U.S. businesses transferring work to foreign sites

08/03/2003

With second-quarter revenues relatively flat, American corporations are under increasing pressure to cut costs to maintain profits.

One way to save, they have learned, is to move jobs and labor costs out of the country.

In decades past, millions of American manufacturing jobs moved overseas, but in recent years the movement has also shifted to the service sector, with everything from low-end call-center jobs to high-paying computer chip design jobs migrating to India, China, Russia, the Philippines and other countries.

IBM is the latest company with plans to accelerate efforts to move white-collar, often high-paying, jobs overseas.

IBM's top employee relations executives said that 3 million service jobs were expected to shift to foreign workers by 2015 and that IBM should move some of its jobs now done in the United States, including software design, to India and other countries.

"Our competitors are doing it and we have to do it," Tom Lynch, IBM's director for global employee relations, said in a conference call to colleagues around the globe, according to the New York Times.

Among area companies with large domestic work forces that are moving jobs overseas:

Honeywell said it will shut down assembly operations at its Pawtucket thermal-control business and move the work to China and Mexico. Initially, the company said it would eliminate 374 jobs, but a package of state and local government incentives convinced the company to save 50 of the jobs and move them to a Honeywell plant in Woonsocket.

Texas Instruments in April announced it was eliminating 800 manufacturing jobs at its Sensors & Controls business in Attleboro and moving the work to company plants in China, Malaysia, Korea and Mexico. The company said the move would cut shipping and labor costs.

On Semiconductor, which operates a plant in East Greenwich, said it was moving support functions to central Europe and Asia as it announced the elimination of 300 U.S. jobs late last year.

A.T. Cross, of Lincoln, about a week ago said it would cut 140 local jobs as it moved some manufacturing to Asia. The company said weak demand for its high-end Cross pens and a subsequent need to lower costs forced the move.

IBM's internal discussion about moving jobs provides a revealing look at how companies are grappling with a growing trend that many economists call off-shoring.

Officials at IBM and many other companies argue that creating more jobs in lower-cost locations overseas keeps their industries competitive, holds costs down for American consumers and helps to develop poorer nations, while supporting overall employment in the United States by improving productivity and the nation's global reach.

"It's not about one shore or another shore," said Kendra R. Collins, an IBM spokeswoman. "It's about investing around the world, including the United States, to build capability and deliver value as defined by our customers."

But in recent weeks many politicians in Washington, including some in the Bush administration, have begun voicing concerns about the issue during a period when the economy is still weak and the information-technology, or IT, sector remains mired in a long slump.

At a congressional hearing on June 18, Bruce P. Mehlman, the Commerce Department's assistant secretary for technology policy, said, "Many observers are pessimistic about the impact of offshore IT service work at a time when American IT workers are having more difficulty finding employment, creating personal hardships and increasing demands on our safety nets."

Forrester Research, a high-technology consulting group, estimates that the number of service-sector jobs newly located overseas, many of them tied to the information-technology industry, will climb to 3.3 million in 2015 from about 400,000 this year. This shift of 3 million represents about 2 percent of all American jobs.

"It's a very important, fundamental transition in the IT service industry that's taking place today," said Debashish Sinha, principal analyst for information technology services and sourcing at Gartner Inc., a consulting firm. "It is a megatrend in the IT services industry."

Forrester estimated that 450,000 computer-industry jobs could be transferred abroad in the next dozen years, representing 8 percent of the nation's total computer jobs.

For example, Oracle, a big maker of specialized business software, plans to increase its jobs in India to 6,000 from 3,200, while Microsoft plans to double the size of its software development operation in India to 500 by late this year. Accenture, a leading consulting firm, has 4,400 workers in India, China, Russia and the Philippines.

Critics worry that such moves will end up doing more harm to the American economy than good.

"Once those jobs leave the country, they will never come back," said Phil Friedman, chairman of Computer Generated Solutions, a 1,200-employee computer software firm. "If we continue losing these jobs, our schools will stop producing the computer engineers and programmers we need for the future."

In the IBM conference call, which took place in March, the company's executives were particularly worried that the trend could spur unionization efforts.

"Governments are going to find that they're fairly limited as to what they can do, so unionization becomes an attractive option," Lynch said on the recording. "You can see some of the fairly appealing arguments they're making as to why employees need to do some things like organizing to help fight this."

The IBM officials also warned that when workers from China come to the United States to learn to do technology jobs now being done here, some American employees might grow enraged about being forced to train the foreign workers who might ultimately take away their livelihoods.

"One of our challenges that we deal with every day is trying to balance what the business needs to do versus impact on people," Lynch said. "This is one of these areas where this challenge hits us squarely between the eyes."

Lynch warned that with the nation's economy in an "anemic" state, the difficulties and backlash from relocating jobs could be greater than in the past.

"The economy is certainly less robust than it was a decade ago, and to move jobs in that environment is going to create more challenges for the reabsorption of the people who are displaced," Lynch said.

The IBM officials said openly that they expected government officials to be angry about this trend.

"It's hard for me to imagine any country just sitting back and letting jobs go offshore without raising some level of concern and investigation," he said.

Those concerns were pointedly raised on June 18, when the House Small Business Committee held a hearing on "The Globalization of White-Collar Jobs: Can America Lose These Jobs and Still Prosper?"

"Increased global trade was supposed to lead to better jobs and higher standards of living," said Donald A. Manzullo, R-Ill., who is the committee chairman. "The assumption was that while lower-skilled jobs would be done elsewhere, it would allow Americans to focus on higher-skilled, higher-paying opportunities. But what do you tell the Ph.D. or professional engineer, or architect, or accountant, or computer scientist to do next? Where do you tell them to go?"

The technology workers' alliance is highlighting IBM's outsourcing plans to help rally IBM workers to the union banner.

"It's a bad thing because high-tech companies like IBM, Microsoft, Oracle and Sun are making the decision to create jobs overseas strictly based on labor costs and cutting positions," said Marcus Courtney, president of the group, an affiliate of the Communications Workers of America. "It can create huge downward wage pressures on the American work force."

Mehlman, the Commerce Department official, said companies are moving more service jobs overseas because trade barriers are falling, because India, Russia and many other countries have technology expertise, and because high-speed digital connections and other new technologies make it far easier to communicate from afar.

Another important reason for moving jobs abroad is lower wages.

"You can get crackerjack Java programmers in India right out of college for $5,000 a year versus $60,000 here," said Stephanie Moore, vice president for outsourcing at Forrester Research. "The technology is such, why be in New York City when you can be 9,000 miles away with far less expense?"

Company officials say this strategy is a vital way to build a global company and to serve customers around the world.

General Electric has thousands of workers in India in call centers, research and development efforts and in information technology. Peter Stack, a GE spokesman, said, "The outsourcing presence in India definitely gives us a competitive advantage in the businesses that use it. Those businesses are some of our growth businesses, and I would say that they're businesses where our overall employment is increasing."

David Samson, an Oracle spokesman, said the expansion of operations in India was "additive" and was not resulting in any jobs losses in the United States.

"Our aim here is not cost-driven," he said. "It's to build a 24/7 follow-the-sun model for development and support. When a software engineer goes to bed at night in the U.S., his or her colleague in India picks up development when they get into work. They're able to continually develop products."