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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications Industry Trends in Engineering Offshoring Vivek Wadhwa I am wearing two hats—one as a technology entrepreneur and one as an academic. As a tech entrepreneur, I was one of the first to outsource software development to Russia and to build a company dependent upon having its entire development team at the other end of the globe. I was also one of the first to outsource research and development to India. I started my operations in Russia in 1992, right after the fall of the Iron Curtain. I can tell you stories about how we hired ex-KGB programmers to reengineer code based on skills they had gained from reengineering American systems during the cold war; but that is a different topic. We employed 50 Russian scientists who built technology that led to the establishment of my second start-up company, which created 200 U.S. jobs and helped many businesses improve their operations. In my first start-up, we also employed many workers on H1-B visas. In the early 1990s, we recruited them from London and Dublin because our British and Irish hires typically cost 40 percent less than Americans with equivalent skills. The fact is that when you hire H1-Bs, they cost a lot less. We built a very successful company as a result, and we didn’t take American jobs away. In fact, we created new jobs. Then I had a heart attack—a career-changing event for me—and I couldn’t continue in tech, so I ended up joining Duke University as an executive in residence. My goal was to give something back by mentoring students and sharing my business knowledge. But when I joined Duke, there were some surprises in store for me. First surprise—I thought I was joining a country club. I thought that academia was pretty laid back—beautiful campuses, easy life styles, and so on—and that this would be a part-time job. It wasn’t a part-time job, though. There’s no such thing as part time in academia, as you folks know. Second surprise—having been a tech entrepreneur during the dot-com days when it was hard to hire good talent—especially from universities like Duke—I didn’t expect students to ask me what sort of courses they should take to make their jobs “outsourcing proof.” After all, I thought, the fact that these kids had made it into Duke University meant that they were highly sought after, top-notch students who would be set in their careers. I talked to many bachelor’s and master’s students, even some Ph.D.s., and found that there were two types of students. One type had no clue about what was going on in the world—these were just hard-core engineers. The other type was more business savvy. These kids worried about their careers and were planning their future. They were trying to figure out how they would pay off the student loans they had amassed at Duke. The third surprise—30 to 40 percent of our students in the Masters of Engineering Management Program were accepting jobs outside the engineering profession. This didn’t make sense to me. All of us talk about the shortage of engineers. Yes, I accept that we want engineering education to be widely disseminated and that engineering education can be a foundation for many professions. But these students weren’t going to J.P. Morgan or to McKinsey Consulting to leverage their engineering education; they were going because of economic opportunity. The bottom line was that engineering was not cool, with some exceptions, of course. Biomedical engineering is really Vivek Wadhwa is executive-in-resident, and adjunct professor, Pratt School of Engineering, Duke University.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications cool. The biomedical students I met showed the same passion, the same fire I used to see in my technologists. But many students in civil engineering and technology didn’t have that passion. They were the ones who were looking for jobs in investment banking. Top IIT graduates from India would take courses in our Fuqua School of Business just to position themselves for jobs in investment banking. I couldn’t answer the question my students had asked, so as an academic, I decided to research the topic, and I asked Professor Gary Gereffi, a professor of sociology at Duke, to help. We thought we’d start by assessing the facts in the outsourcing debate, but we couldn’t find many. Other than three or four academic papers, including one by Harvard professor Richard Freeman, there wasn’t much research on the subject of outsourcing and its impact on the engineering profession. And I didn’t give much credence to reports by industry analyst groups because, as a tech executive, I knew that you could often pay an analyst group to produce a report that would support your point of view. The facts—the numbers commonly cited about the United States graduating 70,000 engineers a year and China and India graduating a million a year—didn’t make sense to me. I had worked in India, and I knew how weak education in India was. I didn’t believe that India was graduating 350,000 engineers a year, as the media often reported. And, as a board member and advisor to several companies doing business in China, I didn’t believe that China was graduating 600,000 engineers either. So the first question we asked was where these data were coming from. None of it made sense. We decided to start by researching this issue, so we enlisted some of our brightest students to investigate the statistics. Here is what we found (Figure 1). The statistics in common use were wrong. We were comparing four-year degrees in the United States with three- and four-year degrees in China and two-, three-, and four-year degrees in India. I have to add a caveat here—the Chinese numbers are suspect. In India, independent bodies track graduation rates. In China, provinces report to the central government, and they tell the government what it wants to hear. The problem is that when you have the wrong information, you reach the wrong conclusions. But when you focus on a single metric, like the number of engineering degrees, there seems to be a simple solution. If the problem is the number of engineers that China and India are graduating is high compared to the number the United States is graduating, then the simple solution for U.S. competitiveness seems to be to for the United States to graduate more. Yet there is no indication that we need more engineering graduates. If we do graduate more, all we will be doing is helping McKinsey, J.P. Morgan, and First Boston with their recruiting because more of our engineering students will have to find employment there. Recently, thanks to the Sloan Foundation, we expanded our research. We went to India and China and met with academics, business executives, and Communist Party officials to get a better understanding of the situation. Almost everyone agreed with our conclusions—that the numbers for India and China were questionable and that the quality of the graduates was questionable. The vast majority of engineers that graduate in India and China are low quality. In China, we met with executives of about a dozen companies, each of whom had a list of as many as 10 universities they would hire from. They all said the rest of the graduates were unemployable by multinationals. If you put the lists of universities together, there are probably 20 in the whole of China (about 5 percent of the engineering schools) from which multinationals or start-up companies can recruit. We learned that the Chinese government created this situation deliberately. About 8 or 10 years ago, they realized FIGURE 1 Engineering, computer science, and information technology degrees awarded in 2004.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications they needed more engineers, so they decided to flood the market with engineering graduates. They told the provinces to increase engineering graduation rates, and the provinces complied, as they always do. But universities like Fudan and Tsinghua—the top universities—resisted. They were able to show the government how quality dropped when graduation rates increased over one or two years. The government then gave the top universities special permission to reduce graduation rates to maintain quality. The China National Reform Commission issued a report about four months ago that said 60 percent of the graduating class of 2006 would not be able to find employment. About two years ago, the Chinese government decided to slow down engineering graduation rates. So you will see two years from now that the engineering graduation numbers drop off again. India is facing different challenges. In India, the country seems to succeed despite the government, while in China the country succeeds because of the government. In India, private industry compensates for the weakness of the government. Right now, in Indian newspapers debates are raging about quotas (more than 50 percent of the seats in all universities are reserved for so-called “scheduled castes”). In fact, India may be messing up its own educational system because politicians get more votes that way. That’s a problem with a democracy. But India also has its own self-defense mechanisms. It is a relatively open, democratic country, and private colleges are beginning to provide high-quality education. Multinationals in India told us they could hire the top 5 to 10 percent of graduates from almost any college in India. Private companies like NIIT provide a “finishing school” for graduates from bad universities and give them enough training to meet the needs of multinationals. We then took our research further and conducted a survey of U.S. companies that outsource engineering jobs. We interviewed 78 presidents, division heads, CEOs, and senior HR representatives from 58 companies. For more information see http://memp.pratt.duke.edu/downloads/Duke_Industry_Trends_in_Engineering_Offshoring_10_24_06.pdf. Our previous research had raised questions about whether companies really hire individuals with two- or three-year diplomas who are graduating en masse from Indian and Chinese universities. I thought they didn’t, but the survey proved me wrong. We found that 40 percent of the companies we interviewed gave us an unqualified yes—that they do hire two- and three-year diploma holders. Seventeen percent said maybe—depending on what kind of additional experience an individual has. We asked companies what additional training they would like the engineers they hire to have. The answers were more communication and presentation skills, internships, computer-related skills, and so on. We hear a lot about the shortages of people with engineering skills, and there was a serious shortage of programmers during the days of the dot-com boom and Y2K. In our survey, we asked companies a series of questions to determine the extent of the shortages in engineering skills today. Eighty percent of the companies said their acceptance rates were greater than 40 percent. In other words, about half the people they offered jobs accepted them. Eighty percent of the companies said that acceptance rates had remained constant or increased over the last few years. Most of these companies don’t offer sign-up bonuses, which are offered when a company is eager to hire people and they are not accepting offers. Today, engineering jobs are being filled in less than four months. This doesn’t look like a skill shortage to me. We asked about what has changed over the last three to five years, and we left the question open ended because we didn’t want to bait our respondents. Most said that the engineers they have hired in the last three to five years generally have better technology skills, better communication skills, and a broader global outlook. Some said there was no change. When asked about the advantages of U.S. engineers, respondents said they understand the market, the business, and communication, they have better interpersonal skills, they are creative, they are good at problem solving, and so on. Thirty-seven percent said U.S. engineers were more productive; 24 percent said equal; 9 percent said overseas engineers were more productive. Thirty-eight percent said U.S. engineering employees produce higher quality work, and 40 percent said equal. When we asked where companies are sending their jobs, India was number one, China number two, Mexico number three, and then a long list of other countries. Here’s where things got really interesting. We found that a very wide variety of jobs where being shipped overseas. When we asked companies to compare jobs overseas to jobs in the United States, 44 percent said U.S. jobs were more technical; only 1 percent said that offshore jobs were more technical; and 33 percent said the jobs were more or less equivalent. When we asked what they gained by offshoring, the responses included access to new markets, culture, co-location, 24/7 development cycle, salary savings, and so on. When we asked companies to compare the availability of engineers in the United States, China, and India, I was astonished at the responses. Seventy-five percent said that India has a large to adequate supply of well qualified entry-level engineers; 59 percent said the United States did; and 54 percent said China did. I didn’t expect this. I thought India would have a greater shortage of engineers than the United States, but the respondents we surveyed said they could hire entry-level graduates more easily in India than in the United States or China. We asked about the strengths and weaknesses of each workforce. For the United States, the weaknesses were salary demands—not a big surprise, lack of industry experience, unwillingness to relocate, and poor work ethics. In China, they were communication skills, visa restrictions, proxim-
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications ity, lack of loyalty, cultural differences, IP theft, lack of a big-picture mindset. In India, it was communication skills, lack of industry knowledge, proximity/visa, poor project management, high turnover, and cultural differences. I thought turnover would be at the top of the list for India, but it was mentioned somewhere in the middle of the survey. This was a big surprise because many articles are about massive turnover. Executives in India said turnover is a big issue, but in our survey it was just a passing point. Turnover didn’t seem to faze these companies. We asked companies about the relative advantages of engineers from each country. For the United States, advantages were communication skills, understanding of industry, superior business acumen, better education/training, a sense of creativity, desire to challenge the status quo. For China, advantages were cost followed by work ethics and willingness to work long hours. For India they were cost, technical knowledge, knowledge of English, education, ability to learn quickly, and work ethics. Cost was cited as the most important reason most companies go overseas. When we asked companies what lies ahead, most said they expected the offshoring trend to continue and to expand. Only 5 percent said it would diminish over time. To draw some general conclusions, I will put my tech CEO hat back on. When I was a tech executive, I learned that you must always fear your competition. You have to be alert and awake. You have to know your competition’s strengths and weaknesses. And you have to be ruthless in crushing the enemy. That’s the way to compete. You learn to take advantage of your strengths, the things that make you what you are. You have to do those things better than the competition, and you have to battle the competition on your turf. In this debate, we have been focusing on the strengths of our competition and competing on their turf. India and China will always have an advantage in numbers, and there is no way we will ever catch up. They graduate more engineers, more dentists, and more shopkeepers. Who cares? We should focus on what makes us what we are. American workers are creative, hardworking, innovative, and can think outside the box, and American universities excel in basic and applied research. The quality of education in America is not just a little better than in the rest of the world; it is miles ahead. I acknowledge that K–12 education can be improved and that we should teach our kids more math and science. But we must start by focusing on our key strengths and doing what we do better.