Transcript No Slide Title

Offshore Outsourcing in an
Increasingly Competitive and
Rapidly Changing World
A High-Tech Perspective
Christopher Novak
Ass’t Director, Research
May 18, 2004
The Genesis
The genesis of this study began at an AeA
Board meeting in October 2003, where offshore
outsourcing was a central topic. At the Board
meeting in February 2004, extensive data and
analysis were presented. The Board suggested
certain refinements in the data and asked for
additional analysis and information. The result
of these deliberations, analysis, and data
mining is the paper.
2
The Purpose



To insert some common sense, sound data, and
rational analysis into the debate.
To describe how the international environment in
which our companies compete has changed and is
continuing to change.
To provide recommendations that can only be
understood in the larger context of the increasingly
competitive and rapidly changing world.
3
Issues Addressed in
The Paper
•
•
Magnitude of Offshore Outsourcing Is
Unknown
Government Projections for Long-Term
Job Growth In High Tech Remain Positive,
Yet in the Short-Term Some Are Being Hurt
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Magnitude is Unknown



There is no systematic collection of data on offshore
outsourcing by the government or private sector
Some projections/predictions are being made
Forrester Research Study (3.3m services jobs to
move offshore by 2015)
– Based on BLS data from height of the bubble
– BLS has since revised these data

Berkeley Study
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Berkeley Study
Berkeley study states that as many as 14
million jobs (not just high tech) are at risk of
being offshored.
 However, the same study notes:

“Indisputably, most of the job loss is due to the
technology downturn, the dot-com bubble, and the
cyclical downturn in the US economy.”
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Institute for International Economics



Jacob Kirkegaard of the Institute for International
Economics states that while some high-tech
occupations have suffered significant job losses in
recent years, the trend is concentrated at the lowerend (low-wage).
The majority of jobs threatened by offshore
outsourcing pay less than the US average wage.
High-paying IT occupations have seen some growth
since 1999.
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U.S. Technology Employment
2001-2002 vs 2002-2003
2001-2002
Total Tech Jobs
2002-2003*
-539,000
-234,000
High-Tech
Manufacturing
-233,000
-120,000
Communications
Services
-146,000
-84,000
Software
-146,000
-30,000
-15,000
0
Engineering & Tech
Services
Some totals may not equal the sum of the individual sectors due to rounding
*2003 data are estimates based on actual numbers through September 2003 and projections for the last quarter of
the year.
Source: U.S. Bureau of Labor Statistics
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And Some Occupations Are Projected to Grow
Through the Next Decade, 2002 vs. 2012
Occupation
TECH JOBS
Network Systems Analysts
Computer Software Engineers,
Applications
Computer Software Engineers,
Systems Software
Computer Systems Analyst
Computer Programmers
High-Tech Industry Projections
High-Tech Industry Employment
2002
2012
% Change
# Change
186,000
394,000
292,000
573,000
+57%
+45%
+106,000
+179,000
281,000
409,000
+46%
+128,000
468,000
499,000
653,000
571,000
+40%
+14%
+185,000
+72,000
6,037,000
7,087,000
+17% +1,050,000
Source: U.S. Bureau of Labor Statistics
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Job Loss More Attributable to
the High-Tech Bubble Burst, a
Weak Domestic and
International Economy, and
Dramatic Increases in
Productivity
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Weak Economies



For three consecutive quarters in 2001, the U.S. GDP
declined as the U.S. economy fell into recession.
The GDP growth rate for the European Union
averaged just over one percent between 2001 and
2003.
Japan’s GDP fell by 0.6 percent in 2001, followed by
two years of anemic growth below one percent.
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U.S. Productivity Rates
(at an annual rate)
8%
5.0%
4.4%
4%
2.6%
2.8%
2.8%
2.1%
1.7%
0%
1997
1998
1999
2000
2001
2002
2003
Source: U.S. Bureau of Labor Statistics
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Change in Manufacturing Jobs
Around the Globe
1995 vs. 2002
Country
1995
2002
% Change
# Change
- in millions of workers China
United States
Russia
Japan
India
United Kingdom
Brazil
Spain
Philippines
Canada
98.0
17.3
17.1
14.6
6.5
4.4
0.1
83.1
15.3
15.1
12.2
6.5
3.9
0.08
-15%
-11%
-12%
-16%
0%
-12%
-20%
-15.0
-1.9
-2.0
-2.3
0.0
-0.5
-0.02
2.4
2.7
1.9
3.0
2.9
2.3
+25%
+7%
+22%
+0.6
+0.2
+0.4
Source: Haver Analytics, AllianceBernstein
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Changes in the
International
Marketplace Are Posing
Significant New
Competitive Challenges
for U.S. Companies.
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"The dominance of the U.S. is already over. What is emerging
is a world economy of blocs represented by NAFTA, the
European Union, and ASEAN. There's no one center in this
world economy. India is becoming a powerhouse very fast. The
medical school in New Delhi is now perhaps the best in the
world. And the technical graduates of the Institute of
Technology in Bangalore are as good as any in the world. Also,
India has 150 million people for whom English is their main
language. So India is indeed becoming a knowledge center."
- Peter Drucker, Interview with Fortune, January 12, 2004
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The Real Challenges Are



Other countries have caught up, especially
in education and in economic reform.
Offshoring is global.
Demographics continue to alter
international competition.
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Some Other Countries
Have Caught Up
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Worldwide Engineering Degrees Awarded
1999 or most recent year available
Rank Country
Bachelor Degrees % of World
1
2
3
4
5
6
7
8
9
10
China
195,354
European Union 134,692
Japan
103,440
Russia
82,409
India*
82,107
United States
60,914
South Korea
45,145
Poland
21,618
Mexico
21,358
Indonesia
20,644
21.2%
14.6%
11.2%
8.9%
8.9%
6.6%
4.9%
2.3%
2.3%
2.2%
* data for India are for 2001 and are from the National Association of Software and Service Companies (NASSCOM)
Source: U.S. National Science Foundation
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Reverse Brain Drain


Until recently, the United States benefited from a
reverse brain drain with the rest of the world as
leading scientists and engineers came to the
United States to study and work.
With changes in policies and factors abroad, more
and more foreign nationals are returning to their
home countries to explore opportunities there, and
fewer are coming to the United States.
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Percent of U.S. Degrees in 2002
Awarded to Foreign Nationals
Bachelor
Master's
Doctor's
56%
60%
47%
47%
53%
45%
37%
40%
25%
20%
13%
7%
8%
4%
2%
0%
Engineering
Computer
Science
Math
Biological
Science
Source: U.S. Department of Education
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Offshoring is a
Global Trend
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Offshore Outsourcing is a
Global Phenomenon

Jobs are being outsourced from:
–
–
–
–
–
Japan
United States
Western Europe
Korea
Singapore
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Offshoring from Japan


Deloitte Research predicts that by 2008
some 400,000 jobs will be offshored from
Japan to other Asian countries.
For Japan, this represents a larger
percentage of the workforce than is
predicted to be offshored by the United
States.
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Demographics
also play a role
in offshoring
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The U.S. Population is Aging
150
123
(in millions)
2002
+8 million
+6%
2025
131
+30 million
+89%
100
+15 million
+57%
50
41
26
64
34
0
25-54
55-64
65+
Source: U.S. Census Bureau
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The Proportion of U.S. Working
Age Population is Shrinking
0-24
100%
12%
25-64
65+
18%
75%
53%
49%
50%
25%
35%
33%
2002
2025
• In 2002, there were 4.4
people in the working age
population (25-64) for every
retired person (65+); by
2025, this is predicted to
drop to 2.7.
• In order to maintain the
same proportions in 2025
as in 2002, the U.S. would
need to add 110 million
more 25-64 year olds.
0%
Source: U.S. Census Bureau
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International Demographics
(in millions of people)
1,600
+42%
+418 million
+16%
+196 million
2000
2010
2020
2030
1,200
800
+29%
+81 million
-9%
-8%
-3%
-13 million
-3 million -10 million
400
0
India
United
States
China
Germany
Japan
Russia
Source: U.S. Census Bureau
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Offshoring Is Not A Zero-Sum Game


Institute for International Economics states
that offshoring increases productivity, profits,
and GDP.
The United States itself is a destination for
offshore outsourcing from other countries.
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Foreign Insourcing into the United States


Foreign direct investment in the United
States totaled $1.3 trillion in 2002.
Foreign companies employ 6.4 million people
in the United States.
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High Tech Stands to Lose the Most

As the nation’s largest exporting sector with
$171 billion in goods exports, high tech
stands to lose the most if protectionist
legislation spurs retaliation.
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