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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
An Academic Perspective on the Globalization of Engineering
Charles M. Vest
When I was asked to speak at the beginning of this session, I pointed out that I do not know a great deal about the topic of offshoring and that everyone else in the room probably knows more. So, my purpose today is to provide some context along with my personal views before you begin your deep exploration of the topic.
My main message this morning is that I wish you well in sorting out, as the workshop subtitle says, the “facts” from the “myths,” and in coming to a deeper understanding of the nature of globalization, particularly for engineers and engineering work. This understanding is very badly needed. Above all, we need guidance on how we as a nation can stop thinking about globalization as a set of awful problems and begin thinking of it as a set of opportunities for America and, indeed, for the world.
THE CURRENT SITUATION
Let’s start with the basics. Where is the expertise going to be in the future? We know that natural shifts and changes are occurring in where engineers and scientists are being educated, although there is some debate about the accuracy and meaning of the statistics. Asia now accounts for a growing share of first science and engineering degrees (NSB, 2006). However, if we look at doctoral degrees, the picture is quite different, with Europe, as a collection of nations, ahead of both Asia and North America.
If we look at first degrees in science and engineering—the bachelor’s level—country by country, the United States has a relatively constant production in natural science and engineering, and China’s production is rising rapidly. If you look behind those facts and separate science from engineering, you see that the United States continues to lead in science degrees, but not in engineering degrees (Figures 1 and 2).
These figures have generated a great deal of debate over the last few years. I learned many years ago that if you want to write a paper that gains a high rank in the science citation indexes, you should make a very obvious error so that everybody will write papers correcting it, thereby driving up the ranking. The first draft of Rising Above the GatheringStorm (COSEPUP, 2007) quoted inaccurate statistics on Chinese and Indian degrees, contributing not only to debate over the report, but to a feeding frenzy of pundits focusing on this error. Vivek Wadhwa, who is speaking later today, more substantively pointed out the problems with those statistics (Wadhwa et al., 2005).
Indeed, I do not disagree very much with what Vivek has to say, which can be summarized in four major points. First, all degrees are not created equal. That is absolutely true. There is a significant disparity in quality among degrees from various institutions in the United States, and far greater disparity among degrees from institutions in places where the higher education system is developing very rapidly, such as China and India.
Second, in proportion to population, there is no obvious imbalance in the numbers of engineers being produced by the United States, China, and India. After all, the United States has less than 5 percent of the world’s population, a percentage that is expected to drop going forward, so why should we expect our absolute number of engineering graduates to be as large as those in much larger countries?
Charles M. Vest is president of the National Academy of Engineering and President Emeritus of the Massachusetts Institute of Technology.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
An Academic Perspective on the Globalization of Engineering
Charles M. Vest
When I was asked to speak at the beginning of this session, I pointed out that I do not know a great deal about the topic of offshoring and that everyone else in the room probably knows more. So, my purpose today is to provide some context along with my personal views before you begin your deep exploration of the topic.
My main message this morning is that I wish you well in sorting out, as the workshop subtitle says, the “facts” from the “myths,” and in coming to a deeper understanding of the nature of globalization, particularly for engineers and engineering work. This understanding is very badly needed. Above all, we need guidance on how we as a nation can stop thinking about globalization as a set of awful problems and begin thinking of it as a set of opportunities for America and, indeed, for the world.
THE CURRENT SITUATION
Let’s start with the basics. Where is the expertise going to be in the future? We know that natural shifts and changes are occurring in where engineers and scientists are being educated, although there is some debate about the accuracy and meaning of the statistics. Asia now accounts for a growing share of first science and engineering degrees (NSB, 2006). However, if we look at doctoral degrees, the picture is quite different, with Europe, as a collection of nations, ahead of both Asia and North America.
If we look at first degrees in science and engineering—the bachelor’s level—country by country, the United States has a relatively constant production in natural science and engineering, and China’s production is rising rapidly. If you look behind those facts and separate science from engineering, you see that the United States continues to lead in science degrees, but not in engineering degrees (Figures 1 and 2).
These figures have generated a great deal of debate over the last few years. I learned many years ago that if you want to write a paper that gains a high rank in the science citation indexes, you should make a very obvious error so that everybody will write papers correcting it, thereby driving up the ranking. The first draft of Rising Above the Gathering Storm (COSEPUP, 2007) quoted inaccurate statistics on Chinese and Indian degrees, contributing not only to debate over the report, but to a feeding frenzy of pundits focusing on this error. Vivek Wadhwa, who is speaking later today, more substantively pointed out the problems with those statistics (Wadhwa et al., 2005).
Indeed, I do not disagree very much with what Vivek has to say, which can be summarized in four major points. First, all degrees are not created equal. That is absolutely true. There is a significant disparity in quality among degrees from various institutions in the United States, and far greater disparity among degrees from institutions in places where the higher education system is developing very rapidly, such as China and India.
Second, in proportion to population, there is no obvious imbalance in the numbers of engineers being produced by the United States, China, and India. After all, the United States has less than 5 percent of the world’s population, a percentage that is expected to drop going forward, so why should we expect our absolute number of engineering graduates to be as large as those in much larger countries?
Charles M. Vest is president of the National Academy of Engineering and President Emeritus of the Massachusetts Institute of Technology.
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FIGURE 1 First natural science degrees. Source: NSB, 2006.
Third, salary trends and other labor market information indicate that there is no shortage of engineers in the United States. This may be true today, but here I must raise a caveat. Everyone I know who has looked at current labor market conditions and predicted what they mean for the future, especially in engineering, has fallen on their sword. I claim no particular wisdom about the “right” number of engineers we should be graduating. But I do think we have to be very careful about basing decisions on today’s marketplace conditions. We really should focus on the future.
Finally, the fourth point is that our universities are better than those of China and India. I agree with that. I don’t know if that situation is fleeting or will last forever. But I believe we should aim at making it last forever. In fact we currently have major advantages over the rest of the world in the way most of our institutions educate most of our engineers.
No matter how you look at it, there are mixed messages out there. Earlier this month, on October 12, 2006, The New York Times carried a story with the headline “Profit Rises 53% at Infosys, a Top Indian Outsourcing Company” (Rai, 2006). A mere five days later, on October 17, there was another headline in the Times, “Skills Gap Hurts Technology
FIGURE 2 First engineering degrees. Source: NSB, 2006.
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Boom in India” (Sengupta, 2006). One important point in the second story was that many software and service companies in India report that the quality of engineering and computer science education is sufficiently bad in their country that they consider only about one of every four engineering graduates employable.
Notwithstanding these mixed signals, I believe the broad trend in graduation numbers matters and should give us pause, for two very simple reasons. First, we must compete in the global economy, while simultaneously maintaining our American standard of living. This is a daunting challenge. Second, I believe that prospering in the Knowledge Age requires people with knowledge, much of it relatively deep in the areas of science and engineering. So we must closely monitor trends and not base decisions just on our current position or where we have been. The important question is what happens to the next generation. What should we do now to prepare young people for their personal and professional lives in the future?
THE IMPORTANCE OF LOCATION
Much of the debate in the popular press and in politics, and certainly in our own profession, has to do with location. For example, if we think very broadly about industrial R&D and innovation and the importance of location, there appear to be two camps out there, as one might expect. The first says, fundamentally, that location does not matter any more and is going to matter even less in the future. This view has been popularized and communicated extremely effectively in The World Is Flat by Thomas Friedman (2005). His basic view is that the Berlin Wall came down in 1989, but Microsoft Windows went up; and one day we woke up and found that $1.5 trillion worth of optical fiber had connected all of us around the world. The interesting story behind that, of course, is that most of the businesses that laid the fiber failed, and some of their managers are sitting in jail. Nonetheless, we ended up connected in a way that we could never have imagined. Friedman goes on to say that globalization has accidentally made Beijing, Bangalore, and Bethesda next-door neighbors, and many jobs are now just a mouse click away from anywhere.
There is another camp that tends to take the position that location does matter. While I am not sure Michael Porter would appreciate me viewing him as a representative of one end of this discussion, because he is a very broad and thoughtful person, he has built a very powerful case over the years about the importance of regional innovation clusters in the United States and elsewhere. These clusters are groupings of industries related to one another, and their proximity and interaction leads to an accumulation of human capital, expertise, synergy, communication, and so forth.
The importance of proximity to universities for small companies and corporate laboratories is well established. Not only do universities often spawn new enterprises, but they also tend to play a very important role in bringing people together, in effect forming a centroid for the boiling and perking that leads to the development of small, technology-based companies.
Another factor that is not mentioned so much is that venture capitalists often prefer working in a small region where they know everybody and can stay close to the companies they invest in as they build their networks.
Manufacturing Migration
My own view is strictly middle of the road, namely, that both camps are correct in that there are some aspects of globalization that make location less important and some that make it more important. I will start with one obvious trend, what I will call “manufacturing migration,” or the idea that many industries, particularly industries that manufacture products, may first develop in the United States, but then migrate to, say, Taiwan and then, perhaps, to Korea, to China, to Vietnam—and who knows where next? One of the questions before you is whether this migration is inevitable. What are its pluses and minuses?
Whether or not migration is inevitable—and I suspect that it is—it is serious business. Just a few factoids here (COSEPUP, 2007; Palmisano, 2006):
Between 2000 and 2003, foreign firms are estimated to have built 60,000 manufacturing plants in China.
In 2004, chemical companies closed 70 facilities in the United States and tagged 40 more for shutdown.
Of the 120 major chemical plants currently under construction, at least as of about two years ago, one was in the United States, and 50 were in China.
So good, bad, or indifferent, manufacturing migration is happening.
What does this mean for the quality and quantity of jobs in the United States? What are we really losing and gaining? In the brief period from the beginning of 2000 to the end of 2002, it is estimated that about 400,000 jobs in IT manufacturing were lost in the United States (PCAST, 2004). While overall employment in U.S. manufacturing declined by 6 percent between 1997 and 2001, employment in computer manufacturing declined by 20 percent.
Changes in Innovation and R&D
Consider the evolution of U.S. corporate innovation and R&D over the past several decades. We might think of the 1970s as the golden age of corporate research laboratories, some of which still exist, generally in rather different forms. The key point here is that corporate R&D labs of that era not only generated new ideas for their own companies, but also
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contributed enormously to the science and engineering commons by virtue of publications, participation in meetings, and collaborations with universities and each other.
In the 1980s, due to the near-death experiences of many segments of U.S. industry, the R&D function was dramatically transformed and was largely absorbed into product development. This was necessary, because it enabled a number of our companies not only to survive, but also to prosper, at least for a period of time. But this trend did represent a change in the U.S. innovation landscape, as corporate labs became less active as sources of non-proprietary ideas.
In the 1990s, of course, having largely turned away from longer term R&D, although there are obvious exceptions here and there, many of our large companies began acquiring their innovation rather than carrying it onboard, by, for example, purchasing high-tech start-ups.
One indicator of this trend is provided by Robert Lucky, who plotted the affiliations of authors of papers published in the IEEE Transactions on Communications by percentage (Figure 3). In 1970, the vast majority of papers were actually written by computer scientists and engineers working for U.S. companies, with only a small percentage authored by academics. This has shifted and changed in two directions. The percentage of authors from both U.S. and non-U.S. industry, at least in this field, has declined to almost nothing these days. This has been accompanied by a rise in authorship by academics, with academics outside the United States now slightly ahead of U.S. academics.
So, with migration between countries and shifts in the roles of companies and universities, the innovation landscape is changing. The question is why. There are some very basic reasons—economics and wage rates, the availability of the Internet and the World Wide Web, and tax and trade policies. However, the fundamental reason is that innovators and the innovation system are just reacting to the increased speed and complexity of business, technology, and markets.
Figure 4 makes this point. If you go back to the introduction of the automobile around the beginning of the twentieth century, it took essentially a lifetime from the first marketing of this product to the point at which it had reached 25 percent of the U.S. population. For the telephone and then the radio, it took something on the order of a professional career for a similar diffusion. In the case of the World Wide Web, it took, astoundingly, only about eight years to reach a quarter of the U.S. population. So things certainly are speeding up.
Stuart Feldman at IBM put together a chart confirming something we all probably know (Figure 5). In 1800, virtually everybody in the United States worked in agriculture, a sector that now accounts for an almost immeasurably small share of our employment. Manufacturing rose but has now declined, being replaced very rapidly by services, particularly services based on information technology.
Population and development are also shifting regularly. A paper from Goldman Sachs a year or two ago estimated, in just one decade, about 80 percent of the world’s middle-income consumers will be living in nations that we currently consider to be outside the industrialized world (Wilson and Purushothaman, 2003).
In addition, consider two facts. First, people everywhere in the world are smart and capable, and when given the opportunity, they will do amazing things. Second, the Internet and the World Wide Web are major democratizing forces that have opened up opportunities and possibilities for people who may not have had them before.
FIGURE 3 Percent authorship of papers in IEEE Transactions on Communications. Source: Lucky, 2006. Reprinted with permission.
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FIGURE 4 Why everyone is in a hurry. Source: Charles M. Vest (compiled from NSB, 2006).
New Business Models
If we add all these trends together, we can see why people are thinking about new models of conducting business. One example is the concept of open innovation that has been popularized by Henry Chesbrough of the Harvard Business School. He points out that companies increasingly find they have to reach beyond their own boundaries—perhaps beyond their own countries, perhaps even into competing organizations—to find the people who do particular things best, where the best ideas originate. Companies have to reach out, grab those people, and somehow bring them together. This has stimulated debate in the business world because of issues about licensing, partnering, joint-venturing, and so forth. But, clearly, some form of openness is developing in our innovation system.
More recently—and more radically—Sam Palmisano, the CEO of IBM, traces the history of corporations over the last two centuries and asserts that we are now shifting away from the model of the multinational corporation to what he calls the “globally integrated enterprise.” That is increasingly the way his company and many others are being run. Globally integrated enterprises are driven by globally shared technologies and standards and linked by information technology, and their focus is shifting from products to production. New borderless strategies, management, and operations for integrated production and value delivery are being developed.
So life, and innovation, today are not simple. Take the recent example of Sony and Toshiba in Japan, which excel at conceiving, designing, and building computer games for young people. IBM, based in the United States, excels at designing and manufacturing sophisticated chips. Those companies got together and, in Austin, Texas, developed new processors designed to drive the next generation of computer games. Then, a few weeks ago, Los Alamos National Laboratory ordered what will probably be the world’s largest supercomputer based on these chips, which were designed for the gaming industry.
Those of you who have a few gray hairs will remember the furor a decade or two ago in this country when someone
FIGURE 5 Percentage of U.S. employment by sector, history and projection. Source: Stuart Feldman, 2005. Reprinted with permission.
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attempted to buy a Japanese Fujitsu supercomputer to use for government-sponsored research. We have come a long way when the Japanese game-chip industry ends up driving Los Alamos’s most advanced computer.
THE GLOBALIZATION OF HIGHER EDUCATION
What does this all this mean for education? Let’s look at how the research university has evolved over time and how it has globalized. We begin in the nineteenth century with Humboldt University in Germany, which developed the model of the research university as we know it. That model was transplanted in the United States with Humboldt rather directly inspiring Johns Hopkins University. In the second half of the nineteenth century and first half of the twentieth century, Berkeley, Stanford, Michigan, Illinois, and others began to adopt, and adapt, the research university model. Institutions such as MIT, RPI, Caltech, and so forth took the model in a somewhat different direction.
Then, in the 1960s and 1970s, this model was literally transplanted into India through the founding of the IITs (Indian Institutes of Technology). In my view, the development of IITs over the past 50 years is one of the most amazing success stories in the world. In 2006, the European Union started to establish EIT, the European Institute of Technology. We do not know how the EIT will develop, but it is interesting to note that Germany and, indeed, Europe are in the process of re-importing the very research university model they first sent to us.
So that was Research University Globalization, Part I. Part II encompasses three trends. First, some institutions are establishing a physical presence in other countries. Many U.S. universities are either opening or have opened campuses abroad, primarily to give their students a different perspective and different experiences. In addition, laboratories, research facilities, medical schools, and other operations are being opened in Singapore, the Middle East, and elsewhere. Some of these are already being dissolved!
A second trend is that strategic alliances are being built among universities around the world. This is an old tradition in basic sciences, such as physics, but somewhat newer in a lot of other areas, including engineering. The Cambridge-MIT Alliance is a good example.
The third, and perhaps most interesting and exciting trend, is virtual presence, which tends to take two different forms. There is a big argument going on about which is best, although there is probably room for both. One is distance education, both synchronous education—for example, the MIT-Singapore link using Internet2 to conduct classes that we conceive of as occurring in a big room, half of which is in Cambridge and half in Singapore—and asynchronous education through various Web-based tools.
The other form of virtual presence is the open-content movement, which I believe represents the emergence of a new meta-university, a platform on which institutions all around the world can share teaching materials, information, methodologies, and so forth. Educators can pick and choose and shape the best material from everywhere and integrate it in ways that fit the local context. In addition, there is a growing number of experiments out there in telepresence, the ability to operate laboratories from a distance, particularly from poorer parts of the world, running expensive educational laboratory equipment in wealthier states.
The next development I will call Research University Globalization, Part III. A lot of groups are beginning to work together and think about the best way to educate and prepare our engineers for the coming century. One example is a study sponsored by Continental AG that has been going on for about a year now called Global Engineering Excellence: Educating Engineers for the 21st Century. The study involves faculty members from ETH Zurich, Georgia Tech, MIT, Shanghai Jiao Tong University, Technical University of Darmstadt, Tsinghua University, E.P.U. Sao Paulo, and the University of Tokyo. Thus excellent minds representing several continents, several approaches, and some of the best engineering schools in the world can think together about the nature of the curriculum and the experience we owe our students.
To summarize, a number of things are going on in the globalization of higher education. I do not think it is a matter of which approach wins, but we will see which approaches succeed—propagation/emulation, overseas campuses and facilities, multinational alliances, distance education, the meta-university (or, as those in industry prefer to call it, “digital convergence”), or plain old-fashioned redefining of our curricula and goals for globalization.
LOOMING PROBLEMS
I leave you with the thought of some real policy clouds looming over globalization. First, there are serious unresolved issues about the control of “deemed exports.” A deemed export, of course, means that an export license is required when sensitive information is shared with a non-U.S. citizen in a research context. We have to resolve this issue. Second, although great improvements have been made in visa policies, there are still problems with the issuance of visas by the U.S. government, particularly for short-term visitors, scholars, participants in joint research and technical meetings, and so forth.
A third looming issue that must be approached carefully is overdependence on foreign graduate students. I think one of the greatest absolute strengths of this country is that wonderful, bright young men and women come to us from all over the world, and I am fully behind as much openness as we can have. At the same time, we must educate more U.S. citizens in science and engineering and encourage them to contribute at advanced levels.
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CONCLUSION
I believe we are the most innovative nation on the planet, and we still have the best research universities in the world. We are still the king of the hill in R&D in most fields. We have these comparative advantages—a strong science and technology base and a free-market economy built on a substrate of democracy and freedom.
But I leave you with this paranoid thought. The enemy I fear most is complacency. We have work to do in this country. I very much look forward to hearing your thoughts and what you can learn and teach us all about the real, evolving nature of globalization.
REFERENCES
COSEPUP (Committee on Science, Engineering, and Public Policy). 2007. Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Washington, D.C.: The National Academies Press.
Feldman, S. 2005. Presentation at Carnegie-Mellon University, June 29, 2005. IBM Research.
Friedman, T. 2005. The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar, Straus and Giroux.
Lucky, R.C. 2006. Personal Communication.
NSB (National Science Board). 2006. Science and Engineering Indicators. Arlington, Va.: National Science Foundation.
Palmisano, S.J. 2006. The globally integrated enterprise. Foreign Affairs 85(3): 127–136.
PCAST (President’s Council of Advisors on Science and Technology). 2004. Sustaining the Nation’s Innovation Ecosystems: Report on Information Technology Manufacturing and Competitiveness. Available online at http://www.ostp.gov/PCAST/FINALPCASTITManuf%20ReportPackage.pdf.
Rai, S. 2006. Profit Rises 53% at Infosys, a Top Indian Outsourcing Company. New York Times, October 12.
Sengupta, S. 2006. Skills Gap Hurts Technology Boom in India. New York Times, October 17.
Wadhwa, V., G. Gereffi, B. Rissing, K. Kalakuntla, S, Cheong, Q. Weng, and N. Lingamneni. 2005. Framing the Engineering Outsourcing Debate: Placing the United States on a Level Playing Field with China and India. Pratt School of Engineering, Duke University. Available online at http://memp.pratt.duke.edu/downloads/duke_outsourcing_2005.pdf.
Wilson, D., and R. Purushothaman. 2003. Dreaming with BRICS: The Path to 2050. Global Economics Paper 99. New York: Goldman Sachs. Available online at http://www2.goldmansachs.com/insight/research/reports/99.pdf.
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