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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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industry trends in engineering offshoring Vivek Wadhwa I am wearing two hats—one as a technology entrepreneur thought that academia was pretty laid back—beautiful cam- and one as an academic. As a tech entrepreneur, I was one of puses, easy life styles, and so on—and that this would be a the first to outsource software development to Russia and to part-time job. It wasn’t a part-time job, though. There’s no build a company dependent upon having its entire develop- such thing as part time in academia, as you folks know. ment team at the other end of the globe. I was also one of Second surprise—having been a tech entrepreneur during the first to outsource research and development to India. the dot-com days when it was hard to hire good talent—espe- I started my operations in Russia in 1992, right after the cially from universities like Duke—I didn’t expect students fall of the Iron Curtain. I can tell you stories about how we to ask me what sort of courses they should take to make their hired ex-KGB programmers to reengineer code based on jobs “outsourcing proof.” After all, I thought, the fact that skills they had gained from reengineering American sys- these kids had made it into Duke University meant that they tems during the cold war; but that is a different topic. We were highly sought after, top-notch students who would be employed 50 Russian scientists who built technology that led set in their careers. to the establishment of my second start-up company, which I talked to many bachelor’s and master’s students, even created 200 U.S. jobs and helped many businesses improve some Ph.D.s., and found that there were two types of stu- their operations. dents. One type had no clue about what was going on in the In my first start-up, we also employed many workers on world—these were just hard-core engineers. The other type H1-B visas. In the early 1990s, we recruited them from Lon- was more business savvy. These kids worried about their don and Dublin because our British and Irish hires typically careers and were planning their future. They were trying to cost 40 percent less than Americans with equivalent skills. figure out how they would pay off the student loans they had The fact is that when you hire H1-Bs, they cost a lot less. We amassed at Duke. built a very successful company as a result, and we didn’t The third surprise—30 to 40 percent of our students in take American jobs away. In fact, we created new jobs. the Masters of Engineering Management Program were ac- Then I had a heart attack—a career-changing event for cepting jobs outside the engineering profession. This didn’t me—and I couldn’t continue in tech, so I ended up joining make sense to me. All of us talk about the shortage of engi- Duke University as an executive in residence. My goal was neers. Yes, I accept that we want engineering education to be to give something back by mentoring students and sharing widely disseminated and that engineering education can be a my business knowledge. But when I joined Duke, there were foundation for many professions. But these students weren’t some surprises in store for me. going to J.P. Morgan or to McKinsey Consulting to lever- First surprise—I thought I was joining a country club. I age their engineering education; they were going because of economic opportunity. The bottom line was that engineering was not cool, with Vivek Wadhwa is executive-in-resident, and adjunct professor, Pratt some exceptions, of course. Biomedical engineering is really School of Engineering, Duke University. 09

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10 THE OFFSHORING OF ENGINEERING cool. The biomedical students I met showed the same pas- degrees in India. I have to add a caveat here—the Chinese sion, the same fire I used to see in my technologists. But numbers are suspect. In India, independent bodies track many students in civil engineering and technology didn’t graduation rates. In China, provinces report to the central have that passion. They were the ones who were looking for government, and they tell the government what it wants jobs in investment banking. Top IIT graduates from India to hear. would take courses in our Fuqua School of Business just to The problem is that when you have the wrong informa- position themselves for jobs in investment banking. tion, you reach the wrong conclusions. But when you focus I couldn’t answer the question my students had asked, so on a single metric, like the number of engineering degrees, as an academic, I decided to research the topic, and I asked there seems to be a simple solution. If the problem is the Professor Gary Gereffi, a professor of sociology at Duke, number of engineers that China and India are graduating is to help. We thought we’d start by assessing the facts in the high compared to the number the United States is graduating, outsourcing debate, but we couldn’t find many. Other than then the simple solution for U.S. competitiveness seems to three or four academic papers, including one by Harvard be to for the United States to graduate more. Yet there is no professor Richard Freeman, there wasn’t much research on indication that we need more engineering graduates. If we the subject of outsourcing and its impact on the engineering do graduate more, all we will be doing is helping McKinsey, profession. And I didn’t give much credence to reports by J.P. Morgan, and First Boston with their recruiting because industry analyst groups because, as a tech executive, I knew more of our engineering students will have to find employ- that you could often pay an analyst group to produce a report ment there. that would support your point of view. Recently, thanks to the Sloan Foundation, we expanded The facts—the numbers commonly cited about the United our research. We went to India and China and met with States graduating 70,000 engineers a year and China and academics, business executives, and Communist Party of- India graduating a million a year—didn’t make sense to me. ficials to get a better understanding of the situation. Almost I had worked in India, and I knew how weak education in everyone agreed with our conclusions—that the numbers for India was. I didn’t believe that India was graduating 350,000 India and China were questionable and that the quality of the engineers a year, as the media often reported. And, as a board graduates was questionable. The vast majority of engineers member and advisor to several companies doing business in that graduate in India and China are low quality. China, I didn’t believe that China was graduating 600,000 In China, we met with executives of about a dozen com- engineers either. So the first question we asked was where panies, each of whom had a list of as many as 10 universities these data were coming from. None of it made sense. they would hire from. They all said the rest of the graduates We decided to start by researching this issue, so we were unemployable by multinationals. If you put the lists enlisted some of our brightest students to investigate the of universities together, there are probably 20 in the whole statistics. Here is what we found (Figure 1). of China (about 5 percent of the engineering schools) from The statistics in common use were wrong. We were com- which multinationals or start-up companies can recruit. paring four-year degrees in the United States with three- and We learned that the Chinese government created this four-year degrees in China and two-, three-, and four-year situation deliberately. About 8 or 10 years ago, they realized 700,000 Number of Subbaccalaureate Degrees 600,000 Number of Bachelor’s Degrees 500,000 292,569 Degrees Awarded 400,000 300,000 200,000 84,898 351,537 103,000 100,000 137,437 112,000 0 United States India China Country FIguRE 1 Engineering, computer science, and information technology degrees awarded in 2004. wadhwa_fig1.eps

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11 INDUSTRY TRENDS IN ENGINEERING OFFSHORING they needed more engineers, so they decided to flood the during the days of the dot-com boom and Y2K. In our survey, market with engineering graduates. They told the provinces we asked companies a series of questions to determine the to increase engineering graduation rates, and the provinces extent of the shortages in engineering skills today. Eighty complied, as they always do. But universities like Fudan and percent of the companies said their acceptance rates were Tsinghua—the top universities—resisted. They were able to greater than 40 percent. In other words, about half the people show the government how quality dropped when graduation they offered jobs accepted them. Eighty percent of the com- rates increased over one or two years. The government then panies said that acceptance rates had remained constant or gave the top universities special permission to reduce gradu- increased over the last few years. Most of these companies ation rates to maintain quality. don’t offer sign-up bonuses, which are offered when a The China National Reform Commission issued a report company is eager to hire people and they are not accepting about four months ago that said 60 percent of the graduat- offers. Today, engineering jobs are being filled in less than ing class of 2006 would not be able to find employment. four months. This doesn’t look like a skill shortage to me. About two years ago, the Chinese government decided to We asked about what has changed over the last three slow down engineering graduation rates. So you will see to five years, and we left the question open ended because two years from now that the engineering graduation numbers we didn’t want to bait our respondents. Most said that the drop off again. engineers they have hired in the last three to five years gen- India is facing different challenges. In India, the country erally have better technology skills, better communication seems to succeed despite the government, while in China skills, and a broader global outlook. Some said there was the country succeeds because of the government. In India, no change. private industry compensates for the weakness of the govern- When asked about the advantages of U.S. engineers, ment. Right now, in Indian newspapers debates are raging respondents said they understand the market, the business, about quotas (more than 50 percent of the seats in all univer- and communication, they have better interpersonal skills, sities are reserved for so-called “scheduled castes”). In fact, they are creative, they are good at problem solving, and India may be messing up its own educational system because so on. Thirty-seven percent said U.S. engineers were more politicians get more votes that way. That’s a problem with a productive; 24 percent said equal; 9 percent said overseas democracy. engineers were more productive. Thirty-eight percent said But India also has its own self-defense mechanisms. It is a U.S. engineering employees produce higher quality work, relatively open, democratic country, and private colleges are and 40 percent said equal. beginning to provide high-quality education. Multinationals When we asked where companies are sending their jobs, in India told us they could hire the top 5 to 10 percent of India was number one, China number two, Mexico number graduates from almost any college in India. Private com- three, and then a long list of other countries. Here’s where panies like NIIT provide a “finishing school” for graduates things got really interesting. We found that a very wide va- from bad universities and give them enough training to meet riety of jobs where being shipped overseas. When we asked the needs of multinationals. companies to compare jobs overseas to jobs in the United We then took our research further and conducted a sur- States, 44 percent said U.S. jobs were more technical; only vey of U.S. companies that outsource engineering jobs. We 1 percent said that offshore jobs were more technical; and interviewed 78 presidents, division heads, CEOs, and senior 33 percent said the jobs were more or less equivalent. When HR representatives from 58 companies. For more infor- we asked what they gained by offshoring, the responses mation see http://memp.pratt.duke.edu/downloads/Duke_ included access to new markets, culture, co-location, 24/7 development cycle, salary savings, and so on. Industry_Trends_in_Engineering_Offshoring_10_4_ When we asked companies to compare the availability 06.pdf. Our previous research had raised questions about whether of engineers in the United States, China, and India, I was companies really hire individuals with two- or three-year astonished at the responses. Seventy-five percent said that diplomas who are graduating en masse from Indian and India has a large to adequate supply of well qualified entry- Chinese universities. I thought they didn’t, but the survey level engineers; 59 percent said the United States did; and 54 proved me wrong. We found that 40 percent of the companies percent said China did. I didn’t expect this. I thought India we interviewed gave us an unqualified yes—that they do hire would have a greater shortage of engineers than the United two- and three-year diploma holders. Seventeen percent said States, but the respondents we surveyed said they could hire maybe—depending on what kind of additional experience an entry-level graduates more easily in India than in the United individual has. We asked companies what additional training States or China. they would like the engineers they hire to have. The answers We asked about the strengths and weaknesses of each were more communication and presentation skills, intern- workforce. For the United States, the weaknesses were salary ships, computer-related skills, and so on. demands—not a big surprise, lack of industry experience, We hear a lot about the shortages of people with engineer- unwillingness to relocate, and poor work ethics. In China, ing skills, and there was a serious shortage of programmers they were communication skills, visa restrictions, proxim-

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1 THE OFFSHORING OF ENGINEERING ity, lack of loyalty, cultural differences, IP theft, lack of a To draw some general conclusions, I will put my tech big-picture mindset. In India, it was communication skills, CEO hat back on. When I was a tech executive, I learned lack of industry knowledge, proximity/visa, poor project that you must always fear your competition. You have to management, high turnover, and cultural differences. be alert and awake. You have to know your competition’s I thought turnover would be at the top of the list for India, strengths and weaknesses. And you have to be ruthless in but it was mentioned somewhere in the middle of the survey. crushing the enemy. That’s the way to compete. You learn This was a big surprise because many articles are about mas- to take advantage of your strengths, the things that make sive turnover. Executives in India said turnover is a big issue, you what you are. You have to do those things better than but in our survey it was just a passing point. Turnover didn’t the competition, and you have to battle the competition on seem to faze these companies. your turf. We asked companies about the relative advantages of In this debate, we have been focusing on the strengths of engineers from each country. For the United States, advan- our competition and competing on their turf. India and China tages were communication skills, understanding of industry, will always have an advantage in numbers, and there is no superior business acumen, better education/training, a sense way we will ever catch up. They graduate more engineers, of creativity, desire to challenge the status quo. For China, more dentists, and more shopkeepers. Who cares? advantages were cost followed by work ethics and willing- We should focus on what makes us what we are. Ameri- ness to work long hours. For India they were cost, technical can workers are creative, hardworking, innovative, and knowledge, knowledge of English, education, ability to learn can think outside the box, and American universities excel quickly, and work ethics. in basic and applied research. The quality of education in Cost was cited as the most important reason most com- America is not just a little better than in the rest of the world; panies go overseas. When we asked companies what lies it is miles ahead. I acknowledge that K–12 education can be ahead, most said they expected the offshoring trend to con- improved and that we should teach our kids more math and tinue and to expand. Only 5 percent said it would diminish science. But we must start by focusing on our key strengths over time. and doing what we do better.