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.

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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 5

Berkeley Study

 Berkeley study states that as many as 14 million jobs (not just high tech) are being offshored.

at risk

of  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 lower end (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 2002-2003* Total Tech Jobs -539,000 -234,000

High-Tech Manufacturing Communications Services Software -233,000 -146,000 -146,000 -120,000 -84,000 -30,000 Engineering & Tech Services -15,000 0 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 2002 2012 % Change # Change TECH JOBS

Network Systems Analysts Computer Software Engineers, Applications Computer Software Engineers, Systems Software Computer Systems Analyst Computer Programmers 186,000 394,000 281,000 468,000 499,000 292,000 573,000 409,000 653,000 571,000

High-Tech Industry Projections

High-Tech Industry Employment 6,037,000 7,087,000 +57% +45% +106,000 +179,000 +46% +128,000 +40% +14% +185,000 +72,000 +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% 4% 1.7% 2.6% 2.8% 2.8% 2.1% 5.0% 4.4% 0% 1997 1998 1999 2000 2001 2002 2003

Source: U.S. Bureau of Labor Statistics 12

Change in Manufacturing Jobs Around the Globe 1995 vs. 2002

Country 1995 2002 % Change # Change

China United States Russia Japan India United Kingdom Brazil

- in millions of workers -

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

Spain Philippines Canada 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 15

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 4 5

6

7 8 9 10 1 2 3 China 195,354 European Union 134,692 Japan 103,440 Russia India*

United States

South Korea Poland Mexico Indonesia 82,409 82,107

60,914

45,145 21,618 21,358 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

60% 40% 20% 0% 7% 47% 56% Engineering Bachelor Master's Doctor's 53% 47% 45% 37% 8% Computer Science 4% 2% 13% 25% Math Biological Science

Source: U.S. Department of Education 20

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 22

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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150

The U.S. Population is Aging

2002 2025

+8 million +6%

131 123 100 50

+15 million +57%

41 26

+30 million +89%

64 34 0 25-54 55-64 65+

Source: U.S. Census Bureau 25

The Proportion of U.S. Working Age Population is Shrinking

100% 75% 50% 25% 0-24 25-64 65+ 12% 18% 53% 35% 49% 33%

•

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% 2002 2025

Source: U.S. Census Bureau 26

International Demographics

(in millions of people)

2000 2010 2020 2030 1,600

+42% +418 million +16% +196 million

1,200 800 400

+29% +81 million -3% -3 million -8% -10 million -9% -13 million

0 India United States China Germany Japan Russia

Source: U.S. Census Bureau 27

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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