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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications Semiconductor Engineers in a Global Economy Clair Brown and Greg Linden University of California, Berkeley THE CHANGING NATURE OF SEMICONDUCTOR ENGINEERING WORK The main forces affecting the nature of engineering work in the semiconductor industry are the evolution and globalization of technology. U.S. semiconductor firms are in many cases leading these changes both at home and abroad. But with increased global competition, U.S. chip engineers must continually upgrade their skills, deal with mobility among employers, and rely upon their own resources, rather than their employers, to manage their careers. At present, global competition does not seem strong enough to undermine the positive employment and wage effects of the industry’s continued growth for most workers, although job opportunities for older workers and those at the bottom of the job distribution have deteriorated. Many overseas companies, such as Taiwan’s foundries and India’s design-services providers, complement U.S. companies and have lowered barriers to entry at a time when the costs of design and manufacturing are skyrocketing. This situation plays to the strengths of U.S. engineering by keeping viable the fabless start-up system for bringing innovation to market. The cost reductions enabled by Asian suppliers of fabrication and design services are also contributing to falling semiconductor prices, and thus supporting the continued expansion of markets, both at home and abroad. The semiconductor (or integrated circuit [IC] or chip) industry involves three distinct stages of production—design, fabrication, and assembly and packaging. Each stage has been affected differently by globalization and offshoring: Design: The design of integrated circuits is carried out primarily by engineers. The offshoring of design activities to low-cost locations has been accelerating since the mid-1990s. Fabrication: Wafer fabrication involves a large number of process and equipment engineers, who account for approximately 25 percent of total direct workers at a manufacturing or fabrication facility (called a “fab”). Offshoring and onshoring of IC factories appears to have reached a relatively mature and stable stage. Assembly and packaging: The final stage of IC manufacturing is the most labor intensive, but engineers make up only 6 percent of the typical assembly plant workforce. Assembly offshoring began in the 1960s, and assembly and packaging are now performed almost entirely abroad. Assembly and packaging are not discussed in this paper because the employment implications for U.S. engineers are insignificant.1 The semiconductor industry produces a wide range of products, from relatively simple discrete diodes and transistors all the way to complex “systems on a chip.” Most market statistics reported here and elsewhere reflect “merchant” semiconductor sales, that is, sales to unrelated companies. A less visible share of the industry is devoted This paper was prepared for the National Academy of Engineering Workshop on the Offshoring of Engineering: Facts, Myths, Unknowns, and Implications, October 24–25, 2006, Washington, D.C. The paper is based on research conducted for a forthcoming book by Brown and Linden, Change Is the Only Constant: How the Chip Industry Deals with Crisis. 1 For an analysis of the globalization of assembly, see Brown and Linden (2006).
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications to “captive” chip design and manufacture internal to a company. This model is most prevalent in Japan but still exists in the United States, primarily at IBM, where nearly 50 percent of chip output in 2000 was for captive use.2 Other systems companies, such as Apple Computer or Cisco, that don’t make or sell chips may nevertheless design them for internal use. These chips may or may not be counted in merchant data depending on whether they are manufactured by a branded ASIC company, such as LSI Logic (which would be counted), or by a manufacturing-services “foundry,” such as Taiwan Semiconductor Manufacturing Corporation (which wouldn’t be included). All foundry sales are excluded from this analysis to prevent double counting. The work of engineers who design, manufacture, and market chips has been transformed by the continuous progression of manufacturing technology, which has evolved for more than 30 years along a trajectory known as “Moore’s Law,” the name given to a prediction made in a 1965 article by Gordon Moore. Moore, who co-founded Intel a few years later, predicted that the cost-minimizing number of transistors that could be manufactured on a chip would double every year (later revised to every two years). The industry has maintained this exponential pace for more than 30 years.3 Moore’s prediction was based on several factors, such as the ability to control manufacturing defects, but the driving technological force has been a steady reduction in the size of transistors. The number of transistors leading-edge producers can fabricate in a given area of silicon has doubled roughly every three years. From 1995 to 2003, the pace accelerated and the number doubled every two years.4 This relentless miniaturization is now reaching the molecular level. The smallest “linewidth” (feature on the chip surface) has shrunk from two microns in 1980 to less than one-tenth of a micron (100 nanometers [nm]) a quartercentury later. Viewed in cross-section, the thickness of horizontal layers of material deposited on the silicon surface is currently about 1.2 nm. For an idea of the scale involved, the width of a human hair is about 100 microns, and the width of a molecule is about 1 nm (one-thousandth of a micron). This progress has involved considerable expense for R&D, and the cost of each generation of factories has steadily increased. By 2003 the price tag for a fab of minimum efficient scale was more than $3 billion. The Moore’s Law trajectory has led to growing complexity of the industry’s most important chip designs. The size of a design team depends on the complexity of the project, the speed with which it must be completed, and the resources available. Design teams can be as small as a few engineers, and project duration can vary from months to years. A chip like Intel’s Pentium 4, with 42 million transistors fabricated on a 180 nm linewidth process, engaged hundreds of design engineers for the full length of a five-year project.5 Functional integration has reached a point at which certain chips encompass most of the individual components that populated the circuit board of earlier systems, giving rise to the name “system on a chip” (SOC). SOC integration offers the benefits of speed, power, reliability, size, and cost relative to the use of separate chips. Although the manufacturing costs of an SOC are lower than for the separate components it replaces, the fixed costs of a complex design can be significantly higher. A major reason is that system-level integration has drawn chip companies into software development because system software should be generated in parallel with the system-level chip to ensure coherence. Chip companies also offer their customers software-development environments, and even applications, to help differentiate their chips from those of their competitors. In a large chip-development project, software can now account for half the engineering hours. U.S. chip companies accounted for about half of the industry’s revenue in 2005, with Intel alone commanding about 15 percent of the market. The only U.S.-based firms in the 2005 global top 10 were Intel and Texas Instruments, but the United States has a great many mid-size companies that account for about half of the top 50. Some of these are “fabless” companies that design and market chips but leave the manufacturing to other companies, primarily Asian contract manufacturers known as foundries. All new entrants to the chip industry in recent years have adopted the fabless model. Fabless revenue has grown much faster (compound annual growth rate of 20 percent) than the semiconductor industry as a whole (7 percent) over the last 10 years. In 2005, the largest fabless companies, Qualcomm, Broadcom, and Nvidia, each had revenues of more than $2 billion. The discussion in this paper of how the labor market for semiconductor engineers, both domestic and worldwide, has been changing in response to changes in skill requirements is based on our ongoing interview-based research on the globalization of the semiconductor industry. Since the early 1990s, the Berkeley Sloan Semiconductor Program has collected data at semiconductor companies globally.6 In the past seven years the authors have interviewed managers and executives at dozens of semiconductor companies (both integrated and fabless) in the United States, Japan, Taiwan, 2 IC Insights data reported in Russ Arensman, “Big Blue Silicon,” Electronic Business, November 2001. 3 The revision occurred in 1975 (John Oates, “Moore’s Law is 40,” The Register, April 13, 2005). 4 Mark LaPedus, “ITRS chip roadmap returns to three-year cycle,” Silicon Strategies, January 21, 2004. 5 Terry Costlow, “Comms held Pentium 4 team together,” EE Times, November 1, 2000. “Linewidth” refers to the size of the features etched on a wafer during the fabrication process. Each semiconductor process generation is named for the smallest feature that can be produced. 6 The Competitive Semiconductor Manufacturing Program is a multidisciplinary study of the semiconductor industry established in 1991 by a grant from the Alfred P. Sloan Foundation with additional support from the semiconductor industry. Further details are available at esrc.berkeley.edu/csm/ and iir.berkeley.edu/worktech/.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications India, China, and Europe. We also use data from the Bureau of Labor Statistics, the Semiconductor Industry Association, and the Institute of Electrical and Electronic Engineers, as well as other published and proprietary sources (e.g., industry consultants). We begin by looking in detail at data sets on employment and earnings of U.S. semiconductor engineers, H-1B workers, and overseas engineers. We then discuss the factors affecting the U.S. labor market for semiconductor engineers, including technological change, immigration policy, and higher education practices. A discussion of globalization follows in terms of offshoring by U.S. companies, the availability and quality of low-cost engineers in Asia, and the development of the semiconductor industry in Taiwan, China, and India. In the final section we consider the outlook for the U.S. chip-industry workforce. THE U.S. LABOR MARKET FOR ENGINEERS Factors that have affected the semiconductor industry in the past six years include a severe recession during 2001, a recovery that stalled in 2004, a large decline in venture funding for start-ups that picked up again in 2006, changes in the number of H-1B visas, and a drop and subsequent recovery in foreign student applications to U.S. graduate engineering schools since 9/11. In light of these changes in government policies and swings in the business cycle, disentangling an underlying, long-term trend in the offshoring of engineering jobs is extremely difficult. Readers should keep this caveat in mind when reading the following analysis of the U.S. labor market for semiconductor engineers, as well as the discussion of engineering jobs in selected countries. Because of inadequacies and gaps in the available data, we use more than one source for our analysis. To identify trends in the employment levels and earnings of semiconductor engineers, we use two major national data sets that have different strengths and weaknesses. The Bureau of Labor Statistics’ Occupational Employment Statistics (OES) (www.bls.gov/oes/home.htm) provides a large job sample collected from establishments that report detailed occupational characteristics. However, comparisons of data from different years are not exact because OES is designed for cross-section comparisons rather than comparisons over time.7 Moreover, OES does not provide educational characteristics. The American Community Survey (ACS) (http://www.census.gov/acs/www/), a relatively new household survey started in 1996 to update the census between decennial surveys, provides not only detailed educational characteristics of workers, but also occupational and industry characteristics of their jobs. Thus ACS is much better suited to our labor market analysis. However, the sample size for ACS for 1996–2002 is too small for detailed analysis. For these reasons, we look at both the OES and ACS data sets in our analysis. Because they yield somewhat different results, however, we caution the reader against drawing strong conclusions based on either data set alone. The inconsistencies and gaps reflect a need for better data collection by government agencies. We also use the very large Census Longitudinal Employer-Household Dynamics (LEHD) data set that links employees and employers to describe semiconductor career paths and firm job ladders between 1992 and 2002. This enables us to look at how workers form career paths by piecing together jobs offered by semiconductor firms. Employment and Earnings (OES Data) We begin by looking at employment levels and annual earnings for selected engineering jobs in 2000 and 2005, based on OES data. For the semiconductor industry, we use the North American Industry Classification System (NAICS) “Semiconductor and Other Electronic Component Manufacturing” (NAICS four-digit level 3344), which includes relatively low-value components such as resistors and connectors. The most relevant subcategory, “Semiconductor and Related Device Manufacturing” (NAICS 334413), accounted for 39 percent of employees (and 45 percent of nonproduction workers) in the 3344 category in 2003, but occupation-specific data are not available at this level of industry detail.8 In 2005, 2.4 million people were employed nationally in “engineering and architecture” occupations,9 with average annual earnings of $63,920 (see Table 1). Another 2.9 million people were employed in “computer and mathematical” occupations, with average annual earnings of $67,100. National employment in engineering and architecture fell 7.5 percent from 2000 to 2005, and average annual earnings of these workers rose 18.2 percent (more than the CPI-urban, which rose 13.4 percent).10 Computer and mathematical jobs increased slightly (0.7 percent) from 2000 to 2005, and average annual earnings of these workers rose 15.6 percent, slightly more than inflation. The semiconductor industry (NAICS 3344) employed 450,000 workers in 2005, with 21 percent in engineering and architecture occupations (36 percent of them as technicians or drafters) and 6.4 percent in computer and math occupations (40 percent of them in computer support or administrative positions). These two groups do not include managers, 7 The OES survey methodology is designed to create detailed cross-sectional employment and wage estimates for the U.S. by industry. It is less useful for comparisons of two or more points in time because of changes in the occupational, industrial, and geographical classification systems, changes in the way data are collected, changes in the survey reference period, and changes in mean wage estimation methodology, as well as permanent features of the methodology. More details can be found at http://www.bls.gov/oes/oes_ques.htm#Ques27. 8 U.S. Census Bureau, “Statistics for Industry Groups and Industries: 2003,” Annual Survey of Manufactures, April 2005. 9 This is the broad occupational category used for engineers in the OES. 10 http://data.bls.gov/cgi-bin/surveymost?cu.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications TABLE 1 Employment Levels and Earnings for Engineers in All Industries and in the Semiconductor Industry, 2000 and 2005 2000 2005 Employment Average Annual Earnings Employment Average Annual Earnings Percentage Change in Employment Percentage Change in Earnings Architecture and Engineering Occupations (total) 2,575,620 $54,060 2,382,480 $63,920 −7.50% 18.24% —in Semiconductors 132,150 $52,100 95,520 $68,720 −27.72% 31.90% Electrical Engineers (total) 162,400 $66,320 144,920 $76,060 −10.76% 14.69% —in Semiconductors 10,050 $69,560 10,620 $82,400 5.67% 18.46% Electronic Engineers (total) 123,690 $66,490 130,050 $79,990 5.14% 20.30% —in Semiconductors 14,170 $65,400 15,700 $82,430 10.80% 26.04% Aerospace Engineers (total) 71,550 $69,040 81,100 $85,450 13.35% 23.77% Chemical Engineers (total) 31,530 $67,160 27,550 $79,230 −2.62% 17.97% Civil Engineers (total) 207,080 $58,380 229,700 $69,480 10.92% 19.01% Computer Hardware Engineers (total) 63,680 $70,100 78,580 $87,170 23.40% 24.35% —in Semiconductors 5,990 $70,780 14,440 $89,870 141.07% 26.97% Industrial Engineers (total) 171,810 $59,900 191,640 $68,500 11.54% 14.36% —in Semiconductors 12,580 $64,420 11,030 $74,250 −2.32% 15.26% Mechanical Engineers (total) 207,300 $60,860 220,750 $70,000 6.49% 15.02% Computer and Mathematical Occupations (total) 2,932,810 $58,050 2,952,740 $67,100 0.68% 15.59% —in Semiconductors 27,080 $66,660 28,770 $77,800 6.24% 16.71% Computer Programmers (total) 530,730 $60,970 389,090 $67,400 −6.69% 10.55% Software Engineers, Applications (total) 374,640 $70,300 455,980 $79,540 21.71% 13.14% —in Semiconductors 5,890 $72,680 8,250 $86,860 40.07% 19.51% Computer Software Engineers, Systems (total) 264,610 $70,890 320,720 $84,310 21.20% 18.93% —in Semiconductors 8,280 $76,660 7,090 $90,820 −14.37% 18.47% who represent 8.2 percent of semiconductor employees. Nationally, some 12 percent of electronics engineers, 7.3 percent of electrical engineers, 18 percent of computer-hardware engineers, 5.8 percent of industrial engineers, and approximately 2 percent of computer-software engineers (applications and systems) are employed in the semiconductor industry. Together these six occupations account for 54 percent of engineering jobs in the semiconductor industry (or 85 percent if techs, drafters, and computer-support jobs are excluded). Engineering jobs (“Architecture and Engineering Occupations”) in the semiconductor industry fell a surprising 28 percent between 2000 and 2005 (Table 1, line 2).11 However, if we look at the major categories for semiconductor engineers, jobs increased for electrical engineers (6 percent), electronics engineers (11 percent), and computer hardware engineers (141 percent). Semiconductor jobs for industrial engineers fell 2 percent, the only specialty in which job growth for semiconductor engineers was lower than for engineers nationally. Jobs for software engineers (“Computer and Mathematical Occupations”) in the semiconductor industry increased by 6 percent between 2000 and 2005, while all jobs in these occupations increased less than 1 percent nationally. The increases were unevenly distributed, however. Semiconductor industry jobs for software-applications engineers increased by 40 percent, while jobs for software-systems engineers fell by 14 percent. On average, engineers in the semiconductor industry command higher salaries than their counterparts in other industries. In 2005, semiconductor industry engineers earned 7.5 percent more than engineers nationally, and software engineers in the semiconductor industry earned 16 percent more than software engineers nationally. In any given specialty, engineers in the semiconductor industry had average annual earnings of 3 percent (for electronics engineers) to 9 percent (for computer software engineers, applications) higher than engineers in other industries. Engineers in the six main semiconductor engineering specialties all experienced average growth in real earnings (i.e., above the inflation rate of 13.4 percent for the period), ranging from 1.9 percent for industrial engineers to 14 percent for computer-hardware engineers. Note that these comparisons are not adjusted for education or experience, which are taken into consideration in the next section using a different data set. Of course, employment levels between 2000 and 2005 did not increase continuously. Applications software engineers experienced a dip in employment in 2004 after strong employment growth in 2003, and electrical and electronics engineers experienced a dip in employment in 2003 followed by very strong growth in 2004. This is consistent with the jump in the national unemployment rate for electrical and electronics engineers to 6.2 percent in 2003, as it converged for the first time in 30 years with the general unemployment 11 Comparison of 2000 and 2005 is not exact because SIC 367 was used in 2000 for the industry code and NAICS 334400 was used in 2005.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications rate, before falling back in 2004 to a more typical rate of 2.2 percent.12 Overall we can say that the labor market for semiconductor engineers appeared to be relatively strong in the five years after the dot-com bust in 2000, when earnings nationally were mostly stagnant during the economic recovery, with income gains going mainly to the top decile (especially the top 1 percent). Semiconductor engineers even experienced better job and earnings growth than engineers in the same specialties in other industries. Although employment for industrial engineers and software-systems engineers in the semiconductor industry fell, employment for the other four specialties increased. Although earnings growth was relatively high only for computer-hardware engineers and electronics engineers in the semiconductor industry, all six specialties had relatively high average annual earnings in 2005, ranging from $74,250 for industrial engineers to $90,820 for software-systems engineers. Age-Earnings Profiles by Education and Experience (ACS Data) To analyze the earnings structures of U.S. semiconductor engineers by education and experience, we use another data set, the ACS (http://www.census.gov/acs/www/). We calculated age-earnings profiles for three educational levels, less than a bachelor’s degree (< B.S.), a bachelor’s degree (B.S.), and a graduate degree (M.S./Ph.D.),13 using ACS data for 2000, 2002, and 2004 for a sample of workers defined as follows: age 21 to 65 industry code 339 (electronics components and products, comparable to NAICS 3344 and 3346) occupation codes (selected electrical and electronics, software, and other engineering occupations and selected managerial occupations)14 The age-earnings profiles for the B.S. (Figures 1 and 2) and M.S./Ph.D. groups (Figures 3 and 4) show how the annual earnings of semiconductor engineers increase with knowledge and skill levels (educational level) and experience (age) for 2000 and 2004. The results are also given in Table 2, which shows earnings profiles for all three educational levels for 2000, 2002, and 2004, with earnings adjusted for inflation (in 2004 dollars using CPI-urban).15 One cautionary note: because the sample size for 2000 is small, the results for that year are less reliable than for 2002 and 2004. Also some of the age-education groups were too small to show full results.16 Returns-to-Experience Median and average real earnings increased with experience (age) for all educational groups through the prime ages. After that, median (but not necessarily average) earnings declined for older workers (age 51–65). However, average earnings did not decline for older workers in any education group in 2000 or for older M.S./Ph.D.-level workers in 2002, and median earnings did not decline for older < B.S. workers in 2004. The general increase and subsequent decline in median earnings implies that these engineers typically received a positive return-to-experience until they were in their fifties and sixties, when earnings for many of them declined. The decline can be explained, at least in part, by the number of weeks worked (Table 3). Workers older than 50 were much more likely than younger workers to work less than a full year (defined, conservatively, as less than 48 weeks of paid work). Comparing degrees, engineers with B.S. degrees typically had higher returns-to-experience than engineers with advanced degrees. B.S. holders earned one-half to three-fourths more in their peak years (age 41–50) than in their entry years (age 21–30). Engineers with graduate degrees (M.S./Ph.D.) earned 10 to 20 percent more in their peak years (age 41–50) than they did a decade earlier (age 31–40), shortly after their entry-level years. The variance in earnings increased with age for primeaged and older engineers (see 90/10 ratio in Table 2). The increase in variance is typically thought to reflect faster growing pay for higher performers, and pay for top earners would be expected to increase as engineers become managers. 12 Data were provided by Ron Hira. BLS redefined occupations beginning with the 2000 survey covering 1999, but there is no evidence that the redefinition has contributed to the post-bubble unemployment rise. See also Kumagai (2003). 13 < BS includes workers with a high school degree or GED but no B.S. degree (the proportion of this group that did not have an associate degree was 41 percent in 2000, 27 percent in 2002, and 13 percent in 2004); BS includes college graduates who do not have a higher degree; MS/PhD includes workers with a Masters or Ph.D. degree (the proportion of this group that had only a Masters was 90 percent in 2000, 81 percent in 2002, and 82 percent in 2004). Workers without a high school degree and workers with professional degrees (e.g., MD, DDS, LLB, JD, DVM) are excluded. 14 We used several different samples of occupation codes in order to test for sensitivity of age-earning profiles to the definition of semiconductor engineer occupations. In the results presented here, we included SOC 172070, 172061, 151021, 151030, 151081, 172131, 172110, 172041, 119041, 113021, 111021, 112020, 113051, and 113061. When we restricted the sample to fewer occupation codes, the age-earnings profiles remained mostly stable, with the earnings of the top 10 percent increasing for older groups with the inclusion of more managerial occupations. 15 Earnings for n percent represents the earnings where n percent of observations are below this value and (100 − n) percent of observations are above this value. Earnings for the 50th percentile represent the median. 16 For education-age-year cells (3 × 4 × 3 = 36) with fewer than 10 observations, no results are shown (two cells). For cells with fewer than 20 observations (and at least 10 observations), only mean and median income and full weeks worked are shown (six cells). The sample sizes by year and education (not age) are as follows:
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications FIGURE 1 Age-earnings profile for B.S. holders in 2000. However, the increase in variance between prime-age and older engineers reflects a sharp drop in pay at the bottom end of the scale (the 10th percentile group), especially in 2004. These profiles indicate that many older engineers are facing declining and inadequate job opportunities. Returns-to-Education As expected, median and average earnings increased with education. Comparing real median earnings for the younger groups, we see that the return for a B.S. degree has been fairly high, with college graduates typically earning 20 percent to 65 percent more (depending on age and year) than those who finished high school but not college. Put another way, in 2002 and 2004, a typical young engineer (age 21–30) with a B.S. degree earned the same pay as a typical engineer without a B.S. but with 10 years more experience (age 31–40). The graduate-degree premiums over a B.S. (median earnings for M.S./Ph.D. compared to B.S.) were not stable over the short time period shown, so it is difficult to determine the trend for returns for graduate education. The graduate-degree premium for the youngest group, when many were still in school, was 36 percent in 2002, but fell to 8 percent in 2004. The graduate-degree premium for workers in the early stages of their careers (age 31–40) was 7 percent in 2000, then shot up to 25 percent in 2002 and 36 percent in 2004, confirming our interview-based findings that the relative FIGURE 2 Age-earnings profile for B.S. holders in 2004.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications FIGURE 3 Age-earnings profile for M.S./Ph.D. holders in 2000. demand for younger M.S. and Ph.D. holders is increasing as a result of increasing technical complexity in manufacturing and design. A typical engineer (age 31–40) with an M.S. or Ph.D. earned slightly less than the average engineer with a B.S. but with 10 years more experience (age 41–50). For workers in their peak years (age 41–50), the graduate-degree premium fell from 16–19 percent in 2000 and 2002 to 9 percent in 2004. For the oldest workers, the graduate-degree premium fell even more dramatically, from 38–49 percent in 2000 and 2002 to 13 percent in 2004. For engineers older than 40 in 2004, the graduate degree premium was only 10 percent, indicating weak incentives for domestic workers to pursue graduate degrees, even though our fieldwork indicates that the industry needs them. The variance in earnings was higher for engineers with graduate degrees than for engineers with B.S. degrees in 2004. In both 2002 and 2004, the variance in earnings for older engineers with B.S. and graduate degrees was very high, with the 90/10 ratio ranging from 4.3 to 7.6. Earnings over Time The ACS earnings profiles showed slower growth of average earnings between 2000 and 2004 than the OES data FIGURE 4 Age-earnings profile for M.S./Ph.D. holders in 2004.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications TABLE 2 Age-Earnings Profiles (adjusted for inflation) for 2000, 2002, and 2004a Age 2000 2002 2004 21–30 31–40 41–50 51–65 21–30 31–40 41–50 51–65 21–30 31–40 41–50 51–65 Less than a Bachelor’s Degree 10th percentile $6,051 $2,9245 $23,194 $32,270 $32,421 $35,461 $34,448 50th percentile $34,966 $60,899 $48,973 $48,405 $57,481 $57,481 $49,515 $40,526 $60,790 $68,895 $70,415 90th percentile $90,759 $80,675 $85,717 $72,607 $121,579 $193,513 $7,770 90/10 ratio 15.00 2.76 3.70 2.25 3.75 5.46 2.84 Mean $4,606 $53,693 $70,505 $46,649 $57,127 $56,069 $52,402 $41,612 $68,819 $84,736 $64,523 Bachelor’s Degree 10th percentile $20,710 $53,444 $44,536 $30,496 $37,061 $49,026 $32,825 $24,316 $36,575 $60,790 $50,658 50th percentile $52,052 $83,505 $91,299 $72,372 $58,239 $72,005 $88,946 $70,945 $58,763 $70,921 $97,263 $89,665 90th percentile $96,867 $130,270 $158,104 $95,299 $127,066 $158,832 $158,832 $81,053 $109,421 $217,829 $217,829 90/10 ratio 4.68 2.44 3.55 3.12 3.43 3.24 4.84 3.33 2.99 3.58 4.30 Mean $58,127 $89,949 $107,758 $109,566 $60,867 $79,222 $104,635 $87,555 $57,470 $76,809 $116,220 $109,410 Master’s Degree or Ph.D. 10th percentile $61,238 $61,238 $61,945 $55,062 $63,533 $45,002 $21,276 $60,790 $60,790 $32,320 50th percentile $89,073 $106,331 $100,207 $79,417 $90,005 $105,888 $105,888 $63,322 $96,250 $106,382 $101,316 90th percentile $111,341 $155,878 $95,299 $137,654 $158,832 $339,901 $91,184 $210,737 $217,829 $217,829 90/10 ratio 1.82 2.55 1.54 2.50 2.50 7.55 4.29 3.47 3.58 6.74 Mean $89,360 $114,175 $121,988 $79,769 $95,060 $120,872 $127,819 $61,167 $112,238 $127,075 $124,065 aThe repetition of earnings in some cells, especially for the 90th percentile group, appears to be a coincidence and not a mistake. A check of the data indicates that many workers with different levels of education and in different occupations reported the same earnings, which are not top coded.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications TABLE 3 Engineers Working Less Than a Full Year (48 Weeks), by Degree Level, for 2000, 2002, and 2004 Age Ranges 21–30 31–40 41–50 51–65 2000 Less than a Bachelor’s Degree a 10% 0 35.71% Bachelor’s Degree 25% 3.28% 2.56% 10.53% Master’s Degree or Ph.D. a 3.23% 4.55% 12.5% 2002 Less than a Bachelor’s Degree 14.81% 0 14.89% 31.82% Bachelor’s Degree 13.7% 11.11% 9.24% 28.57% Master’s Degree or Ph.D. 13.33% 16.13% 3.7% 26.09% 2004 Less than a Bachelor’s Degree 35.71% 7.69% 3.70% 20% Bachelor’s Degree 15.85% 10.62% 9.82% 10.71% Master’s Degree or Ph.D. 25% 7.34% 12.35% 17.78% Note: The value in each cell is the proportion of engineers in that age group with the indicated degree who worked less than 48 weeks in the indicated year. a<10 observations (not shown) showed between 2000 and 2005, primarily because the ACS earnings were higher than in OES data in 2000 and comparable in 2004 and 2005. However patterns varied across occupations. In the ACS data, average computer science earnings grew much faster than average electrical and electronics earnings, where growth did not keep up with inflation (not shown in tables). In comparison, the OES data showed comparable positive earnings growth for these occupations between 2000 and 2005. Although ACS data were developed to be compared over time, while OES data were not, the small sample sizes of the ACS data make them less representative and less reliable than the OES data. For these reasons, we cannot say with confidence how much earnings by semiconductor engineers grew from 2000 to 2005. Summary Overall the earnings data indicate potential problems in the high-tech engineering market. Although the graduate-degree premium appears to be adequate for younger workers, the low returns-to-experience for engineers with graduate degrees make returns on investment in a graduate degree inadequate over an engineer’s entire career, especially the returns implied by the 2004 ACS data. The returns to a BS degree were adequate for engineers younger than 50. However, older workers at all three educational levels experienced a troubling drop in median real earnings. The data also indicate that the variance in earnings for high-tech engineers is growing, partly because earnings at the bottom of the distribution are rising very slowly, or even falling, as engineers age. Thus, although the high-tech engineering labor market appears to be strong nationally, data by age and education indicate that engineering jobs at the bottom end may be deteriorating and that older engineers may be finding fewer high-quality job opportunities. Career Paths for Semiconductor Professionals (LEHD Data) We now look briefly at how the jobs and earnings of semiconductor workers, including engineers, changed from 1992 to 2001 based on a very large linked employer-employee data set, the Census Bureau’s LEHD.17 The data cover all occupations, engineers as well as office workers, technicians, managers, and others. We focus here on prime-age male and female workers (ages 35–54) in two educational groups—medium (some college) and high (college graduate and above). The career paths are shown for modal groups, that is, the largest groups of workers who had held one, two, or three jobs, with at least one job in a semiconductor establishment during the decade. Other (smaller) groups of workers also changed jobs but had different career paths. For those who had held two jobs; the first job was outside the semiconductor industry and the second job in it. For those who had held three jobs, the first two were outside the semiconductor industry, and the last one was in the industry. Career Paths Semiconductor workers followed two distinct types of career paths—loyalist and job changer (see Table 4). Workers who already worked for semiconductor employers and had good job ladders (high initial earnings and good earnings growth) tended to become loyalists, that is, they did not change jobs during the period studied. The career paths of loyalists were considerably better than the career paths of job changers. Workers on inferior job ladders outside the semiconductor industry tended to become job changers, and most of them eventually ended up on a relatively good job ladder. Job changers had relatively low initial earnings in jobs outside the semiconductor industry and experienced substantial earnings growth (usually 20 to 30 percent for younger and 10 to 20 percent for older workers) by taking jobs in the semiconductor industry. Among job changers, two-jobbers began with higher pay outside the industry and were able to enter the semiconductor industry sooner than three-jobbers. Although highly educated three-jobbers experienced healthy earnings increases when they changed jobs outside the semiconductor industry, the increase was smaller than when they got jobs in the industry. Because the overall earnings growth 17 This material is taken from the Sloan-Census project that produced the book Economic Turbulence by Brown et al. (2006) and related papers (see www.economicturbulence.com). See Chapter 5 for an overview of job ladders and Chapter 6 for an overview of career paths in the semiconductor and four other industries (software, finance, trucking, and retail food).
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications TABLE 4 Semiconductor Career Paths, Workers Age 35–54 Males Females Loyalists Two Jobs Three Jobs Loyalists Two Jobs Three Jobs Medium Education A $32,564 $15,046 $12,458 $13,084 $8,148o $7,314 B .054 .056 .058 .039 .030 .041 C $55,780 $25,926 $21,998 $19,641 $10,999 $10,999 High Education A $36,084 $22,893 $18,197 $14,990 $10,132 $9298 B .059 .048 .047 .044 .028 .030 C $65,207 $36,925 $29,068 $23,569 $13,356 $12,570 Notes: A = mean initial earnings (2005 dollars, inflated from 2001 dollars using the CPI-urban). B = net annualized earnings growth rate (in log points) over the 10-year simulated career path. C = simulated 2001 final average earnings (2005 dollars). Source: Adapted from Economic Turbulence (Brown et al., 2006), Chapter 6, Table 6.1. Original calculations by authors from Census LEHD data. These career paths are for all workers in all occupations in the industry. They include engineers, as well as office workers, technicians, managers, and other occupations. of two-jobbers and three-jobbers was about the same over the 10-year period, the two-jobbers usually maintained their initial earnings advantage. Although job changers usually experienced higher earnings growth over the decade than loyalists, the growth did not offset their much lower initial earnings. Thus loyalists ended the period with substantially higher earnings. The legendary job hoppers in Silicon Valley (engineers who left good jobs for even better ones), constituted a smaller group than the job changers shown here, who left relatively low-wage jobs for jobs that paid slightly more. Job Ladders Data (not shown here) indicate that large firms provided 85 percent of semiconductor jobs. Firm fortune matters in the job ladders offered by large, low-turnover firms, as we see by comparing firms with growing employment to firms with shrinking employment. Large growing firms with low turnover provided 50 percent of the jobs in the industry, and these firms are typically known for providing good jobs. Semiconductor jobs in these firms tended to last a relatively long time—27 percent lasted for at least five years during the decade studied. Large shrinking firms with low turnover provided an interesting contrast. Even though these firms were reducing employment, new hires still accounted for 30 percent of jobs; however, less than 20 percent of jobs lasted more than five years. Thus these firms appeared to be replacing experienced workers with less-expensive new hires. When we compared ongoing and completed long-term (more than five years) jobs, we found that shrinking large firms tended to shed experienced workers with lower earnings growth, because annualized earnings growth was higher (by half a percentage point) in ongoing jobs than in completed jobs for all groups. These patterns marked a change in the way big companies deal with difficulties. IBM provides a good example of how downsizing programs evolved from the 1980s to the 1990s. In 1983, IBM offered workers at five locations a voluntary early retirement program in which workers with 25 or more years of experience would receive two years of pay over a four-year period. IBM offered voluntary retirement programs again in 1986 and 1989.18 Because these programs were voluntary for the general workforce, rather than for targeted job titles or divisions, the change in workforce usually did not turn out as the company might have chosen: better workers often opted to leave, and weaker workers, without good job opportunities elsewhere, often opted to stay. The deep recession in the early 1990s finally pushed IBM, DEC, and Motorola, once known for providing employment security, to make layoffs.19 The new approach to downsizing included voluntary programs for targeted workers. If these workers did not accept the termination program, they could be subject to layoffs, making the program less than voluntary in reality. In 1991 and 1992, IBM selected workers eligible for termination, which included a bonus of up to a year’s salary. In this way, more than 40,000 workers were “transitioned” out of the company. Downsizing continued through 1993, and by 1994 IBM was actually laying off workers.20 With the dot-com bust in the early 2000s, semiconductor companies undertook massive layoffs. By the end of 2001, Motorola had laid off more than 48,000 workers from its peak of 150,000 employees in 2000.21 As swings in demand became more volatile, the idea of lifetime employment in the semiconductor industry became a thing of the past, although selected workers still had excellent job ladders and long careers. The data in Table 5 show that for large firms with low turnover, growing firms offered higher initial earnings than shrinking firms to both men and women (by 7 to 37 percent), 18 http://www.allianceibm.org/news/jobactions.htm. 19 Some of the observations about specific firms here most likely reflect divisions of these large, complex firms beyond their production of semiconductors. We think the patterns discussed reflect the impact of globalization on high-tech firms. 20 http://www.allianceibm.org/news/jobactions.htm. 21 http://www.bizjournals.com/austin/stories/2001/12/17/daily22.html.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications TABLE 5 Job Ladders for Semiconductor Industry Workers, Age 35–54 Growing, Large Firms with Low Turnover Shrinking, Large Firms with Low Turnover Growing, Large Firms with High Turnover Growing, Small Firms with Low Turnover Growing, Small Firms with High Turnover Males Medium Educated A $21,462 $18,012 $14,810 $15,517 $17,115 B .054 .061 .063 .068 .076 C $36,592 $33,266 $27,860 $30,771 $36,592 Highly Educated A $23,057 $21,541 $21,388 $21,070 $20,600 B .059 .061 .040 .075 .055 C $41,582 $39,503 $32,018 $44,493 $35,761 Females Medium Educated A $13,024 $9519 $10,589 $8,506 $8,879 B .039 .036 .021 .048 .085 C $19,128 $13,722 $12,890 $13,722 $20,791 Highly Educated A $14,080 $10,334 $12,424 $10,692 $9897 B .044 .036 −.002 .054 .064 C $22,038 $14,970 $12,059 $18,296 $18,712 Notes: A = mean initial earnings (2005 dollars, inflated from 2001 using the CPI-urban). B = net annualized earnings growth rate (in log points) across the simulated career path. C = simulated 2001 final average earnings (2005 dollars). Source: Economic Turbulence (Brown et al., 2006), Chapter 5, Table 5.1. Original calculations by authors from Census LEHD data. The career paths are for all workers in all occupations in the semiconductor industry, including engineers, office workers, technicians, managers, and other occupations. and the growing firms compared to shrinking firms offered lower earnings growth to men and higher earnings growth to women. Overall men’s job ladders are more similar in growing and shrinking firms than women’s job ladders, and so men seem more protected from economic turbulence than women. A comparison of “stayers” (i.e., ongoing long jobs) and “movers” (i.e., completed 1–3 year jobs) shows that annualized earnings growth for short jobs was only two-thirds that of long jobs in both growing and shrinking large firms. These results indicate that growing firms used high initial earnings to attract talented workers, among whom only a select group was given access to career development with long, steep job ladders. Compared to growing firms, large shrinking firms paid lower initial earnings but offered higher earnings growth for short jobs; the job ladders for younger men were better relative to those of older men. These results indicate that large firms, both growing and shrinking, used market-driven compensation systems based on salaries in the spot market for engineers. Growing firms appeared to provide long job ladders with career development for a select group, while other workers faced either a plateau or “up or out.” Possibly workers not on the fast track left voluntarily for better jobs elsewhere. Shrinking firms appeared to keep selected experienced workers and replaced the others with new hires at market rates. New hires appeared not to have access to long job ladders with career development, even though the older workers still had long job ladders. These findings are consistent with changes we observed in our fieldwork at large U.S. companies in the 1990s. Small growing firms with low turnover were likely to be early-stage fabless companies that hired mainly technical personnel and offered relatively good job ladders for college-educated workers. Although these firms offered relatively low initial earnings, their earnings growth was high. After 10 years, earnings at these companies surpassed earnings of experienced workers in large shrinking firms and were close to earnings at large growing firms with low turnover. Small, growing firms may be an increasingly important source of good job ladders. Overall, economic turbulence has had negative effects on job ladders. Over the decade studied, growing large firms with low turnover allowed highly paid new hires to compete for access to long job ladders with career development, while shrinking large firms with low turnover forced experienced workers to compete to keep their jobs, which were either being eliminated or being filled by new hires paid at market rates. In any case, the era of lifetime jobs with career development appears to be over, and many workers must improve their job prospects through mobility. FACTORS THAT INFLUENCE ENGINEERING WORK AND WAGES The U.S. labor market for engineers is affected by a variety of long-term forces, including technological change, immigration policy, and educational practices. In this section we consider the effects of each of these. Technological Change: Wafer Size Engineering jobs in chip fabs have evolved over the last several technology generations, driven primarily by simultaneous increases in wafer size and automation, both of which have been important for raising productivity and keeping the industry on its Moore’s Law trajectory. We look at how
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications TABLE 11 U.S. Semiconductor Engineers by Location, 1997–2005 1997 1998 1999 2000 2001 2002 2003 2004 2005 U.S.-based Engineers 49,702 46,704 61,856 76,129 72,564 72,860 71,991 66,581 83,167 Offshore Engineers 7,253 19,692 17,446 19,964 27,226 29,813 30,876 34,632 42,193 Total 58,952 68,394 81,301 98,093 101,791 104,675 104,870 103,217 127,365 % in U.S. 87.3% 70.3% 77.9% 79.2% 72.7% 70.9% 69.9% 65.8% 66.3% Source: David R Ferrell, “SIA Workforce Strategy Overview,” ECEDHA Presentation March 2005; 2004 and 2005 data: unpublished SIA survey results provided by Ferrell. although the OES data for those two years do not confirm this trend.43 The number of offshore engineers increased sharply in 1998, and again in 2001, and again in 2005. Even with the ups and downs, the percentage of the workforce in the United States tended to hover between 70 and 80 percent from 1998 to 2003; it then fell to 66 percent in 2004–2005. These data indicate a mild shift in employment of engineers offshore relative to the United States. If it continues, this shift could have a depressive effect on U.S. engineering employment and earnings. The Semiconductor Industry in Japan, Taiwan, China, and India Engineers in the U.S. semiconductor industry have long been accustomed to competition from abroad. However, the competition may now be within a single company, for example, between two design groups in different countries. In this section, we look at the availability, quality, and cost of chip engineers outside the United States. A major problem with comparing semiconductor engineering talent in different countries is that the engineers in China and India, and to a lesser extent in Taiwan, are younger and have less education than engineers in the United States and Japan. In India and China, technicians with two-year degrees are often classified as engineers (this happens much less often in the United States and Japan). Relatively little graduate training is available in semiconductor engineering in India and China, and what is available is not comparable to graduate programs in the United States and Japan. Taiwan is an intermediate case; undergraduate and master’s level engineering programs are comparable to those in the United States and Japan, although Ph.D. programs are still catching up. Taiwan’s semiconductor industry was built largely by Ph.D. engineers who returned to Taiwan after receiving degrees and valuable work experience in the United States. A similar process is occurring in China and India. Thus we think Taiwan may provide a model of how semiconductor engineering will develop in India and China as the semiconductor industry in those countries matures, with the important difference that Taiwan is a much smaller country. The semiconductor industry in India and China is still quite young in terms of design, although both countries are active in this area. In China, domestic companies, often with personnel and funds from Taiwan, are major players in the development of semiconductor design. In China’s fabrication sector, both multinational companies (MNCs) and domestic companies (again with input from Taiwan) are very important players. In India, where subsidiaries of MNCs are the major players in the development of the semiconductor industry, fabrication has not yet begun. Semiconductor Engineering in Asia With the caveat that comparisons of semiconductor engineers in the United States, Japan, Taiwan, China, and India involve comparing engineers with different education and experiences, Table 12 provides rough estimates (based on a combination of published sources and interviews) of salaries, worldwide fab investment by local companies, and the number of active chip designers (excluding embedded software). We also provide an index of protection of intellectual property (IP), which is an important consideration in deciding which engineering activities might be moved outside the United States. However, the intellectual property protection rating covers all industries; thus low scores in the table may reflect lapses in specific sectors, such as pharmaceuticals, trademark goods, or recorded media, which are not relevant to the semiconductor industry. The salary figures suggest that engineers in the United States and Japan earn much more than most Asian engineers. These data, however, are imprecise and have high variance; thus they provide only a general guide. The salaries are for engineers with at least five years of experience in the United States and for engineers aged 40 in Japan, the approximate age they leave the union and begin to receive higher salaries. Note that 40 is the age at which the salary trajectory for U.S. engineers begins to level out. Semiconductor engineers in the other countries tend to be younger and less experienced; thus the salaries for engineers in China and India are for individuals with one to three years of experience. 43 The OES total for all software and other engineer categories was 73,650 in the May 2004 data and 76,300 in the May 2005 data.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications TABLE 12 Estimates for Selected Countries Annual Salaries for EE/CS Engineers Value of Fabs Constructed, by Country of Ownership, 1995–2006 Number of Chip Designers Intellectual Property Protection, 2004 (10 = high) United States $82,000 $74 billion 45,000 9.0 Japan $60,000 $66 billion —a 7.2 Taiwan $30,000 $72 billion 14,000 6.5 India $15,000 $0 7,000 5.0 China $12,000 $26 billion 5,000 3.7 aWe have been unable to obtain an estimate for the number of chip designers in Japan. Sources: U.S. salary from 2004 BLS Occupational Employment Statistics web site (average for electronics and software engineers in NAICS 3344); Japan salary (average for circuit designer and embedded software engineers aged 40 years old) from Intelligence Corporation’s data on job offers in 2003; Taiwan salary information from March 2005 interview with U.S. executive in Taiwan; China and India salaries are estimated based on a combination of interviews, business literature and online job offerings; value of fabs (when fully equipped) from Strategic Marketing Associates (www.scfab.com), reported in “Chipmaking in the United States,” Semiconductor International, August 1, 2006; number of chip designers in U.S. from iSuppli as reported in “Another Lure Of Outsourcing: Job Expertise,” WSJ.com, April 12, 2004; number of chip designers in Taiwan from interview with Taiwan government consultant to industry, March 2005; number of chip designers in India and China are author estimates based on conflicting published sources and discussions with industry analysts in 2005; intellectual property protection data from Gwartney et al., 2006, Chapter 3. All numbers rounded to reflect lack of precision. As the semiconductor industry quickly expands in China and India, wages are reportedly rising rapidly. For example, the salary range offered by SanDisk in Bangalore (JobStreet.com, June 2005) for a design engineer with one to three years of experience was $9,200 to $18,400.44 The salary gap is narrower for comparable key employees. One report claimed in 1999 that the salary ratio between the United States and India for experienced design engineers or managers was only 3-to-1.45 Senior managers with foreign experience are paid a large premium that eliminates any cost advantage; this reflects the critical importance of these managers in implementing new technology and projects.46 The overall differential between Indian and U.S. salaries has been declining as Indian salaries rise, and the earnings of domestically trained Indian engineers has been doubling in their first five years on the job. Salaries are also difficult to compare because of different compensation packages. In the United States and Taiwan, profit-sharing bonuses that vary with the business cycle can be an important part of a compensation package. In the United States, benefits, including health insurance, Social Security, and stock options, also make comparisons difficult. The value of fab construction over the past decade provides a general idea of the presence of this part of the value chain in each country. China, at $26 billion, has made significant inroads since its early public-private joint ventures with Japan’s NEC in the mid-1990s. In India, in sharp contrast, not a single commercial-scale fab has been constructed, although several have been proposed. We also estimate the number of chip designers, a group that is critical to the development of the semiconductor industry. According to some sources, about 400 chip designers are being added each year in India and China.47 However, that number can be misleading, because there is some confusion about the definition of “chip designer.” One industry executive claimed that there were only 500 “qualified IC designers” in China in 2004.48 A Taiwanese consultant didn’t even consider the later (and lower skilled) stage of physical design, called “place and route,” to be part of chip design.49 By those criteria, about 30 percent of the Taiwanese designers shown in the table would be eliminated. Estimates of Higher Education As we discussed above, engineering programs in U.S. universities have attracted large numbers of foreign students. The United States leads the world in higher education, especially in graduate training, as the Academic Ranking of World Universities (http://ed.sjtu.edu.cn/ranking.htm) by Shanghai Jiao Tong University shows (see Table 13). Fifty-three of the top 100 universities are located in the United States; five are located in Japan. Of the top 500 universities, 168 are in the United States, 34 are in Japan, and only 21 are in China, Taiwan, and India combined. The numbers for bachelor of science engineering degrees in Table 13 must be treated with caution, because the quality of education varies widely from country to country. The numbers may indicate political and social commitment to advancing technical education rather than actual capability. Also, these numbers are changing as India, and especially China, expand their engineering degree programs. According to a widely cited Duke University study, the annual number of new EE-CS-IT bachelor’s degrees in China in 2004 had reached 350,000 (Gereffi and Wadhwa, 2005). But it is an open question how long it will take these new programs to develop quality teaching programs. Although China and India have large numbers of engineering graduates, according to our interviews graduates from U.S. universities are better trained, especially in 44 Converted at 43.52 Indian rupees to the dollar. 45 “Special report: India awakens as potential chip-design giant,” EE Times, January 22, 1999. 46 Interviews at 15 semiconductor design centers in Bangalore in November 2005. 47 For India: “Designs on the future,” Express Computer (India), February 10, 2003; for China: PriceWaterhouseCoopers (2004), p. 7. 48 PriceWaterhouseCoopers (2004), p. 7. 49 E-mail exchange, March 2005.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications TABLE 13 Estimates of Higher Education for Selected Countries Academic Ranking of World Universities, 2005 Engineering B.S. Degrees, 2001 Universities in Top 100 Universities in Top 500 U.S. 53 168 110,000 Japan 5 34 110,000 Taiwan 0 5 35,000 China 0 13 220,000 India 0 3 110,000 Source: Academic Ranking of World Universities values tabulated by authors from ARWU 2005 Edition, accessible at http://ed.sjtu.edu.cn/ranking2005.htm; engineer B.S. degrees tabulated by authors for “Engineering” and “Math/Computer Science” from Appendix Table 2-33, “Science and Engineering Indicators 2004,” National Science Foundation except for India, which is an estimate for 2003–2004 from Appendix “USA-China-India” in Gereffi and Wadhwa, 2005. teamwork on projects and in using tools and equipment. For example, undergraduate students in India and China usually have no chance to work with automated chip design (EDA) tools, while EE students in the United States do. According to McKinsey, only 10 percent of Chinese and 25 percent of Indian engineering graduates are likely to be suitable for employment by U.S. MNCs (McKinsey Global Institute, 2005).50 However, as we have already pointed out, the competition is not only between U.S. students trained in the United States and foreign students trained abroad. A large number of foreign students receive training in the United States. Country Profiles Next we look at the evolution of the semiconductor industries in Taiwan, India, and China and compare the technology capabilities of these countries with those of the United States. On the design side, the quality of engineers in Asian countries, both in universities and in companies, has been improving, as is clear from papers submitted to the International Solid-State Circuits Conference (ISSCC), which is IEEE’s global forum for presenting advances in chip design (see Figure 8). From 2001 to 2006, submissions from China, India, and especially Taiwan increased noticeably. The number of acceptances for Taiwan also increased dramatically, even as the overall acceptance rate fell from 53 percent to 38 percent, and we expect that acceptances from India and China will increase in the near future as the quality of their university engineering programs improves. Taiwan Taiwan has the best-established semiconductor industry of the three Asian countries. According to Taiwan’s Ministry of Economic Affairs, the country ranked third (behind the U.S. and Japan) in semiconductor-related U.S. patents.51 The foundry model originated in Taiwan in 1987, and three of the top five foundries are located there. Taiwan also has rapidly growing production of memory chips and numerous successful fabless chip companies, four of which reported revenues of more than $500 million in 2005.52 Table 14 shows the value of Taiwan’s semiconductor industry output by stage of production for 2005. Fabrication, at $18.9 billion, accounts for the largest share of the $34.8 billion total, followed by chip design at $8.6 billion. Similar analyses are not possible in most major chip-producing countries where all stages of production are performed by large integrated producers. Taiwanese companies, however, have embraced the disaggregated business model, and only a handful of companies are involved in multiple steps in the value chain. Since the late 1970s, Taiwan has benefited from focused government programs and the return of U.S.-educated and trained engineers.53 In 1980, the government created the Hsinchu Science-Based Industrial Park, which is still the island’s largest concentration of semiconductor firms. Hsinchu is also home to two of Taiwan’s leading engineering universities, and the government’s microelectronics lab, ERSO, which played a pioneering role in the development of the industry, including the creation of chip companies such as TSMC and UMC. ERSO conducts some of the most advanced research in the country, and its thousands of alumni are encouraged to commercialize technology via local startup companies. The Taiwanese chip-design sector is mostly locally owned, although a few MNCs also operate design subsidiaries there. Taiwanese companies have embraced the fabless model, and some 60 fabless companies were listed on the Taiwan Stock Exchange in December 2004.54 By comparison, about 70 fabless companies were listed on NASDAQ in 2004. In 2001, the Taiwanese government renewed its efforts (Si-Soft) to improve local chip-design capabilities. As part of this initiative, the faculty teaching chip design more than doubled, from 200 in 2001 to more than 400 by 2005.55 One advantage for Taiwan’s fabless firms is the availability of an important local market. Many Taiwanese systems companies design, assemble, and procure components for computers, communications equipment, and consumer elec- 50 These figures were arrived at by McKinsey based on a survey of HR managers at multinational subsidiaries in these and other countries that asked the question: “Of 100 graduates with the correct degree, how many could you employ if you had demand for all?” 51 Cited in “Taiwan ranks 4th in the world in US patents received,” Taipei Times, Oct. 17, 2006. 52 “Data Snapshot,” Semiconductor Insights: Asia (FSA), Issue 1, 2006. 53 Saxenian (2002). 54 FSA (2005). 55 Chikashi Horikiri, “Taiwan Transforms into IC Development Center,” Nikkei Electronics Asia, February 2006.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications FIGURE 8 ISSCC acceptances and rejections by country, 2001–2006. Source: Tabulated from unpublished ISSCC data. TABLE 14 Value of Taiwan’s Semiconductor Industry, 2005 Output Value (US$ billions) Growth Since 2004 IC design $8.63 5.8% Foundry services $18.90 −3.0% IC packaging $5.21 6.4% IC testing $2.04 13.0% Source: IEK-IT IS data, reported in “Taiwan IC production value reached US$34.8 billion in 2005, says government agency,” DigiTimes.com, January 19, 2006. tronics for world-famous brands, including Hewlett-Packard, Nokia, and Sony. In 1999, 62 percent of Taiwan’s chip-design revenue came from local sales.56 Taiwan is second only to the United States in fabless firms by revenue, with firms specializing in cost-down, fast-follower capabilities. From a U.S. perspective, Taiwanese competition has shortened the market window during which U.S. chip companies can recoup their investments in chips before similar products are produced at a lower price. Taiwan’s design teams were praised in our interviews for their execution, a vital trait in an industry where time-to-market often means the difference between profit and loss. A frequent criticism, however, was that they were not yet truly innovative. Ironically, Taiwanese companies are locked in as technology followers by their reliance on business from local systems firms, which are as much as a generation behind the leading-edge technology.57 In the early stage of development of its semiconductor industry, Taiwan depended upon graduate training in the United States. Since the mid-1990s, the number of Taiwanese receiving Ph.D.s in engineering has declined steadily, and today only a few are pursuing graduate training in the United States. Although graduate education has improved in Taiwan, we heard some concerns in our interviews about declining numbers of returnees from the United States. Past returnees brought with them both graduate training and work experience that included management skills as well as practical knowledge. The Taiwanese government has instituted several programs to improve the local design sector, including a plan to train several thousand new design engineers in Taiwan’s universities, the creation of an exchange where local chip-design houses can license reusable functional blocks, and an incubator where early-stage start-ups can share infrastructure and services.58 Another initiative is intended to attract chip-design subsidiaries of major semiconductor companies; early takers include Sony and Broadcom (a major U.S. fabless company). In 2000, a government research institute created the SoC Technology Center (STC) to design functional blocks that can be licensed to local companies, a model Taiwan has used successfully in other segments of the electronics industry. STC has more than 200 engineers, most of whom have master’s degrees or better.59 For the Taiwanese semiconductor industry, China presents both a major challenge and a major opportunity. The 56 Data from Taiwan’s Industrial Technology Research Institute cited in Table 5, Chang and Tsai (2002). 57 Breznitz (2005). 58 “Trends in SOC design unthaw at SOC 2004,” EDN, December 9, 2004. 59 SoC Technology Center interview, March 2005. “SoC” is a common industry acronym for “system-on-a-chip” meaning a complex semiconductor. integrating multiple functions.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications challenge is competition in the foundry and fabless sectors, especially for low-cost designs using older technology, as well as competition for talented engineers to work in China and bring with them their knowledge of advanced technology in design and manufacturing. The opportunity is the chance to partner with Chinese companies elsewhere in the value chain, enabling Taiwanese companies to provide high-end design services. In addition, Taiwanese companies would have access to China’s rapidly growing markets. So far, political issues have made it difficult for Taiwanese chip companies to develop partnerships and markets in China, even as they lose experienced engineers to Chinese competitors. Taiwan-born engineers are an important force in technology development in China, in much the same way that the United States was an important force in technology development in Taiwan. Although China seems to be benefiting more than Taiwan from the flow of engineers, capital, and business activities between the two countries, this may change over time if the Taiwanese government changes its policy. China China appears to be following a similar pattern—government sponsorship, local access to system firms (such as Haier, Huawei, and TCL) that are increasingly engaged in world markets, and active involvement of expatriates returning from the United States or experienced engineers relocating from Taiwan.60 In little more than a decade, with the help of foreign companies (as investors or as technology licensors) and the Chinese government, Chinese firms have developed impressive fabrication capability. Table 15 shows the main chip fabs in China, based primarily in Shanghai. The most striking feature is that they are all foundries working under contract rather than companies that design and manufacture their own products. U.S.-based chip companies have few high-profile deals with Chinese foundries—the major exception being Texas Instruments, which began working with Semiconductor Manufacturing International Corp (SMIC) in 2002 and added a deal to co-develop SMIC’s 90 nm process in 2004.61 Executives with U.S. experience have also played key roles. For example, the CEOs of ASMC and HHNEC previously worked at AMD.62 Apart from SMIC, China’s foundries have adopted modest growth plans, especially compared to the headline-grabbing predictions of two or three years ago.63 But chip TABLE 15 Major Fabs in China, 2006 Company Fab Location First Year of Production Capacity (wafers per month, 8-inch equivalent) Advanced Semiconductor Manufacturing Corp (ASMC) Shanghai 1995 25,000 Shanghai Hua Hong NEC Electronics (HHNEC) Shanghai 1999 50,000 Semiconductor Manufacturing International Corp (SMIC) Shanghai, Tianjin, and Beijing 2001 150,000 Grace Semiconductor Manufacturing Corp (GSMC) Shanghai 2003 27,000 He Jian Technology Suzhou 2003 42,000 Taiwan Semiconductor Manufacturing Co (TSMC) Shanghai 2004 15,000; (40,000 planned) Source: iSuppli data, reported in Cage Chao and Esther Lam, “Despite China-based foundries reporting full utilization rates in 1Q, Taiwan players not overly impressed,” Digitimes.com, March 22, 2006. fabrication is now firmly established in China and will gradually expand. Although China’s fabs pose a growing challenge to Taiwanese foundries, from the perspective of U.S. chip firms they add welcome competition to the market for wafer processing. A potentially more worrisome development for U.S. firms is the emergence of a fabless design sector in China. Since 2003, China has claimed to have more than 400 chip-design firms. Many are small, poorly managed companies that deplete their seed money before they can bring a product to market. Others offer design services rather than their own products.64 One interviewee, echoed by others, claimed that many, if not most, firms outside the top 10 are engaged in various types of reverse engineering, which is often illegal.65 Foreign firms are generally reluctant to bring lawsuits, however, for fear of displeasing the authorities and the likelihood of losing in Chinese courts. But at least two U.S. companies are suing Chinese rivals in export markets for intellectual property violations.66 China’s top 10 chip-design firms in 2005 had total revenues of more than $1 billion, $400 million of which was from Hong Kong-based Solomon Systec, a designer of LCD 60 Saxenian (2002). 61 Mark LaPedus, “TI, SMIC sign deal to develop 90-nm technology by Q1 ’05,” Silicon Strategies, Oct.28, 2004. 62 Chintay Shih, “Experience on developing Taiwan high-tech cluster,” presentation at 4th ITEC International Forum, Doshisha University, June 17, 2006. 63 Mike Clendenin, “Deflated expectations in China’s IC biz,” EE Times, August 28, 2006. 64 Assessment of Byron Wu, iSuppli analyst, reported in “Analyst: China’s IC design houses struggling for survival,” EE Times, May 20, 2004. 65 Interview with a European chip executive, conducted by Elena Obukhova in Shanghai, December 2003. 66 See “An offshore test of IP rights,” Electronic Business, May 2004; and “SigmaTel Sues Chinese Chipmaker over IP,” Electronic News, January 6, 2005.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications drivers that was spun off from Motorola in 1999.67 The next largest firms (Actions [media player chips], $150 million, and Vimicro [PC camera image processors], $95 million) had IPOs on NASDAQ in 2005. China’s large, growing domestic market provides opportunities for China’s chip design companies to grow and become profitable, and in the future Chinese companies may be able to design products for the global marketplace. The local systems firms provide a sizable market for local fabless start-ups. The best chip design work is being done by local systems firms and a few world-class start-ups headed by U.S. returnees. The Chinese government has taken many steps to support chip-design firms, some of the largest of which are state owned. These measures include tax reductions, venture investing, incubators in seven major cities, and special government projects.68 A value-added tax preference for domestically designed chips was phased out under U.S. pressure and will reportedly be replaced by a WTO-friendly R&D fund, although this had not been announced as of this writing (September 2006).69 The return of Chinese nationals with education and work experience has been an important part of China’s recent technology development.70 Returnees provide valuable management experience and connectivity to global networks that tend to accelerate the development of China’s chip sector.71 According to government statistics on student returnees, in 2003, of the 580,000 students reported to have gone abroad since 1978, 150,000 had returned.72 The returnees had started 5,000 businesses, including more than 2,000 IT companies in Beijing’s Zhongguancun Science Park (one-sixth the park total).73 China is working to attract more high-tech returnees with a range of specially targeted incentives and infrastructure.74 China is not yet an important destination for design offshoring by U.S. firms. Of the top 20 U.S. semiconductor companies, only a handful had opened design centers in China (compared to 18 in India) as of June 2006. Most of these design centers are targeting the local market for the time being, and, according to press reports, some are engaged in software or system design rather than chip design per se. Concerns about intellectual property protection appear to pose a greater barrier to foreign design activity in China than in India.75 Chip design in China is at an early stage, but the relatively young Chinese chip-design engineers will steadily build their experience. One factor that favors the development of local design companies is that Chinese engineers prefer to work for domestic start-ups and domestic companies rather than MNCs. Many young Chinese engineers, especially returnees, are willing to risk working for emerging companies that may earn them great wealth. Some companies, particularly those whose founders include expatriates with foreign education and experience, are likely to begin to impact global markets by the end of the decade. It is still too early to predict the future relative importance of domestically owned and foreignowned chip-design activities, or to predict whether domestic firms will be involved mostly with contract services or with creating and selling chips. The education of semiconductor engineers in China is also at an early stage. As discussed above, the quality of Chinese engineering graduates varies widely, and few have the knowledge and skills necessary to work on advanced technology or for MNCs. However, MNCs, including chip and EDA firms, have been involved in improving engineering education in China, and the government has been actively recruiting world-class engineering professors to Chinese universities. Over time we expect semiconductor engineering education, especially at the graduate level, to continue improving. For now, returnees from the United States and experienced engineers from Taiwan will continue to play an important role in transferring technology to China. India The semiconductor industry in India presents a very different picture. India faces benign neglect by the government, a lack of manufacturing for chips and systems, and fewer returnees from the United States.76 Unlike Taiwan and China, India has no high-volume chip manufacturing, although as many as five proposals to build foundries are in various stages of negotiation.77 India is estimated to have 120 chip-design firms, and revenues from chip design in 2005 were estimated to be 67 Chinese government data cited in Mcallight Liu, “China’s Semiconductor Market: IC Design and Applications,” Semiconductor Insights: Asia (FSA), Issue 1, 2006 and iSuppli data in Mark LaPedus, “iSuppli lists China’s top fabless IC rankings,” EE Times, April 21, 2006. 68 “Synopsys Teams with China’s Ministry of Science and Technology, SMIC,” Nikkei Electronics Asia, March 21, 2003; “An Uneven Playing Field,” Electronic News, July 3, 2003; “China nurtures home-grown semiconductor industry,” EBN, December 8, 2003; “China government to support Solomon Systech, Actions and Silan,” DigiTimes, April 14, 2005. 69 “China to form R&D fund to replace VAT rebate, says report,” EE Times, April 15, 2005. 70 Saxenian (2002). 71 “Story behind the Story: Design in China is growing, but not exploding,” audiocast by Bill Roberts, Electronic Business, September 1, 2006, http://www.edn.com/article/CA6368425.html?text=%22design+in+china%22#. 72 “More overseas Chinese students returning home to find opportunities,” November 16, 2003, http://www.china-embassy.org/eng/gyzg/t42338.htm. 73 “More overseas Chinese students return home,” January 1, 2004, http://www.china-embassy.org/eng/gyzg/t57364.htm. 74 Mike Clendenin, “China starting to lure back its best brains,” EE Times, January 3, 2002. 75 “SIA Pushes Steps to Better IP Protection in China,” Electronic News, November 17, 2004. 76 Saxenian (2002). 77 Russ Arensman, “Move over, China,” Electronic Business, March 2006.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications $583 million.78 Most chip design is taking place in MNC subsidiaries, including most of the top 20 U.S. companies and many European companies. The flow of semiconductor engineering talent to MNCs has slowed the diffusion of technology to local firms, and India has no major fabless companies designing chips for sale under their own brand. Domestic chip-design companies with varied capabilities mainly provide design services. According to a study by the India Semiconductor Association, local design companies use a time- and material-based pricing method by which specific tasks are allocated to be carried out within set time lines.79 These companies tend to develop simple subsystems based on customer specifications. Larger independent design-services firms are much more sophisticated. They use a fixed-price method, are able to provide end-to-end solutions that incorporate in-house proprietary intellectual property, and offer design services across the VLSI design flow. The government is developing policies to support domestic chip-design firms. In our fieldwork we found that Indian engineers prefer MNCs to local start-ups, which are perceived as risky by engineers and their family members. This is a contrast with China, where engineers are relatively eager to join start-ups, which often receive some government support. Foreign chip companies have been attracted by Indian engineers’ knowledge of English and the successful Indian software sector. Many early investments by chip companies were focused on software, the writing of microcode that becomes part of a chip. Over time, Indian affiliates have taken on a bigger role, eventually extending to complete chip designs from specification to physical layout. This transition sometimes happens quickly. Intel, for example, opened a software center in Bangalore in 1999 and began building a design team for 32-bit microprocessors in 2002.80 Since most domestically trained engineers lack knowledge of the technology being transferred, the necessary management skills, and knowledge of the entire product cycle, American MNCs are highly dependent on returnees with advanced degrees from the United States to develop new projects in India. So far there have been few instances of design engineers in India leaving MNCs to start their own companies, as often happens in the United States. However, we heard of at least two cases in the past two years at one U.S. subsidiary. We also heard that leaving an MNC to start a company is becoming more acceptable among Indian engineers, many of whom are motivated to help India develop rather than to accumulate great wealth.81 Foreign subsidiaries face formidable problems in their Indian operations, including a very tight labor market and inadequate infrastructure. As in China, the quality of Indian engineering graduates varies greatly. This problem is exacerbated in India because most engineers there want to study computer science rather than electronics, and many are not aware of the job opportunities in semiconductors. Graduate education in EE is in its infancy, and doctoral education in the seven major technical universities is not up to U.S. standards. The very low wages paid to professors, the lack of expensive and constantly changing EDA tools, and the difficulty and expense of having sample chips fabricated, all contribute to problems in the development of world-class graduate education. In addition, India has not attracted nearly as many returnees as China. The low flow of new domestic graduates and returnees into the EE labor supply, coupled with the need for at least three to five years of experience for fully productive chip designers, has meant that the supply of design engineers has not kept pace with increasing demand. As a result, wages for chip designers have been rising rapidly, both at the entry level and during the first five years. As mentioned above, salaries for engineers with five years of experience are double entry-level salaries. Inadequate infrastructure, especially in Bangalore, also poses serious problems for chip-design centers. Because of the lack of a stable energy supply and lack of office space, foreign subsidiaries must make substantial investments to provide both offices and electricity. Bangalore, the country’s primary city for high-tech, is plagued by narrow, potholefilled roads that are often gridlocked, forcing employees to spend long hours commuting. In addition, high-tech companies are spread throughout the city, making commuting between companies, or even between company locations, very time consuming. In addition, the housing stock in Bangalore has not kept up with growth, and housing prices and rents have been rising rapidly. Many employees are faced with a choice of living in inadequate housing or living far from work. The housing and schooling problems are especially severe for returnees from the United States, who want to replicate the quality of U.S. housing and schools their families know. Several executives told us that their cost of living in Bangalore was almost as high as in the United States because of the high cost of housing and international schools.82 The shortage of engineering talent and weak infrastructure have constrained the rate of growth in the semiconductor design industry, both for foreign subsidiaries and for local companies, in India generally, and in Bangalore particularly. Some companies have been moving operations to areas that have better infrastructure and are less expensive than Bangalore. However, the talent shortage remains, especially for experienced engineers with advanced degrees. 78 Data from Frost & Sullivan, in Chitra Giridhar, “India design firms as product innovators,” Electronic Business, July 18, 2006. 79 “Study: Indian design firms prefer time and material model,” EE Times, Sept 22, 2006. 80 “Intel, TSMC Set Up Camps In Developing Asian Markets,” WSJ.com, August 30, 2002. 81 Personal communications in Bangalore, November 2005. 82 Personal communications in Bangalore, November 2005.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications OUTLOOK AND CONCLUSION The United States remains the world leader in the semiconductor industry in terms of market share, development of successful new companies, supply of experienced engineers, and graduate engineering education. Moreover, the United States is the leading location for system design, the stage at which most semiconductor purchase decisions are made.83 Our competitors, especially Japan, Korea, Taiwan, and the European Union, look to the United States for lessons on encouraging innovation and start-ups in the semiconductor industry. Nevertheless, competition from low-cost countries, especially China and India, which have rapidly growing and potentially large markets, may pose competitive threats to U.S. companies and engineers in the future. Outlook for U.S. Engineers The job market for U.S. semiconductor engineers shows there is some strength in employment and earnings growth, but also shows evidence of labor market problems, especially for older engineers and for the bottom 10 percent at all educational levels. We also observed signs of a decline in the earnings premium for graduate degrees (M.S./Ph.D. compared to a B.S.), and low returns-to-experience for engineers with graduate degrees. The situation is especially difficult for older engineers whose skills can rapidly become obsolete. Experienced design engineers are often forced to work on mature technologies, which pay less and may present fewer interesting problems. For example, according to a salary survey in 2004 by EE Times, the average annual salary for U.S. and European engineers skilled at designing for the latest chip-process technology was $107,000, whereas engineers designing for more mature analog technology averaged $87,000.84 Results of a regional survey of Silicon Valley, considered the cradle and creative font of the semiconductor industry, reveal that the recent job climate there is difficult. Overall the number of jobs in Silicon Valley has continually decreased since 2001, and jobs in the semiconductor and semiconductor-equipment industries declined 23 percent between 2002 and 2005, although the average wage rose 12 percent during the same period. Thus the survey paints a mixed picture of the health of the industry.85 Not surprisingly, industry participants disagree about the significance of offshoring for the U.S. job market. A 2004 survey by EE Times of more than 1,453 chip- and board-design engineers and managers showed that about half believed that foreign outsourcing would lead to a reduction in head count. Qualitative opinions were also divided, with optimists noting that reduced costs have strengthened companies and increased job security, and pessimists bemoaning downward pressure on wages and employment as well as the possible loss of intellectual property and, in the long run, industry leadership.86 We have observed that some movement of design jobs is related to the business cycle. There was a wave of design offshoring at the height of the dot-com bubble. Then, when the cascading effect of the subsequent downturn reached the semiconductor industry, chip companies began cutting staff at home. Now that the recovery requires the expansion of design operations, chip companies appear to be expanding design operations abroad faster than at home.87 It is too early to predict where this relative shift in the geographic distribution of employment will find its new equilibrium. Even experts disagree about whether or not the United States is educating too few engineers and scientists and is facing a shortage.88 This is partly because economists find it hard to believe there can be a shortage in a labor market when real earnings across the board are stagnant. This is partly a reflection of government policies that affect the immigration and education of high-tech engineers. Policy Issues The industry’s offshoring has gone well beyond the point at which blunt instruments such as trade policy can help engineers without harming companies. Taxes or quotas on traded activities or goods would raise costs for the many companies that have already invested offshore in a wide array of design and manufacturing activities for both the foreign and domestic chip markets. Policy changes are thus unlikely to improve the demand side of the labor market. Industry has, however, been actively lobbying for changes on the supply side in the form of changes to educational and immigration policies that increase the supply of high-tech workers. The winter 2005 newsletter of the Semiconductor Industry Association includes two articles on the subject, “Maintaining Leadership as Global Competition Intensifies” by the organization’s president and “America Must Choose to Compete” by the outgoing CEO of Intel. One of the main targets of industry analyses is education. Higher education policies, which reflect both university decisions and government funding, determine the number and country of origin of students at all levels, but especially at the graduate level. Foreign nationals in our M.S. and Ph.D. programs in science and engineering have a direct impact on the supply of knowledge workers, both in the United States and in China and India. Foreign graduates of U.S. universi- 83 iSuppli data reported in Dylan McGrath, “U.S. still top design influencer; China, India rising fast,” EE Times, September 28, 2006. 84 “After 10-year surge, salaries level off at $89k,” EE Times, August 28, 2003. 85 Joint Venture: Silicon Valley Network, “2006 Index of Silicon Valley,” available online at http://www.jointventure.org/PDF/Index%202006.pdf. The data are from state unemployment insurance data, which is the basis for the Census data. 86 “It’s an outsourced world, EEs acknowledge,” EE Times, August 27, 2004. 87 See, for example, “The perfect storm brews offshore,” Electronic Business, March 2004. 88 See, for example, Freeman (2003, 2005); Task Force on the Future of American Innovation (2005); NRC (2000, 2001); Butz et al. (2004).
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications ties must obtain temporary visas, usually H1-B visas, before they can work in the United States after graduation. Legislation is under consideration to provide permanent residency status to foreigners educated in the United States. We are hopeful that this policy will be implemented soon. Government policies regulating immigration, especially the issuance of H-1B (Non-Immigrant Professional) and L-1 (Intra-Company Transfer) visas, also have a significant impact on the number of foreign engineers engaged in semiconductor and software work. In a delayed response to the recession, changes in policy that took effect in 2004 set severe limits on the number of visas for foreign workers. When the number of H-1B visas was thus reduced, many U.S. companies used the opportunity to send foreign nationals with U.S. education and experience back to India and China to help build operations there. An area of policy that has received less attention is compensation for engineers who are harmed by offshoring. As a result of the offshoring of chip design, consumers have benefited from lower prices and new products (although much of that benefit is received outside the United States). Some of the short-term cost of offshoring, however, is being borne by engineers in particular companies or industry sectors in which companies are restructuring globally. Currently, white-collar workers like chip designers do not qualify for trade-adjustment assistance from the government when their jobs are sent abroad. It would make sense to help these highly-skilled workers with retraining and other forms of assistance to enable them to remain productive. As Federal Reserve Chair Bernanke remarked, “The challenge for policy makers is to ensure that the benefits of global economic integration are sufficiently wide-shared—for example, by helping displaced workers get the necessary training to take advantage of new opportunities—that a consensus for welfare-enhancing change can be obtained.”89 Finally, we need more and better data. As researchers in other industries have noted, more labor market data, both for the United States and for our trading partners, are necessary for proper assessments of the effects of offshoring.90 In the meantime, national policies affecting education, labor markets, and innovation will continue to be based upon informed speculation. How Should U.S. Engineers Respond? American engineers are naturally responding to the impact of the changing labor market on their careers. The highly rewarded career path of working for one company for an entire career is no longer an option. Most engineers today must expect to work for several firms. In fact, changing jobs is now the most effective way for them to advance their careers, both in terms of improving pay and learning new technologies and skills. Networking with colleagues from one’s alma mater and former companies as well as through professional associations is an excellent way of keeping up with job opportunities as well as learning about new technologies. Our advice to semiconductor engineers is to embrace the mobile labor market and look to job changes as a way of advancing. Each job should be chosen carefully to improve skills and take advantage of previous job experience. Engineers must continually stay in touch with their networks and share knowledge with their colleagues about what is happening in the field and about job opportunities. In short, engineers today must be in charge of their careers; they can no longer depend on employers to provide them with the training they need to keep up their skills. Foreign nationals working for U.S. companies can use their networks to develop careers both in the United States and in their home countries. Returnees who are willing to return home for short- or long-term stints can bargain for good salary packages from U.S. employers. U.S. nationals should also go abroad to develop contacts and expertise in specific cultures and regional markets. Semiconductor engineers are known for their flexibility and ability to solve challenging problems and to learn new technologies. The semiconductor industry is likely to continue to undergo constant crisis and change, and chip engineers should use these industry characteristics to their advantage in planning their careers by seeking jobs where they can learn about new technologies and new markets. To be successful in the industry, an engineer must see change as an opportunity rather than a problem. Lessons Learned In its short history, the semiconductor industry has faced continual challenges and has done an extraordinary job of overcoming them, often in innovative ways that were not anticipated. The industry has also continually experienced large swings in demand and prices, and we expect the cyclical nature of the industry to continue, even as the long-term trend moves upward. Our predictions for the future of the industry and recommendations for setting policy must not extrapolate from conditions in the short run, especially during a downturn. We must look to the long-term history of the industry to ensure that policy decisions, either by governments or by companies, are made on a solid foundation. Macro-policies that ensure a strong economy with steady growth are critical to the development of the semiconductor industry, which is negatively affected by national recessions and high interest rates. Government support for higher education, especially graduate education, should be the cornerstone of public policy to support innovation. A strong university system with state-of-the-art graduate training and strong links to 89 Edmund L. Andrews, “Fed Chief Sees Faster Pace for Globalization,” New York Times, August 25, 2006. 90 See the excellent study by Tim Sturgeon et al. (2006).
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications companies is critical for innovation in the semiconductor industry. U.S. universities are essential to educating Ph.D.-level engineers, who are as likely to be from Asia as from the United States. Social networks, such as workers’ contacts at their former universities and former employers, are important adjuncts to a company’s formal knowledge base. Company awareness of this is critical to ensuring that employees’ knowledge is recognized and used rather than flowing outward into these networks. Conclusion The semiconductor industry is in the intermediate stages of the complex, dynamic process of globalization. At this point it is hard to predict the impact of offshoring on the competitive position of the U.S. semiconductor industry and on the earnings and employment of domestic engineers, and whether the new equilibrium will be acceptable. Thus policy interventions must be flexible. Offshoring is an important step in the integration of India and China into the global economy. These countries appear to be pursuing different roles vis-à-vis the United States, with China’s chip industry acting more as a competitor (e.g., fabless start-ups) and India’s playing a more complementary role (e.g., design services). Both countries will certainly become more important in high-tech industries, both as markets and suppliers. However, their ability to move up the semiconductor technology curve is constrained at the moment by a lack of graduate education, undeveloped financial systems, and inadequate intellectual property protection, as well as severe problems facing their political systems. We expect that the United States will maintain its leadership position in the semiconductor industry, and we expect the industry and its resourceful engineers to continue to find ways to overcome challenges. For now, modifications in government policies affecting universities, immigration, and workers affected by trade would alleviate some of the labor market problems we have described. ACKNOWLEDGMENTS Clair Brown is professor of economics and director of the Center for Work, Technology, and Society (IIR) at University of California, Berkeley; Greg Linden is senior research fellow at the center. Yongwook Paik provided excellent research assistance. The authors would like to thank the Alfred P. Sloan Foundation, the Institute for Industrial Relations at UC Berkeley, and the Institute for Technology, Enterprise and Competitiveness (ITEC/COE) and Omron Fellowship at Doshisha University, Japan, for funding. Bob Doering and Bill Spencer provided detailed and helpful comments on the workshop version of this paper. We are also grateful to Ben Campbell, David Ferrell, Michael Flynn, Gartner Dataquest, Ron Hira, Dave Hodges, Rob Leachman, Daya Nadamuni, Elena Obukhova, Devadas Pillai, Semiconductor Industry Association, Chintay Shih, Gary Smith, Strategic Marketing Associates, Yea-Huey Su, Tim Tredwell, and C-K Wang for their valuable contributions. Melissa Appleyard, Hank Chesbrough, Jason Dedrick, Rafiq Dossani, Richard Freeman, Deepak Gupta, Bradford Jensen, Ken Kraemer, Frank Levy, B. Lindsay Lowell, Jeff Macher, Dave Mowery, Tom Murtha, Tim Sturgeon, Michael Teitelbaum, and Eiichi Yamaguchi, as well as participants at the NAE Workshop on the Offshoring of Engineering, the 2005 Brookings Trade Forum on Offshoring of White-Collar Work, the Berkeley Innovation Seminar, and the Doshisha ITEC seminar series provided thoughtful discussions that improved the paper. We are especially grateful to Gail Pesyna at the Sloan Foundation for her long-running support of, and input into, our research. 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DigiTimes http://digitimes.com/ EDN http://www.edn.com Electronic Business http://www.edn.com (formerly separate) Electronic News http://www.edn.com (formerly separate) Express Computer (India) http://www.expresscomputeronline.com The Register http://www.theregister.co.uk/ Silicon Strategies http://www.eetimes.com (formerly separate) Electronic News http://www.edn.com (formerly separate) New York Times http://www.nytimes.com Nikkei Electronics Asia http://techon.nikkeibp.co.jp Semiconductor Business News http://www.eetimes.com (formerly separate) Semiconductor International http://www.reed-electronics.com/semiconductor/ Taipei Times http://www.taipeitimes.com WSJ.com http://online.wsj.com ADDITIONAL READING Borrus, M. 1988. Competing for Control: America’s Stake in Microelectronics. Cambridge, Mass.: Ballinger Publishing. Ernst, D. 2004. Internationalisation of Innovation: Why is Chip Design Moving to Asia? Working Paper 64 (rev. March 2004). Honolulu, Hi.: East-West Center. 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The Globalisation of High Technology Production: Society, Space, and Semiconductors in the Restructuring of the Modern World. New York: Routledge. Henisz, W.J., and J.T. Macher. 2004. Firm- and country-level trade-offs and contingencies in the evaluation of foreign investment. Organization Science 15(5): 537–554. Hira, R. 2004. U.S. immigration regulations and India’s information technology industry. Technological Forecasting & Social Change 71: 837–854. Hira, R. 2005. Impacts and Trends of Offshoring Engineering Tasks and Jobs. The Bridge 35(3): 22–27. Available online at http://www.nae.edu/NAE/bridgecom.nsf/weblinks/NAEW-6GEK5J?OpenDocument. Howell, T.R., B.L. Bartlett, W.A. Noellert, and R. Howe. 2003. China’s Emerging Semiconductor Industry: The Impact of China’s Preferential Value-Added Tax on Current Investment Trends. San Jose, Calif.: Semiconductor Industry Association. International Business Strategies. 2002. Analysis of the Relationship between EDA Expenditures and Competitive Positioning of IC Vendors: A Custom Study for EDA Consortium. Available online at www.edac.org/downloads/resources/profitability/HandelJonesReport.pdf. Accessed April 15, 2005. Leachman, R.C., and C.H. Leachman. 2004. Globalization of Semiconductors: Do Real Men Have Fabs, or Virtual Fabs? Pp. 203–231 in Locating Global Advantage: Industry Dynamics in the International Economy, edited by M. Kenney with R. Florida. Stanford, Calif.: Stanford University Press. Linden, G., C. Brown, and M. Appleyard. 2004. The Net World Order’s Influence on Global Leadership in the Semiconductor Industry. Pp. 232–257 in Locating Global Advantage, edited by M. Kenney with R. Florida. Stanford, Calif.: Stanford University Press. Linden, G., and D. Somaya. 2003. System-on-a-chip integration in the semiconductor industry: industry structure and firm strategies. Industrial and Corporate Change 12(3): 545–576. MAEI (Malaysian-American Electronics Industry). 1995. Malaysian-American Electronics Industry: Annual Survey 1994/1995. Mimeo. Kuala Lumpur, Malaysia: MAEI. McKendrick, D.G., R.F. Doner, and S. Haggard. 2000. From Silicon Valley to Singapore : Location and Competitive Advantage in the Hard Disk Drive Industry. Stanford, Calif.: Stanford University Press. Semiconductor Industry Association. 2003. International Technology Roadmap For Semiconductors: Design.” Available online at public.itrs.net/Files/2003ITRS/Home2003.htm as of April 19, 2005. Tilton, J.E. 1991. International Diffusion of Technology: The Case of Semiconductors. Washington D.C.: Brookings Institution.