India’s Conquest of IBM an Ominous Sign for US Workers

The New York Times article published recently discussing the fact that IBM now employs more workers in India than it does in the U.S. should come as no surprise. India continues to churn out science and technology graduates at a rate almost triple the United States, and at less than a third of the cost. For a country with a population of over 900 million – roughly three times the U.S. – India could soon overtake the United States as the world’s hub for technology innovation and business

The wizened old executives at IBM cannot be oblivious of this fact. For years, IBM and other technology companies have essentially ‘insourced’ lower cost Indian tech labor on a contract or consulting basis. In fact, some Indian firms – Infosys and Tata Consulting – have made multi-billion dollar businesses from labor arbitrage – importing Indian workers on HB-1 visas to work in the United States at a fraction of the cost of a U.S. educated worker.  As cloud-based services become increasingly common, the need to actually import Indian workers on U.S. work visas is becoming less important. With the cloud – IT services can become location-independent; customer’s needs can be fulfilled by anyone, anytime, from any place on earth.

As the NYT article also points out, IBM is far from the only U.S. firm to capitalize on labor arbitrage.  Tech manufacturers such as Apple and Dell have long relied upon a primarily foreign work force to manufacture its products. Apple’s justification for this was that the manufacturing relied primarily upon low-skilled workers, while the design and distribution were reserved for higher-skilled U.S. workers.  But with manufacturers like Tesla and Solar City proving that uniting both design and production on the same shop floor can drastically improve quality and time-to-market, the offshoring rationale seems less and less justifiable.

IBM’s primary business now consists of ‘services’ – data storage, cloud-based software, and outsourced IT consulting – which rely upon a college-educated tech work force. In the U.S. these services are primarily produced by college graduates as well.  IBM’s business has creeped up the value chain, no longer consisting primarily of low-level support services, but increasingly focusing on high-level software design and problem solving traditionally reserved for the U.S.-based technological labor force.

While India is flourishing under the outsourced labor market scenario, the U.S. worker finds himself competing on a somewhat unfair playing field. It costs roughly $100,000 to produce a competent software engineer in the U.S. The average cost of producing a software engineer in India is roughly $20,000 – with the Indian government picking up the tab in many cases. Furthermore, while STEM education has become almost a dirty word among U.S. educators who prefer a more liberal-arts oriented curriculum, India rewards STEM degrees (math, science, engineering, and medicine) to the exclusion of almost all other professions.

What is not going to happen is that a shrinking of the world.  Investments will flow where they are most richly rewarded. Customers will seek the lowest cost and highest value options among competing providers.  An America First approach that attempts to merely impose trade sanctions on imports of goods, labor and services will fail flatly.  An appropriate response to rising global competition in tech goods and services should be a heightened investment in STEM education at all levels of the educational system. We should understand that an educated, technologically competent workforce is not merely a function of market demand, but a core national infrastructure priority. The U.S. government should continue to invest in technological innovation and education because it ultimately protects American interests from global competition. The Indians and Chinese have proven this model – provided state-sponsored education in core industries – and over the past two decades basically risen from starvation to prosperity to a real competitive threat to the United States.

While we should not lead with protectionism, the U.S. should not give away its intellectual property either.  When asked during a quarterly earnings call in 2006 why his company had not moved more of its chip manufacturing facilities offshore, Intel CEO Andy Grove responded that “shop-floor” innovation drove chip design for a greater degree than most of its competitors understood.  The Chinese, Korean and Indian firms that manufacture outsourced U.S. designs understand this all too well.  Just compare an I-phone to a Samsung Galaxy smart phone. Their designs are remarkably similar because Samsung essentially produces all of Apple’s designs – and borrows significantly from Apple’s intellectual property along the way to developing its own competing products.

There are two primary reasons to protect the U.S. worker. The first is obvious: without a robust work force, no one will be able to afford all of the goods sold in the United States. The second reason, though at least as important, is slightly less obvious. By outsourcing manufacturing and services, we are essentially giving away the secret sauce that goes into technological innovation in the first place. We need to be careful that in the quest to find ever cheaper workers we don’t give away the whole store to foreign competition.

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