TECHNOLOGY WEEK --- Barron's Online -- Asia or Bust: Will Silicon Valley Move to Asia? --- U.S. Tech firms increasingly move jobs overseas 30 June 2003 Barron's (A version of this column originally appeared June 25 in Barron's Online) Three years ago, telecom equipment firm ANDA Networks had about 100 engineers in Silicon Valley. Now it has seven. Where did those jobs go? To Wuhan, China, a city of seven million people about 400 miles west of Shanghai. ANDA employs 65 engineers there. In Wuhan, San Jose-based ANDA Networks pays an engineer about $17,000 per year, including benefits -- about one-seventh of what it pays his or her counterpart in Silicon Valley. No surprise, then, that privately held ANDA slashed operating costs by 90% in 2002. ANDA's story is becoming more and more common these days as demand for technology remains weak and investors push for stronger earnings growth, forcing tech companies to cut costs. How? The same way other manufacturing and services companies are doing so -- through consolidation and exporting jobs overseas. In fact, Silicon Valley may well be the epicenter of the restructuring that's transforming all of American business. The big problem is weak demand -- especially compared with the boom years of the late '90s. "I don't think [technology spending at that level] will come back in my lifetime," says Sam Jadallah, general partner at venture capital firm Mohr, Davidow Ventures in Menlo Park, Calif. Indeed, there doesn't seem to be another Y2K, Internet-related spending splurge or a robust economy around the corner to juice earnings. "If they aren't innovating, what are customers going to buy in the future?" asks Brian Flanagan, co-manager of the AAL Technology Stock Fund. What's more, personal computers, computer networking and wireless technology -- responsible for much of the job growth during the tech bubble -- are maturing businesses. And tech companies have to slash costs, just like everybody else. Increasingly, that means outsourcing jobs to China, India and elsewhere. India's allure is particularly strong for tech companies because of its vast supply of well-trained, highly educated, English-speaking professionals, all available at bargain-basement salaries. A product designer or engineering services worker may earn salary and benefits 80% lower in India than in the U.S. or Western Europe, according to consulting firm Booz Allen Hamilton. Not surprisingly, American tech giants like IBM, Accenture and Oracle all have operations there. About 2,800 IBM employees now work out of offices in three cities in India. And outsourcing firm Infosys Technologies, based in Bangalore, India, takes more and more work off the hands of its 345 customers, including Microsoft and Lucent Technologies. Between companies like Infosys and U.S. corporations that open their own facilities offshore, more than 3.3 million U.S. services jobs, accounting for $136 billion in wages, should migrate overseas in the next 15 years, according to market research firm Forrester Research. Many of those jobs flying the coop will be in technology, which represents about 10% of the gross national product. It's no longer just customer service jobs, either, that are migrating abroad. "Now they are moving engineering teams, where they had just moved production [before]," says Barry Jaruzelski, managing partner of Booz Allen. But sending jobs half a world away brings up issues of oversight, quality control and delayed communications, as well as legal concerns and risks to intellectual property. Many nations simply don't have the technical skills, resources and infrastructure that China and India offer. Meanwhile, technology companies face an unfamiliar problem -- overcapacity. That, and the impetus to cut costs, could lead to a new wave of mergers in the sector. The computer industry "is about as large as it's going to be," and has about 1,000 companies that need to go bankrupt, Oracle's chief executive officer Larry Ellison told The Wall Street Journal in April. Ellison apparently is putting his money where his mouth is, having launched a $6.3-billion hostile takeover bid for PeopleSoft. Just three and a half years ago, we were in a New Economy whose growth engine was technology, where the U.S.'s competitive advantage appeared well nigh impregnable. Now, tech companies are slashing costs, and software engineers in Palo Alto are fighting for jobs with much-lower-paid counterparts in Bangalore. Welcome to the Great Shakeout, Silicon Valley. It's going to be part of the way we do business for quite a while. --- Note: In a four-part series last week, Barron's Online looked at how outsourcing and consolidation will affect American industry. This was the third part. ---
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