Offshore Outsourcing in an Offshore Outsourcing in an Increasingly Competitive and Increasingly Competitive and

Rapidly Changing WorldRapidly Changing WorldA High-Tech PerspectiveA High-Tech Perspective

Christopher NovakChristopher NovakAss’t Director, ResearchAss’t Director, Research

May 18, 2004May 18, 2004

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The Genesis The Genesis

The genesis of this study began at an AeA Board meeting in October 2003, where offshore outsourcing was a central topic. At the Board meeting in February 2004, extensive data and analysis were presented. The Board suggested certain refinements in the data and asked for additional analysis and information. The result of these deliberations, analysis, and data mining is the paper.

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The PurposeThe Purpose

To insert some common sense, sound data, and rational analysis into the debate.

To describe how the international environment in which our companies compete has changed and is continuing to change.

To provide recommendations that can only be understood in the larger context of the increasingly competitive and rapidly changing world.

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• Magnitude of Offshore Outsourcing Is Unknown

• Government Projections for Long-Term Job Growth In High Tech Remain Positive, Yet in the Short-Term Some Are Being Hurt

Issues Addressed in Issues Addressed in The PaperThe Paper

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Magnitude is UnknownMagnitude is Unknown

There is no systematic collection of data on offshore outsourcing by the government or private sector

Some projections/predictions are being made Forrester Research Study (3.3m services jobs to

move offshore by 2015)– Based on BLS data from height of the bubble– BLS has since revised these data

Berkeley Study

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Berkeley StudyBerkeley Study

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

However, the same study notes:“Indisputably, most of the job loss is due to the technology downturn, the dot-com bubble, and the cyclical downturn in the US economy.”

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Institute for International EconomicsInstitute for International Economics

Jacob Kirkegaard of the Institute for International Economics states that while some high-tech occupations have suffered significant job losses in recent years, the trend is concentrated at the lower-end (low-wage).

The majority of jobs threatened by offshore outsourcing pay less than the US average wage.

High-paying IT occupations have seen some growth since 1999.

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2001-2002 2002-2003*

Total Tech Jobs -539,000 -234,000

High-Tech Manufacturing -233,000 -120,000

CommunicationsServices -146,000 -84,000

Software -146,000 -30,000

Engineering & Tech -15,000 0Services

Some totals may not equal the sum of the individual sectors due to rounding*2003 data are estimates based on actual numbers through September 2003 and projections for the last quarter of the year. Source: U.S. Bureau of Labor Statistics

U.S. Technology EmploymentU.S. Technology Employment2001-2002 vs 2002-20032001-2002 vs 2002-2003

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Occupation 2002 2012 % Change # Change

TECH JOBS Network Systems Analysts 186,000 292,000 +57% +106,000Computer Software Engineers, 394,000 573,000 +45% +179,000 ApplicationsComputer Software Engineers, 281,000 409,000 +46% +128,000 Systems SoftwareComputer Systems Analyst 468,000 653,000 +40% +185,000Computer Programmers 499,000 571,000 +14% +72,000

High-Tech Industry ProjectionsHigh-Tech Industry Employment 6,037,000 7,087,000 +17% +1,050,000

And Some Occupations Are Projected to Grow And Some Occupations Are Projected to Grow Through the Next Decade, 2002 vs. 2012Through the Next Decade, 2002 vs. 2012

Source: U.S. Bureau of Labor Statistics

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Job Loss More Attributable to Job Loss More Attributable to the High-Tech Bubble Burst, a the High-Tech Bubble Burst, a

Weak Domestic and Weak Domestic and International Economy, and International Economy, and

Dramatic Increases in Dramatic Increases in ProductivityProductivity

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Weak EconomiesWeak Economies

For three consecutive quarters in 2001, the U.S. GDP declined as the U.S. economy fell into recession.

The GDP growth rate for the European Union averaged just over one percent between 2001 and 2003.

Japan’s GDP fell by 0.6 percent in 2001, followed by two years of anemic growth below one percent.

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U.S. Productivity RatesU.S. Productivity Rates(at an annual rate)(at an annual rate)

1.7%

2.6% 2.8% 2.8%

2.1%

5.0%

4.4%

0%

4%

8%

1997 1998 1999 2000 2001 2002 2003

Source: U.S. Bureau of Labor Statistics

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Country 1995 2002 % Change # Change

- in millions of workers -

China 98.0 83.1 -15% -15.0United States 17.3 15.3 -11% -1.9Russia 17.1 15.1 -12% -2.0Japan 14.6 12.2 -16% -2.3India 6.5 6.5 0% 0.0United Kingdom 4.4 3.9 -12% -0.5Brazil 0.1 0.08 -20% -0.02

Spain 2.4 3.0 +25% +0.6Philippines 2.7 2.9 +7% +0.2Canada 1.9 2.3 +22% +0.4

Change in Manufacturing JobsChange in Manufacturing JobsAround the GlobeAround the Globe

1995 vs. 20021995 vs. 2002

Source: Haver Analytics, AllianceBernstein

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Changes in the Changes in the International International

Marketplace Are Posing Marketplace Are Posing Significant New Significant New

Competitive Challenges Competitive Challenges for U.S. Companies.for U.S. Companies.

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"The dominance of the U.S. is already over. What is emerging "The dominance of the U.S. is already over. What is emerging is a world economy of blocs represented by NAFTA, the is a world economy of blocs represented by NAFTA, the European Union, and ASEAN. There's no one center in this European Union, and ASEAN. There's no one center in this world economy. India is becoming a powerhouse very fast. The world economy. India is becoming a powerhouse very fast. The medical school in New Delhi is now perhaps the best in the medical school in New Delhi is now perhaps the best in the world. And the technical graduates of the Institute of world. And the technical graduates of the Institute of Technology in Bangalore are as good as any in the world. Technology in Bangalore are as good as any in the world. Also, India has 150 million people for whom English is their Also, India has 150 million people for whom English is their main language. So India is indeed becoming a knowledge main language. So India is indeed becoming a knowledge center."center."

- Peter Drucker, Interview with Fortune, January 12, 2004- Peter Drucker, Interview with Fortune, January 12, 2004

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The Real Challenges Are The Real Challenges Are

Other countries have caught up, especially in education and in economic reform.

Offshoring is global. Demographics continue to alter

international competition.

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Some Other Countries Some Other Countries Have Caught UpHave Caught Up

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Worldwide Engineering Degrees AwardedWorldwide Engineering Degrees Awarded1999 or most recent year available1999 or most recent year available

Rank Country Bachelor Degrees % of World

1 China 195,354 21.2%2 European Union 134,692 14.6%3 Japan 103,440 11.2%4 Russia 82,409 8.9%5 India* 82,107 8.9%6 United States 60,914 6.6%7 South Korea 45,145 4.9%8 Poland 21,618 2.3%9 Mexico 21,358 2.3%

10 Indonesia 20,644 2.2%

* data for India are for 2001 and are from the National Association of Software and Service Companies (NASSCOM)Source: U.S. National Science Foundation

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Reverse Brain Drain Reverse Brain Drain

Until recently, the United States benefited from a reverse brain drain with the rest of the world as leading scientists and engineers came to the United States to study and work.

With changes in policies and factors abroad, more and more foreign nationals are returning to their home countries to explore opportunities there, and fewer are coming to the United States.

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Percent of U.S. Degrees in 2002 Percent of U.S. Degrees in 2002 Awarded to Foreign NationalsAwarded to Foreign Nationals

7% 8%4% 2%

47%

37%

13%

56%53%

25%

47%45%

0%

20%

40%

60%

Engineering ComputerScience

Math BiologicalScience

Bachelor Master's Doctor's

Source: U.S. Department of Education

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Offshoring is a Offshoring is a Global TrendGlobal Trend

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Offshore Outsourcing is a Offshore Outsourcing is a Global Phenomenon Global Phenomenon

Jobs are being outsourced from:– Japan

– United States

– Western Europe

– Korea

– Singapore

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Offshoring from Japan Offshoring from Japan

Deloitte Research predicts that by 2008 some 400,000 jobs will be offshored from Japan to other Asian countries.

For Japan, this represents a larger percentage of the workforce than is predicted to be offshored by the United States.

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Demographics Demographics also play a role also play a role

in offshoringin offshoring

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The U.S. Population is AgingThe U.S. Population is Aging

123

2634

131

41

64

0

50

100

150

25-54 55-64 65+

(in

mil

lio

ns)

2002 2025

Source: U.S. Census Bureau

+15 million+57%

+30 million+89%

+8 million+6%

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

35% 33%

53%49%

12% 18%

0%

25%

50%

75%

100%

2002 2025

0-24 25-64 65+

Source: U.S. Census Bureau

• In 2002, there were 4.4 In 2002, there were 4.4 people in the working age people in the working age population (25-64) for every population (25-64) for every retired person (65+); by retired person (65+); by 2025, this is predicted to 2025, this is predicted to drop to 2.7.drop to 2.7.

• In order to maintain the In order to maintain the same proportions in 2025 same proportions in 2025 as in 2002, the U.S. would as in 2002, the U.S. would need to add 110 million need to add 110 million more 25-64 year olds.more 25-64 year olds.

• In 2002, there were 4.4 In 2002, there were 4.4 people in the working age people in the working age population (25-64) for every population (25-64) for every retired person (65+); by retired person (65+); by 2025, this is predicted to 2025, this is predicted to drop to 2.7.drop to 2.7.

• In order to maintain the In order to maintain the same proportions in 2025 same proportions in 2025 as in 2002, the U.S. would as in 2002, the U.S. would need to add 110 million need to add 110 million more 25-64 year olds.more 25-64 year olds.

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International DemographicsInternational Demographics(in millions of people)(in millions of people)

Source: U.S. Census Bureau

0

400

800

1,200

1,600

India UnitedStates

China Germany Japan Russia

2000 2010 2020 2030

+29%+81 million

+16%+196 million

+42%+418 million

-8%-10 million

-9%-13 million-3%

-3 million

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Offshoring Is Not A Zero-Sum GameOffshoring Is Not A Zero-Sum Game

Institute for International Economics states that offshoring increases productivity, profits, and GDP.

The United States itself is a destination for offshore outsourcing from other countries.

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Foreign Insourcing into the United StatesForeign Insourcing into the United States

Foreign direct investment in the United States totaled $1.3 trillion in 2002.

Foreign companies employ 6.4 million people in the United States.

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High Tech Stands to Lose the MostHigh Tech Stands to Lose the Most

As the nation’s largest exporting sector with $171 billion in goods exports, high tech stands to lose the most if protectionist legislation spurs retaliation.