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Semiconductor Engineers in a Global Economy

Clair Brown and Greg Linden

University of California, Berkeley

THE CHANGING NATURE OF SEMICONDUCTOR ENGINEERING WORK

The main forces affecting the nature of engineering work in the semiconductor industry are the evolution and globalization of technology. U.S. semiconductor firms are in many cases leading these changes both at home and abroad. But with increased global competition, U.S. chip engineers must continually upgrade their skills, deal with mobility among employers, and rely upon their own resources, rather than their employers, to manage their careers.

At present, global competition does not seem strong enough to undermine the positive employment and wage effects of the industry’s continued growth for most workers, although job opportunities for older workers and those at the bottom of the job distribution have deteriorated. Many overseas companies, such as Taiwan’s foundries and India’s design-services providers, complement U.S. companies and have lowered barriers to entry at a time when the costs of design and manufacturing are skyrocketing. This situation plays to the strengths of U.S. engineering by keeping viable the fabless start-up system for bringing innovation to market. The cost reductions enabled by Asian suppliers of fabrication and design services are also contributing to falling semiconductor prices, and thus supporting the continued expansion of markets, both at home and abroad.

The semiconductor (or integrated circuit [IC] or chip) industry involves three distinct stages of production—design, fabrication, and assembly and packaging. Each stage has been affected differently by globalization and offshoring:

  • Design: The design of integrated circuits is carried out primarily by engineers. The offshoring of design activities to low-cost locations has been accelerating since the mid-1990s.

  • Fabrication: Wafer fabrication involves a large number of process and equipment engineers, who account for approximately 25 percent of total direct workers at a manufacturing or fabrication facility (called a “fab”). Offshoring and onshoring of IC factories appears to have reached a relatively mature and stable stage.

  • Assembly and packaging: The final stage of IC manufacturing is the most labor intensive, but engineers make up only 6 percent of the typical assembly plant workforce. Assembly offshoring began in the 1960s, and assembly and packaging are now performed almost entirely abroad. Assembly and packaging are not discussed in this paper because the employment implications for U.S. engineers are insignificant.1

The semiconductor industry produces a wide range of products, from relatively simple discrete diodes and transistors all the way to complex “systems on a chip.” Most market statistics reported here and elsewhere reflect “merchant” semiconductor sales, that is, sales to unrelated companies. A less visible share of the industry is devoted

This paper was prepared for the National Academy of Engineering Workshop on the Offshoring of Engineering: Facts, Myths, Unknowns, and Implications, October 24–25, 2006, Washington, D.C. The paper is based on research conducted for a forthcoming book by Brown and Linden, Change Is the Only Constant: How the Chip Industry Deals with Crisis.

1

For an analysis of the globalization of assembly, see Brown and Linden (2006).



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semiconductor engineers in a global economy Clair Brown and greg Linden University of California, Berkeley the ChAnging nAtUre of dustry involves three distinct stages of production—design, semiConDUCtor engineering WorK fabrication, and assembly and packaging. Each stage has been affected differently by globalization and offshoring: The main forces affecting the nature of engineering work in the semiconductor industry are the evolution and global- • Design: The design of integrated circuits is carried ization of technology. U.S. semiconductor firms are in many out primarily by engineers. The offshoring of design cases leading these changes both at home and abroad. But activities to low-cost locations has been accelerating with increased global competition, U.S. chip engineers must since the mid-1990s. continually upgrade their skills, deal with mobility among • Fabrication: Wafer fabrication involves a large number employers, and rely upon their own resources, rather than of process and equipment engineers, who account for their employers, to manage their careers. approximately 25 percent of total direct workers at a At present, global competition does not seem strong manufacturing or fabrication facility (called a “fab”). enough to undermine the positive employment and wage Offshoring and onshoring of IC factories appears to effects of the industry’s continued growth for most workers, have reached a relatively mature and stable stage. although job opportunities for older workers and those at • Assembly and packaging: The final stage of IC manu- the bottom of the job distribution have deteriorated. Many facturing is the most labor intensive, but engineers overseas companies, such as Taiwan’s foundries and India’s make up only 6 percent of the typical assembly plant design-services providers, complement U.S. companies and workforce. Assembly offshoring began in the 1960s, have lowered barriers to entry at a time when the costs of and assembly and packaging are now performed design and manufacturing are skyrocketing. This situation almost entirely abroad. Assembly and packaging are plays to the strengths of U.S. engineering by keeping viable not discussed in this paper because the employment the fabless start-up system for bringing innovation to market. implications for U.S. engineers are insignificant.1 The cost reductions enabled by Asian suppliers of fabrication and design services are also contributing to falling semicon- The semiconductor industry produces a wide range ductor prices, and thus supporting the continued expansion of products, from relatively simple discrete diodes and of markets, both at home and abroad. transistors all the way to complex “systems on a chip.” The semiconductor (or integrated circuit [IC] or chip) in- Most market statistics reported here and elsewhere reflect “merchant” semiconductor sales, that is, sales to unrelated companies. A less visible share of the industry is devoted This paper was prepared for the National Academy of Engineering Workshop on the Offshoring of Engineering: Facts, Myths, Unknowns, and Implications, October 24–25, 2006, Washington, D.C. The paper is based on 1 For research conducted for a forthcoming book by Brown and Linden, Change an analysis of the globalization of assembly, see Brown and Linden (2006). Is the Only Constant: How the Chip Industry Deals with Crisis. 149

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150 THE OFFSHORING OF ENGINEERING to “captive” chip design and manufacture internal to a com- like Intel’s Pentium 4, with 42 million transistors fabricated pany. This model is most prevalent in Japan but still exists on a 180 nm linewidth process, engaged hundreds of design engineers for the full length of a five-year project.5 in the United States, primarily at IBM, where nearly 50 percent of chip output in 2000 was for captive use.2 Other Functional integration has reached a point at which certain systems companies, such as Apple Computer or Cisco, that chips encompass most of the individual components that don’t make or sell chips may nevertheless design them for populated the circuit board of earlier systems, giving rise to internal use. These chips may or may not be counted in mer- the name “system on a chip” (SOC). SOC integration offers chant data depending on whether they are manufactured by the benefits of speed, power, reliability, size, and cost relative a branded ASIC company, such as LSI Logic (which would to the use of separate chips. be counted), or by a manufacturing-services “foundry,” Although the manufacturing costs of an SOC are lower such as Taiwan Semiconductor Manufacturing Corpora- than for the separate components it replaces, the fixed costs tion (which wouldn’t be included). All foundry sales are of a complex design can be significantly higher. A major excluded from this analysis to prevent double counting. reason is that system-level integration has drawn chip com- The work of engineers who design, manufacture, and panies into software development because system software market chips has been transformed by the continuous pro- should be generated in parallel with the system-level chip to gression of manufacturing technology, which has evolved ensure coherence. Chip companies also offer their customers for more than 30 years along a trajectory known as “Moore’s software-development environments, and even applications, Law,” the name given to a prediction made in a 1965 article to help differentiate their chips from those of their competi- by Gordon Moore. Moore, who co-founded Intel a few years tors. In a large chip-development project, software can now later, predicted that the cost-minimizing number of transis- account for half the engineering hours. tors that could be manufactured on a chip would double U.S. chip companies accounted for about half of the every year (later revised to every two years). The industry has industry’s revenue in 2005, with Intel alone commanding maintained this exponential pace for more than 30 years.3 about 15 percent of the market. The only U.S.-based firms Moore’s prediction was based on several factors, such as in the 2005 global top 10 were Intel and Texas Instru- the ability to control manufacturing defects, but the driving ments, but the United States has a great many mid-size technological force has been a steady reduction in the size companies that account for about half of the top 50. Some of transistors. The number of transistors leading-edge pro- of these are “fabless” companies that design and market ducers can fabricate in a given area of silicon has doubled chips but leave the manufacturing to other companies, pri- roughly every three years. From 1995 to 2003, the pace ac- marily Asian contract manufacturers known as foundries. celerated and the number doubled every two years.4 All new entrants to the chip industry in recent years have This relentless miniaturization is now reaching the mo- adopted the fabless model. lecular level. The smallest “linewidth” (feature on the chip Fabless revenue has grown much faster (compound annual surface) has shrunk from two microns in 1980 to less than growth rate of 20 percent) than the semiconductor industry as one-tenth of a micron (100 nanometers [nm]) a quarter- a whole (7 percent) over the last 10 years. In 2005, the largest century later. Viewed in cross-section, the thickness of hori- fabless companies, Qualcomm, Broadcom, and Nvidia, each zontal layers of material deposited on the silicon surface is had revenues of more than $2 billion. currently about 1.2 nm. For an idea of the scale involved, the The discussion in this paper of how the labor market for width of a human hair is about 100 microns, and the width semiconductor engineers, both domestic and worldwide, of a molecule is about 1 nm (one-thousandth of a micron). has been changing in response to changes in skill require- This progress has involved considerable expense for ments is based on our ongoing interview-based research on R&D, and the cost of each generation of factories has the globalization of the semiconductor industry. Since the steadily increased. By 2003 the price tag for a fab of mini- early 1990s, the Berkeley Sloan Semiconductor Program has collected data at semiconductor companies globally.6 In mum efficient scale was more than $3 billion. The Moore’s Law trajectory has led to growing complex- the past seven years the authors have interviewed managers ity of the industry’s most important chip designs. The size of and executives at dozens of semiconductor companies (both a design team depends on the complexity of the project, the integrated and fabless) in the United States, Japan, Taiwan, speed with which it must be completed, and the resources available. Design teams can be as small as a few engineers, 5 Terry Costlow, “Comms held Pentium 4 team together,” EE Times, and project duration can vary from months to years. A chip November 1, 2000. “Linewidth” refers to the size of the features etched on a wafer during the fabrication process. Each semiconductor process genera- tion is named for the smallest feature that can be produced. 2 IC Insights data reported in Russ Arensman, “Big Blue Silicon,” Elec- 6 The Competitive Semiconductor Manufacturing Program is a multi- tronic Business, November 2001. disciplinary study of the semiconductor industry established in 1991 by 3The revision occurred in 1975 (John Oates, “Moore’s Law is 40,” The a grant from the Alfred P. Sloan Foundation with additional support from Register, April 13, 2005). the semiconductor industry. Further details are available at esrc.berkeley. 4 Mark LaPedus, “ITRS chip roadmap returns to three-year cycle,” Silicon edu/csm/ and iir.berkeley.edu/worktech/. Strategies, January 21, 2004.

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151 SEMICONDUCTOR ENGINEERS IN A GLOBAL ECONOMY India, China, and Europe. We also use data from the Bureau surveys, provides not only detailed educational characteris- of Labor Statistics, the Semiconductor Industry Association, tics of workers, but also occupational and industry charac- and the Institute of Electrical and Electronic Engineers, as teristics of their jobs. Thus ACS is much better suited to our well as other published and proprietary sources (e.g., indus- labor market analysis. However, the sample size for ACS try consultants). for 1996–2002 is too small for detailed analysis. For these We begin by looking in detail at data sets on employ- reasons, we look at both the OES and ACS data sets in our ment and earnings of U.S. semiconductor engineers, H-1B analysis. Because they yield somewhat different results, workers, and overseas engineers. We then discuss the factors however, we caution the reader against drawing strong con- affecting the U.S. labor market for semiconductor engineers, clusions based on either data set alone. The inconsistencies including technological change, immigration policy, and and gaps reflect a need for better data collection by govern- higher education practices. A discussion of globalization ment agencies. follows in terms of offshoring by U.S. companies, the We also use the very large Census Longitudinal Employer- availability and quality of low-cost engineers in Asia, and Household Dynamics (LEHD) data set that links employees the development of the semiconductor industry in Taiwan, and employers to describe semiconductor career paths and China, and India. In the final section we consider the outlook firm job ladders between 1992 and 2002. This enables us to for the U.S. chip-industry workforce. look at how workers form career paths by piecing together jobs offered by semiconductor firms. the U.s. LABor mArKet for engineers employment and earnings (oes Data) Factors that have affected the semiconductor industry in the past six years include a severe recession during 2001, a We begin by looking at employment levels and annual recovery that stalled in 2004, a large decline in venture fund- earnings for selected engineering jobs in 2000 and 2005, ing for start-ups that picked up again in 2006, changes in the based on OES data. For the semiconductor industry, we use number of H-1B visas, and a drop and subsequent recovery the North American Industry Classification System (NAICS) in foreign student applications to U.S. graduate engineering “Semiconductor and Other Electronic Component Manu- schools since 9/11. In light of these changes in government facturing” (NAICS four-digit level 3344), which includes policies and swings in the business cycle, disentangling an relatively low-value components such as resistors and con- underlying, long-term trend in the offshoring of engineering nectors. The most relevant subcategory, “Semiconductor jobs is extremely difficult. Readers should keep this caveat in and Related Device Manufacturing” (NAICS 334413), mind when reading the following analysis of the U.S. labor accounted for 39 percent of employees (and 45 percent of market for semiconductor engineers, as well as the discus- nonproduction workers) in the 3344 category in 2003, but sion of engineering jobs in selected countries. occupation-specific data are not available at this level of industry detail.8 Because of inadequacies and gaps in the available data, we use more than one source for our analysis. To identify In 2005, 2.4 million people were employed nationally in “engineering and architecture” occupations,9 with average trends in the employment levels and earnings of semiconduc- tor engineers, we use two major national data sets that have annual earnings of $63,920 (see Table 1). Another 2.9 mil- different strengths and weaknesses. The Bureau of Labor lion people were employed in “computer and mathematical” Statistics’ Occupational Employment Statistics (OES) (www. occupations, with average annual earnings of $67,100. Na- bls.gov/oes/home.htm) provides a large job sample collected tional employment in engineering and architecture fell 7.5 from establishments that report detailed occupational char- percent from 2000 to 2005, and average annual earnings of acteristics. However, comparisons of data from different these workers rose 18.2 percent (more than the CPI-urban, which rose 13.4 percent).10 Computer and mathematical years are not exact because OES is designed for cross-section comparisons rather than comparisons over time.7 Moreover, jobs increased slightly (0.7 percent) from 2000 to 2005, and OES does not provide educational characteristics. average annual earnings of these workers rose 15.6 percent, The American Community Survey (ACS) (http://www. slightly more than inflation. census.gov/acs/www/), a relatively new household survey The semiconductor industry (NAICS 3344) employed started in 1996 to update the census between decennial 450,000 workers in 2005, with 21 percent in engineering and architecture occupations (36 percent of them as technicians or drafters) and 6.4 percent in computer and math occupa- 7 The OES survey methodology is designed to create detailed cross- tions (40 percent of them in computer support or administra- sectional employment and wage estimates for the U.S. by industry. It is less tive positions). These two groups do not include managers, useful for comparisons of two or more points in time because of changes in the occupational, industrial, and geographical classification systems, 8 U.S. Census Bureau, “Statistics for Industry Groups and Industries: changes in the way data are collected, changes in the survey reference pe- riod, and changes in mean wage estimation methodology, as well as perma- 2003,” Annual Survey of Manufactures, April 2005. 9This is the broad occupational category used for engineers in the OES. nent features of the methodology. More details can be found at http://www. 10 http://data.bls.gov/cgi-bin/surveymost?cu. bls.gov/oes/oes_ques.htm#Ques7.

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15 THE OFFSHORING OF ENGINEERING TABLE 1 Employment Levels and Earnings for Engineers in All Industries and in the Semiconductor Industry, 2000 and 2005 2000 2005 Average Average Percentage Percentage Annual Annual Change in Change in Employment Earnings Employment Earnings Employment Earnings Architecture and Engineering Occupations (total) 2,575,620 $54,060 2,382,480 $63,920 –7.50% 18.24% —in Semiconductors 132,150 $52,100 95,520 $68,720 –27.72% 31.90% Electrical Engineers (total) 162,400 $66,320 144,920 $76,060 –10.76% 14.69% —in Semiconductors 10,050 $69,560 10,620 $82,400 5.67% 18.46% Electronic Engineers (total) 123,690 $66,490 130,050 $79,990 5.14% 20.30% —in Semiconductors 14,170 $65,400 15,700 $82,430 10.80% 26.04% Aerospace Engineers (total) 71,550 $69,040 81,100 $85,450 13.35% 23.77% Chemical Engineers (total) 31,530 $67,160 27,550 $79,230 –2.62% 17.97% Civil Engineers (total) 207,080 $58,380 229,700 $69,480 10.92% 19.01% Computer Hardware Engineers (total) 63,680 $70,100 78,580 $87,170 23.40% 24.35% —in Semiconductors 5,990 $70,780 14,440 $89,870 141.07% 26.97% Industrial Engineers (total) 171,810 $59,900 191,640 $68,500 11.54% 14.36% —in Semiconductors 12,580 $64,420 11,030 $74,250 –2.32% 15.26% Mechanical Engineers (total) 207,300 $60,860 220,750 $70,000 6.49% 15.02% Computer and Mathematical Occupations (total) 2,932,810 $58,050 2,952,740 $67,100 0.68% 15.59% —in Semiconductors 27,080 $66,660 28,770 $77,800 6.24% 16.71% Computer Programmers (total) 530,730 $60,970 389,090 $67,400 –6.69% 10.55% Software Engineers, Applications (total) 374,640 $70,300 455,980 $79,540 21.71% 13.14% —in Semiconductors 5,890 $72,680 8,250 $86,860 40.07% 19.51% Computer Software Engineers, Systems (total) 264,610 $70,890 320,720 $84,310 21.20% 18.93% —in Semiconductors 8,280 $76,660 7,090 $90,820 –14.37% 18.47% who represent 8.2 percent of semiconductor employees. by 40 percent, while jobs for software-systems engineers fell Nationally, some 12 percent of electronics engineers, 7.3 by 14 percent. percent of electrical engineers, 18 percent of computer- On average, engineers in the semiconductor industry hardware engineers, 5.8 percent of industrial engineers, and command higher salaries than their counterparts in other approximately 2 percent of computer-software engineers industries. In 2005, semiconductor industry engineers earned (applications and systems) are employed in the semiconduc- 7.5 percent more than engineers nationally, and software tor industry. Together these six occupations account for 54 engineers in the semiconductor industry earned 16 percent percent of engineering jobs in the semiconductor industry more than software engineers nationally. In any given spe- (or 85 percent if techs, drafters, and computer-support jobs cialty, engineers in the semiconductor industry had average are excluded). annual earnings of 3 percent (for electronics engineers) to Engineering jobs (“Architecture and Engineering Oc- 9 percent (for computer software engineers, applications) cupations”) in the semiconductor industry fell a surprising higher than engineers in other industries. Engineers in the six 28 percent between 2000 and 2005 (Table 1, line 2).11 How- main semiconductor engineering specialties all experienced ever, if we look at the major categories for semiconductor average growth in real earnings (i.e., above the inflation rate engineers, jobs increased for electrical engineers (6 percent), of 13.4 percent for the period), ranging from 1.9 percent for electronics engineers (11 percent), and computer hardware industrial engineers to 14 percent for computer-hardware engineers (141 percent). Semiconductor jobs for industrial engineers. Note that these comparisons are not adjusted for engineers fell 2 percent, the only specialty in which job education or experience, which are taken into consideration growth for semiconductor engineers was lower than for in the next section using a different data set. engineers nationally. Of course, employment levels between 2000 and 2005 Jobs for software engineers (“Computer and Mathemati- did not increase continuously. Applications software engi- cal Occupations”) in the semiconductor industry increased neers experienced a dip in employment in 2004 after strong by 6 percent between 2000 and 2005, while all jobs in these employment growth in 2003, and electrical and electronics occupations increased less than 1 percent nationally. The in- engineers experienced a dip in employment in 2003 followed creases were unevenly distributed, however. Semiconductor by very strong growth in 2004. This is consistent with the industry jobs for software-applications engineers increased jump in the national unemployment rate for electrical and electronics engineers to 6.2 percent in 2003, as it converged for the first time in 30 years with the general unemployment 11 Comparison of 2000 and 2005 is not exact because SIC 367 was used in 2000 for the industry code and NAICS 334400 was used in 2005.

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153 SEMICONDUCTOR ENGINEERS IN A GLOBAL ECONOMY rate, before falling back in 2004 to a more typical rate of The age-earnings profiles for the B.S. (Figures 1 and 2) and 2.2 percent.12 M.S./Ph.D. groups (Figures 3 and 4) show how the annual Overall we can say that the labor market for semiconduc- earnings of semiconductor engineers increase with knowl- tor engineers appeared to be relatively strong in the five years edge and skill levels (educational level) and experience (age) after the dot-com bust in 2000, when earnings nationally for 2000 and 2004. were mostly stagnant during the economic recovery, with The results are also given in Table 2, which shows earn- income gains going mainly to the top decile (especially the ings profiles for all three educational levels for 2000, 2002, top 1 percent). Semiconductor engineers even experienced and 2004, with earnings adjusted for inflation (in 2004 dol- lars using CPI-urban).15 One cautionary note: because the better job and earnings growth than engineers in the same specialties in other industries. Although employment for sample size for 2000 is small, the results for that year are industrial engineers and software-systems engineers in less reliable than for 2002 and 2004. Also some of the age- education groups were too small to show full results.16 the semiconductor industry fell, employment for the other four specialties increased. Although earnings growth was relatively high only for computer-hardware engineers and Returns-to-Experience electronics engineers in the semiconductor industry, all six specialties had relatively high average annual earnings Median and average real earnings increased with expe- in 2005, ranging from $74,250 for industrial engineers to rience (age) for all educational groups through the prime $90,820 for software-systems engineers. ages. After that, median (but not necessarily average) earnings declined for older workers (age 51–65). However, average earnings did not decline for older workers in any Age-earnings Profiles by education education group in 2000 or for older M.S./Ph.D.-level and experience (ACs Data) workers in 2002, and median earnings did not decline for To analyze the earnings structures of U.S. semiconduc- older < B.S. workers in 2004. The general increase and tor engineers by education and experience, we use another subsequent decline in median earnings implies that these data set, the ACS (http://www.census.gov/acs/www/). We engineers typically received a positive return-to-experience calculated age-earnings profiles for three educational levels, until they were in their fifties and sixties, when earnings less than a bachelor’s degree (< B.S.), a bachelor’s degree for many of them declined. The decline can be explained, (B.S.), and a graduate degree (M.S./Ph.D.),13 using ACS data at least in part, by the number of weeks worked (Table 3). for 2000, 2002, and 2004 for a sample of workers defined as Workers older than 50 were much more likely than younger follows: workers to work less than a full year (defined, conserva- tively, as less than 48 weeks of paid work). • age 21 to 65 Comparing degrees, engineers with B.S. degrees typically • industry code 339 (electronics components and prod- had higher returns-to-experience than engineers with ad- ucts, comparable to NAICS 3344 and 3346) vanced degrees. B.S. holders earned one-half to three-fourths • occupation codes (selected electrical and electronics, more in their peak years (age 41–50) than in their entry years software, and other engineering occupations and se- (age 21–30). Engineers with graduate degrees (M.S./Ph.D.) lected managerial occupations)14 earned 10 to 20 percent more in their peak years (age 41–50) than they did a decade earlier (age 31–40), shortly after their entry-level years. 12 Data were provided by Ron Hira. BLS redefined occupations begin- The variance in earnings increased with age for prime- ning with the 2000 survey covering 1999, but there is no evidence that the aged and older engineers (see 90/10 ratio in Table 2). The in- redefinition has contributed to the post-bubble unemployment rise. See also crease in variance is typically thought to reflect faster grow- Kumagai (2003). 13 < BS includes workers with a high school degree or GED but no B.S. ing pay for higher performers, and pay for top earners would degree (the proportion of this group that did not have an associate degree be expected to increase as engineers become managers. was 41 percent in 2000, 27 percent in 2002, and 13 percent in 2004); BS includes college graduates who do not have a higher degree; MS/PhD in- 15 Earnings for n percent represents the earnings where n percent of obser- cludes workers with a Masters or Ph.D. degree (the proportion of this group that had only a Masters was 90 percent in 2000, 81 percent in 2002, and 82 vations are below this value and (100 – n) percent of observations are above percent in 2004). Workers without a high school degree and workers with this value. Earnings for the 50th percentile represent the median. 16 For education-age-year cells (3 × 4 × 3 = 36) with fewer than 10 ob- professional degrees (e.g., MD, DDS, LLB, JD, DVM) are excluded. 14We used several different samples of occupation codes in order to servations, no results are shown (two cells). For cells with fewer than 20 test for sensitivity of age-earning profiles to the definition of semiconduc- observations (and at least 10 observations), only mean and median income tor engineer occupations. In the results presented here, we included SOC and full weeks worked are shown (six cells). 172070, 172061, 151021, 151030, 151081, 172131, 172110, 172041, The sample sizes by year and education (not age) are as follows: 119041, 113021, 111021, 112020, 113051, and 113061. When we restricted 2000 2002 2004 the sample to fewer occupation codes, the age-earnings profiles remained < BS 44 129 127 mostly stable, with the earnings of the top 10 percent increasing for older BS 151 367 363 groups with the inclusion of more managerial occupations. MS/PhD 78 250 271

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154 THE OFFSHORING OF ENGINEERING $250,000 90% 50% $200,000 10% Earnings $150,000 $100,000 $50,000 21–30 31–40 41–50 51–65 Age FIguRE 1 Age-earnings profile for B.S. holders in 2000. Brown -Linden other way, in 2002 and 2004, a typical young engineer (age Figure 1 However, the increase in variance between prime-age and older engineers reflects a sharp drop in pay at the bottom end 21–30) with a B.S. degree earned the same pay as a typical of the scale (the 10th percentile group), especially in 2004. engineer without a B.S. but with 10 years more experience These profiles indicate that many older engineers are facing (age 31–40). declining and inadequate job opportunities. The graduate-degree premiums over a B.S. (median earn- ings for M.S./Ph.D. compared to B.S.) were not stable over the short time period shown, so it is difficult to determine Returns-to-Education the trend for returns for graduate education. The graduate- As expected, median and average earnings increased degree premium for the youngest group, when many were with education. Comparing real median earnings for the still in school, was 36 percent in 2002, but fell to 8 percent in younger groups, we see that the return for a B.S. degree has 2004. The graduate-degree premium for workers in the early been fairly high, with college graduates typically earning stages of their careers (age 31–40) was 7 percent in 2000, 20 percent to 65 percent more (depending on age and year) then shot up to 25 percent in 2002 and 36 percent in 2004, than those who finished high school but not college. Put an- confirming our interview-based findings that the relative $250,000 90% $200,000 50% 10% $150,000 Earnings $100,000 $50,000 21–30 31–40 41–50 51–65 Age FIguRE 2 Age-earnings profile for B.S. holders in 2004. Brown -Linden Figure 2

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155 SEMICONDUCTOR ENGINEERS IN A GLOBAL ECONOMY $250,000 90% 50% $200,000 10% $150,000 Earnings $100,000 $50,000 21–30 31–40 41–50 51–65 Age FIguRE 3 Age-earnings profile for M.S./Ph.D. holders in 2000. Brown -Linden Figure 3 demand for younger M.S. and Ph.D. holders is increasing as pursue graduate degrees, even though our fieldwork indicates a result of increasing technical complexity in manufacturing that the industry needs them. and design. A typical engineer (age 31–40) with an M.S. or The variance in earnings was higher for engineers with Ph.D. earned slightly less than the average engineer with a graduate degrees than for engineers with B.S. degrees in B.S. but with 10 years more experience (age 41–50). 2004. In both 2002 and 2004, the variance in earnings for For workers in their peak years (age 41–50), the graduate- older engineers with B.S. and graduate degrees was very degree premium fell from 16–19 percent in 2000 and 2002 to high, with the 90/10 ratio ranging from 4.3 to 7.6. 9 percent in 2004. For the oldest workers, the graduate-degree premium fell even more dramatically, from 38–49 percent in Earnings over Time 2000 and 2002 to 13 percent in 2004. For engineers older than 40 in 2004, the graduate degree premium was only 10 The ACS earnings profiles showed slower growth of percent, indicating weak incentives for domestic workers to average earnings between 2000 and 2004 than the OES data $250,000 $200,000 90% 50% $150,000 10% Earnings $100,000 $50,000 21–30 31–40 41–50 51–65 Age FIguRE 4 Age-earnings profile for M.S./Ph.D. holders in 2004. Brown -Linden Figure 4

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156 TABLE 2 Age-Earnings Profiles (adjusted for inflation) for 2000, 2002, and 2004 a 2000 2002 2004 Age 21–30 31–40 41–50 51–65 21–30 31–40 41–50 51–65 21–30 31–40 41–50 51–65 Less than a Bachelor’s Degree 10th percentile $6,051 $2,9245 $23,194 $32,270 $32,421 $35,461 $34,448 50th percentile $34,966 $60,899 $48,973 $48,405 $57,481 $57,481 $49,515 $40,526 $60,790 $68,895 $70,415 90th percentile $90,759 $80,675 $85,717 $72,607 $121,579 $193,513 $7,770 90/10 ratio 15.00 2.76 3.70 2.25 3.75 5.46 2.84 Mean $4,606 $53,693 $70,505 $46,649 $57,127 $56,069 $52,402 $41,612 $68,819 $84,736 $64,523 Bachelor’s Degree 10th percentile $20,710 $53,444 $44,536 $30,496 $37,061 $49,026 $32,825 $24,316 $36,575 $60,790 $50,658 50th percentile $52,052 $83,505 $91,299 $72,372 $58,239 $72,005 $88,946 $70,945 $58,763 $70,921 $97,263 $89,665 90th percentile $96,867 $130,270 $158,104 $95,299 $127,066 $158,832 $158,832 $81,053 $109,421 $217,829 $217,829 90/10 ratio 4.68 2.44 3.55 3.12 3.43 3.24 4.84 3.33 2.99 3.58 4.30 Mean $58,127 $89,949 $107,758 $109,566 $60,867 $79,222 $104,635 $87,555 $57,470 $76,809 $116,220 $109,410 Master’s Degree or Ph.D. 10th percentile $61,238 $61,238 $61,945 $55,062 $63,533 $45,002 $21,276 $60,790 $60,790 $32,320 50th percentile $89,073 $106,331 $100,207 $79,417 $90,005 $105,888 $105,888 $63,322 $96,250 $106,382 $101,316 90th percentile $111,341 $155,878 $95,299 $137,654 $158,832 $339,901 $91,184 $210,737 $217,829 $217,829 90/10 ratio 1.82 2.55 1.54 2.50 2.50 7.55 4.29 3.47 3.58 6.74 Mean $89,360 $114,175 $121,988 $79,769 $95,060 $120,872 $127,819 $61,167 $112,238 $127,075 $124,065 aThe repetition of earnings in some cells, especially for the 90th percentile group, appears to be a coincidence and not a mistake. A check of the data indicates that many workers with different levels of education and in different occupations reported the same earnings, which are not top coded.

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157 SEMICONDUCTOR ENGINEERS IN A GLOBAL ECONOMY TABLE 3 Engineers Working Less Than a Full Year (48 that older engineers may be finding fewer high-quality job Weeks), by Degree Level, for 2000, 2002, and 2004 opportunities. Age Ranges Career Paths for semiconductor 21–30 31–40 41–50 51–65 Professionals (LehD Data) 2000 a Less than a Bachelor’s Degree 10% 0 35.71% We now look briefly at how the jobs and earnings of semi- Bachelor’s Degree 25% 3.28% 2.56% 10.53% conductor workers, including engineers, changed from 1992 a Master’s Degree or Ph.D. 3.23% 4.55% 12.5% to 2001 based on a very large linked employer-employee 2002 data set, the Census Bureau’s LEHD.17 The data cover all Less than a Bachelor’s Degree 14.81% 0 14.89% 31.82% Bachelor’s Degree 13.7% 11.11% 9.24% 28.57% occupations, engineers as well as office workers, techni- Master’s Degree or Ph.D. 13.33% 16.13% 3.7% 26.09% cians, managers, and others. We focus here on prime-age 2004 male and female workers (ages 35–54) in two educational Less than a Bachelor’s Degree 35.71% 7.69% 3.70% 20% groups—medium (some college) and high (college graduate Bachelor’s Degree 15.85% 10.62% 9.82% 10.71% and above). Master’s Degree or Ph.D. 25% 7.34% 12.35% 17.78% The career paths are shown for modal groups, that is, the Note: The value in each cell is the proportion of engineers in that age group largest groups of workers who had held one, two, or three with the indicated degree who worked less than 48 weeks in the indicated jobs, with at least one job in a semiconductor establishment year. a<10 observations (not shown) during the decade. Other (smaller) groups of workers also changed jobs but had different career paths. For those who had held two jobs; the first job was outside the semiconductor industry and the second job in it. For showed between 2000 and 2005, primarily because the ACS those who had held three jobs, the first two were outside earnings were higher than in OES data in 2000 and com- the semiconductor industry, and the last one was in the parable in 2004 and 2005. However patterns varied across industry. occupations. In the ACS data, average computer science earnings grew much faster than average electrical and elec- tronics earnings, where growth did not keep up with inflation Career Paths (not shown in tables). In comparison, the OES data showed Semiconductor workers followed two distinct types of comparable positive earnings growth for these occupations career paths—loyalist and job changer (see Table 4). Work- between 2000 and 2005. ers who already worked for semiconductor employers and Although ACS data were developed to be compared over had good job ladders (high initial earnings and good earn- time, while OES data were not, the small sample sizes of the ings growth) tended to become loyalists, that is, they did not ACS data make them less representative and less reliable change jobs during the period studied. The career paths of than the OES data. For these reasons, we cannot say with loyalists were considerably better than the career paths of confidence how much earnings by semiconductor engineers job changers. grew from 2000 to 2005. Workers on inferior job ladders outside the semiconductor industry tended to become job changers, and most of them Summary eventually ended up on a relatively good job ladder. Job changers had relatively low initial earnings in jobs outside Overall the earnings data indicate potential problems in the semiconductor industry and experienced substantial the high-tech engineering market. Although the graduate- earnings growth (usually 20 to 30 percent for younger and degree premium appears to be adequate for younger workers, 10 to 20 percent for older workers) by taking jobs in the the low returns-to-experience for engineers with graduate semiconductor industry. Among job changers, two-jobbers degrees make returns on investment in a graduate degree began with higher pay outside the industry and were able to inadequate over an engineer’s entire career, especially the enter the semiconductor industry sooner than three-jobbers. returns implied by the 2004 ACS data. The returns to a BS de- Although highly educated three-jobbers experienced healthy gree were adequate for engineers younger than 50. However, earnings increases when they changed jobs outside the semi- older workers at all three educational levels experienced a conductor industry, the increase was smaller than when they troubling drop in median real earnings. The data also indicate got jobs in the industry. Because the overall earnings growth that the variance in earnings for high-tech engineers is grow- ing, partly because earnings at the bottom of the distribution 17This material is taken from the Sloan-Census project that produced are rising very slowly, or even falling, as engineers age. Thus, the book Economic Turbulence by Brown et al. (2006) and related papers although the high-tech engineering labor market appears to (see www.economicturbulence.com). See Chapter 5 for an overview of job be strong nationally, data by age and education indicate that ladders and Chapter 6 for an overview of career paths in the semiconductor engineering jobs at the bottom end may be deteriorating and and four other industries (software, finance, trucking, and retail food).

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158 THE OFFSHORING OF ENGINEERING TABLE 4 Semiconductor Career Paths, Workers Age 35–54 Males Females Loyalists Two Jobs Three Jobs Loyalists Two Jobs Three Jobs Medium Education A $32,564 $15,046 $12,458 $13,084 $8,148o $7,314 B .054 .056 .058 .039 .030 .041 C $55,780 $25,926 $21,998 $19,641 $10,999 $10,999 High Education A $36,084 $22,893 $18,197 $14,990 $10,132 $9298 B .059 .048 .047 .044 .028 .030 C $65,207 $36,925 $29,068 $23,569 $13,356 $12,570 Notes: A = mean initial earnings (2005 dollars, inflated from 2001 dollars using the CPI-urban). B = net annualized earnings growth rate (in log points) over the 10-year simulated career path. C = simulated 2001 final average earnings (2005 dollars). Source: Adapted from Economic Turbulence (Brown et al., 2006), Chapter 6, Table 6.1. Original calculations by authors from Census LEHD data. These career paths are for all workers in all occupations in the industry. They include engineers, as well as office workers, technicians, managers, and other occupations. of two-jobbers and three-jobbers was about the same over In 1983, IBM offered workers at five locations a voluntary the 10-year period, the two-jobbers usually maintained their early retirement program in which workers with 25 or more initial earnings advantage. years of experience would receive two years of pay over a Although job changers usually experienced higher earn- four-year period. IBM offered voluntary retirement programs again in 1986 and 1989.18 Because these programs were vol- ings growth over the decade than loyalists, the growth did not offset their much lower initial earnings. Thus loyalists ended untary for the general workforce, rather than for targeted job the period with substantially higher earnings. The legendary titles or divisions, the change in workforce usually did not job hoppers in Silicon Valley (engineers who left good jobs turn out as the company might have chosen: better workers for even better ones), constituted a smaller group than the often opted to leave, and weaker workers, without good job job changers shown here, who left relatively low-wage jobs opportunities elsewhere, often opted to stay. for jobs that paid slightly more. The deep recession in the early 1990s finally pushed IBM, DEC, and Motorola, once known for providing employment security, to make layoffs.19 The new approach to downsizing Job Ladders included voluntary programs for targeted workers. If these Data (not shown here) indicate that large firms provided workers did not accept the termination program, they could 85 percent of semiconductor jobs. Firm fortune matters in be subject to layoffs, making the program less than voluntary the job ladders offered by large, low-turnover firms, as we in reality. In 1991 and 1992, IBM selected workers eligible see by comparing firms with growing employment to firms for termination, which included a bonus of up to a year’s with shrinking employment. Large growing firms with low salary. In this way, more than 40,000 workers were “transi- turnover provided 50 percent of the jobs in the industry, and tioned” out of the company. Downsizing continued through 1993, and by 1994 IBM was actually laying off workers.20 these firms are typically known for providing good jobs. Semiconductor jobs in these firms tended to last a relatively With the dot-com bust in the early 2000s, semiconductor long time—27 percent lasted for at least five years during companies undertook massive layoffs. By the end of 2001, the decade studied. Motorola had laid off more than 48,000 workers from its peak of 150,000 employees in 2000.21 As swings in demand Large shrinking firms with low turnover provided an interesting contrast. Even though these firms were reduc- became more volatile, the idea of lifetime employment in ing employment, new hires still accounted for 30 percent the semiconductor industry became a thing of the past, al- of jobs; however, less than 20 percent of jobs lasted more though selected workers still had excellent job ladders and than five years. Thus these firms appeared to be replacing long careers. experienced workers with less-expensive new hires. When The data in Table 5 show that for large firms with low we compared ongoing and completed long-term (more than turnover, growing firms offered higher initial earnings than five years) jobs, we found that shrinking large firms tended shrinking firms to both men and women (by 7 to 37 percent), to shed experienced workers with lower earnings growth, because annualized earnings growth was higher (by half a 18 http://www.allianceibm.org/news/jobactions.htm. 19 Some of the observations about specific firms here most likely reflect percentage point) in ongoing jobs than in completed jobs for divisions of these large, complex firms beyond their production of semicon- all groups. ductors. We think the patterns discussed reflect the impact of globalization These patterns marked a change in the way big companies on high-tech firms. deal with difficulties. IBM provides a good example of how 20 http://www.allianceibm.org/news/jobactions.htm. downsizing programs evolved from the 1980s to the 1990s. 21 http://www.bizjournals.com/austin/stories/001/1/17/daily.html.

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159 SEMICONDUCTOR ENGINEERS IN A GLOBAL ECONOMY TABLE 5 Job Ladders for Semiconductor Industry Workers, Age 35–54 Growing, Large Firms Shrinking, Large Firms Growing, Large Firms Growing, Small Firms Growing, Small Firms with Low Turnover with Low Turnover with High Turnover with Low Turnover with High Turnover Males Medium Educated A $21,462 $18,012 $14,810 $15,517 $17,115 B .054 .061 .063 .068 .076 C $36,592 $33,266 $27,860 $30,771 $36,592 Highly Educated A $23,057 $21,541 $21,388 $21,070 $20,600 B .059 .061 .040 .075 .055 C $41,582 $39,503 $32,018 $44,493 $35,761 Females Medium Educated A $13,024 $9519 $10,589 $8,506 $8,879 B .039 .036 .021 .048 .085 C $19,128 $13,722 $12,890 $13,722 $20,791 Highly Educated A $14,080 $10,334 $12,424 $10,692 $9897 B .044 .036 –.002 .054 .064 C $22,038 $14,970 $12,059 $18,296 $18,712 Notes: A = mean initial earnings (2005 dollars, inflated from 2001 using the CPI-urban). B = net annualized earnings growth rate (in log points) across the simulated career path. C = simulated 2001 final average earnings (2005 dollars). Source: Economic Turbulence (Brown et al., 2006), Chapter 5, Table 5.1. Original calculations by authors from Census LEHD data. The career paths are for all workers in all occupations in the semiconductor industry, including engineers, office workers, technicians, managers, and other occupations. and the growing firms compared to shrinking firms offered educated workers. Although these firms offered relatively lower earnings growth to men and higher earnings growth low initial earnings, their earnings growth was high. After to women. Overall men’s job ladders are more similar in 10 years, earnings at these companies surpassed earnings of growing and shrinking firms than women’s job ladders, and experienced workers in large shrinking firms and were close so men seem more protected from economic turbulence than to earnings at large growing firms with low turnover. Small, women. A comparison of “stayers” (i.e., ongoing long jobs) growing firms may be an increasingly important source of and “movers” (i.e., completed 1–3 year jobs) shows that an- good job ladders. nualized earnings growth for short jobs was only two-thirds Overall, economic turbulence has had negative effects on that of long jobs in both growing and shrinking large firms. job ladders. Over the decade studied, growing large firms These results indicate that growing firms used high initial with low turnover allowed highly paid new hires to compete earnings to attract talented workers, among whom only a for access to long job ladders with career development, while select group was given access to career development with shrinking large firms with low turnover forced experienced long, steep job ladders. workers to compete to keep their jobs, which were either Compared to growing firms, large shrinking firms paid being eliminated or being filled by new hires paid at market lower initial earnings but offered higher earnings growth rates. In any case, the era of lifetime jobs with career devel- for short jobs; the job ladders for younger men were better opment appears to be over, and many workers must improve relative to those of older men. These results indicate that their job prospects through mobility. large firms, both growing and shrinking, used market-driven compensation systems based on salaries in the spot market fACtors thAt infLUenCe for engineers. Growing firms appeared to provide long job engineering WorK AnD WAges ladders with career development for a select group, while other workers faced either a plateau or “up or out.” Pos- The U.S. labor market for engineers is affected by a va- sibly workers not on the fast track left voluntarily for better riety of long-term forces, including technological change, jobs elsewhere. Shrinking firms appeared to keep selected immigration policy, and educational practices. In this section experienced workers and replaced the others with new hires we consider the effects of each of these. at market rates. New hires appeared not to have access to long job ladders with career development, even though the technological Change: Wafer size older workers still had long job ladders. These findings are consistent with changes we observed in our fieldwork at large Engineering jobs in chip fabs have evolved over the last U.S. companies in the 1990s. several technology generations, driven primarily by simulta- Small growing firms with low turnover were likely to be neous increases in wafer size and automation, both of which early-stage fabless companies that hired mainly technical have been important for raising productivity and keeping personnel and offered relatively good job ladders for college- the industry on its Moore’s Law trajectory. We look at how

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168 THE OFFSHORING OF ENGINEERING TABLE 11 U.S. Semiconductor Engineers by Location, 1997–2005 1997 1998 1999 2000 2001 2002 2003 2004 2005 U.S.-based Engineers 49,702 46,704 61,856 76,129 72,564 72,860 71,991 66,581 83,167 Offshore Engineers 7,253 19,692 17,446 19,964 27,226 29,813 30,876 34,632 42,193 Total 58,952 68,394 81,301 98,093 101,791 104,675 104,870 103,217 127,365 % in U.S. 87.3% 70.3% 77.9% 79.2% 72.7% 70.9% 69.9% 65.8% 66.3% Source: David R Ferrell, “SIA Workforce Strategy Overview,” ECEDHA Presentation March 2005; 2004 and 2005 data: unpublished SIA survey results provided by Ferrell. although the OES data for those two years do not confirm gineering will develop in India and China as the semiconduc- this trend.43 tor industry in those countries matures, with the important The number of offshore engineers increased sharply in difference that Taiwan is a much smaller country. 1998, and again in 2001, and again in 2005. Even with the The semiconductor industry in India and China is still ups and downs, the percentage of the workforce in the United quite young in terms of design, although both countries are States tended to hover between 70 and 80 percent from 1998 active in this area. In China, domestic companies, often with to 2003; it then fell to 66 percent in 2004–2005. These data personnel and funds from Taiwan, are major players in the indicate a mild shift in employment of engineers offshore development of semiconductor design. In China’s fabrica- relative to the United States. If it continues, this shift could tion sector, both multinational companies (MNCs) and do- have a depressive effect on U.S. engineering employment mestic companies (again with input from Taiwan) are very and earnings. important players. In India, where subsidiaries of MNCs are the major players in the development of the semiconductor industry, fabrication has not yet begun. the semiconductor industry in Japan, taiwan, China, and india Semiconductor Engineering in Asia Engineers in the U.S. semiconductor industry have long been accustomed to competition from abroad. However, With the caveat that comparisons of semiconductor engi- the competition may now be within a single company, for neers in the United States, Japan, Taiwan, China, and India example, between two design groups in different countries. involve comparing engineers with different education and In this section, we look at the availability, quality, and cost experiences, Table 12 provides rough estimates (based on a of chip engineers outside the United States. combination of published sources and interviews) of salaries, A major problem with comparing semiconductor engi- worldwide fab investment by local companies, and the num- neering talent in different countries is that the engineers in ber of active chip designers (excluding embedded software). China and India, and to a lesser extent in Taiwan, are younger We also provide an index of protection of intellectual prop- and have less education than engineers in the United States erty (IP), which is an important consideration in deciding and Japan. In India and China, technicians with two-year which engineering activities might be moved outside the degrees are often classified as engineers (this happens much United States. However, the intellectual property protection less often in the United States and Japan). Relatively little rating covers all industries; thus low scores in the table may graduate training is available in semiconductor engineering reflect lapses in specific sectors, such as pharmaceuticals, in India and China, and what is available is not comparable trademark goods, or recorded media, which are not relevant to graduate programs in the United States and Japan. Taiwan to the semiconductor industry. is an intermediate case; undergraduate and master’s level The salary figures suggest that engineers in the United engineering programs are comparable to those in the United States and Japan earn much more than most Asian engineers. States and Japan, although Ph.D. programs are still catch- These data, however, are imprecise and have high variance; ing up. thus they provide only a general guide. The salaries are for Taiwan’s semiconductor industry was built largely by engineers with at least five years of experience in the United Ph.D. engineers who returned to Taiwan after receiving States and for engineers aged 40 in Japan, the approximate degrees and valuable work experience in the United States. age they leave the union and begin to receive higher salaries. A similar process is occurring in China and India. Thus we Note that 40 is the age at which the salary trajectory for U.S. think Taiwan may provide a model of how semiconductor en- engineers begins to level out. Semiconductor engineers in the other countries tend to be younger and less experienced; thus the salaries for engineers in China and India are for individu- 43The OES total for all software and other engineer categories was 73,650 als with one to three years of experience. in the May 2004 data and 76,300 in the May 2005 data.

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169 SEMICONDUCTOR ENGINEERS IN A GLOBAL ECONOMY TABLE 12 Estimates for Selected Countries In the United States, benefits, including health insurance, Social Security, and stock options, also make comparisons Value of Fabs Intellectual difficult. Annual Constructed, Property The value of fab construction over the past decade pro- Salaries by Country of Number Protection, for EE/CS Ownership, of Chip 2004 vides a general idea of the presence of this part of the value Engineers 1995–2006 Designers (10 = high) chain in each country. China, at $26 billion, has made signifi- cant inroads since its early public-private joint ventures with United States $82,000 $74 billion 45,000 9.0 —a Japan $60,000 $66 billion 7.2 Japan’s NEC in the mid-1990s. In India, in sharp contrast, Taiwan $30,000 $72 billion 14,000 6.5 not a single commercial-scale fab has been constructed, India $15,000 $0 7,000 5.0 although several have been proposed. China $12,000 $26 billion 5,000 3.7 We also estimate the number of chip designers, a group aWe have been unable to obtain an estimate for the number of chip that is critical to the development of the semiconductor in- designers in Japan. dustry. According to some sources, about 400 chip designers Sources: U.S. salary from 2004 BLS Occupational Employment Statistics are being added each year in India and China.47 However, web site (average for electronics and software engineers in NAICS 3344); Japan salary (average for circuit designer and embedded software engineers that number can be misleading, because there is some con- aged 40 years old) from Intelligence Corporation’s data on job offers in fusion about the definition of “chip designer.” One industry 2003; Taiwan salary information from March 2005 interview with U.S. executive claimed that there were only 500 “qualified IC executive in Taiwan; China and India salaries are estimated based on a com- designers” in China in 2004.48 A Taiwanese consultant didn’t bination of interviews, business literature and online job offerings; value even consider the later (and lower skilled) stage of physical of fabs (when fully equipped) from Strategic Marketing Associates (www. scfab.com), reported in “Chipmaking in the United States,” Semiconduc- design, called “place and route,” to be part of chip design.49 tor International, August 1, 2006; number of chip designers in U.S. from By those criteria, about 30 percent of the Taiwanese design- iSuppli as reported in “Another Lure Of Outsourcing: Job Expertise,” WSJ. ers shown in the table would be eliminated. com, April 12, 2004; number of chip designers in Taiwan from interview with Taiwan government consultant to industry, March 2005; number of chip designers in India and China are author estimates based on conflicting Estimates of Higher Education published sources and discussions with industry analysts in 2005; intel- lectual property protection data from Gwartney et al., 2006, Chapter 3. All As we discussed above, engineering programs in U.S. numbers rounded to reflect lack of precision. universities have attracted large numbers of foreign students. The United States leads the world in higher education, es- pecially in graduate training, as the Academic Ranking of World Universities (http://ed.sjtu.edu.cn/ranking.htm) by As the semiconductor industry quickly expands in China Shanghai Jiao Tong University shows (see Table 13). Fifty- and India, wages are reportedly rising rapidly. For example, three of the top 100 universities are located in the United the salary range offered by SanDisk in Bangalore (JobStreet. States; five are located in Japan. Of the top 500 universities, com, June 2005) for a design engineer with one to three years 168 are in the United States, 34 are in Japan, and only 21 are of experience was $9,200 to $18,400.44 in China, Taiwan, and India combined. The salary gap is narrower for comparable key employ- The numbers for bachelor of science engineering degrees ees. One report claimed in 1999 that the salary ratio between in Table 13 must be treated with caution, because the qual- the United States and India for experienced design engineers ity of education varies widely from country to country. The or managers was only 3-to-1.45 Senior managers with foreign numbers may indicate political and social commitment to experience are paid a large premium that eliminates any advancing technical education rather than actual capability. cost advantage; this reflects the critical importance of these Also, these numbers are changing as India, and especially managers in implementing new technology and projects.46 China, expand their engineering degree programs. According The overall differential between Indian and U.S. salaries to a widely cited Duke University study, the annual number has been declining as Indian salaries rise, and the earnings of new EE-CS-IT bachelor’s degrees in China in 2004 had of domestically trained Indian engineers has been doubling reached 350,000 (Gereffi and Wadhwa, 2005). But it is an in their first five years on the job. open question how long it will take these new programs to Salaries are also difficult to compare because of dif- develop quality teaching programs. ferent compensation packages. In the United States and Although China and India have large numbers of engi- Taiwan, profit-sharing bonuses that vary with the business neering graduates, according to our interviews graduates cycle can be an important part of a compensation package. from U.S. universities are better trained, especially in 44 Converted at 43.52 Indian rupees to the dollar. 45 “Special 47 For India: “Designs on the future,” Express Computer (India), February report: India awakens as potential chip-design giant,” EE Times, January 22, 1999. 10, 2003; for China: PriceWaterhouseCoopers (2004), p. 7. 46 Interviews at 15 semiconductor design centers in Bangalore in No- 48 PriceWaterhouseCoopers (2004), p. 7. 49 E-mail exchange, March 2005. vember 2005.

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170 THE OFFSHORING OF ENGINEERING Taiwan TABLE 13 Estimates of Higher Education for Selected Countries Taiwan has the best-established semiconductor industry Academic Ranking of of the three Asian countries. According to Taiwan’s Ministry World Universities, 2005 of Economic Affairs, the country ranked third (behind the U.S. and Japan) in semiconductor-related U.S. patents.51 Universities Universities Engineering in Top 100 in Top 500 B.S. Degrees, 2001 The foundry model originated in Taiwan in 1987, and three of the top five foundries are located there. Taiwan also has U.S. 53 168 110,000 Japan 5 34 110,000 rapidly growing production of memory chips and numerous Taiwan 0 5 35,000 successful fabless chip companies, four of which reported China 0 13 220,000 revenues of more than $500 million in 2005.52 India 0 3 110,000 Table 14 shows the value of Taiwan’s semiconductor Source: Academic Ranking of World Universities values tabulated by industry output by stage of production for 2005. Fabrication, authors from ARWU 2005 Edition, accessible at http://ed.sjtu.edu.cn/ at $18.9 billion, accounts for the largest share of the $34.8 ranking005.htm; engineer B.S. degrees tabulated by authors for “Engineer- billion total, followed by chip design at $8.6 billion. Simi- ing” and “Math/Computer Science” from Appendix Table 2-33, “Science lar analyses are not possible in most major chip-producing and Engineering Indicators 2004,” National Science Foundation except for India, which is an estimate for 2003–2004 from Appendix “USA-China- countries where all stages of production are performed by India” in Gereffi and Wadhwa, 2005. large integrated producers. Taiwanese companies, however, have embraced the disaggregated business model, and only a handful of companies are involved in multiple steps in the value chain. teamwork on projects and in using tools and equipment. For Since the late 1970s, Taiwan has benefited from focused example, undergraduate students in India and China usually government programs and the return of U.S.-educated and have no chance to work with automated chip design (EDA) trained engineers.53 In 1980, the government created the tools, while EE students in the United States do. According Hsinchu Science-Based Industrial Park, which is still the to McKinsey, only 10 percent of Chinese and 25 percent of island’s largest concentration of semiconductor firms. Hsin- Indian engineering graduates are likely to be suitable for chu is also home to two of Taiwan’s leading engineering employment by U.S. MNCs (McKinsey Global Institute, universities, and the government’s microelectronics lab, 2005).50 ERSO, which played a pioneering role in the development However, as we have already pointed out, the competi- of the industry, including the creation of chip companies tion is not only between U.S. students trained in the United such as TSMC and UMC. ERSO conducts some of the most States and foreign students trained abroad. A large number advanced research in the country, and its thousands of alumni of foreign students receive training in the United States. are encouraged to commercialize technology via local start- up companies. Country Profiles The Taiwanese chip-design sector is mostly locally owned, although a few MNCs also operate design subsidiar- Next we look at the evolution of the semiconductor ies there. Taiwanese companies have embraced the fabless industries in Taiwan, India, and China and compare the model, and some 60 fabless companies were listed on the technology capabilities of these countries with those of the Taiwan Stock Exchange in December 2004.54 By compari- United States. On the design side, the quality of engineers son, about 70 fabless companies were listed on NASDAQ in in Asian countries, both in universities and in companies, 2004. In 2001, the Taiwanese government renewed its efforts has been improving, as is clear from papers submitted to (Si-Soft) to improve local chip-design capabilities. As part the International Solid-State Circuits Conference (ISSCC), of this initiative, the faculty teaching chip design more than which is IEEE’s global forum for presenting advances in doubled, from 200 in 2001 to more than 400 by 2005.55 chip design (see Figure 8). From 2001 to 2006, submissions One advantage for Taiwan’s fabless firms is the availabil- from China, India, and especially Taiwan increased notice- ity of an important local market. Many Taiwanese systems ably. The number of acceptances for Taiwan also increased companies design, assemble, and procure components for dramatically, even as the overall acceptance rate fell from 53 computers, communications equipment, and consumer elec- percent to 38 percent, and we expect that acceptances from India and China will increase in the near future as the quality of their university engineering programs improves. 51 Cited in “Taiwan ranks 4th in the world in US patents received,” Taipei Times, Oct. 17, 2006. 52 “Data Snapshot,” Semiconductor Insights: Asia (FSA), Issue 1, 2006. 50These 53 Saxenian (2002). figures were arrived at by McKinsey based on a survey of HR 54 FSA (2005). managers at multinational subsidiaries in these and other countries that 55 Chikashi Horikiri, “Taiwan Transforms into IC Development Center,” asked the question: “Of 100 graduates with the correct degree, how many could you employ if you had demand for all?” Nikkei Electronics Asia, February 2006.

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171 SEMICONDUCTOR ENGINEERS IN A GLOBAL ECONOMY Average annual rejections Average annual acceptances U.S. Japan Korea Taiwan China India FIguRE 8 ISSCC acceptances and rejections by country, 2001–2006. Source: Tabulated from unpublished ISSCC data. TABLE 14 Value of Taiwan’s Semiconductor In the early stage of development of its semiconductor Industry, 2005 industry, Taiwan depended upon graduate training in the United States. Since the mid-1990s, the number of Taiwanese Output Value receiving Ph.D.s in engineering has declined steadily, and (US$ billions) Growth Since 2004 Brown -Linden today only a few are pursuing graduate training in the United Figure 8 IC design $8.63 5.8% States. Although graduate education has improved in Taiwan, Foundry services $18.90 –3.0% "fixed image" heard some concerns in our interviews about declining we IC packaging $5.21 6.4% numbers of returnees from the United States. Past returnees IC testing $2.04 13.0% brought with them both graduate training and work experi- Source: IEK-IT IS data, reported in “Taiwan IC production value reached ence that included management skills as well as practical US$34.8 billion in 2005, says government agency,” DigiTimes.com, January 19, 2006. knowledge. The Taiwanese government has instituted several pro- grams to improve the local design sector, including a plan tronics for world-famous brands, including Hewlett-Packard, to train several thousand new design engineers in Taiwan’s Nokia, and Sony. In 1999, 62 percent of Taiwan’s chip-design universities, the creation of an exchange where local chip- revenue came from local sales.56 Taiwan is second only to design houses can license reusable functional blocks, and an the United States in fabless firms by revenue, with firms incubator where early-stage start-ups can share infrastructure specializing in cost-down, fast-follower capabilities. From and services.58 Another initiative is intended to attract chip- a U.S. perspective, Taiwanese competition has shortened design subsidiaries of major semiconductor companies; early the market window during which U.S. chip companies can takers include Sony and Broadcom (a major U.S. fabless recoup their investments in chips before similar products are company). In 2000, a government research institute created produced at a lower price. the SoC Technology Center (STC) to design functional Taiwan’s design teams were praised in our interviews for blocks that can be licensed to local companies, a model their execution, a vital trait in an industry where time-to- Taiwan has used successfully in other segments of the elec- market often means the difference between profit and loss. A tronics industry. STC has more than 200 engineers, most of frequent criticism, however, was that they were not yet truly whom have master’s degrees or better.59 innovative. Ironically, Taiwanese companies are locked in as For the Taiwanese semiconductor industry, China pres- technology followers by their reliance on business from local ents both a major challenge and a major opportunity. The systems firms, which are as much as a generation behind the leading-edge technology.57 5 8 “ Tr e n d s i n S O C d e s i g n u n t h aw a t S O C 2 0 0 4 ,” E D N , December 9, 2004. 56 Data from Taiwan’s Industrial Technology Research Institute cited in 59 SoC Technology Center interview, March 2005. “SoC” is a common Table 5, Chang and Tsai (2002). industry acronym for “system-on-a-chip” meaning a complex semiconduc- 57 Breznitz (2005). tor. integrating multiple functions.

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17 THE OFFSHORING OF ENGINEERING TABLE 15 Major Fabs in China, 2006 challenge is competition in the foundry and fabless sectors, especially for low-cost designs using older technology, as Capacity well as competition for talented engineers to work in China First (wafers per and bring with them their knowledge of advanced technology Year of month, 8-inch Company Fab Location Production equivalent) in design and manufacturing. The opportunity is the chance to partner with Chinese companies elsewhere in the value Advanced Shanghai 1995 25,000 chain, enabling Taiwanese companies to provide high-end Semiconductor Manufacturing Corp design services. In addition, Taiwanese companies would (ASMC) have access to China’s rapidly growing markets. Shanghai Hua Hong Shanghai 1999 50,000 So far, political issues have made it difficult for Taiwan- NEC Electronics ese chip companies to develop partnerships and markets in (HHNEC) China, even as they lose experienced engineers to Chinese Semiconductor Shanghai, 2001 150,000 Manufacturing Tianjin, and competitors. Taiwan-born engineers are an important force International Corp Beijing in technology development in China, in much the same way (SMIC) that the United States was an important force in technol- Grace Semiconductor Shanghai 2003 27,000 ogy development in Taiwan. Although China seems to be Manufacturing Corp benefiting more than Taiwan from the flow of engineers, (GSMC) He Jian Technology Suzhou 2003 42,000 capital, and business activities between the two countries, Taiwan Semiconductor Shanghai 2004 15,000; this may change over time if the Taiwanese government Manufacturing Co (40,000 planned) changes its policy. (TSMC) Source: iSuppli data, reported in Cage Chao and Esther Lam, “Despite China China-based foundries reporting full utilization rates in 1Q, Taiwan players not overly impressed,” Digitimes.com, March 22, 2006. China appears to be following a similar pattern— government sponsorship, local access to system firms (such as Haier, Huawei, and TCL) that are increasingly engaged fabrication is now firmly established in China and will gradu- in world markets, and active involvement of expatriates ally expand. Although China’s fabs pose a growing chal- returning from the United States or experienced engineers relocating from Taiwan.60 In little more than a decade, with lenge to Taiwanese foundries, from the perspective of U.S. chip firms they add welcome competition to the market for the help of foreign companies (as investors or as technology wafer processing. licensors) and the Chinese government, Chinese firms have A potentially more worrisome development for U.S. firms developed impressive fabrication capability. is the emergence of a fabless design sector in China. Since Table 15 shows the main chip fabs in China, based pri- 2003, China has claimed to have more than 400 chip-design marily in Shanghai. The most striking feature is that they are firms. Many are small, poorly managed companies that all foundries working under contract rather than companies deplete their seed money before they can bring a product to that design and manufacture their own products. U.S.-based market. Others offer design services rather than their own chip companies have few high-profile deals with Chinese products.64 One interviewee, echoed by others, claimed that foundries—the major exception being Texas Instruments, many, if not most, firms outside the top 10 are engaged in which began working with Semiconductor Manufacturing various types of reverse engineering, which is often illegal.65 International Corp (SMIC) in 2002 and added a deal to co-develop SMIC’s 90 nm process in 2004.61 Executives Foreign firms are generally reluctant to bring lawsuits, how- ever, for fear of displeasing the authorities and the likelihood with U.S. experience have also played key roles. For ex- of losing in Chinese courts. But at least two U.S. companies ample, the CEOs of ASMC and HHNEC previously worked at AMD.62 are suing Chinese rivals in export markets for intellectual property violations.66 Apart from SMIC, China’s foundries have adopted China’s top 10 chip-design firms in 2005 had total rev- modest growth plans, especially compared to the headline- grabbing predictions of two or three years ago.63 But chip enues of more than $1 billion, $400 million of which was from Hong Kong-based Solomon Systec, a designer of LCD 60 Saxenian (2002). 61 Mark 64Assessment of Byron Wu, iSuppli analyst, reported in “Analyst: China’s LaPedus, “TI, SMIC sign deal to develop 90-nm technology by Q1 ’05,” Silicon Strategies, Oct.28, 2004. IC design houses struggling for survival,” EE Times, May 20, 2004. 62 Chintay Shih, “Experience on developing Taiwan high-tech clus- 65 Interview with a European chip executive, conducted by Elena ter,” presentation at 4th ITEC International Forum, Doshisha University, Obukhova in Shanghai, December 2003. 66 See “An offshore test of IP rights,” Electronic Business, May 2004; June 17, 2006. 63 Mike Clendenin, “Deflated expectations in China’s IC biz,” EE Times, and “SigmaTel Sues Chinese Chipmaker over IP,” Electronic News, August 28, 2006. January 6, 2005.

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173 SEMICONDUCTOR ENGINEERS IN A GLOBAL ECONOMY drivers that was spun off from Motorola in 1999.67 The next offshoring by U.S. firms. Of the top 20 U.S. semiconductor largest firms (Actions [media player chips], $150 million, companies, only a handful had opened design centers in and Vimicro [PC camera image processors], $95 million) China (compared to 18 in India) as of June 2006. Most of had IPOs on NASDAQ in 2005. these design centers are targeting the local market for the China’s large, growing domestic market provides op- time being, and, according to press reports, some are engaged portunities for China’s chip design companies to grow and in software or system design rather than chip design per se. become profitable, and in the future Chinese companies may Concerns about intellectual property protection appear to be able to design products for the global marketplace. The pose a greater barrier to foreign design activity in China than in India.75 local systems firms provide a sizable market for local fabless start-ups. The best chip design work is being done by local Chip design in China is at an early stage, but the relatively systems firms and a few world-class start-ups headed by U.S. young Chinese chip-design engineers will steadily build their returnees. experience. One factor that favors the development of local The Chinese government has taken many steps to sup- design companies is that Chinese engineers prefer to work port chip-design firms, some of the largest of which are for domestic start-ups and domestic companies rather than state owned. These measures include tax reductions, ven- MNCs. Many young Chinese engineers, especially returnees, ture investing, incubators in seven major cities, and special are willing to risk working for emerging companies that may government projects.68 A value-added tax preference for earn them great wealth. Some companies, particularly those domestically designed chips was phased out under U.S. whose founders include expatriates with foreign education pressure and will reportedly be replaced by a WTO-friendly and experience, are likely to begin to impact global markets R&D fund, although this had not been announced as of this by the end of the decade. It is still too early to predict the fu- writing (September 2006).69 ture relative importance of domestically owned and foreign- The return of Chinese nationals with education and work owned chip-design activities, or to predict whether domestic experience has been an important part of China’s recent firms will be involved mostly with contract services or with technology development.70 Returnees provide valuable man- creating and selling chips. agement experience and connectivity to global networks that The education of semiconductor engineers in China is tend to accelerate the development of China’s chip sector.71 also at an early stage. As discussed above, the quality of According to government statistics on student returnees, in Chinese engineering graduates varies widely, and few have 2003, of the 580,000 students reported to have gone abroad the knowledge and skills necessary to work on advanced since 1978, 150,000 had returned.72 The returnees had started technology or for MNCs. However, MNCs, including chip 5,000 businesses, including more than 2,000 IT companies and EDA firms, have been involved in improving engineer- in Beijing’s Zhongguancun Science Park (one-sixth the ing education in China, and the government has been actively park total).73 China is working to attract more high-tech recruiting world-class engineering professors to Chinese returnees with a range of specially targeted incentives and universities. Over time we expect semiconductor engineer- infrastructure.74 ing education, especially at the graduate level, to continue China is not yet an important destination for design improving. For now, returnees from the United States and experienced engineers from Taiwan will continue to play an important role in transferring technology to China. 67 Chinese government data cited in Mcallight Liu, “China’s Semicon- ductor Market: IC Design and Applications,” Semiconductor Insights: Asia India (FSA), Issue 1, 2006 and iSuppli data in Mark LaPedus, “iSuppli lists China’s top fabless IC rankings,” EE Times, April 21, 2006. The semiconductor industry in India presents a very dif- 68 “Synopsys Teams with China’s Ministry of Science and Technology, ferent picture. India faces benign neglect by the government, SMIC,” Nikkei Electronics Asia, March 21, 2003; “An Uneven Playing Field,” Electronic News, July 3, 2003; “China nurtures home-grown semi- a lack of manufacturing for chips and systems, and fewer conductor industry,” EBN, December 8, 2003; “China government to sup- returnees from the United States.76 Unlike Taiwan and China, port Solomon Systech, Actions and Silan,” DigiTimes, April 14, 2005. India has no high-volume chip manufacturing, although as 69 “China to form R&D fund to replace VAT rebate, says report,” EE many as five proposals to build foundries are in various Times, April 15, 2005. stages of negotiation.77 70 Saxenian (2002). 71 “Story behind the Story: Design in China is growing, but not ex- India is estimated to have 120 chip-design firms, and ploding,” audiocast by Bill Roberts, Electronic Business, September 1, revenues from chip design in 2005 were estimated to be 2006, http://www.edn.com/article/CA636845.html?text=%design+in+ china%#. 72 “More overseas Chinese students returning home to find opportunities,” 75 “SIA Pushes Steps to Better IP Protection in China,” Electronic News, November 16, 2003, http://www.china-embassy.org/eng/gyzg/t4338.htm. 73 “More overseas Chinese students return home,” January 1, 2004, http:// November 17, 2004. 76 Saxenian (2002). www.china-embassy.org/eng/gyzg/t57364.htm. 74 Mike Clendenin, “China starting to lure back its best brains,” EE Times, 77 Russ Arensman, “Move over, China,” Electronic Business, January 3, 2002. March 2006.

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174 THE OFFSHORING OF ENGINEERING $583 million.78 Most chip design is taking place in MNC inadequate infrastructure. As in China, the quality of Indian subsidiaries, including most of the top 20 U.S. companies engineering graduates varies greatly. This problem is exac- and many European companies. The flow of semiconduc- erbated in India because most engineers there want to study tor engineering talent to MNCs has slowed the diffusion of computer science rather than electronics, and many are not technology to local firms, and India has no major fabless aware of the job opportunities in semiconductors. Graduate companies designing chips for sale under their own brand. education in EE is in its infancy, and doctoral education Domestic chip-design companies with varied capabilities in the seven major technical universities is not up to U.S. mainly provide design services. According to a study by the standards. The very low wages paid to professors, the lack India Semiconductor Association, local design companies of expensive and constantly changing EDA tools, and the use a time- and material-based pricing method by which difficulty and expense of having sample chips fabricated, all specific tasks are allocated to be carried out within set time contribute to problems in the development of world-class lines.79 These companies tend to develop simple subsystems graduate education. based on customer specifications. In addition, India has not attracted nearly as many return- Larger independent design-services firms are much more ees as China. The low flow of new domestic graduates and sophisticated. They use a fixed-price method, are able to returnees into the EE labor supply, coupled with the need for provide end-to-end solutions that incorporate in-house pro- at least three to five years of experience for fully productive prietary intellectual property, and offer design services across chip designers, has meant that the supply of design engi- the VLSI design flow. The government is developing policies neers has not kept pace with increasing demand. As a result, to support domestic chip-design firms. wages for chip designers have been rising rapidly, both at In our fieldwork we found that Indian engineers prefer the entry level and during the first five years. As mentioned MNCs to local start-ups, which are perceived as risky by above, salaries for engineers with five years of experience engineers and their family members. This is a contrast with are double entry-level salaries. China, where engineers are relatively eager to join start-ups, Inadequate infrastructure, especially in Bangalore, also which often receive some government support. poses serious problems for chip-design centers. Because of Foreign chip companies have been attracted by Indian the lack of a stable energy supply and lack of office space, engineers’ knowledge of English and the successful Indian foreign subsidiaries must make substantial investments to software sector. Many early investments by chip companies provide both offices and electricity. Bangalore, the country’s were focused on software, the writing of microcode that primary city for high-tech, is plagued by narrow, pothole- becomes part of a chip. Over time, Indian affiliates have filled roads that are often gridlocked, forcing employees to taken on a bigger role, eventually extending to complete chip spend long hours commuting. In addition, high-tech com- designs from specification to physical layout. This transition panies are spread throughout the city, making commuting sometimes happens quickly. Intel, for example, opened a between companies, or even between company locations, software center in Bangalore in 1999 and began building a very time consuming. design team for 32-bit microprocessors in 2002.80 In addition, the housing stock in Bangalore has not kept up Since most domestically trained engineers lack knowl- with growth, and housing prices and rents have been rising edge of the technology being transferred, the necessary rapidly. Many employees are faced with a choice of living management skills, and knowledge of the entire product in inadequate housing or living far from work. The housing cycle, American MNCs are highly dependent on returnees and schooling problems are especially severe for returnees with advanced degrees from the United States to develop from the United States, who want to replicate the quality new projects in India. So far there have been few instances of U.S. housing and schools their families know. Several of design engineers in India leaving MNCs to start their own executives told us that their cost of living in Bangalore was companies, as often happens in the United States. However, almost as high as in the United States because of the high cost of housing and international schools.82 we heard of at least two cases in the past two years at one U.S. subsidiary. We also heard that leaving an MNC to start The shortage of engineering talent and weak infrastruc- a company is becoming more acceptable among Indian en- ture have constrained the rate of growth in the semiconductor gineers, many of whom are motivated to help India develop design industry, both for foreign subsidiaries and for local rather than to accumulate great wealth.81 companies, in India generally, and in Bangalore particularly. Foreign subsidiaries face formidable problems in their Some companies have been moving operations to areas that Indian operations, including a very tight labor market and have better infrastructure and are less expensive than Ban- galore. However, the talent shortage remains, especially for experienced engineers with advanced degrees. 78 Data from Frost & Sullivan, in Chitra Giridhar, “India design firms as product innovators,” Electronic Business, July 18, 2006. 79 “Study: Indian design firms prefer time and material model,” EE Times, Sept 22, 2006. 80 “Intel, TSMC Set Up Camps In Developing Asian Markets,” WSJ.com, August 30, 2002. 81 Personal communications in Bangalore, November 2005. 82 Personal communications in Bangalore, November 2005.

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175 SEMICONDUCTOR ENGINEERS IN A GLOBAL ECONOMY oUtLooK AnD ConCLUsion in head count. Qualitative opinions were also divided, with optimists noting that reduced costs have strengthened com- The United States remains the world leader in the semi- panies and increased job security, and pessimists bemoaning conductor industry in terms of market share, development of downward pressure on wages and employment as well as the successful new companies, supply of experienced engineers, possible loss of intellectual property and, in the long run, and graduate engineering education. Moreover, the United industry leadership.86 States is the leading location for system design, the stage at We have observed that some movement of design jobs which most semiconductor purchase decisions are made.83 is related to the business cycle. There was a wave of design Our competitors, especially Japan, Korea, Taiwan, and the offshoring at the height of the dot-com bubble. Then, when European Union, look to the United States for lessons on the cascading effect of the subsequent downturn reached the encouraging innovation and start-ups in the semiconductor semiconductor industry, chip companies began cutting staff industry. Nevertheless, competition from low-cost countries, at home. Now that the recovery requires the expansion of especially China and India, which have rapidly growing and design operations, chip companies appear to be expanding potentially large markets, may pose competitive threats to design operations abroad faster than at home.87 It is too early U.S. companies and engineers in the future. to predict where this relative shift in the geographic distribu- tion of employment will find its new equilibrium. outlook for U.s. engineers Even experts disagree about whether or not the United States is educating too few engineers and scientists and is The job market for U.S. semiconductor engineers shows facing a shortage.88 This is partly because economists find it there is some strength in employment and earnings growth, hard to believe there can be a shortage in a labor market when but also shows evidence of labor market problems, espe- real earnings across the board are stagnant. This is partly a cially for older engineers and for the bottom 10 percent at reflection of government policies that affect the immigration all educational levels. We also observed signs of a decline and education of high-tech engineers. in the earnings premium for graduate degrees (M.S./Ph.D. compared to a B.S.), and low returns-to-experience for en- Policy issues gineers with graduate degrees. The situation is especially difficult for older engineers whose skills can rapidly become The industry’s offshoring has gone well beyond the point obsolete. Experienced design engineers are often forced to at which blunt instruments such as trade policy can help work on mature technologies, which pay less and may pres- engineers without harming companies. Taxes or quotas on ent fewer interesting problems. For example, according to a traded activities or goods would raise costs for the many salary survey in 2004 by EE Times, the average annual salary companies that have already invested offshore in a wide for U.S. and European engineers skilled at designing for the array of design and manufacturing activities for both the latest chip-process technology was $107,000, whereas engi- foreign and domestic chip markets. Policy changes are thus neers designing for more mature analog technology averaged unlikely to improve the demand side of the labor market. $87,000.84 Industry has, however, been actively lobbying for changes Results of a regional survey of Silicon Valley, considered on the supply side in the form of changes to educational and the cradle and creative font of the semiconductor industry, immigration policies that increase the supply of high-tech reveal that the recent job climate there is difficult. Over- workers. The winter 2005 newsletter of the Semiconductor all the number of jobs in Silicon Valley has continually Industry Association includes two articles on the subject, decreased since 2001, and jobs in the semiconductor and “Maintaining Leadership as Global Competition Intensifies” semiconductor-equipment industries declined 23 percent by the organization’s president and “America Must Choose between 2002 and 2005, although the average wage rose to Compete” by the outgoing CEO of Intel. 12 percent during the same period. Thus the survey paints a One of the main targets of industry analyses is education. mixed picture of the health of the industry.85 Higher education policies, which reflect both university de- Not surprisingly, industry participants disagree about the cisions and government funding, determine the number and significance of offshoring for the U.S. job market. A 2004 country of origin of students at all levels, but especially at survey by EE Times of more than 1,453 chip- and board- the graduate level. Foreign nationals in our M.S. and Ph.D. design engineers and managers showed that about half programs in science and engineering have a direct impact on believed that foreign outsourcing would lead to a reduction the supply of knowledge workers, both in the United States and in China and India. Foreign graduates of U.S. universi- 83 iSuppli data reported in Dylan McGrath, “U.S. still top design influ- encer; China, India rising fast,” EE Times, September 28, 2006. 84 “After 10-year surge, salaries level off at $89k,” EE Times, August 86 “It’s an outsourced world, EEs acknowledge,” EE Times, 28, 2003. August 27, 2004. 85 Joint Venture: Silicon Valley Network, “2006 Index of Silicon Valley,” 87 See, for example, “The perfect storm brews offshore,” Electronic Busi- available online at http://www.jointventure.org/PDF/Index%0006.pdf. ness, March 2004. 88 See, for example, Freeman (2003, 2005); Task Force on the Future of The data are from state unemployment insurance data, which is the basis for the Census data. American Innovation (2005); NRC (2000, 2001); Butz et al. (2004).

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176 THE OFFSHORING OF ENGINEERING ties must obtain temporary visas, usually H1-B visas, before their careers, both in terms of improving pay and learning they can work in the United States after graduation. Legisla- new technologies and skills. Networking with colleagues tion is under consideration to provide permanent residency from one’s alma mater and former companies as well as status to foreigners educated in the United States. We are through professional associations is an excellent way of hopeful that this policy will be implemented soon. keeping up with job opportunities as well as learning about Government policies regulating immigration, especially new technologies. the issuance of H-1B (Non-Immigrant Professional) and Our advice to semiconductor engineers is to embrace the L-1 (Intra-Company Transfer) visas, also have a significant mobile labor market and look to job changes as a way of impact on the number of foreign engineers engaged in advancing. Each job should be chosen carefully to improve semiconductor and software work. In a delayed response to skills and take advantage of previous job experience. En- the recession, changes in policy that took effect in 2004 set gineers must continually stay in touch with their networks severe limits on the number of visas for foreign workers. and share knowledge with their colleagues about what is When the number of H-1B visas was thus reduced, many happening in the field and about job opportunities. In short, U.S. companies used the opportunity to send foreign nation- engineers today must be in charge of their careers; they can als with U.S. education and experience back to India and no longer depend on employers to provide them with the China to help build operations there. training they need to keep up their skills. An area of policy that has received less attention is com- Foreign nationals working for U.S. companies can use pensation for engineers who are harmed by offshoring. As their networks to develop careers both in the United States a result of the offshoring of chip design, consumers have and in their home countries. Returnees who are willing to benefited from lower prices and new products (although return home for short- or long-term stints can bargain for much of that benefit is received outside the United States). good salary packages from U.S. employers. U.S. nationals Some of the short-term cost of offshoring, however, is be- should also go abroad to develop contacts and expertise in ing borne by engineers in particular companies or industry specific cultures and regional markets. sectors in which companies are restructuring globally. Semiconductor engineers are known for their flexibil- Currently, white-collar workers like chip designers do not ity and ability to solve challenging problems and to learn qualify for trade-adjustment assistance from the government new technologies. The semiconductor industry is likely to when their jobs are sent abroad. It would make sense to continue to undergo constant crisis and change, and chip help these highly-skilled workers with retraining and other engineers should use these industry characteristics to their forms of assistance to enable them to remain productive. As advantage in planning their careers by seeking jobs where Federal Reserve Chair Bernanke remarked, “The challenge they can learn about new technologies and new markets. To for policy makers is to ensure that the benefits of global be successful in the industry, an engineer must see change economic integration are sufficiently wide-shared—for as an opportunity rather than a problem. example, by helping displaced workers get the necessary training to take advantage of new opportunities—that a con- Lessons Learned sensus for welfare-enhancing change can be obtained.”89 Finally, we need more and better data. As researchers in In its short history, the semiconductor industry has faced other industries have noted, more labor market data, both for continual challenges and has done an extraordinary job of the United States and for our trading partners, are necessary overcoming them, often in innovative ways that were not for proper assessments of the effects of offshoring.90 In the anticipated. The industry has also continually experienced meantime, national policies affecting education, labor mar- large swings in demand and prices, and we expect the cycli- kets, and innovation will continue to be based upon informed cal nature of the industry to continue, even as the long-term speculation. trend moves upward. Our predictions for the future of the industry and recommendations for setting policy must not extrapolate from conditions in the short run, especially dur- how should U.s. engineers respond? ing a downturn. We must look to the long-term history of American engineers are naturally responding to the the industry to ensure that policy decisions, either by gov- impact of the changing labor market on their careers. The ernments or by companies, are made on a solid foundation. highly rewarded career path of working for one company Macro-policies that ensure a strong economy with steady for an entire career is no longer an option. Most engineers growth are critical to the development of the semiconductor today must expect to work for several firms. In fact, chang- industry, which is negatively affected by national recessions ing jobs is now the most effective way for them to advance and high interest rates. Government support for higher education, especially graduate education, should be the cornerstone of public 89 Edmund L. Andrews, “Fed Chief Sees Faster Pace for Globalization,” policy to support innovation. A strong university system New York Times, August 25, 2006. with state-of-the-art graduate training and strong links to 90 See the excellent study by Tim Sturgeon et al. (2006).

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177 SEMICONDUCTOR ENGINEERS IN A GLOBAL ECONOMY companies is critical for innovation in the semiconductor Industry Association, Chintay Shih, Gary Smith, Strategic industry. U.S. universities are essential to educating Ph.D.- Marketing Associates, Yea-Huey Su, Tim Tredwell, and C-K level engineers, who are as likely to be from Asia as from the Wang for their valuable contributions. Melissa Appleyard, United States. Social networks, such as workers’ contacts at Hank Chesbrough, Jason Dedrick, Rafiq Dossani, Richard their former universities and former employers, are important Freeman, Deepak Gupta, Bradford Jensen, Ken Kraemer, adjuncts to a company’s formal knowledge base. Company Frank Levy, B. Lindsay Lowell, Jeff Macher, Dave Mowery, awareness of this is critical to ensuring that employees’ Tom Murtha, Tim Sturgeon, Michael Teitelbaum, and Eiichi knowledge is recognized and used rather than flowing out- Yamaguchi, as well as participants at the NAE Workshop on ward into these networks. the Offshoring of Engineering, the 2005 Brookings Trade Forum on Offshoring of White-Collar Work, the Berkeley Innovation Seminar, and the Doshisha ITEC seminar series Conclusion provided thoughtful discussions that improved the paper. We The semiconductor industry is in the intermediate stages are especially grateful to Gail Pesyna at the Sloan Foundation of the complex, dynamic process of globalization. At this for her long-running support of, and input into, our research. point it is hard to predict the impact of offshoring on the The authors are responsible for any errors. competitive position of the U.S. semiconductor industry and on the earnings and employment of domestic engineers, and referenCes whether the new equilibrium will be acceptable. Thus policy Breznitz, D. 2005. Development, flexibility, and R&D performance in interventions must be flexible. the Taiwanese IT industry—capability creation and the effects of Offshoring is an important step in the integration of India state-industry co-evolution. Industrial and Corporate Change 14(1): and China into the global economy. These countries appear 153–187. to be pursuing different roles vis-à-vis the United States, Brown, C., and B. Campbell. 2001. Technical change, wages, and employ- with China’s chip industry acting more as a competitor (e.g., ment in semiconductor manufacturing. 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