Engineering Globalization: Overview of Trends & Implications

Ron Hira
Rochester Institute of Technology, rhira@[Link]

Abstract — There is strong evidence, based on news reports India’s economies, as measured by Gross Domestic Product
and supported by experts, that engineering work and tasks are (GDP), are growing at 8-10% per annum, a rate that’s 3 to 4
being restructured and reallocated across different countries. Yet times developed countries. Firms wish to locate their facilities
this significant transformation of the engineering enterprise
hasn’t been explored systematically. This paper will summarize close to these emerging economies. Further, wage rates for
current trends in the size, scope, and trajectory of engineering high-skilled workers in India and China are significantly lower
globalization. The implications of engineering globalization for than for U.S. workers. A typical engineer in India is paid
engineering education will be explored based on these findings. $10,000-15,000 per annum versus $85,000 in the U.S. Even
with the additional costs of cross-country management and
I. INTRODUCTION somewhat lower productivity, engineering unit labor costs are
substantially lower in India than the U.S.
Two leading bodies, the National Science Board (the Another, often overlooked, factor are the behavioral and
governing board of the U.S. National Science Foundation) and governance changes in corporate board rooms. There’s been a
the U.S. National Academy of Engineering (NAE) have growing trend since the 1980s for boardrooms and executives
highlighted that engineering research, development, and to focus on maximizing shareholder value at the expense of
design are increasingly being globalized. Yet, as both bodies other stakeholders, such as workers [3]. This is most
acknowledge, this critical and emerging phenomenon has yet obviously observed in executive compensation schemes,
to be systematically documented and analyzed. where many executives now receive the majority of their
In its biennial flagship report the National Science Board compensation in stock. It’s unsurprising then that increasing
highlights that the driver of globalization is the private sector, the stock price overwhelmingly drives corporate decisions. As
“Science & Engineering Indicators 2010 provides clear a result, corporate executives’ interests are no longer
evidence that science and engineering (S&E) research is necessarily aligned with their incumbent workers nor with
becoming an increasingly international endeavor.” … “Nearly their home country [4]. This has enabled firms to more easily
everywhere, however, decisions affecting the bulk of R&D dismiss their incumbent workers for more efficient overseas
expenditures are made by industry [1].” workers.
In a recent committee report, the NAE draws attention to Technology has been another key enabler. The dramatic
the implications for the entire U.S. engineering enterprise, drop in the cost of telecommunications has reduced the
“The NAE recognizes that offshoring raises significant transaction costs and improved the speed of completing cross
challenges not only for engineers themselves, but also for border work. Managerial innovations and technologies have
industry, educational institutions, government, and also played an important role in segmenting work and
professional societies. Many engineering tasks can now be enabling cross-border teams to complete projects [5].
performed anywhere in the world by qualified professionals Finally, public policies have been a critical factor in
with access to appropriate connectivity. To sustain and attracting engineering work. The Indian government, for
strengthen U.S. engineering capabilities in this new example, has offered a tax holiday for any company that
environment, the United States may need to consider new exports white-collar services (from animation to accounting to
approaches to education, career development, management, information technology to engineering design). Additionally,
and policy, and make changes where appropriate [2].” India has created software technology parks to ensure that
A combination of forces is driving engineering firms have reliable utilities such as electricity. China has many
globalization, and while the data has not been systematically policies to attract high-level work, such as incentives,
collected, we can make some predictions about the shape and infrastructure investments, as well as those specifically
trajectory of engineering globalization and its expected targeted at technology transfer. China requires joint-ventures
impacts on the engineering enterprise. with domestic companies in many sectors, including the
automotive sector, and requires research & development
II. WHAT DRIVES ENGINEERING GLOBALIZATION investments from foreign multinational corporations that wish
There are a number of factors, private and public, that have to have market access. U.S. public policy on the other hand
enabled and driven engineering globalization. The private has been largely laissez faire – policymakers have chosen to
sector has been the primary driver as companies seek ignore the effects of offshoring. In fact, in a few key areas,
expanding markets, in countries like China and India, as well such as tax and immigration policies, U.S. policy choices
as lower labor costs for high-skilled workers. China and actually encourage offshoring. A number of fields, including

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engineering and accounting are being offshored, but the field told Wall Street analysts that it planned its largest increase in
that has been on leading edge of offshoring is information offshoring for 2009, when it will move many of its more
technology. complex and higher-wage jobs overseas so that nearly 35
percent of its workforce will be in low-cost countries.
So, why have the U.S. firms so aggressively increased their
III. INFORMATION TECHNOLOGY AS A PREVIEW OF
low-cost country headcounts? The answer is that the Indian
ENGINEERING GLOBALIZATION
offshore outsourcing business model is significantly more
We have an excellent case study for how these dynamics profitable. Comparing the financial performance of four
may play out in the near future. One of the most important companies, two offshore outsourcing firms (Infosys and
high-technology stories of the past decade has been the swift Wipro) against two of the largest U.S.-based IT service firms
rise of the Indian IT services industry, including firms such as (EDS and CSC) shows that the market capitalizations of
Wipro, Infosys, TCS, and Satyam, as well as U.S.-based firms Infosys ($20billion) and Wipro ($15billion) were much higher
such as Cognizant and iGate that use the same business model. than EDS ($13billion) and CSC ($10billion) even though their
There is no need to speculate about whether the Indian firms sales were a small fraction. In other words, Wall Street was
will eventually take the lead in this sector; they already have saying loud and clear that Infosys and Wipro were market
become market leaders. By introducing an innovative, leaders. The reason for the extraordinary valuations of Infosys
disruptive business model, the Indian firms have transformed and Wipro was that their net profit margins were multiples of
the sector in the matter of four short years. U.S. IT services EDS and CSC. Infosys averages a remarkable 28% profit
firms such as IBM, EDS, CSC, and ACS were caught flat- margin in an industry where 6% to 8% is considered a good
footed. Not a single one of those firms would have considered year. Infosys maintained these margins while growing its
Infosys, Wipro, or TCS as direct competitors as recently as revenues and headcount by 40% per year, so it comes with
2003, but now they are moving as fast as possible to copy little surprise that the CEOs of EDS and CSC began to reduce
their business model by moving as much work as possible to U.S. and European workforces and ramped up hiring in India
low-cost countries. The speed and size of the shift is and other low-cost countries.
remarkable. There is no doubt that the engineering globalization will
The Indian IT outsourcing firms have extensive U.S. take on a different trajectory than information technology and
operations, but they prefer to hire temporary guest workers needs to be studied more closely. Data and cases of
with H-1B or L-1 visas. The companies train these workers in engineering globalization will be presented at the session.
the US, then send them home, be hired and do the same work
at lower salaries. These companies rarely sponsor their H-1B
V. CONCLUSION
and L-1 workers for U.S. legal permanent residence.
The important lesson though is how the U.S. IT services Globalization is an emerging phenomenon that will
firms have responded to the competitive challenge. Instead of transform the engineering enterprise in a very short period of
investing in their U.S. workers with better tools and time. Information Technology has been completely
technologies, the firms chose to imitate the Indian model by transformed in a short 6 years. Given the rapid pace in which
offshoring jobs to low-cost countries. IBM held a historic globalization can take place focusing more systematic study of
meeting with Wall Street analysts in Bangalore in June 2006, all aspects of engineering globalization is imperative. It will
where the entire IBM executive team pitched their strategy to have a profound effect on research, the location of workers,
adopt the Indian offshore-outsourcing business model, and the supply of workers. It will have profound effects on
including an additional $6-billion investment to expand its engineering education. In this paper we explore those effects.
Indian operations. IBM’s headcount in India has grown from
6,000 in 2003 to more than 110,000 in 2011, while its U.S.
REFERENCES
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