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issue: July 2005 APPLIANCE Magazine

Appliance Line
A Look at Outsourcing - Part 2

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by Lisa Bonnema, Editor, APPLIANCE Magazine

More often than not, outsourcing immediately brings manufacturing to mind, but companies can’t afford to ignore the other half of this hot-button issue—engineering.

Lisa Bonnema, Editor, APPLIANCE Magazine

Last month, I attempted to offer an alternative perspective on outsourcing—a manufacturing trend that, as of late, many executives pretend to know everything about. But the truth is that no one can truly wrap their arms around this complex issue. To borrow a quote from Dr. Paul Davies, UK-based author of What’s This India Business?: “Outsourcing is said to be the answer; if we only knew what the question was.” Using that as a foundation, I vowed that this editorial would provide some realities that aren’t intended to evoke “fear” or pessimism, but rather understanding so you can form your own strategies.

As I stated last month, I’m not convinced (yet) that all manufacturing is moving to China, but I’m also realistic in that some engineering and design work will. While many believe engineering and technology may be the saving grace for developed countries competing with low-wage regions, recent reports indicate that these “differentiating factors” are quickly becoming a commodity.

The Task Force on the Future of American Innovation, a coalition of high-tech industry, scientific societies, and higher education associations, recently warned that the U.S. is in danger of losing its leadership role in innovation, a position it has held since the end of World War II. Based on a report released by the organization in mid-February, developing nations such as Asia are successfully gaining technology knowledge, with every intention of catching up to—and even surpassing—the U.S.

Kenneth David, a professor at Michigan State University, believes this is directly related to education. Areas of India and China, he says, are “hyper investing” in education, whereas the U.S. is divesting in education. “Education is a far bigger problem than cost of materials or labor in outsourcing manufacturing because even now we are not producing the quantities of engineers, and we are certainly not producing anywhere near the quantities of PhDs in engineering, that we used to,” he says.

And data from the Task Force show Mr. David is on target. The association, whose members include technology leaders like Hewlett-Packard and Microsoft, reports that from 1994 to 2001, graduate science and engineering enrollment in the U.S. declined by 10 percent for U.S. citizens, but increased 25-percent for foreign-born students. In 2001, approximately 57 percent of all science and engineering post-doctoral positions at U.S. universities were held by foreign-born scholars.

On an international scale, Mr. David says that North America has about 60,000 engineering graduates per year, and Europe has about 40,000. China, however, has about 220,000 engineering graduates and is aiming for close to 300,000 in the next couple of years.

How does this affect U.S. companies? The Task Force report shows that more than half of those with science and engineering degrees in the U.S. workforce are 40 or older, which means that a mass retirement could lead to a shortage of engineers for companies in years to come.

As pointed out by Diana Hicks, chair of the School of Public Policy at the Georgia Institute of Technology, knowledge-based economies like the U.S. rely on the capabilities of highly skilled people to create new knowledge and ideas. Without that knowledge, regions are giving up a competitive edge, which almost forces companies to outsource to retain the advantage. “We must develop our innovative capabilities to their fullest,” Ms. Hicks warned in a statement from the Task Force.

As you may have already guessed, figures show that the U.S. government isn’t putting much into education or R&D for that matter. As percentage of GDP, federal funding for physical science research has actually been in a 30-year decline, according to the Task Force. Since the 1980s, U.S. private sector research has far exceeded federal investment in R&D, providing more than 68 percent of R&D. Of those private funds, however, 71 percent were for development, not basic research.

Even R&D areas that the U.S. federal government is investing in, such as nanotechnology, shouldn’t necessarily provide a sense of security. In fact, federal investment seems to be prompting other regions to increase their budgets as well. According to UK-based Institute of Nanotechnology, Asia Pacific countries have been steadily increasing their nanotechnology R&D budgets since the U.S. first announced its National Nanotechnology Initiative in January 2000. In 2002 and 2003 alone, the region’s R&D budgets for nanotechnology exceeded U.S. $1 billion. These are economies with fewer resources than the U.S.

To avoid being all gloom and doom, I do want to provide some suggestions for keeping your engineers competitive. Mr. David says an additional skill companies can give their engineers is transcultural communication. “Connectivity in itself does not ensure or guarantee communication,” Mr. David says. “Outsourcing means co-designing at a distance. Such communication brings up issues that are not just economic or financial—or even technical. Cultural miscommunication among dispersed design units cost a particular large company $250 million per year. This is not a ‘soft’ issue.”

This means educating engineers in cultural issues and power issues that occur when design teams are dispersed around the world. “If technical knowledge is becoming a commodity, this is not a commodity,” Mr. David says. “Here is something you can do—add on a professional skill needed for your participation in outsourcing operations.”

As far as on what developed regions like the U.S. and Europe can do to stay competitive, Mr. David points to what other countries are already doing to increase their “knowledge banks.” In addition to increasing federal funding for education, he says that educational systems should be set up around a zone or “hot spot” where high-tech industry and academia can co-supply each other. “Think of establishing outsource-orientated zones in the United States,” he explains. “You produce an intermediate product with the needs of the next workbench in mind. Companies already communicate to engineering schools via external evaluators. Do universities communicate to high schools? High schools to primary schools? Is that something that could be a co-supplied situation? We can supply our engineers with a new source of international advantage if we invest our resources in the right direction.”

As with any complex issue, it goes without saying that there are never any easy answers. We all see the double-edged sword: Without outsourcing, some manufacturers simply can’t compete with low-cost regions, yet with it, those same manufacturers are funding the regions in which their largest competitors are based; regions that are hyper-investing in technology and education.

But that’s capitalism, right? Only the strongest survive, and the smartest thrive. My hope is that the appliance industry is closely looking at all aspects of this business before making knee-jerk decisions that might only provide short-term success. We are a global industry with global resources. Let’s not put all our eggs in one basket—it only takes one nudge for the system to crack.

Email us at:editors_mail@appliance.com

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