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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications 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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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications puter industry show no significant change in the number of engineers since 2002. There are no comparable data for the PC industry, per se. However, although the PC industry continues to grow in scale and PCs increase in complexity, thus increasing the need for engineering work, there appears to be little or no increase in engineering jobs in the United States. This can be explained partly by the increasing productivity of engineers, but mostly by a large increase in engineering jobs in CMs and ODMs, especially in Taiwan and China. Engineering work that remains in the United States is being tailored to the needs of newer, smaller personal computing products, such as wireless notebooks, tablet notebooks, PDAs, MP3 players, and smart phones. This work requires not only knowledge of engineering design for small form factor, but also new engineering specialties related to communications, networking, embedded software, and particularly the interfaces between these and hardware engineering. Interviewees in PC companies said that generally there was a good balance between the supply and demand for engineers in the United States, but noted shortages in experienced managers (product managers, engineering-discipline managers, project managers, high-level design mangers) and, particularly, in the engineering subdisciplines mentioned in the body of this report. A few firms carefully develop engineers by hiring graduates of elite engineering schools, but most PC firms prefer to hire experienced engineers from other firms. All of the firms we interviewed hire at least some engineers outside of the United States, some primarily to reduce cost, others for their specialized knowledge. In some cases, companies hire engineers working in offshore facilities, but more often they hire foreign-born engineers to work in the United States, often from U.S. universities. All of the executives considered U.S. immigration policies flawed for failing to consider industry needs, treating all engineering jobs/levels alike, and making it difficult for graduates to stay in the United States. They also faulted limits on the number of visas. At the same time, most executives believe that 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 commercialization of innovation. INTRODUCTION The personal computing (PC) industry includes desktop and notebook PCs, PC-based servers, and various handheld computing devices, such as PDAs, personal music players, and smart phones. Worldwide revenues for the industry totaled $235 billion in 2005, including $191 billion in desktop and portable PCs, $28 billion in PC servers, and $16 billion in smart handheld devices. In addition, PC software accounts for a large share of the packaged-software industry, which had sales of $225 billion, and PC use drives sales of information technology (IT) services and other hardware, such as storage, peripherals, and networking equipment (IDC, 2006a). In 2005, more than 200 million PCs were shipped worldwide, including 135 million desktops and 65 million notebooks (IDC, 2006b). The United States has the largest PC market (61 million units shipped), followed by Western Europe (47 million units), Asia-Pacific (40 million units), Japan (14 million), and the rest of the world (38 million). The United States is not only the leading market but is also home to the top two PC vendors, HP and Dell, as well as Microsoft and Intel, which continue to set the key technology standards for the global industry. However, competition is becoming increasingly global, with non-U.S. firms holding the next five spots (Table 1) since IBM’s PC division was acquired by China’s Lenovo in 2004. As the cost of displays and other key technologies has fallen and as customer demand for mobile products has increased, notebooks and various handheld devices have become the fastest growing product categories. These products are less standardized than desktop PCs and require more engineering in the new-product development phase. In addition, PC models and form factors have proliferated as vendors try to provide customers with more choices, which also increases the engineering requirements of the industry. Finally, PC-based servers account for the largest and fastest growing share of the server market, also requiring more engineering effort to develop cheaper hardware that can handle the work formerly done by expensive proprietary systems. Unlike the mainframe computer industry, which consisted of vertically integrated firms, the structure of the PC industry is based on specialization, with most firms concentrating on one segment, such as components, systems, software, distribution, or services. Most PC makers today have focused their efforts even further by outsourcing manufacturing, logistics, and other functions and concentrating their own efforts on high-level design, marketing, and branding. Subassembly and final assembly have been outsourced to CMs since the TABLE 1 Worldwide PC Market Share, 2005 Company Market Share (%) Della 18.2 HPa 15.7 Lenovo 6.3 Acer 4.7 Fujitsu/Fujitsu Siemens 4.1 Toshiba 3.5 NEC 2.9 Applea 2.3 Gatewaya 2.2 Sony 1.6 aU.S. companies. Source: Adapted from IDC, 2006b.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications early 1990s. Some parts of the product-development process for notebook PCs were outsourced to Taiwanese ODMs. PC makers that produce industry standard, or “Wintel” PCs, based on the Windows operating systems and Intel-compatible microprocessors, do not require much innovation. These products are based on hardware and software interface standards set by Microsoft and Intel, and all of the necessary components are available from outside suppliers. Thus most of the R&D in the industry is done by makers of software and components, such as semiconductors, displays, hard drives, and storage. Nevertheless, although PC makers do not generally create new technologies, they play a critical role in their integration and adoption. PC makers decide which technologies are brought to market, in which combinations, and at what price. Although they have little choice in operating systems (Microsoft dominates here), PC makers make critical choices about which innovations to integrate and which standard to support (when multiple standards are being promoted, as is often the case). To make these choices and to develop and produce successful products, PC companies must have a combination of technical and market knowledge. ENGINEERING WORK IN THE PC INDUSTRY Most engineers in the PC industry are involved in newproduct development rather than R&D. Spending on R&D by Dell is just 0.9 percent of revenues. HP spends more for R&D as a company, but much of it is concentrated on HP’s printing business. Even companies such as Apple or Palm, which spend proportionately more on R&D, are engaged more in product development and the integration of new technologies than in research. Most core innovations in the industry are made at the component level for semiconductors, displays, and hard drives. R&D in the PC industry is focused more on systems engineering, power management, heat dissipation, software tools, and security and data protection (e.g., locking the hard drive if a notebook PC is dropped). The emphasis has shifted over the past decade as outside suppliers have provided standardized chip sets, integrated more functionality into microprocessors, and developed standard motherboard designs. In the past, some PC companies were involved in the design of application-specific integrated circuits (ASICs), but today these firms either use standard chip sets or work with chip-design companies to customize ASICs for their products. PC companies also used to do their own board layouts, but now they mostly use standard motherboards for desktops and outsource board layout for notebooks. Most engineering work in the industry today involves new-product development for desktop and notebook PCs; work on new products, such as tablet PCs, blade servers, and smart handheld devices is also increasing. Product development in the industry has become quite standardized. As outlined by Wheelwright and Clark (1992), most product development consists of three phases: design, development, and production. Each of these phases is further divided into specific activities, with outputs and gates that must be passed before the next phase can begin. Design refers to envisioning and defining a new product based on outside innovations and on customer needs. Development is the making and testing of a working product based on the design. Production is the building and shipping of the product, which involves knowledge of process engineering, cost-reduction measures, logistics, and so on. Product Development for Desktop PCs Although product development processes have been standardized in the industry, the nature of the engineering varies significantly by product category. Developing a desktop product is primarily a problem of system integration (i.e., incorporating new technologies into products and ensuring that they work together). In terms of physical design, most desktop models are still based on industry standard form factors, such as the bulky but flexible midtower chassis. Standard motherboard designs are available from Intel and various third-party manufacturers. Other components, such as drives and add-on cards are built to fit into standard enclosures. For desktop PCs, the emphasis is on the development of a new chassis as a basis for multiple models, or stock-keeping units (SKUs), which can be designed for different markets and with different configurations. A PC company executive explained that the design of a new chassis takes about nine months, but a new model based on an existing chassis can be built and tested in as little as two weeks. One vendor introduces as many as 1,000 different consumer desktop SKUs in one year. Development Processes for Notebook PCs Notebook PCs have different characteristics that add complexity to the design and development process. Notebooks must be able to run on batteries; the display must be incorporated into the unit; the product must be lightweight yet very sturdy; and the product must be appealing visually. Components must be packaged very tightly into a product that is small, thin, light, portable, durable, and energy efficient, and that does not become too hot to handle from the heat generated by its operation. Notebook developers must make choices and trade-offs to optimize a number of factors (a bigger battery will run longer but add weight; more memory will improve performance but increase cost; a faster processor will increase speed but produce more heat). New-product development involves solving problems as new technologies are added or new form factors are introduced. Figure 1 illustrates the product development process for notebook PCs. Manufacturability is a major issue for notebooks because they must be produced in high volume and at low cost. There-
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications FIGURE 1 Product-development cycle for notebook PCs. fore, the final assembly must be a relatively simple process in which packing components and subassemblies can be put into a very tight space quickly and with a high level of reliability. One of the most significant costs for notebooks can be warranteed repairs. Industry sources estimate that as many as 25 percent of notebooks require a warranteed repair during the first year after purchase. A dramatic example was the recall of millions of notebooks in 2006 because of faulty Sony batteries. Both Sony and the notebook vendors who had to deal with the recalls and resulting consumer concerns incurred significant costs. Product Development for Newer Products No dominant technology architecture is available for smart phones, iPods, PDAs, and other newer products, most of which are unique to particular companies. Therefore, product development requires more fundamental design choices, such as the selection of core components and operating systems and knowledge is more tacit. In addition, collaboration across engineering disciplines is more important, especially for convergence products, such as smart phones and other mobile devices. Product development for a new device can take as long as 12 to 18 months. Skill Requirements Different skills are required for each stage of product development (Figure 2). The design stage requires knowledge of markets and customer demand, as well as an understanding of technology trends. Engineers, usually those who have moved into product management from other engineering jobs, must be able to talk to marketing people and understand how customer demand and technology trends converge. These individuals generally have both experience and advanced degrees. The teams that develop new-product concepts and manage them through to fruition often include a software engineer, a cost engineer, and a technical product manager, as well as a general project manager and people with business skills, such as finance and marketing. Another key skill at the design stage is industrial design, which is taught in universities but requires a strong sense of the aesthetic tastes of customers in a particular market. A variety of engineering skills are required at the development stage, primarily in mechanical, electronic and electrical engineering, PCB layout, and software engineering. For notebook PCs, specialized skills are required in thermal dissipation, EMI, acoustics, shock and vibration, power management, materials, and radio frequency. For communications products, such as smart phones, critical skills include radio frequency and software control of telephonic components. These skills require a combination of formal training and experience working in a particular specialty. At the production stage, the necessary skills are mainly industrial engineering, quality assurance, manufacturing management, and logistics. In addition, this phase requires sustaining engineering, that is, support for products after they are in high-volume production to handle midlife upgrades, such as the addition of a faster processor, end-of-life components, or problems that show up in the field. In addition to technical skills, firms want engineers who can work in teams that may include people from different FIGURE 2 Engineering skills for new-product development.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications engineering disciplines, as well as marketing people, product managers, and other non-engineering professionals. Non-engineers are particularly important during the design stage, but also throughout development for new product categories for which there are no road maps. Development of these products requires a mix of art and science, what one company refers to as the “Zen” of design, an intuitive understanding gained by working closely in teams led by “Zen masters” who have a sense of the features that should be included and the ones that should be left out. Experience Requirements Some firms look primarily for experienced engineers as a way of (1) avoiding the cost of training and (2) immediately increasing productivity. One executive said, “Over the last 15 years, the industry has become so competitive that we have to hire mostly experienced people; we can’t wait for junior engineers to learn. We still recruit at colleges but not as much as in the past. It used to be 10 to 15 new hires a year. Now it is more like two per year. Nowadays, engineers get into the field and keep moving around in order to learn.” Not everyone agrees, however. An executive from a nearby competitor said he liked to hire engineers right out of college and had set up an internship program with six universities so students could get experience during summer breaks. Interns in the program become part of core design teams right away, and after a few years are “very self-assured.” Most of these students spend two or three summers working with the company. More than half of the interns are offered jobs after graduation. Nearly all students accept, unless they are going on to graduate school. A similar opinion of the value of new graduates was 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 without experience in manufacturing or development because they “don’t know that some things can’t be done.” If they go into manufacturing or development first, they often “learn” that some things can’t be done. His company wants people who are not “burdened by experience.” At the other end of the spectrum, there is a shortage in the United States of experienced engineering managers to run projects and departments. Interviewees reported that the shortage is even more acute outside the United States. They defined two types of engineering managers—(1) engineering supervisors who manage engineering teams and (2) technical program managers responsible for getting products to market. The latter do not necessarily have deep technical knowledge, but they are good planners and organizers. The very best of them have a deep understanding of the technology or of how a product will perform in a market. Engineering managers must see that various internal organizations (e.g., engineering, manufacturing, product managers) work together on a product and work with outside firms (e.g., ODMs and component suppliers). According to one executive, “They have to be able to whip people into order.” Changing Requirements The firms we interviewed reported that the share of jobs in software engineering is increasing. This trend is not obvious in government employment data for the computer industry (Table 2) but is evident in survey data of PC firms (Table 3). 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 even hard-disk drives that can be customized for specific clients. Interviewees described a need for people with both software and hardware skills, especially for emerging products that involve close integration of software and hardware functions, such as smart phones and other handheld devices with communications capabilities. A smart phone, for example, may support multiple radio frequencies (e.g., GSM, CDMA, WiFi) and a number of applications, such as e-mail, instant messaging, and Web browsing. The formatting of the bit structure from the applications is different for each radio protocol. Thus software for many products must be written to fit and run on specific integrated circuits, unlike PCs, in which software applications can run on any Intel-compatible hardware running Windows via Windows application programming interfaces. For PCs, software development is largely independent of specific hardware configurations. Examples of requirements include software engineers who understand telephony and how communication networks function or electrical engineers who know how software controls telephony functions on a smart phone or en- TABLE 2 Employment Levels for Selected Engineering Occupations in the Computer Industry, 2002–2005a 2002 2003 2004 2005 Computer software engineers-applications (15-1031) 10,250 9,890 12,110 12,800 Computer software engineers-systems software (15-1032) 18,809 18,148 19,430 18,240 Computer hardware engineers (17-2061) 11,140 12,030 11,880 12,940 Electrical engineers (17-2071) 4,580 4,020 3,200 2,900 Electronics engineers, excluding computers (17-2072) 4,360 4,030 3,490 3,710 Industrial engineers (17-2112) 3,520 3,640 3,570 3,430 Mechanical engineers (17-2140) 2,100 2,470 2,160 2,280 Engineering managers (11-9041) 5,270 5,460 5,690 5,630 Industrial designers (27-1021) 260 290 190 180 Totals 60,289 59,978 61,720 62,110 aThe computer industry is defined as NAICS 334100 (Computer and Peripheral Equipment Manufacturing). Data for years prior to 2002 are based on SIC code 357 (Computer and Office Equipment). Source: Bureau of Labor Statistics, 2005.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications TABLE 3 Survey Results by Job Category (for 5 companies interviewed) Engineering Job Category Major Activity Demand for Engineers Availability in the United States Availability in Other Locationsa Cost and Quality (relative to U.S.)a 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 Industrial engineers Manufacturing n/ab n/ab 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 with a network. These skills are currently being taught on the job, because few universities have programs that combine training in computer science and electrical engineering. Productivity and Demand for Engineers The productivity of engineers has increased steadily, so fewer engineering resources are required per model/SKU (number of engineers/SKU is used as a productivity measure by some PC makers). However, because of the growth of the industry and the proliferation of SKUs, the overall demand for engineers has grown. For instance, 10 years ago one PC company reported having 50 engineers shipping 50 to 75 SKUs per year in consumer desktops. Today, the company has 165 engineers shipping 1,000 to 1,200 SKUs per year. The increase in productivity is partly due to the use of CAD tools, but it also reflects the outsourcing of development to ODMs. GLOBALIZATION OF THE INDUSTRY The PC industry is highly globalized. Final assembly is being done in dozens of countries, but manufacturing is increasingly concentrated in the Asia-Pacific region (Figure 3). The globalization of the PC industry was present almost from its inception in the late 1970s, as early PC makers imported a number of components from Asian suppliers. In the 1980s, leading PC makers, such as IBM, Compaq, Apple, and Dell, set up assembly operations for desktops and notebooks offshore, with production in all major world regions (Ireland, Scotland, and France in Europe; Malaysia and Singapore in the Asia-Pacific region; and Mexico in the Americas). Subassemblies, such as motherboards and base units, were produced by Asian suppliers or U.S. CMs who located production near major vendors. Final assembly also has been increasingly outsourced to CMs and ODMs. Time-critical, build-to-order production is located in regional markets, and less time-sensitive, build-to-forecast production is located mostly in China. U.S. PC makers began moving notebook production offshore in the early 1990s. Taiwan developed a homegrown industry focused on notebook PC production, led by a group of ODMs, such as Quanta and Compal, that developed specialized technical knowledge in issues critical to notebook performance, such as battery life, heat dispersion, rugged mechanicals, and electromagnetic interference. Notebooks were produced in Taiwan or Southeast Asia, but as pricing pressure on ODMs increased, the Taiwanese government removed restrictions on manufacturing notebooks in China, and the Taiwanese notebook industry moved en masse to the Shanghai/Suzhou area of eastern China. By 2005, more than 80 percent of the notebook computers in the world were produced by Taiwanese firms, almost entirely in China (DigiTimes, 2006). Offshoring and Outsourcing of New-Product Development Branded U.S. PC makers kept product development in house and onshore in the 1980s, but in the notebook market they fell behind Japanese competitors who had superior skills in miniaturizing components and developing small, light, thin products. IBM reacted to Japanese competition by moving notebook development to its subsidiary in Japan, which came up with the very successful Thinkpad design. Compaq worked with Citizen Watch Company in Japan to engineer its notebooks and produce key subassemblies. Apple contracted with Sony for one of the original Powerbook models (Business Week, 1991). In time, however, most PC makers turned to Taiwanese ODMs for manufacturing, not only to reduce costs, but also to avoid becoming dependent on Japanese partners who
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications FIGURE 3 Computer hardware production by region. Source: Reed Electronics Research, 2005. could become competitors. Gradually, Taiwanese ODMs developed specialized engineering skills and began to take over product development as well. Companies such as Dell and Gateway were able to enter the notebook market by working with ODMs on design and development, taking advantage of capabilities nurtured by their competitors. A major factor influencing the outsourcing of product development was a “pull” from ODMs. Taiwanese ODMs often did not charge explicitly for product development, which they did to win production contracts (according to interviews in Taiwan and China). In addition, once an ODM had a contract, the PC maker had incentives to work with the same ODM for future upgrades and enhancements to its products. A great deal of tacit knowledge, known only by the ODM, was created in the development process. Also, the close linkage of development activities and manufacturing and the feedback to design from manufacturing and sustaining support, created linkages that favored a continuing relationship with that ODM to reduce costs and improve quality. In addition to the pull from ODMs, there was a “push” by PC vendors. In recent years, some PC makers (notably Dell and HP) have set up their own design centers in Taiwan, thus offshoring some detailed system design, while keeping concept design and system architecture in house. The companies had several motivations—lower cost engineers and programmers, faster development because test facilities were nearby, availability of experienced engineers, government tax incentives, and proximity to emerging markets in Asia. Also, proximity to ODMs made it possible for a design center to send personnel to its ODM for problem solving and to use the ODM’s testing facilities. Taiwan also has a pool of skilled, experienced engineers who are less expensive than their U.S. counterparts. In addition, the Taiwanese government provides incentives to attract design centers and strengthen ties to U.S. high-tech companies. For instance, the Industrial Technology Research Institute set up by the Taiwanese government established an incubator in San Jose, California, to link Taiwanese venture capitalists and tech suppliers with entrepreneurs in Silicon Valley (Boudreau, 2006). At the same time, Taiwanese ODMs have been moving engineering work, as well as manufacturing, to China. ODM design teams in Taiwan are still responsible for the development of advanced technologies and new products that provide competitive advantage. As products mature, however, the development of product variations, incremental improvements, and life-cycle support has moved to China, where they are close to manufacturing and can take advantage of lower costs. As Figure 4 shows, notebook PC makers and ODMs have also shifted new-product development activities from Taiwan to China, a trend driven by the lower cost of engineers in China and the proximity to manufacturing facilities. Lu and Liu (2004) found that, after access to engineers, the second major factor for locating development activities is proximity to the manufacturing site. For notebooks and other products for which design-for-manufacturability is very important, it is valuable for a company to be able to build and test prototypes on the actual final assembly line. Also, the time frame for ramping up to mass production has been cut dramatically, as have overall product cycles as firms try to introduce new technologies quickly and avoid product obsolescence. If critical manufacturing processes and equipment (particularly tooling equipment) are in place at the manufacturing site, high-volume production can begin almost immediately after a design is finalized. ODMs save time and money by having both pilot and mass production
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications 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 testing equipment to China has been made, it is cost effective to move more development there as well, even if this means bringing in experienced engineers from Taiwan for a year or more to lead development teams. The shift of product development to Taiwan and China depends not only on the stage of the activity but also on the maturity of the product. The Taiwan design centers of U.S. PC makers are mostly involved in developing new models based on existing product platforms. The development of new form factors or the incorporation of new technologies is still led by teams in the United States. Taiwanese ODMs tend to keep the development of the newest product generations in Taiwan, where they have close working relationships with key component suppliers such as Intel. They are more likely to move the development of more mature products to China. The activities that are still being done in the United States, which do not appear likely to be moved in the near future, include R&D, concept design, and product planning. All companies, whether American, Japanese, Korean, or other, tend to concentrate R&D in their home countries. Product design benefits from proximity to leading markets where new innovations are first adopted. As long as the United States remains the leading market for innovations in the PC industry and U.S. companies remain leaders in the industry, it is likely that these functions will remain mostly in the United States. Although R&D activity in the PC industry is limited, design and product planning continue to expand as the market grows and rapid innovation in upstream technologies continues. Some of this work is moving to Taiwan, especially for notebooks, but most is still concentrated in the United States. Foreign PC makers, such as Lenovo, Acer, Fujitsu, and Toshiba design products in their home countries (e.g., China, Taiwan, Japan). However, Lenovo, which acquired IBM’s PC business, has left concept design and product planning for the global Thinkpad line in North Carolina, and most development in Japan. U.S. ENGINEERING WORKFORCE IN THE PC INDUSTRY Based on data from the U.S. government, the engineering workforce for the entire computer industry remained at about 60,000 from 2002 to 2005 (Table 2). Before 2002, employment numbers were based on Bureau of Labor Statistics data for the broader category, Computers and Office Equipment. Thus the numbers are not comparable in absolute terms. However, employment levels remained stable from 1999 to 2001. About half of the engineers in the industry are employed in the two categories of computer software engineers (applications and system software). The most growth took place in applications engineering, from 10,250 to 12,800. The biggest losses have been in electrical and electronics engineering, where a combined 2,500 jobs were lost. These changes may reflect a shift in focus from hardware to software reported by interviewees. In the United States, salaries in the computer industry have risen in every engineering occupation (Table 4) since 2002, a pattern also seen in the broader industry category for 1999 to 2001. In the PC industry, our interviews suggest that engineering salaries increased rapidly during the dot-com boom of the late-1990s, then stagnated, and now are rising
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications TABLE 4 Mean Annual Wages for Selected Engineering Occupations in the Computer Industry, 1999–2005a 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 Manufacturing) 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 rose from $61,030 in 1999 to $78,210 in 2005, an increase of 28.1 percent, which compares to a 20.1 percent increase in the consumer price index for the same period (http://data.bls.gov/cgi-bin/cpicalc.pl). These data suggest that foreign competition is not driving down salaries in the United States, as had been feared. They may also show that U.S. engineering resources are being shifted to higher value activities and that engineers are in fact becoming more productive, both of which would support higher salaries. Compared to salaries in other major computer-producing countries, salaries for U.S. engineers are very high. For all engineering categories, including technicians, the average salary is $78,210 (Bureau of Labor Statistics, 2005). Salaries for engineering professions that require four-year degrees average more than $90,000 (Table 4). The average salary for electronics engineers in all industries in the United States is about $80,000, compared to $60,000 in Japan, $20,000 in Taiwan, and less than $10,000 in China (Tables 5 and 6). However, engineering salaries are reportedly rising fast in China, especially in industry clusters, such as the Shanghai/Suzhou area, as MNCs and TABLE 5 Comparative Salaries for Electronics Engineers by Location Average Base Salary United States $78,000 Japan $63,000 Taiwan $20,000 China $10,000 Sources: For U.S., Bureau of Labor Statistics Occupational Employment Statistics. For Japan, Quan (2002). For Taiwan, EE Times (2003) and interviews with ODMs in Taiwan. For China, PR Newswire (2004) and interviews with PC makers and ODMs in Taiwan and China. Taiwanese firms compete with domestic companies for talent. The willingness of MNCs to pay higher salaries gives them access to more experienced engineers and graduates of top universities, but turnover rates are high. SKILL AVAILABILITY IN THE UNITED STATES AND OTHER COUNTRIES Limited national data have been collected on production and the availability of engineers in different countries. A Duke University study of engineering graduates in the United States, China, and India showed that even for these data, definitions are often incompatible (Gereffi and Wadhwa, 2005). We could find no international data at all on the availability of engineers with skills in specific specialties, such as electrical, mechanical, industrial, or software engineers, so we must rely on interviews, our small survey of companies, and other qualitative information. Gereffi and Wadhwa distinguish between dynamic and transactional engineers, a classification we found useful for characterizing engineering workforces in different countries based on our interviews. Dynamic engineers are TABLE 6 Engineering Salaries in China, by Home Base of Notebook PC Companies Company Home Base Base Salaries Paid in China United States $15,000 (6–7 years experience) $7500 (new graduates) Japan or Europe Similar to U.S. companies Taiwan $5,000 (new graduates) China $5,000 (new graduates) Source: Interviews with PC makers and ODMs in China, Taiwan, and Japan.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications capable of abstract thinking and high-level problem solving using scientific knowledge, are able to work in teams, and are able to work with people from other countries and cultures. Dynamic engineers have at least four-year degrees in engineering and are leaders in innovation. Transactional engineers have learned engineering fundamentals but can not apply this knowledge to solving large problems. Most transactional engineers, who do not have four-year degrees, are responsible for rote engineering tasks. United States In our interviews, engineering managers and executives of U.S. companies described engineers in the United States and elsewhere in words very much like those of Gereffi and Wadhwa, with some additional country-level distinctions. In general, U.S. engineers are more dynamic and analytical than their international counterparts, and they have the ability to lead the innovation process. The team culture in most firms means that most U.S. engineers understand working in cross-functional teams and project management. Even new U.S. graduates have been trained to work in teams as part of their university education. Also, many U.S. engineers have gained some international experience as members of engineering teems sent to Asia to work with local development teams, sometimes for weeks or months at a time. In addition, a large number of immigrants have earned degrees in the United States and then remained in the country to work for U.S. firms. Because these individuals have knowledge of their home countries, they are often chosen to work with engineering teams in those countries. As part of the entrepreneurial culture in the United States, many U.S. engineers have gained business experience by working on product-development teams or by being involved in start-up companies. Entrepreneurial skills are critical in the early design process when technology road maps must be matched with market demand to develop new products. These skills cannot be easily learned in less entrepreneurial environments farther from leading markets. Taiwan Taiwan has a mix of dynamic and transactional engineers, including many mechanical and electrical engineers with strong hands-on experience. Taiwan has the deepest pool of notebook PC developers in the world, as well as engineers with extensive experience developing other products, such as PC motherboards, optical drives, low-end network devices, and add-on cards. In addition, some Taiwanese ODMs are moving into the mobile phone business. Taiwanese engineers learn mostly on the job and develop great depth in specific disciplines such as EMI, board layout, and thermal and power management. Engineering graduates of Taiwanese universities are said to lack the analytical skills of their U.S. counterparts—skills that are important for working with key component suppliers to define new product architectures. They also have a poor understanding of international markets and generally lack the ability to design successful products on their own. Nevertheless, some Taiwanese engineers are strong managers and team leaders who can manage their own parts of a project and work effectively with PC makers. China Most Chinese engineers, even those with four-year degrees, fit the definition of transactional engineers. According to one interviewee, Chinese engineers “work perfectly at doing what they have been told but cannot think about what needs to be done; they lack both creativity and motivation. They are good at legacy systems, but not new things; they can’t handle ‘what if’ situations.” Chinese mechanical and electronic design engineers are well trained but lack the hands-on skills that come with experience. However, they are gaining this experience and receiving significant training on the job from both multinational and Taiwanese employers. One major ODM offers free training courses to engineers and brings in Taiwanese engineers to teach them. ODMs also work with local universities to develop courses in the skills they need. In the words of an ODM manager, “China is a gold mine of human resources, but if you don’t train them, you won’t be able to take advantage of it.” An American executive was equally enthusiastic, “The average might not be high, but there are so many that the cream of the crop must be very good. Chinese engineers feel ownership of the product, pride in it. American engineers will work their tails off on a project if they believe in it passionately, then will want to take off to go skiing or something. The Chinese will just move on to the next project.” Chinese engineers do not have strong design skills or marketing knowledge, especially for foreign markets, but 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 making long-term investments in training Chinese engineers and other professionals, and he expected that his U.S. company would move some of its product development to China as those skills were developed. Japan Industrial designers in Japan are not only very good at designing for the Japanese market, but can also create products for the U.S. market if they work with U.S. design and marketing people. Good examples are the IBM Thinkpad line and the successful Toshiba and Sony notebook products.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications Notebooks account for more than 50 percent of Japan’s PC market, and many products are developed specifically for that demanding market. As a result, Japanese design and development teams have great depth of skills in all design and development areas. They also are very strong in design-for-manufacturability, because most Japanese firms do their own design, development, and manufacturing (although lower value PCs and other products are increasingly being outsourced to Taiwanese companies). IMPACTS OF OFFSHORING ON U.S. ENGINEERING EMPLOYMENT Engineering employment in the U.S. PC industry has remained stable in recent years in spite of some offshoring of new-product development. One interpretation is that offshoring may have been well established by the late 1990s and has not greatly affected U.S. engineering employment since then. By 2000, U.S. PC makers had either outsourced development and manufacturing to ODMs or, in the case of IBM, had assigned development to teams in Japan and had offshored manufacturing. As a result, much of the hardware, mechanical, electrical, and electronics engineering required for product development was already offshore, as was the industrial engineering associated with manufacturing. Software engineering, engineering management, and a relatively small numbers of jobs in the various hardware, mechanical, and electrical disciplines necessary to support product design and management were left in the United States. One result of the offshoring of notebook PC development is that capabilities have been created in Taiwan, such as design-for-manufacturability and designing for small form factors, that can be applied to new product categories, such as handheld devices, smart phones, and digital music players. The fact that U.S. engineering employment in the PC industry is not growing during a time of rapid growth in demand and a proliferation of products and models probably indicates that more engineering is being done outside the United States. ODMs that have gained capabilities in the PC industry are now becoming major suppliers of mobile phones and are likely to become involved in other mobile consumer devices. The Offshore Scene Reports and data from our interviews show that Taiwanese CMs and ODMs are rapidly expanding their engineering capabilities. Quanta, the largest notebook ODM, employed about 3,500 engineers in 2003. Since then, Quanta has opened a large new R&D facility outside Taipei that is expected to eventually house 6,000 engineers. The company is also adding engineers in China. Other ODMs have also increased their engineering resources as they take over most of the development and production of the global notebook industry. One interviewee at a U.S. PC maker estimated that the ratio of in-house engineers to ODM engineers on its development projects is about 1:3 for consumer desktops, but closer to 1:1 for notebooks and commercial desktops. A smaller PC maker, by contrast, had only 50 engineers overseeing its ODMs, which develop all of its products. Most of the work that has moved offshore is transactional engineering, including board layout, tooling, electrical and mechanical engineering, and software testing. These jobs require engineering skills and experience in specific areas, such as power management, EMI, and heat dispersion. Most engineering work related to manufacturing has also been moved offshore, although there are enough high-level industrial and process engineers in the United States to oversee manufacturing in both places and travel to Asia to troubleshoot when necessary. These jobs do not require great analytical skills, but because a large share of the engineering work required for new-product development falls into the transactional category, the number of engineers offshore can be very high. For instance, the world’s largest CM, Foxconn, is said to have 10,000 tooling engineers, including 2,000 designers (Datamonitor, 2005). Many of these may be technicians with less than a four-year degree. Nevertheless, this example shows how a Taiwanese company can employ large numbers of low-cost engineers for more routine work that must be done very quickly to bring high-volume production on line. As one U.S. executive said, “We don’t do much PCB layout, tooling, or testing any more. You can’t compete with the large numbers of Asian engineers for that kind of work. The U.S. can’t compete on numbers of engineers. We have to take what we’re great at in the U.S. and leverage the rest of the world’s skills.” The U.S. Scene The more advanced engineering work is, the less vulnerable it is to offshoring. Taiwanese and Chinese engineers and companies are considered weaker in system-level design and in software than U.S. engineers. In addition, they lack the ability to develop entirely new products that are likely 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 ODM and that they only buy off-the-shelf designs from ODMs for low-end products or when they need to fill out a product line very quickly. One PC maker said that a relatively small number of inhouse engineers is necessary for performing the advanced tasks that remain in the United States. Even though these are critical activities, they are not where the bulk of the engineering work is. The same point was made by two top engineering executives at U.S. PC companies. As one of them told us, “The jobs that are really important and are in
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications the U.S. involve product architecture where you need senior engineers, hardware and software engineers generally, and mechanical engineers and industrial design people.” The other said, “The core of the design process is in the United States. We define the product—how it looks, how it will be assembled, materials used, features and technologies to incorporate. We determine the mechanical and electrical architecture.” R&D, which depends on high-level researchers with advanced degrees, often Ph.D.s, is also less vulnerable to offshoring. Other reasons for keeping R&D in this country are the strategic importance of some R&D projects and the need to protect intellectual property. Unlike product development, R&D and manufacturing are not necessarily interdependent. Thus R&D jobs have not been “pulled” offshore by manufacturing. R&D requires highly specific skills, and the key to success is finding people with those skills. If they happen to be offshore, firms are more likely to bring them to the United States, or to hire foreign graduates of U.S. universities, than to move the R&D offshore. One component maker, for instance, has 150 researchers at its R&D lab in the United States, about half of whom are from outside the United States. Unlike companies in other industry segments, such as Intel and IBM, which have R&D labs outside the United States, the U.S. PC industry has kept its R&D in this country. REFERENCES Boudreau, J. 2006. Taiwan Towers as Tech Innovator. San Jose Mercury News, January 23. Available online at http://www.siliconvalley.com/mld/siliconvalley/13692201.htm. Bureau of Labor Statistics. 2005. Occupational Employment Statistics. Available online at http://www.bls.gov/oes/home.htm. Business Week. 1991. Laptops Take Off. March 18, pp. 118–124. Datamonitor. 2005. Hon Hai Precision Industry Company Limited: Company Profile. DigiTimes. 2006. ICT Report—4Q 2005: Taiwan’s Notebooks. Taipei: DigiTimes Research. EE Times. 2003. EE Times-Asia Salary and Opinion Survey Reveals Mixed Fortunes for Asia’s Engineers. Available online at http://corporate.globalsources.com/INFO/PRESS/ARTICLES/OCT2303.HTM. Gereffi, G., and V. Wadhwa. 2005. Framing the Engineering Outsourcing Debate: Placing the United States on a Level Playing Field with China and India. Master of Engineering Management Program, Duke University. IDC (International Data Corporation). 2006a. Worldwide Black Book: Q2 2006. Framingham, Mass.: IDC. IDC. 2006b. Worldwide PC Market: 4Q05 and 2005 Review. Framingham, Mass.: IDC. Lu, L.Y.Y., and J.S. Liu. 2004. R&D in China: an empirical study of Taiwanese IT companies. R&D Management 34(4): 453–465. PR Newswire. 2004. Salaries of mainland China Electronic Engineers Rising by up to 12 Percent—Global Sources Survey. Available online at http://www.prnewswire.co.uk/cgi/news/release?id=130057. Quan, M. 2002. EE compensation, increases vary worldwide. EE Times. Available online at http://www.eet.com/story/OEG20020926S0024. Reed Electronics Research. 2005. Yearbook of World Electronics Data, Volumes 1–4. Wheelwright, S.C., and K.B. Clark. 1992. Revolutionizing Product Development: Quantum Leaps in Speed, Efficiency, and Quality. New York: Free Press.