineering associated with manufacturing. Soft- shows how a Taiwanese company can employ large num- ware engineering, engineering management, and a relatively bers of low-cost engineers for more routine work that must small numbers of jobs in the various hardware, mechanical, be done very quickly to bring high-volume production on and electrical disciplines necessary to support product design line. As one U.S. executive said, “We don’t do much PCB and management were left in the United States. layout, tooling, or testing any more. You can’t compete with One result of the offshoring of notebook PC develop- the large numbers of Asian engineers for that kind of work. ment is that capabilities have been created in Taiwan, such The U.S. can’t compete on numbers of engineers. We have as design-for-manufacturability and designing for small to take what we’re great at in the U.S. and leverage the rest form factors, that can be applied to new product categories, of the world’s skills.” such as handheld devices, smart phones, and digital music players. The fact that U.S. engineering employment in the the U.s. scene PC industry is not growing during a time of rapid growth in demand and a proliferation of products and models probably The more advanced engineering work is, the less vulner- indicates that more engineering is being done outside the able it is to offshoring. Taiwanese and Chinese engineers United States. ODMs that have gained capabilities in the PC and companies are considered weaker in system-level design industry are now becoming major suppliers of mobile phones and in software than U.S. engineers. In addition, they lack and are likely to become involved in other mobile consumer the ability to develop entirely new products that are likely devices. to appeal to the U.S. market. All of the notebook vendors we interviewed agreed that they would not turn over concept design, product management, or product architecture to an the offshore scene ODM and that they only buy off-the-shelf designs from Reports and data from our interviews show that Taiwan- ODMs for low-end products or when they need to fill out a ese CMs and ODMs are rapidly expanding their engineering product line very quickly. capabilities. Quanta, the largest notebook ODM, employed One PC maker said that a relatively small number of in- about 3,500 engineers in 2003. Since then, Quanta has house engineers is necessary for performing the advanced opened a large new R&D facility outside Taipei that is ex- tasks that remain in the United States. Even though these pected to eventually house 6,000 engineers. The company are critical activities, they are not where the bulk of the is also adding engineers in China. Other ODMs have also engineering work is. The same point was made by two top increased their engineering resources as they take over most engineering executives at U.S. PC companies. As one of of the development and production of the global notebook them told us, “The jobs that are really important and are in

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136 THE OFFSHORING OF ENGINEERING referenCes the U.S. involve product architecture where you need senior engineers, hardware and software engineers generally, and Boudreau, J. 2006. Taiwan Towers as Tech Innovator. San Jose Mercury mechanical engineers and industrial design people.” The News, January 23. Available online at http://www.siliconvalley.com/mld/ other said, “The core of the design process is in the United siliconvalley/136901.htm. States. We define the product—how it looks, how it will Bureau of Labor Statistics. 2005. Occupational Employment Statistics. Available online at http://www.bls.gov/oes/home.htm. be assembled, materials used, features and technologies to Business Week. 1991. Laptops Take Off. March 18, pp. 118–124. incorporate. We determine the mechanical and electrical Datamonitor. 2005. Hon Hai Precision Industry Company Limited: Com- architecture.” pany Profile. R&D, which depends on high-level researchers with DigiTimes. 2006. ICT Report—4Q 2005: Taiwan’s Notebooks. Taipei: advanced degrees, often Ph.D.s, is also less vulnerable to DigiTimes Research. EE Times. 2003. EE Times-Asia Salary and Opinion Survey Reveals Mixed offshoring. Other reasons for keeping R&D in this country Fortunes for Asia’s Engineers. Available online at http://corporate. are the strategic importance of some R&D projects and the globalsources.com/INFO/PRESS/ARTICLES/OCT303.HTM. need to protect intellectual property. Unlike product develop- Gereffi, G., and V. Wadhwa. 2005. Framing the Engineering Outsourc- ment, R&D and manufacturing are not necessarily interde- ing Debate: Placing the United States on a Level Playing Field with pendent. Thus R&D jobs have not been “pulled” offshore by China and India. Master of Engineering Management Program, Duke University. manufacturing. IDC (International Data Corporation). 2006a. Worldwide Black Book: Q2 R&D requires highly specific skills, and the key to suc- 2006. Framingham, Mass.: IDC. cess is finding people with those skills. If they happen to be IDC. 2006b. Worldwide PC Market: 4Q05 and 2005 Review. Framingham, offshore, firms are more likely to bring them to the United Mass.: IDC. States, or to hire foreign graduates of U.S. universities, Lu, L.Y.Y., and J.S. Liu. 2004. R&D in China: an empirical study of Tai- wanese IT companies. R&D Management 34(4): 453–465. than to move the R&D offshore. One component maker, for PR Newswire. 2004. Salaries of mainland China Electronic Engineers Ris- instance, has 150 researchers at its R&D lab in the United ing by up to 12 Percent—Global Sources Survey. Available online at States, about half of whom are from outside the United States. http://www.prnewswire.co.uk/cgi/news/release?id=130057. Unlike companies in other industry segments, such as Intel Quan, M. 2002. EE compensation, increases vary worldwide. EE Times. and IBM, which have R&D labs outside the United States, Available online at http://www.eet.com/story/OEG00096S004. Reed Electronics Research. 2005. Yearbook of World Electronics Data, the U.S. PC industry has kept its R&D in this country. Volumes 1–4. Wheelwright, S.C., and K.B. Clark. 1992. Revolutionizing Product Devel- opment: Quantum Leaps in Speed, Efficiency, and Quality. New York: Free Press.