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11.09
Contending with the Downside of Offshoring
By Donald Christiansen
One thing is certain. Offshoring
is here to stay. Purchasing parts, subsystems,
and even complete systems from non-U.S.
companies has been going on for years and is
escalating.
In a study the National Academy
of Engineering began in 2006, it concluded that
“offshoring appears to have contributed to the
competitive advantage of U-S.-based firms in a
variety of industries, and the negative impacts
of offshoring on U.S. engineering appear to have
been relatively modest to date.” However, the
study did note severe impacts in some industry
sectors and for some jobs.
One area the study gave
relatively less attention to, listing it last in
a series of ten findings, was offshoring’s
impact on national security. In that regard, its
main concern seemed to center on the possibility
of detailed plans and other information about
U.S. buildings and infrastructure falling into
“the wrong hands,” and that maliciously placed
code might compromise the security of DOD
networks. Yet back in 1988, the Defense Science
Board called the dependence of the U.S. military
on foreign parts dangerously high.
During the Gulf War, urgently
needed replacement parts were obtained from
Japan, Germany, France, and even Thailand. The
State Department had to intervene with some
foreign governments in order to expedite needed
parts to the Gulf. F-16 fighter radars contained
Japanese components, as did our air-to-air
missiles. In 1991, 60 Minutes reported that at
least twenty U.S. weapons systems, including the
M-1 tank and the F-15 and F-18 fighters depended
on foreign-made components. Replacement battery
packs for command and control computers and
solid-state devices for IFF transponders were
obtained from France. Did this mean that spares
did not exist in the United States? Perhaps.
DOD’s policy was to minimize stockpiles of
spares or consumable parts. The concept of
“needs-pull” inventorying was then becoming
popular, too.
In a 1991 editorial, I wrote: “An
active war that stresses, damages, or destroys
equipment may change the rules. In wartime it
would make sense for the military to resist
total dependence on parts from foreign
countries, even nominal allies.” Would it be
realistic, I asked, for the Defense Department
to insist on alternative U.S. sources for all
electronic components in military gear? I
wondered then whether the production capability
needed to guarantee such a requirement had moved
irreversibly offshore — suggesting that the United
States could never again be the “arsenal of
democracy” it was in World War II.
Fast Forward
Have any of the lessons relating
to parts procurement and replacement learned
during the Gulf War mattered in the present
conflicts? It is not clear. Perhaps the failure
by the military to supply ground personnel
adequately with equipment in Iraq was a
bureaucratic blunder unrelated to U.S.
production capability. I am not sure. On the
other hand, the military’s inability to deal
successfully with IEDs would, I suspect, have
little to do with spare parts.
The Civilian Side
When Boeing downsized its
Dreamliner project, a commercial jetliner to
replace its aging 767, it expanded its
traditional outsourcing to include not just
parts, but both design and construction of major
aircraft sections, including the wings. The idea
was to have its suppliers share the risks by
becoming partners in the project. But the
Dreamliner is now two years behind schedule.
Boeing’s CEO told a New York Times
reporter that the company lost control of the
process by farming out more design and
production work than ever and not keeping close
tabs on suppliers. The resulting delays caused
financial difficulties for Vought Aircraft,
manufacturer of the new fuselage, so Boeing
bought the plant that made it from Vought. Major
suppliers to the Dreamliner project include one
Italian and three Japanese companies.
Don’t Ask, Don’t Tell
One version of offshoring might
be termed “inshoring.” Described in a recent
issue of Business Week, it is how
U.S.-based technical service organizations (TSOs),
or “body shops,” as they are widely known,
supply contract workers to well-known American
companies. Many of them are foreign workers
brought to the United States on H-1B visas, some
of them illegally or dishonestly obtained in
ways that had been abetted by body-shop coaches.
Thus prominent U.S. firms could readily find
themselves contracting with body shops that
violate visa laws. As an example, the TSO can
set up an “office” in a low-wage part of the
country and claim the contract workers are
employed there. In reality, they work for a
company in, say, New Jersey, where the
prevailing wage may be 50 percent higher.
Federal law requires that TSOs (or any company)
using visa workers must pay the prevailing wage,
by occupation and location. U.S. companies often
don’t know the originating source of their
contract workers nor, according to Business
Week, do they press to find out. The TSOs
may add still another obfuscating layer by
hiring subcontractors, making it even more
difficult for a client firm to know who the
contract workers actually work for, how much
they are being paid, and whether they have
falsely-obtained visas.
What’s Missing
Most study groups agree that
offshoring by U.S. firms of both manufacturing
and R&D functions is increasing rapidly. But a
lack of sufficient data is seen as a drawback to
legislators and policy makers in addressing the
downside issues. One problem as reported by the
NAE is that companies are reluctant to disclose
specifics about their offshoring practices. The
NAE study concedes that as “routine” engineering
tasks are outsourced to India or China, U.S.
engineers will lose their jobs. And if those
jobs are replaced by higher-level jobs, those
new jobs do not replace the jobs that were lost.
The Duke Offshoring Research
Network reported that the number of U.S.
companies engaging in offshoring has more than
doubled from 2005 to 2008, and few intend to
return activities to the United States. The Duke
report claims the two reasons for the increasing
rate of globalization are speed to market and a
domestic shortage of engineering talent. It
omits mention of cost savings. Those conducting
the NAE study wondered whether offshoring is
negatively affecting the public perception of
engineering and, if so, whether it has led to
fewer talented U.S. students choosing to pursue
engineering careers. Their conclusion, once
again, was that data are too sparse to either
confirm or allay these concerns.
Meanwhile, as offshoring
continues to escalate, a further loss of
manufacturing capacity and worker skills is
contemplated. How the accompanying stresses, for
not only engineers, but American workers in
general, can be ameliorated and managed is not
at all clear.
Resources
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Engardio, P., “Can the Future Be
Built in America?,” Business Week, Sept.
21, 2009.
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Duke University Offshoring
Research Network, a network of universities,
scholars, and practitioners that tracks and
reports on the globalization of business
services and activities.
-
Mandel, M., “The Real Cost of
Offshoring,” Business Week, June 18,
2007.
-
Christiansen, D., “Friendly
Second-sourcing,” IEEE Spectrum, June
1991.
-
Drew, C., “A Dream Interrupted
at Boeing,” New York Times, Sept. 6,
2009.
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Hamm, S., and M. Herbst,
“America’s High-Tech Sweatshops,” Business
Week, Oct. 12, 2009.
-
Hira, R., “Impacts and Trends of
Offshoring Engineering Tasks and Jobs,” The
Bridge, 35 (3), 2005.
-
Thursby, J., and M. Thursby,
Here or There? A Survey on the Factors in
Multinational R&D Location, National
Academies Press, 2006,
http://www.nap.edu/catalog/11675.html.
-
Offshoring of Services: An
Overview of the Issues, GAO, 2005,
http://www.gao.gov/new.items/d065.pdf.
-
Offshoring: An Elusive
Phenomenon, National Academy of Public
Administration, 2006.
-
Christiansen, D., “The Global
Engineer,” Today’s Engineer Online,
http://www.todaysengineer.org/2008/Dec/backscatter.asp.
-
Christiansen, D., “Make or
Buy?,” Today’s Engineer Online,
http://www.todaysengineer.org/2006/Feb/backscatter.asp.
-
Friedman, T. L., The World Is
Flat, Farrar Straus and Giroux, 2005.
-
Morgan, R.P., “Offshoring and
the Future of the U.S. Engineering Workforce and
Profession,” Today’s Engineer Online,
http://www.todaysengineer.org/2008/Jun/opinion/asp.
Donald Christiansen is the
former editor and publisher of IEEE Spectrum
and an independent publishing consultant. He is
a Fellow of the IEEE. He can be reached at
donchristiansen@ieee.org.
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