India’s IBM conquest is an ominous sign for American industry

IBM now employs approximately one-third of its work force in India, according to a New York Times report published last week. It’s a bad sign for the United States, but it should surprise no one. India churns out science and technology graduates at a rate almost triple the U.S., and at less than a third of the cost. It’s a country with a population of over 900 million — roughly three times the U.S. — and it could soon overtake us to become the world’s hub for technology innovation and business.

The wizened old executives at IBM cannot be oblivious to 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, such as Infosys and Tata Consulting, have made multibillion-dollar businesses from labor arbitrage — importing Indian workers to work at a lower cost than comparable U.S. workers. As cloud-based services become increasingly common, the need to actually import Indian workers on U.S. work visas is becoming less important. With cloud services, workers can work remotely; customer needs can be fulfilled by anyone, anytime, from any place on earth.

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 products. Apple’s justification was that its manufacturing relied primarily upon low-skilled workers, while design and distribution were reserved for higher-skilled U.S. workers. But with manufacturers such as Tesla and Solar City proving that both design and production can take place on the same shop floor while drastically improving quality and time to market, the rationale for offshoring seems less justifiable.

{mosads}IBM’s primary business now consists of services that include data storage, cloud-based computing and IT consulting, all of which rely upon a college-educated tech work force. IBM’s business has crept up the value chain and no longer consists primarily of low-level support services, but increasingly focuses 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 an 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. While STEM education (science, technology, engineering and math) has become an almost dirty word among U.S. educators who prefer a curriculum more oriented toward liberal arts, India rewards STEM degrees to the exclusion of almost all other professions.

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 increasing 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 that state-sponsored education in core industries can be effective. Over the past two decades, their people have effectively risen from starvation to prosperity to become 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 iPhone to a Samsung Galaxy smartphone. 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, which is 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 our quest to find cheaper workers, we do not give the whole store away to foreign competition.