Offshore Outsourcing in an Increasingly Competitive and Rapidly Changing World A High-Tech Perspective Christopher Novak

1. Offshore Outsourcing in an Increasingly Competitive and Rapidly Changing World A High-Tech Perspective Christopher Novak Ass’t Director, Research May 18, 2004

2. 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.

3. The Purpose • To insert some common sense, sound data, and rational analysis into the debate. • To describe how the international environment in which our companies compete has changed and is continuing to change. • To provide recommendations that can only be understood in the larger context of the increasingly competitive and rapidly changing world.

4. Issues Addressed in The Paper • Magnitude of Offshore Outsourcing Is Unknown • Government Projections for Long-Term Job Growth In High Tech Remain Positive, Yet in the Short-Term Some Are Being Hurt

5. Magnitude is Unknown • There is no systematic collection of data on offshore outsourcing by the government or private sector • Some projections/predictions are being made • Forrester Research Study (3.3m services jobs to move offshore by 2015) • Based on BLS data from height of the bubble • BLS has since revised these data • Berkeley Study

6. Berkeley 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.”

7. Institute for International Economics • Jacob Kirkegaard of the Institute for International Economics states that while some high-tech occupations have suffered significant job losses in recent years, the trend is concentrated at the lower-end (low-wage). • The majority of jobs threatened by offshore outsourcing pay less than the US average wage. • High-paying IT occupations have seen some growth since 1999.

8. U.S. Technology Employment 2001-2002 vs 2002-2003 2001-2002 2002-2003* Total Tech Jobs -539,000 -234,000 High-Tech Manufacturing -233,000 -120,000 Communications Services -146,000 -84,000 Software -146,000 -30,000 Engineering & Tech -15,000 0 Services 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

9. And Some Occupations Are Projected to Grow Through the Next Decade, 2002 vs. 2012 Occupation 2002 2012 % Change # Change TECH JOBS Network Systems Analysts 186,000 292,000 +57% +106,000 Computer Software Engineers, 394,000 573,000 +45% +179,000 Applications Computer Software Engineers, 281,000 409,000 +46% +128,000 Systems Software Computer Systems Analyst 468,000 653,000 +40% +185,000 Computer Programmers 499,000 571,000 +14% +72,000 High-Tech Industry Projections High-Tech Industry Employment 6,037,000 7,087,000 +17% +1,050,000 Source: U.S. Bureau of Labor Statistics

10. Job Loss More Attributable to the High-Tech Bubble Burst, a Weak Domestic and International Economy, and Dramatic Increases in Productivity

11. Weak Economies • For three consecutive quarters in 2001, the U.S. GDP declined as the U.S. economy fell into recession. • The GDP growth rate for the European Union averaged just over one percent between 2001 and 2003. • Japan’s GDP fell by 0.6 percent in 2001, followed by two years of anemic growth below one percent.

12. U.S. Productivity Rates(at an annual rate) Source: U.S. Bureau of Labor Statistics

13. Change in Manufacturing JobsAround the Globe1995 vs. 2002 Country 1995 2002 % Change # Change - in millions of workers - China 98.0 83.1 -15% -15.0 United States 17.3 15.3 -11% -1.9 Russia 17.1 15.1 -12% -2.0 Japan 14.6 12.2 -16% -2.3 India 6.5 6.5 0% 0.0 United Kingdom 4.4 3.9 -12% -0.5 Brazil 0.1 0.08 -20% -0.02 Spain 2.4 3.0 +25% +0.6 Philippines 2.7 2.9 +7% +0.2 Canada 1.9 2.3 +22% +0.4 Source: Haver Analytics, AllianceBernstein

14. Changes in the International Marketplace Are Posing Significant New Competitive Challenges for U.S. Companies.

15. "The dominance of the U.S. is already over. What is emerging is a world economy of blocs represented by NAFTA, the European Union, and ASEAN. There's no one center in this world economy. India is becoming a powerhouse very fast. The medical school in New Delhi is now perhaps the best in the world. And the technical graduates of the Institute of Technology in Bangalore are as good as any in the world. Also, India has 150 million people for whom English is their main language. So India is indeed becoming a knowledge center." - Peter Drucker, Interview with Fortune, January 12, 2004

16. 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.

17. Some Other Countries Have Caught Up

18. Worldwide Engineering Degrees Awarded1999 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

19. 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.

20. Percent of U.S. Degrees in 2002 Awarded to Foreign Nationals Source: U.S. Department of Education

21. Offshoring is a Global Trend

22. Offshore Outsourcing is a Global Phenomenon • Jobs are being outsourced from: • Japan • United States • Western Europe • Korea • Singapore

23. 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.

24. Demographics also play a role in offshoring

25. The U.S. Population is Aging +8 million +6% +30 million +89% +15 million +57% Source: U.S. Census Bureau

26. The Proportion of U.S. Working Age Population is Shrinking • In 2002, there were 4.4 people in the working age population (25-64) for every retired person (65+); by 2025, this is predicted to drop to 2.7. • In order to maintain the same proportions in 2025 as in 2002, the U.S. would need to add 110 million more 25-64 year olds. Source: U.S. Census Bureau

27. +16% +196 million +42% +418 million +29% +81 million -8% -10 million -9% -13 million -3% -3 million International Demographics(in millions of people) Source: U.S. Census Bureau

28. Offshoring Is Not A Zero-Sum Game • Institute for International Economics states that offshoring increases productivity, profits, and GDP. • The United States itself is a destination for offshore outsourcing from other countries.

29. Foreign Insourcing into the United States • Foreign direct investment in the United States totaled $1.3 trillion in 2002. • Foreign companies employ 6.4 million people in the United States.

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