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Electronic Design

Offshoring. Outsourcing. Out Of Work

Questions abound concerning where the next generation of EEs will come from and where they will find employment.

It's a crazy game of Catch-22. A loud call for more U.S. EEs comes from the likes of the IEEE-USA, the Semiconductor Industry Association, the American Electronics Association, and several other groups that want to maintain and promote the United States as the world center of technical innovation. Yet jobs are scarcer than ever, as they move offshore or get eliminated through industry downsizing and restructuring.

Hewlett-Packard recently announced a massive restructuring with 14,500 job cuts, including about 10% of HP Labs' technical staff. Kyocera plans to hire contract manufacturer and designer Flextronics International to replace its cell-phone manufacturing operation in North America, resulting in 1700 job cuts. San Diego-based Kyocera was producing 10 million cell phones a year.

India and China are now the primary destinations of electronics outsourcing. Yet Mexico, a longtime major source of cheap labor for TV and printer assembly, has become a hotspot for manufacturing and engineering services. Among those expanding to south of the border are Flextronics International, Freescale Semiconductor, HP, and IBM.

Nokia plans to extend its operations in Mexico as well. It also is building a new mobile phone plant in India, the company's first manufacturing facility in that country. Nokia will invest $150 million in the Indian plant, which is scheduled to open by the middle of next year and eventually employ 2000 people.

Well over half (60.6%) of the respondents to Electronic Design's 2005 Reader Profile Survey indicated that their company was outsourcing manufacturing or assembly, while just over half (52.1%) said they're now outsourcing design work. Most of the offshore work is going to India (26.1%) and China (23.5%).

U.S. still leads

The survey's respondents also said that 67.6% of their company's outsourced work was going to other locations in the U.S. According to market researcher iSuppli's Design Influence Tool (DIT), which measures purchases in U.S. dollars for 169 OEMs worldwide representing 75% of the global chip market, the U.S. continues to lead the world in electronic systems design. But for how long? What will new product development and innovation cost?

"It's hard to generalize with any confidence," says Ben Zarlingo, a communications test product manager at Agilent Technologies. "What I hear consistently is that organizations need complicated products designed very quickly, under very tight budgets. I'm not sure if that can be boiled down to one issue, but perhaps it generally falls under the heading of competitive pressures."

Alan Hill, principal engineer at Raytheon Missile Systems, pretty much agrees. "Industry is being pressured to perform faster so there is less opportunity to do on-the-job training," says Hill. "As a hiring manager, the best that I hope for is that the applicant has sufficient training that they can readily adapt to needs of our \[military\] customers and industry."

Indeed, when asked about the professional issues keeping them up at night, respondents most often chose "looming project deadlines" (36.3%). The other most common reasons for worry were staying current with new and emerging technologies, concerns about job security and the economy, and outsourcing issues.

While most of the world's electronic designs continue to originate in the U.S., this contrasts sharply with the country's propensity to outsource its production to other regions. Greg Sheppard, executive vice president for iSuppli, notes that U.S. influence in electronic design is actually on the rise.

More than 40.2% of new semiconductor sales in 2005 are driven by design activity in the U.S. That's the largest growth among the top 10 design nations. But while U.S. semiconductor manufacturers still have 47% of the worldwide microchip market, only 20% of new production facilities now under construction are in the U.S.

The DIT study expects electronic system design in the U.S. to drive 33.5% of the world's semiconductor purchasing in 2005, amounting to $58.7 billion worth of chip sales for the year. Japan is second, with its design activity generating 26.1% of worldwide chip sales, followed by Taiwan at 9.9%, Germany at 5.8%, China/Hong Kong at 5.4%, and South Korea at 5.3%.

The better and more timely news is that a study released in late September by the AeA says the U.S. tech sector added nearly 190,000 jobs, a 3.4% increase between January 2004 and June 2005, for a total of 5.72 million. This data, collected by the U.S. Bureau of Labor Statistics (BLS) and compiled by the AeA, indicates that the tech sector has generated a net increase in jobs over the last six-, 12-, and 18-month time span.

"The data confirm our suspicion that the high-tech industry has recovered from the bursting of the tech bubble of 2000-2001," says AeA's President and CEO, William T. Archey. "While industry growth is by no means explosive, the rise in high-tech jobs has been steady, and we find it encouraging that even tech manufacturing experienced a small increase. The trend over the last 18 months has impressed us. After precipitous declines in 2001 and 2002, job losses began to slow, but only now are we witnessing actual gains. This benefits our economy as a whole because tech jobs pay 84% more than the average private sector job."

Engineering and tech services added the most jobs, 100,800, followed by software services with an employment growth of 75,600. Only communcations services experienced a decline, losing 9400 jobs.

Business downturns are the leading cause of unemployment among U.S. technical professionals, according to 62% of U.S. IEEE members who reported being laid off in the 2004 IEEE-USA Unemployment Survey. Offshoring, which happens when companies move at least part of their operation to a foreign location, is now the second highest cause at 15%. And, 10% blamed mergers or acquisitions for their layoff. (Curiously, just over 71% of the respondents to the Electronic Design reader survey reported they were "not very concerned" or "not concerned at all" about losing their jobs to outsourcing.)

Why outsource?

Lower tax rates and incentives that reduce the cost of capital in other countries—not labor costs— are the principal reason why most new manufacturing facilities are currently being built outside the U.S., according to the Semiconductor Industry Association (SIA). Approximately two-thirds of the 300-mm wafer fabrication facilities under construction worldwide are located in Asia, many of them in China. (Of the 103,000 engineers employed by U.S. chip firms in 2003, 30% were located offshore.)

Research from the Center for Strategic Supply Research (CAPS) and global management consulting firm A.T. Kearney also suggests that companies make outsourcing decisions driven by cost reduction and the desire to focus on their core operations, rather than revenue and competitive advantage. More than 80% of companies in the study said reduced operating costs, reduced capital investment, and the need to focus on their core business were the primary reasons for their outsourcing activities.

The Conference Board, one of the world's largest business membership and research organizations, has its own concerns about technology companies shifting work offshore. The group suggests that companies considering offshoring need to examine the full impact of their decision, both at home and abroad, to determine whether they're adding or destroying their economic, social, and environmental value.

The board's report, "The New Corporate Reality: External and Market Considerations," says public backlash to offshoring (chiefly the reaction to job losses at home) has kept many business leaders from taking operations abroad. Offshoring also can hurt local tax bases and tarnish a company's brand. The negatives ultimately affect a company's home workforce, and the rapid growth in offshore destinations often strains local infrastructure and creates damaging cultural stresses, the report says.

"Even for companies that believe they exist solely to create value for shareholders, the social or sustainability implications of offshoring warrant considerable consideration, since, on a practical level, companies' reputations—their brand, desirability as employer, and, therefore, their financial success— are at stake," says Tom Heijmen, senior advisor to the Conference Board on offshoring and outsourcing.

11,000 more jobs

Basing all foundry production in the U.S. instead of Asia might add 11,000 U.S. jobs, including 2600 highly paid engineers. That's based on back-oftheenvelope calculations by Clair Brown, an economics professor at the University of California-Berkeley and director of the university's Center of Work, Technology and Society, and Greg Linden, a research associate at the center.

Also, the U.S. semiconductor industry's reliance on high-end design jobs—which Brown and Linden call "the latest frontier of offshoring"— is one of the reasons why keeping as much chip design as possible in the U.S. should be a cause for great concern.

Still, Brown and Linden see certain advantages to designing and manufacturing offshore. Their prime example is market access. U.S.based ASIC producers like IBM and LSI Logic have established design centers in all major European and Asian markets to facilitate interaction between their engineers and customers.

Many companies also maintain other offshore design centers that develop "cells," or building blocks that are later combined in various ways. These centers often help keep costs low while seeking skilled engineers. Many U.S. semiconductor companies invest overseas to gain specialized skills. (Great Britain has developed a certain expertise in consumer multimedia, while Scandinavian countries are noted for their wireless network technology.)

To get a clearer picture of the global availability of "qualified IC designers," Brown and Linden consulted the IEEE, which says that 40% of its 365,000 members are located outside the U.S. The IEEE's Solid-State Circuits Society (SSCS), the IEEE technical society most closely associated with chip design, had 19,715 members worldwide in 2001. More than half (56%) were outside the U.S., with China, Taiwan, and India making up three of the four fastest growing SSCS national memberships.

Brown and Linden believe that while the picture of the job market for U.S. chip designers remains unclear, "the short-term dynamic of expansion overseas with modest growth of domestic design centers gives some cause for concern."

Heavy lobbying

Two of the more subtle forces affecting the semiconductor industry over the past five years include changes in the number of H-1B visas and a drop in foreign student applications to U.S. graduate engineering schools. The recession in 2001 and the decline in venture funding for startups are other factors.

"Companies lobbied hard to get an exemption for anybody who has a master's or PhD from a U.S. university," says Ron Hira, professor at the Rochester Institute of Technology and IEEE-USA's vice president for career activities, as well as co-author of Outsourcing America.

"It turns out that they didn't use up the 20,000 additional visas they were allotted," Hira says. He also notes that only 8000 to 9000 of the 20,000 were actually used. "That's a little surprising because demand wasn't as big as everyone predicted."

At least three recent immigration bills in the U.S. Senate could impact current visa H-1B status. "The Indian government has been lobbying very hard through the WTO \[World Trade Organization\] to eliminate the cap \[on visas\] and take away prevailing wage requirements," Hira says. "They view their advantage as high skill, low cost, and the barrier is getting their labor at the customer site."

The 2003 annual SIA Semiconductor Workforce Strategy Committee Survey shows that 70% of U.S. industry engineers are working in the United States (Fig. 1). But that dropped to 65% in 2004 and into 2005. U.S. chip companies also still have most of their facilities and employment in the U.S., yet 73% of U.S. chip industry sales are now outside the U.S. market. Even though the industry is coming off two strong years, 2005 is expected to show only a modest gain in new job creation, according to the SIA Workforce Strategy Overview.

EE enrollment in U.S. universities is another issue. Total electrical/electronic engineering degree awards have already dropped by 14% in the past decade in the U.S. David R. Ferrell, the SIA's director of Workforce Strategy and an IBM human resources executive, says he expects university enrollment of EE majors to continue falling. One indicator of this trend is that only 35% of the EE hires in the U.S. this year will be from U.S. schools.

Part of the problem, notes Ferrell, is that just under 40% of those who start out as EE majors drop out in the first or second year. On top of that, more American technology companies are moving their marketing and manufacturing operations offshore and hiring local engineering talent. China graduates significantly more EEs than the U.S. Ferrell says that from everything he has heard, newly minted Chinese engineers are highly qualified and maintain a very good work ethic. "We should be very concerned," he says.

The Engineering Workforce Commission of the American Association of Engineering Societies reports that U.S. schools graduate only 7% of the world's engineers, placing the U.S. sixth among other nations. That's just ahead of South Korea but behind China, India, the European Union, Japan, and Russia. Technology Forecasters, the market research organization, believes Mexico is now graduating about the same number of engineers as the U.S.

The number of U.S. undergraduate EE students rose in 2002, but dropped again in 2003 (Fig. 2). Graduate EE students were up in 2003, possibly due in part to the dot-com boom and increased H1-B visa cap. But Ferrell says that interviews with 14 schools show declines of 5% to 15% in enrollments in 2004. When it comes to EE undergraduate degrees, only about 10% of U.S. graduates are foreign born. But that changes dramatically with master's and PhD degrees (Fig. 3).

From a public-policy perspective, Ferrell believes a change in visa legislation will ensure that foreign nationals continue to bring innovation to the U.S. Microsoft's Bill Gates strongly agrees, telling an audience at the Library of Congress in Washington this past April that the federal government's strict limits on temporary visas for technology workers should be scrapped.

"The theory behind the H-1B \[visas\] that too many smart people are coming is questionable," Gates said. Ferrell also has called for more federal R&D funding and programs to encourage math, science, and engineering enrollments.

It doesn't help that U.S. students score behind 20 countries in math and 13 countries in science, according to data developed by the Program for International Student Assessment, the National Center for Education Statistics, and the U.S. Department of Education.

Another means of getting a U.S. education these days is to go online. According to Sean O'Donnell, director of distance education (DE) at the Villanova University College of Engineering, 139 of the 300 engineering schools in the U.S. now offer online master's degree programs. Many of them have substantial foreign student participation. Villanova will offer its third fully online master's degree in electrical and computer engineering this fall.

"The DE program has exploded in popularity in recent years," says O'Donnell. Hira also says that several U.S. universities with engineering programs, including the Massachusetts Institute of Technology and the Rochester Institute of Technology, have established satellite campuses offshore, further aggravating job opportunities for U.S. engineers.

Federal spending cuts

The federal government hasn't been much help in generating new technology sector jobs. A further blow to the nation's competitiveness will result from cutbacks in spending on basic research, mainly by the Pentagon and NASA, as well as reducing university funding for education and research.

The National Institute of Aerospace (NIA) says the war in Iraq has pressured military R&D spending, forcing the Pentagon's vaunted Defense Advanced Research Projects Agency (DARPA) to shift much of its budget from basic to applied research to support the war effort. Industry investment in R&D is on the decline as well.

Robert Lucky headed telecommunications research at Bell Laboratories before taking a similar job at Telcordia Technologies. He retired from there in 2002 and now heads the National Academy of Science panel studying telecom research in the U.S. He estimates that 85% of the research papers generated in the U.S. come from academia and only 7% from industry. But a strong relationship between academia and government research programs remains, particularly within defense and aerospace.

Tessera Technologies, a specialist in miniaturization technologies for the electronics industry, transferred its chip-scale packaging technology to North Dakota State University. It also has partnered with the university to develop a fully functional microelectronics center. The multiyear program is sponsored by the Defense Microelectronics Activity, an arm of the Pentagon. It aims to develop wireless, low-observable surveillance sensors combined with a high-sensitivity basestation receiver to collect more accurate intelligence information. Tessera has a similar arrangement with the University of Alaska, Fairbanks.

Lost talent

One of the biggest concerns of Alan Hill of Raytheon is that much of the talent in the military and other government programs in the U.S. is about to retire. "There is a significant vacuum of engineers to replace them," Hill says. "The highest risk I see is that when we lose that experience and slowly replace it, we will more likely than not recreate the wheel because the new generation cannot rely on the advice of seasoned veterans."

The American Association for the Advancement of Science (AAAS) sees some hope that Congress will spare broad R&D budget cuts in the next fiscal year. Kei Koizumi, director of the R&D Budget and Policy Program at AAAS, believes the U.S. Senate is inclined to push for R&D spending that exceeds the budget proposed by the Administration.

Based on action thus far, the Senate would increase non-defense R&D investment by $2.2 billion, or 3.9%, over 2005 levels. Under the Administration's original budget proposal, issued in February, Koizumi's analysis shows the total federal R&D portfolio for 2006 would rise $733 million to $132.3 billion. That very small 0.6% increase would be far short of the expected 2% rate of inflation. This proposal represents the first decline in the total federal R&D budget since 1996. The Senate and House have proposed boosting NASA's R&D budget more than 7%. However, much of that could be diverted to getting the space-shuttle program back online.

For a list of organization and company URLs see Drill Deeper 11254.

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