Outsourcing: The next technology battlefields

Rather than try to reverse the outsourcing wave, the best way for America to fend off foreign competition is to invent technologies.

CAMBRIDGE, Mass.--Few people know it, but the invention of the microwave oven can be traced back to an inquisitive engineer's sweet tooth.

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It happened one day in 1946, the story goes, when Percy Spencer noticed that a candy bar had melted in his pocket while he was testing a new magnetron vacuum tube for Raytheon, as part of its radar research that began during World War II. Intrigued, he placed some popcorn kernels near the tube, and an egg, the next morning--and discovered that the intense heat had similar effects.

"Scientists familiar with magnetrons knew the tubes generated heat at the same time they radiated the microwave energy that made radar possible," reads the of the company, which was founded more than 80 years ago here near Harvard University, the Massachusetts Institute of Technology and other crucibles of advanced research. "Spencer was the first, however, to discover that one could cook food using microwave radio signals."

History is full of accidental inventions like this, especially in the United States: Teflon, Coca-Cola and nylon all emerged as serendipitous offshoots of unrelated research. And that is exactly why many U.S. corporate and political leaders believe that it is imperative for the nation to maintain its emphasis on advanced research and innovative science. With more resources and policies concentrated on research and development, they argue, the better the chances are for the United States to make more important scientific discoveries.

By luck or design, American technological breakthroughs have resulted from a combination of industrial research, government-funded academic work and commercial competition. Such "disruptive" technologies are needed today more than ever to lead the next industrial cycle--otherwise, U.S. companies risk being eclipsed by other nations, as more high-level R&D work is done offshore in an increasingly global marketplace.

"Essentially, it's a marketplace realignment that we can't stop," Craig McCaw, a telecommunications industry pioneer and now chairman and CEO of Eagle River Investments, said of the offshore-outsourcing trend at a recent Boston conference on the topic. "You have a choice: Do you want U.S. companies to be buried in the global competition, or do you want them to succeed and prosper?"

Backing the future (chart)

The goal, R&D proponents say, is for U.S. researchers to leapfrog the competition with breakthrough products, thereby lessening the significance of innovation by other countries working on existing technologies.

"Much of America's technological preeminence in the 1990s was attributable to R&D investments made by the federal government in the 1960s, 1970s and 1980s. Past technology advancements stimulated by federal R&D include integrated circuits, the Internet, personal computers, jet aircrafts and supercomputers," the said in a recent report on offshoring and related issues. "University-based R&D in the physical sciences MUST be increased. Many U.S. trading partners and developing countries have more generous and permanent R&D tax incentives than the United States."

Clearly, the United States still outspends all other nations, when it comes to R&D: $284 billion in 2003, according to the . That figure, however, is up a meager 1 percent over 2002, a steep drop from average annual growth of 5.8 percent between 1994 and 2000.

It is impossible, of course, to predict with any certainty which technologies will lead the next industrial generation. But some notable advances are taking place in promising fields:

• Nanotechnology: Investment is pouring in, leading to advances in semiconductor design and the manufacture of small memory and processor chips. Research in academia and in industry--notably the labs of IBM and chipmaking giant Intel--is leading the way.

It should also , where President Bush has authorized the appropriation of $3.7 billion over four years starting in October for nanotechnology research and development. Federal funding for nanotech R&D has increased sixfold since 1997, from $116 million to an estimated $961 million in 2004.

• Biotechnology: R&D spending for the top 20 pharmaceutical companies is expected to grow from $57 billion in 2002 to more than $73 billion by 2006, according to consulting firm Frost & Sullivan.

The pace of innovation in food is expected to quicken as researchers tackle problems such as improving the nutritional quality and disease resistance of certain crops. A particular area that continues to attract funding is bioinformatics, a science that attained prominence in the 1990s. It seeks to use computer technology in complex biological problems such as mapping the molecular structure of living things.

• Material science: Government and industry investment is driving the development of advanced "smart" materials that can better withstand heat and vibration, change to absorb shocks and stresses, and even function as lightweight power sources. Such materials might be used in future robotics applications, medical treatments, defense applications and building construction. For instance, the Defense Advanced Research Projects Agency's (DARPA) program is working on the development of aircraft structures that can change to suit multiple purposes--for example, a bomber that can be instantly streamlined to fly attack missions.

In addition to investing in these cutting-edge areas, mainstream computing companies continue to spend money and resources on new, more-efficient tools for building key infrastructure, such as software, microprocessors and networking components. But even in areas where U.S. industry has been long established, it could prove difficult for companies to maintain preeminence, as offshoring helps build greater skill levels in other countries.

Although much attention has focused on Asia, Eastern Europe could provide a far more formidable challenge to the United States in high-level research because of its deep roots in sophisticated technology. The former Soviet Union consistently produced some of world's most prominent scientists, especially during its massive defense buildup to counter the Pentagon's "Star Wars" satellite program and other high-tech initiatives during the Cold War.

"Eastern Europe cultivates some of the most highly technical, skilled work forces in the world," said Bill Gargano, senior vice president of sales and marketing at , a New Jersey-based outsourcing company that maintains advanced R&D centers throughout the region. "One of the fundamental differentiators of EPAM is its ability to leverage its industry and business knowledge to design and develop proprietary solutions."

Indian technology companies, particularly biotech and software businesses, are working on cutting-edge innovation as well. "Indian companies, especially the big ones, are waking up to the patents philosophy, as they find that patents are highly profitable," said Badruddin Syed, an executive vice president at outsourcing firm . "The Indian software industry feels that it has to position itself as creators of high-value solutions, rather than just of low-cost offerings."

In addition, the United States faces some internal obstacles, including slower growth in the number of possible workers to recruit and train. The nation's work force is expected to grow by 1.1 percent between 2000 and 2010, and by just 0.4 percent in the next decade, according to a study released in April by Rand researchers.

And if the standard laws of supply and demand hold true, the smaller number of qualified engineers and other technology workers in America will mean higher wage increases.

Tech Update Outsourcing Toolkit "Now, engineers with Ph.D.s and recent college graduates alike are hearing that they are too expensive, that their job can be done more cheaply abroad," Paul Almeida, president of the Department of Professional Employees at the , said in testimony at congressional hearings on offshoring. "If an advanced degree, years of experience and excellent work habits are not enough to land a job, and the U.S. comparative advantage in services and high tech has seriously eroded, what does the future of work look like for the United States?"

Industry veterans counter that the cost savings gained from outsourcing will enable U.S. companies to invest that money back into R&D. "As functionality and performance are relegated to commodity status, companies will concentrate on higher levels of research. Core developers will be working on new advanced technologies," said George Gilbert, managing partner of the .

Those on both sides of the issue agree that more attention must be paid to the country's education system at all levels, if major innovation is to continue in the United States.

"We don't want a policy that focuses only on keeping low-end jobs," said Rick White, a former Republican congressman and now president and CEO of bipartisan industry lobbying group . "Instead, we want to do what we've always done, which is creating the next wave of high-end jobs. That's what we're good at--that's what we've done for the last 200 years."

If current employment trends continue, however, that will be far easier said than done. A 2000 study from the nonprofit found financial disincentives to pursuing advanced degrees in computer science. Factoring in school costs, the

Staying power (chart)

"Until recently, the United States experienced a reverse 'brain drain' with the rest of the world, as leading scientists and engineers came to the United States to study and work," the American Electronics Association said in its report. "With changes in policies and other factors abroad, more and more foreign nationals are returning to their home countries to explore opportunities there, and fewer are coming to and staying in the United States."

Executives of offshore outsourcing companies confirm that entrepreneurial trend. "A lot of people in India are definitely taking risks, especially in the intellectual-property arena," said Vamsee Tirukkala, a co-founder and executive vice president of , an offshoring research and consulting firm. "For years, Indian companies were typically very bureaucratic--it was very common to call your boss 'sir'--based on hierarchy, perhaps inherited from the British. That mind-set is changing."

Others caution against overemphasizing geographic distinctions, arguing that computer science research will become an increasingly cosmopolitan phenomenon, with people of different countries working together.

"It's arrogant to think we will be able to keep all research in the U.S.," said James Foley, chairman of the and a . He believes that United States-born graduate students should get international experience in order to learn how to manage cultural differences.

Andy Oram, an editor at technology publisher O'Reilly & Associates and a member of activist group , goes even further. "The whole notion of 'domination' may undergo a change. Each country is realizing how much it depends on suppliers and customers outside its borders; eventually, this means much more intertwined and trusting relationships among companies in different countries," he said.

"We should think not of maintaining the United States' dominant position--when did we ever deserve that position?--but of maximizing economic relationships for everybody," Oram added. "While a lot of great new products come from intimate, face-to-face collaboration--and this will help keep jobs in the United States--we also need to communicate with people on other continents. That means creating a communications infrastructure that allows cheap, high-quality videoconferencing. We must do this to cut down the travel forced on corporate representatives, which exhausts them and contributes to climate change."

Many U.S. universities and corporations have begun joint programs that are aimed at stemming the offshore tide with practical training that students can use as soon as they enter the work force. But some students fear that university programs could become too narrow, if they stress immediate vocational skills at the expense of broader knowledge and theory that can lead to more creative innovation.

Joseph Barillari, a senior at Princeton University who is majoring in computer science, is grateful that his course work has focused largely on theoretical issues as a way to prepare him for the future. He believes that his education has prepared him well to pursue a Ph.D. in computer science and, possibly, a career as an entrepreneur later on.

"If you take a class in Oracle 9.0, you're probably going to be in trouble," he said. "But if you take a class in database systems, you're probably going to be OK."

Whether practical or theoretical, technology executives say the most important factor in the future of R&D is the power of free thinking. "I think the U.S. will definitely continue to be the leader in innovation. If we can continue to focus on not only great companies but great ideas, and how to really take advantage of them, we will be very competitive," Jerry Yang, co-founder of Yahoo, said last month at the Boston outsourcing conference.

For now, even some of the largest foreign technology companies agree. "The U.S. technology industry is the fountainhead of innovation," said Nandan Nilekani, co-founder and chief executive of Infosys Technologies. "Innovation requires both very strong technology knowledge as well as customer access and customer intimacy. So I think the United States will always lead in those matters."

Perhaps, but as the offshoring phenomenon has shown, the economics of foreign outsourcing may prove too tempting to resist in R&D, as it has in services.

"Indian companies will be able to compete with U.S. companies in these sunrise industries, as players in the IT industry realize the importance of R&D and invest heavily in it," said Manoj Kunkalienkar, the executive director and president of

CNET News.com's Dinesh C. Sharma in New Delhi and Matt Hines in Cambridge, Mass., contributed to this report.

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