July 2008

System Integration

Anchors aweigh

Engineering jobs moving out as globalization strengthens in automation industry


  • Off-shoring not a trend; embrace it, and move forward.
  • Engineers could contract in face of off-shoring.
  • Talent shortage still up for debate.
  • Practical business means facing unknowns.
By Ellen Fussell Policastro

Cry all you want. Complain about it, deny it, or build programs to change it. But globalization is here to stay, and engineering jobs are moving overseas faster and faster. So why not just embrace it?

The trend has been accelerating since 2003, and the only thing that hasn't changed is "it's at a broad level of the whole economy," said Tom Arrison, senior staff officer at The National Academies in Washington, D.C. Just how broad is difficult to measure though because employment and trade statistics make it difficult to track when certain markets are going overseas, he said. "If you say off-shoring is when firm A in the U.S. hired X number of engineers overseas and got rid of Y number of engineers in the U.S., it's difficult to say when or how that's happening," Arrison said.

 As far as what types of companies are off-shoring, Arrison found in one of the Academy studies that OEMs are globalizing their engineering to best fit their production footprint. Some of that is market-driven. So "if you want to sell in China, you need to manufacture in China."

Those are the cold hard facts, but it is not gloom and doom for all engineers.

Contracting basic skills

Arie Lewin, a professor at Duke's Fuqua School of Business and lead principle investigator of the international off-shoring research project at Duke University in Durham, N.C., said he believes the "nerd techies" are still in huge demand, especially those with basic skills whom contracting companies such as Kelly services are placing in their fast-growing contract business. "If I need a not-so-sophisticated engineering job, like redoing specifications or tweaking a design, I can go to Kelly services and find someone who can do this job on a contract basis," Lewin said. "I don't know how it happened, but there are a growing number of engineers who find work on a contract basis through temporary agencies."

Companies are looking for ways to increase efficiency of how they use engineers. "In the past, they had engineers working full-time, but they only got 60% efficiency," Lewin said. "But vanilla jobs are not very creative, it's just applying engineering techniques and modifying specs. A lot of companies figured out they could get higher efficiency by not putting these engineers on the payroll and only getting them when they need them."

Talent shortage?

In a podcast from the City Club of Cleveland, a podium for civic dialog, Vivek Wadhwa, executive in residence at Duke University, talked about how to respond effectively to off-shoring in the engineering sector. In short, engineers have to realize engineering is an "up or out" profession, and they have to keep their skills current. "That isn't a nice thing to say, but it's the reality of the industry," Wadhwa said.

Wadhwa said he believes the engineering industry is not doing enough to make the profession interesting or create the excitement needed to lure students into the engineering profession. "Instead, [the industry] blames the education system and harps on the theme that they are moving jobs offshore because there is a shortage of engineers, and the K-12 education system doesn't teach enough math and science, so our children aren't excited about engineering," he said.

If you agree on the numbers of graduating engineers in India and China, "then you'll agree the prescription is to graduate more," Wadhwa said. But after looking into the facts behind this, students at Duke found these numbers had no basis. "When you cut through it all and compare apples to apples, India graduated 120,000 (the same number as the U.S.). China said they graduated 300,000, but those numbers are not justified. They're propaganda," he said.

Wadhwa's solution is to "stop blaming our schools and focus on creating real demand for engineers (which means higher salaries and bonuses), and we have to have national initiatives, which highlight the importance of engineering and science." If political leaders talked up a Sputnik-type project to create alternative energies, or solve global warming and eradicate disease, that would create the excitement needed, Wadhwa said. "I don't think that individual engineering companies can do anything about the perception of this profession, but the industry can by putting the same pressure on political leaders as they do on other strategic issues."

Lewin sees a positive side of what he believes is a shortage of engineering talent; companies are finding a way to stretch out available talent. "The same engineers on your payroll whom you use 60% of the time now work for two companies for 80% of the time," he said. "That's still an improvement by itself." While this is an interesting solution in the short-term, Lewin said the long-term implication is worse because it depresses the motivation of young people to get into the engineering profession.

Based on Lewin's studies, companies such as Caterpillar, John Deere, and automotive and engineering companies are planning ahead-up to 36 months in advance. The trend is a growing and steep increase in off-shoring, not just in engineering development, but  aggressive off-shoring of product development design and engineering work. "We don't believe the reason is cost," Lewin said. "We think the reason is a global shortage of talent. The Western world is in competition for emerging talent."

Lewin's project focuses on how companies are "resigning themselves to hiring lower-quality people, and some are learning how to get the work done outside the U.S." But simultaneously, because India and China are making heavy investments in training people in science and engineering, "you see the emergence of new geographic knowledge clusters. If you're a company that needs expertise in one of these clusters, you have no choice but to go there," he said.

Clinging clusters

Some of the bigger clusters in the U.S. are biotech, semiconductors, and software. If a large pharmaceutical company owns a plan to increase lab square footage, yet reduce employees by two-thirds and triple the rate of new product development, they are going to have to think of new ways to do product development. So what will the remaining one-third do? "These are the innovation people, working with molecules, therapy, and how to break it down into pieces, outsource, and get the work done in different parts of the world, so no group that works on one piece can see what the total picture is," Lewin said. "But in the process they'll be more efficient, and it might even increase the probability of a hit (turning a compound into a vaccine for instance), given the hit rate is so low."

Sexy ruse

Some engineering industries are trying to market engineering as exciting and sexy to lure students into the field, which Ron Hira, assistant professor at Rochester Institute of Technology, in Rochester, N.Y., believes is just plain silly. "Is investment banking sexy or is it that it pays better? Is law sexy?" There are also all kinds of organizations that are trying to encourage students to enter into the engineering field. "But it's like pushing on a rope," Hira said.

Hira said he believes students are rational about what to study. "Because we don't know how vulnerable some of these professions are, students are shying away from computer science. But you haven't seen wages go up. And students are rational. There isn't a demand for computer scientists."

Practical business

If it is not a shortage of engineers or skills, why go overseas? Simple, it is cheaper. In polling companies who are sending work overseas, Wadhwa's team asked about signup bonuses and acceptance rates. The answer was there was no shortage of engineers. "We asked them about productivity and the comparison of U.S. engineers to those in India and China. They said those in the U.S. were better or equal to Indians and Chinese-"more productive, better educated, and with more relevant skills," he said.

One of the other factors affecting off-shoring is intellectual property. "Companies are trying to move the past generation products overseas and keeping the more proprietary cutting edge information, that would kill competitive advantage if it were to get out," Hira said. "We're seeing this in the semiconductor industry," he said. China is getting a 300 millimeter fabrication facility (300 mm wafers (12 in. silicon wafers)-a $2.5 billion project.

The automotive sector is looking at not only doing production but manufacturing overseas, Hira said. Pharmaceutical companies are planning clinical trials and production overseas. "Companies are agnostic about where they locate their facilities. They're not tied to one country. They'll locate to wherever makes sense. This affects the site selection and depends on tax breaks."

How it affects engineers really depends on what educators do. You obviously do not want to teach things that will be rendered obsolete. You do not want to compete with someone who is willing to take $6,000 a year. "You have to be five times better or do something completely different," he said. "That could be that you'll provide in-person services, which can't be off-shored, or you provide better services."

Planning for unknown

The types of engineering jobs that are geographically sticky as opposed to the ones moving overseas are anybody's guess, Hira said. "We don't have good data on what's going and what's staying." The basic stories Hira hears are the jobs requiring project management are not moving overseas in low-cost countries because there's less experience. "The problem is we don't know how that will play out; we don't know which ones will be off-shored and which ones will not," Hira said. So it is hard to know what to do. Engineering Deans are guessing at what will go offshore and what will stay, and changing their curriculum accordingly.

Another part of the story Hira's team has heard is the developed countries on the cutting edge will do the latest things and the low-cost countries will do the more labor-intensive generation. "But that's starting to shift as those countries target R&D as well," he said. Google has an R&D center in India, "but they hire their R&D staff for $30K a year, whereas in the U.S. they'd be $150K-$200K a year." GE has the Jack Welch Research Center in Bangalore, India. "They have more people there in their R&D center than they do in the world including their old research center in N.Y. It doesn't follow the simple division of labor that the high end would stay here," he said. "A lot of these companies are hiring 2-3 year (associate degree level) engineers and training them on the job. IBM has gone from 6,000 workers in India to 75,000 in five years-a 10-fold increase."

So what are manufacturers' long-term goals? The state of U.S. workers is no longer part of corporate decision-making. "The CEOs and decision-makers are not compensated by how many U.S. workers they have; they are considered global companies not U.S. companies, Hira said, "and they're acting rationally. But there's no counterbalance, no organized effort."

The cold hard facts, Hira said, is the U.S. is deindustrializing. And the most important thing to remember for U.S. companies is, "you're training your competitors," Hira said. "If I'm an engineer, I've got to compete against someone who has a good education who's willing to take $8,000 a year. In the old days, I had advantages because my company had the latest tools and technologies. So that made me more productive and could justify that differential. Now you have [companies like] Boeing taking those tools and technologies to [foreign] engineers. That takes away my advantages as an American engineer.


Ellen Fussell Policastro is the associate editor of InTech.  Her e-mail is efussellpolicastro@isa.org.

System integrators talk of outsourcing debate

By Ellen Fussell Policastro

With the increase in outsourcing and off-shoring in the automation industry, students, engineers, educators, and manufacturers have plenty to say about where they fit into the mix. But what about systems integrators? Are they benefitting from the surge in outsourcing? InTech talked to a few systems integrators to find out how they fit into the debate and where they are going in the future of global manufacturing and automation.

Manufacturers rely more on systems integrators

Because manufacturers have downsized their own technical staff, and because technology is changing faster than ever, it has become more difficult for end users to maintain competence in the latest technologies, driving a reliance on systems integrators they had not seen before, especially at the initial stages of a project.

"More often than not, there are still some companies that do detail specifications themselves; they'll have a good idea of what they want, but we get involved at the conceptual stages, and they're either bypassing a bid spec altogether or we help them put it together," said Ed Diehl, executive director of Concept Systems Inc. in Albany, Ore., and executive board chair of CSIA.

Marty Michael, vice president of business operations at Advanced Automation in Exton, Penn., said he believes so strongly in this whole direction that his company went offshore and entered into a joint venture (now an acquisition merger) in the Middle East "so we could use offshore capabilities to a greater extent, and we've been working with how to use offshore resources since 2000," he said.

In the old paradigm, Diehl said, users knew what they wanted and where, but they needed someone to do it. Today, "they want us to tell them how to automate a process to improve it, and they bypass the bid request and give us work or use what we provide them to create a bid request. So not only are they outsourcing the act of putting the package together; they're outsourcing designing it," Diehl said.

The process today helps end users Diehl said because "they're talking to people who live and breathe automation everyday and have access to all the technologies out there."

Engineering shortage

Another benefit for systems integrators is the perceived engineering shortage. "Users in the Fortune 100 space in food and life sciences are struggling to get their plants upgraded," Michael said. Most integrators in the U.S. market "don't have available bandwidth to take on the work; they don't have the resources to put together software and solutions," he said.

In the last year, Michael's company has hired over 100 engineers, "and we're not a huge company. It's been painful because there's a huge shortage. When I do a project for an MES system that requires 50 people in the food and beverage industry who know software, the only choice I have is to go offshore for resources," he said. "You can't meet customer needs without using outsourced people."

Very few people are coming into the engineering space, Michael said, "and if you look at the number of engineers who'll retire out of manufacturing versus the number who will graduate and go into that space, the balance is offset with a lack of engineering.

Michael has been talking to students at manufacturing schools who are afraid to enter the field because they believe all manufacturing is going to China. "That's true if you're building cars," he said. "But we're not going to outsource making bread and meats. That will stay with the agricultural base in the U.S. and consumers."

Challenges, opportunities ahead

The down side of the systems integration influx is end users have to be smart about how to evaluate who is a good integrator. "They're taking a risk when they frame this out because they're not as intimate with it," Diehl said. "A lot of it is intellectual property-software, which you can't touch or feel, so how do they manage the risk?"

Manufacturers have to learn how to shop for an integrator. "Everyone can point to a systems integration project that went sour," Diehl said. "And it's rarely because they chose the wrong hardware platform. The issue is the implementation, and that comes down to people and process used by their control systems integrator."

Another challenge lies with some integrators as they are also seeing a potential for their jobs to go overseas. While Diehl said systems integration work is "not something you can do over a phone very easily; it requires a real hands-on approach," integrators like Stephen Goldberg, director of the industrial systems division at Matrix Technologies Inc., in Maumee, Ohio, said his company was supplying services overseas, "so we're getting outsourced too, and we're doing everything we can to combat offshore by training and being efficient," he said. "We have clients in some Pacific Rim markets that use our services because of systems that we've installed for them in the past."

Goldberg said he has talked to people who have used those overseas services. "And I haven't heard of anyone having success," he said. "That seems to be related to how many times work has to be redone before the end user is satisfied. When we do a project, there's no communications barrier, and we get it done correctly the first time."

Since companies will probably continue to outsource for their business, the need for systems integrators is just going to grow, Diehl said. The future also holds opportunities for engineers who are outsourced. "Go work for a system integrator," Diehl said. "Everybody's looking for engineers, but the talent out there is hard to find. So if somebody has lost their job, with a bit of retraining, and in some cases that's not even required, it's an awesome field to be in," he said. "Our mission is to educate kids in high school and college about industrial automation and systems integration and get people into the field."