By Mitch Gurney

July 30, 2010

As anyone who has read my articles posted here knows I’m not a big fan of either party.

Here in California we have two heavy weights running for election. One is the former CEO of eBay from 1998 – 2008, Meg Whitman, a Republican running for Governor with plenty of personal wealth and powerful interest that could help her win. The other is the former CEO of HP from 1999 – 2005 Carly Fiorina a Republican running for State Senator in a bid to unseat Democrat Barbara Boxer. She, like Whitman has plenty of personal wealth and powerful interest too. But the Senate race appears to be tight. Senator Boxer appears more popular with the general public in comparison to the Democrat opposing Whitman for Governor, former Governor Jerry Brown. Regardless, all of these principle players have big money and powerful interest behind them. But quite frankly big interest is the last thing we need more of running the show whether here in California or in Washington. 

I’m not picking on Ms Whitman or Ms Fiorina, I’m sure both ladies are nice people. Both talk tough about creating jobs and both talk tough about making California competitive – again. But folks it’s not about making California or the U.S. or even U.S. companies competitive, that’s not our real challenge. When it comes to jobs the real issue here should be about how American wages are to compete with the cheap wages abroad. Own any HP products? Ever notice where they’re manufactured? HP products contribute to our trade imbalance. I am sure both ladies truly relate to the unemployed American programmer who can’t find meaningful work because his job was outsourced.  

Take my word for it, our elected officials know the real deal but there are no simply solutions and they mustn’t let the secret out. If you really believe your candidate and party of choice has your back you may want to reconsider, especially if you are unemployed. The following story illustrates my point and some readers may recall this event, frankly I had forgotten about it.       

Back in July 2004 Congress was expecting a report it had requested via an Act of Congress but the Bush Administration blocked them from receiving. With the elections on the horizon Bush handlers feared the findings of the report would be damaging to his reelection. That report, a 364 page document prepared by the Commerce Department – Office of Technology Policy entitled “An Overview of Workforce Globalization in the U.S. IT Services and Software, U.S. Semiconductor, and U.S. Pharmaceutical Industries,” provided an in-depth analysis of the ongoing loss of U.S. high tech jobs (semiconductors, information technology and software, and pharmaceuticals) and represented the most complete analysis to date on offshoring of U.S. jobs. The report’s findings were not favorable thus a 2 year battle ensued with the White House and Congressional Republicans blocking Democrats demands for them to release the report.

In September 2005 the Commerce Department released to Congress a 12-page summary of the report which concealed most of the harmful findings plus put a positive spin on outsourcing. While Congress did eventually receive the actual Commerce report in 2006 making 46 pages of it available here, the full electronic copies of both it and the 12 page summary report have never been made available to the public on the Commerce site.

What was released to the public was a 70 page report by the Government Accountability Office (GAO) entitled OFFSHORING: U.S. Semiconductor and Software Industries Increasingly Produce in China and India but its analysis focused on only two sectors, the semiconductor and software industries were the Commerce report focused on four industries. While its findings confirmed some of those of the suppressed Commerce report, it too like the 12 page summary painted a rosier picture of the consequences of outsourcing. Unlike the Commerce report the GAO report made no recommendations.

The offshore outsourcing of American jobs under the pretext of “free trade” and “globalization” is an agenda of U.S multinational corporations and consequentially the unspoken agenda of both parties. I can’t help wondering how much of the battle over this Commerce Report was political grandstanding with a bunch of smoke and mirrors. Yes its findings, if made public, might have been damaging to Bush but from a historical vantage point for anyone with their head not stuck up some deep dark cavernous hole it should have been equally damaging for both parties. I suspect far more powerful influences were at play in suppressing this report and our political friends dutifully played the good cop versus bad cop game they know so well. In some respects this fiasco reminds me of the game hide and seek where you twirl the blindfolded guy (that’s you and me) all around before setting him loose to seek the hiders. As it turns out that while this battle was hotly reported and debated in the press not much was made of it during or after the elections.

Details of this sordid affair may be reviewed with these articles:

Commerce Department Report on Offshore Outsourcing Finally Sees the Light of Day

Offshoring data to get recrunched

Quashed report tracks design exodus

GAO Confirms That U.S. Jobs Still Going Overseas

Commerce Report on Offshoring Confirms U.S. Job Losses May Accelerate

Globalization and the American Workforce

The New Face of Class Warfare

The GOA report charts the trend in outsourcing that began in the 1960’s and reveals the long term evolution of the outsourcing strategy. This process evolved slowly expanding over time as corporations realized the financial benefits to their bottoms lines with the report pointing out on page 7:

As firms experienced cost savings and observed high-quality work in these offshore locations, they expanded offshore operations to include more advanced operations, such as software design and systems integration.

And on page 13 notes:

Offshoring in semiconductor manufacturing began in the 1960s with labor intensive manufacturing activities, such as assembly. U.S. firms invested in overseas manufacturing facilities to perform the labor-intensive assembly of semiconductors for export to the United States. 

On page 15, Fig 2 the GOA report charts:

U.S. Semiconductor Manufacturing Trends, 1960–2005

1960s to 1980s

Assembly abroad

Companies initially moved assembly, testing, and packaging offshore.

1980s to 2000s

Foundries abroad

Companies began contracting with offshore fabrication plants to produce wafers from designs.

2000s to 2005

Design abroad

Some design services were offshored, or a part of global teams operating in many countries.

Complex global production chains developed as designs may be fabricated in different locations, and wafers then sent to still other locations for assembly, testing, and packaging.

During all this time where have our elected officials been? It goes without saying but during this enter time only Corporate America, Republicans, and the Democrats have been running the show in Washington. Corporate America rolled their big money machines into town many years ago and it’s been a plutocracy party feast ever since.

The Democrats fighting to get that Commerce report chaired the U.S. House of Representatives Committee on Science and Technology and once receiving it provided a 46 page Overview summary and reported some of its findings:

The U.S. semiconductor industry has an established history of outsourcing and off-shoring.  Fifty percent of the industry’s employees and thirty percent of its engineers were in offshore locations in 2003 

Venture capitalists are now encouraging U.S. IT start-ups to use lower cost offshore destinations for software development to reduce the “cash-burn rate

The present driver of off-shoring in semiconductor design is to reduce labor costs and shorten the time to market

Present outsourcing and off-shoring trends have the potential to affect the U.S. semiconductor manufacturing workforce” putting downward pressure on U.S. wages…

The overview verifies what the article noted above, “Commerce Reports finally sees light of day” posted at the Manufacturing and Technology News website when they reported receiving a full copy of the report giving the following accounting of some of its findings:

it…contains a long (and sobering) section on the shift of the U.S. semiconductor industry to offshore locations …”As leading companies locate in or contract with labor in other countries, concerns about the shift of work include fears that higher value work may shift from the United States to other locations, impacting U.S. industrial strength and high-salary employment… Layoffs in the United States, especially in the IT sector, have only exacerbated this concern

…there is “growing pressure in corporate America — from customers, consultants, and financial markets — to offshore IT work, as well as growing external and political pressure to stem the flow of American jobs going overseas

The report …highlights the fact that the impact on U.S. competitiveness “appears to be negligible”

In the long term, the U.S. risks losing high-end R&D and design jobs because, as semiconductor fabs move to Asia, high-skilled jobs move with them

The design centers that U.S. companies are “rapidly” creating in Asia “do not support local customers but support the home office with lower-cost designers

The cost of employing a design engineer in Ireland, Taiwan, China or India has been estimated to be 50 to 90 percent lower than in the United States

It further states that, “the number of engineers employed offshore by U.S. semiconductor companies rose by more than 10,000 between 2000 and 2003, while engineers employed in the United States dropped by 4,000 during the same period, according to estimates by the Semiconductor Industry Association

The report …describes the types of IT services and software jobs …being outsourced…stating the obvious: that Indian outsourcing companies “are expanding staff annually by the thousands.” The report describes the reasons for the trend including the fact that “venture capitalists are now encouraging U.S. IT start-ups to use lower-cost offshore destinations for software development to reduce the ‘cash burn rate

…the report ventured into issues impacting the continued loss of semiconductor industry jobs. “With fewer companies investing in new wafer manufacturing in the United States, process R&D co-located with leading edge facilities may also decline, resulting in fewer high-skill jobs for U.S. graduates. Offshoring of design work can also impose downward pressure on U.S. wages and reduce the demand for U.S. design engineers. As the number of overseas design centers increases, it may draw foreign talent from the United States

It…also addressed the potential of offshore outsourcing in the pharmaceutical industry…[the report in observed that] skyrocketing health care costs could lead to pharmaceutical companies deciding not to make future investments in the United States. “It may be…that investment incentives and the global geography of capabilities and infrastructure will shift in the years ahead in ways that will help other countries’ pharmaceutical industries take on a larger role than at present in the global pharmaceutical innovation engine…

 Quashed report tracks design exodus noted the Commerce report expressed concerns:

With most chip manufacturing moving offshore and the number of new U.S. design centers in India growing every month, some observers also worry that U.S. companies will eventually shift research and development overseas. The Commerce report quoted one semiconductor executive as concluding: “Industry is pretty well agreed that it will”

Reducing labor costs is the key driver, the report added, noting that design engineers in China or India, among other locales, are paid as much as 80 percent less than U.S. engineers.

Interestingly in 2003 economist apparently were referring to the recovery at the time as a “jobless recovery.” In an article by The Registry noted Intel CEO Craig Barrett: Admits jobs aren’t coming back to US:

They’re calling it the ‘jobless recovery’ – but it’s a misleading phrase. New jobs are being created in the tech sector, only CEOs are making sure they’re in China and India, not at home in the United States.

Craig Barrett admits to the New York Times today that while Intel has maintained a steady head count in the US, it has hired a thousand new software engineers in India and China.

Barrett has a curious phrase to justify this new trend. “To be competitive, we have to move up the skill chain overseas,” he said.  

The Times cites an estimate that a million jobs have been moved offshore since March 2001.

 Reiterated throughout both the Commerce Overview report and the GAO report is the primary reason for outsourcing is to reduce labor cost with the Commerce Overview noting:

In India…salaries are about a fifth of U.S. salaries… resulting in savings for U.S. companies of about 40 percent once factoring in additional cost for travel, management, and infrastructure.

The main driver for IT services and software offshoring is cost reductions in labor cost resulting in savings of up to 70 to 90 percent, with total net savings reaching 35 to 60 percent compared to performing that work in the U.S.

The main primary drivers for U.S. semiconductor companies in locating facilities overseas and for offshoring semiconductor design is to reduce labor cost

For example the cost of employing a design engineer in Ireland, Taiwan, China, or India has been estimated to be 75 to 90 percent of that the U.S.

Between 2000 – 2003 the number of engineers employed in the U.S. decreased from approximately 76,000 to 72000 while the number of overseas engineers employed by U.S. companies increased from approximately 20,000 to 30,000

 The Democrats chairing on the Committee on Science and Technology posted at the time the following comments:

…offshoring has begun to strike at the very high-tech jobs that we believed U.S. workers would move to fill as blue-collar opportunities shifted to other countries.  A Cable News Network report in early March 2006 noted that 500,000 American jobs have migrated to India in recent years.  That number is expected to triple in the next two years as American companies seek to cuts costs and streamline business.  India is but one example of a country that seems to be gaining employment at the expense of American workers.  Over the last six years, the U.S. has lost [nearly]…3 million jobs due to offshoring.

Not surprisingly with their big money and corporate members, representative organizations such as the U.S. Chamber of Commerce and some think tanks like the Heritage Foundation are strong supporters of outsourcing. What else should we expect given their clientele?  

The other day at another site where I am a guest writer posted an outline entitled “Corporate Takeover of America” by Accuracy_IT. An anonymous reader wrote they were disturbed by the outline, viewing it as an attack on the Republicans and defending his party. Granted, the outline delineates a Republican strategy but I suggest this strategy applies equally to the Democrats by replacing each of the conservative leaning aspects of the strategy with the corresponding liberal or Democratic leaning equivalents. After the Corporate Takeover had been posted to the site I exchanged email communications with the author, who wishes to remain anonymous, and they explained the outline was written about 5 or 6 year ago, around the same time of the above event, and described themselves as an unemployed programmer unable to find meaningful work since their job was outsourced a few years ago. I strongly recommend studying the outline for the strategy it represents with an open mind.   

In returning to our story I’m sure there were some folks in Washington who had good intentions but we all know what the road to hell is paved with. Obviously not much came of the big ruckus over that Commerce report. It was effectively shut away in that crammed closet of dirty secrets with everything returning to business as usual, and no real changes.

Mitch Gurney

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