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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

• Engardio, P., “Can the Future Be Built in America?,” Business Week, Sept. 21, 2009.

• 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.

• 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.