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Make or Buy?

by Donald Christiansen

When I was a young engineer, my mentors stressed the importance of the make-or-buy decision. From them I learned to opt for the in-house manufacture of the critical parts of any design in which I had played a role. I don’t mean commodity-type parts like resistors and capacitors. Those parts were readily and affordably available from quality suppliers like Allen-Bradley, IRC, Mallory, Sprague and Cornell-Dubilier. But I was convinced that unique parts or subsystems could best be made and their quality better assured, if “we” manufactured them. I also believed that if there were a proprietary advantage to any part or its manufacturing process, then it ought to be made in-house. I remember visiting Tektronix in the late 1960s, where I was impressed that the company made many of the parts for its highly regarded line of test equipment. It even had its own unit to fabricate specialized ceramic parts.

But in my own situation, I soon learned that once a prototype was nearing pilot production, a team of controllers and procurement people would scour our design parts list to determine what might be outsourced. The advantages, they noted, would be several. We would not have to invest in production equipment we did not already own, and we would not have to learn manufacturing skills we did not already possess. Furthermore, the company from whom we could procure a needed part might be located where the going wage was less, thus lowering its unit cost.

By the latter part of the 20th century, I think engineers had become inured to the general practice of outsourcing hardware. By then, Asia was widely producing commodity components like discrete resistors and capacitors — and even some computer chips once obtained exclusively from U.S. makers. Outsourcing had become offshoring.

Fastforward to 2005

Today, not only manufacturing, but hardware and software design is being offshored. Thomas Friedman notes in his bestselling The World Is Flat that companies like Microsoft, Dell and General Electric do backroom computer work in China, as well as innovative software R&D. From their operations in India, Cisco Systems, General Electric, IBM, Intel and Texas Instruments together have filed more than 1000 patent applications. In Bangalore, an Intel team is developing chips for high-speed broadband wireless systems.

An engineer of my acquaintance told me this all happened “while I wasn’t watching.” He couldn’t say that had he worked for Boeing, GE or Hewlett Packard. In Moscow, Boeing employs 800 Russian engineers and scientists to design aeronautical software. Boeing cites the shortage of U.S. aeronautical engineers, but the company also benefits because the Russian pay scale is one third that of U.S. engineers. Hewlett Packard has more than 140,000 employees, many of them skilled engineers, in 178 countries. Former General Electric CEO Jack Welch boasted “We’ve searched the globe for the best products and intellect.” Welch noted that GE’s radiology system benefits from a global supply chain that provides highest quality and lowest cost for each of its 179 parts. Its components are made in Bangalore, Canada, Korea, Mexico, North Africa, the United States and some European countries. The scanner’s generator is built in India, its suspension system in Mexico, and its tube mechanism in the United States. The whole thing is then assembled in Beijing.

Boeing, GE and HP engineers may be sanguine about teaming with non-U.S. designers, but others are not. Some seem to accept the offshoring of manufactured parts as a fait accompli, but draw the line at design and engineering jobs. U.S. engineers who are unemployed because of offshoring are understandably bitter.

On the other hand, some economists say that offshoring will create more U.S. jobs than it displaces. Political commentator George Will noted that while IBM intended to send 3,000 jobs overseas, it would create 4,500 new U.S. jobs. (He did not estimate how many of either would be engineering jobs.) Will recommends that jobs that become obsolete in one part of the world be let go gracefully. Trying to “save” them through legislation or trade embargoes is, at best, a delaying proposition, the argument goes. As did blacksmiths and buggy designers, we should move on to higher technology goals — a noble but difficult challenge, and a subject for elaboration at another time.

Meanwhile, one thing seems certain. In the world of Make or Buy?, Make is out and Buy is in. And offshoring is here to stay.

Resources

For more on offshoring:

Friedman, B.M., The Moral Consequences of Economic Growth, Alfred Knopf, 2005.

Friedman, T.L., The World Is Flat, Farrar, Straus and Giroux, 2005.

Welch, J., Jack, Straight from the Gut, Warner Business Books, 2001.

Will, G. F., “How to Kill Jobs,” The Washington Post, Feb. 19, 2004.

Donald Christiansen is the former editor and publisher of IEEE Spectrum and an independent publishing consultant. He may be reached at donchristiansen@ieee.org.