Offshore Storm: The Global Razor's Edge

IBM may send 4,730 white-collar jobs to India and China. Another 14 million could follow.

The defining political issue for America in the next decade has arrived now, courtesy of India, China, and any number of aspiring developing nations. That issue is offshore outsourcing—not of blue-collar factory guys, but of well-paid knowledge workers. It is a question that will get traction in November's elections. It will only grow bigger and more divisive.

The tipping point? Perhaps we've just witnessed it. In December, The Wall Street Journal reported that IBM will soon ship as many as 4,730 white-collar jobs overseas. The news is essential for three reasons. First, this is IBM—still, arguably, this nation's preeminent technology company. Second, these aren't lowly coding grunts (a function IBM has staffed from India for years), but engineers and managers making $75,000 to $100,000 a year. Indian talent likely can do comparable work for one-fifth the cost.

Third, and most telling, IBM didn't comment on the leaked news. IBM knows its public relations: Shredding the pay stubs of middle-class workers is a sensitive matter. Last summer, as the Journal also reported, union activists got hold of a tape of an IBM employee-relations exec warning human-resource managers that offshoring "is going to raise a lot of tensions."

So, welcome to your future. Researchers at the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, estimate that as many as 14 million ser-vice workers, or 11% of the nation's total jobs, are vulnerable to offshoring. Intel is opening a glittering new $41 million campus in Bangalore to house 1,000 workers. Morgan Stanley Dean Witter has announced plans to ship some equity research overseas. "A ferocious new wave of outsourcing of white-collar jobs," the Fisher Center folks call it.

"It is a global world that we live in, and this is just business as usual," says one venture capitalist.

The reality is, offshore outsourcing is inevitable—and for the economy, that's not such a bad thing. Nowhere is this clearer than in the place you would least expect: Silicon Valley, the cradle of America's technology economy.

Sure, hourly workers and engineers in the Valley are jittery; offshoring is a touchstone issue for a nascent union drive at IBM's plants there. But listen to the serious money—the entrepreneurs and venture capitalists who make things happen in the Valley. They understand, first, that this isn't about a race to the bottom. Rather, to compete in a climate of weak capital markets, their companies have to be run as efficiently as possible.

"It is a global world that we live in, and this is just business as usual," says Richard Kramlich of New Enteprise Associates, a big VC firm. "We demand that businesses stay profitable or go out of business; to do that, they have no choice but to go overseas."

Two-thirds of the portfolio companies at Mayfield Ventures, another VC firm, already have offshore operations. And Mayfield won't consider funding new companies without an offshore strategy, says partner Yogen Dalal. "All startups need to be as efficient as possible in getting their developments to market with the least amount of money," he says. "If they can do that by utilizing talent overseas, so much the better."

Others argue convincingly that the drive for cost efficiency obscures even bigger potential benefits. "The reality is that you are also creating a very large market opportunity for U.S. firms," says Arjun Gupta of TeleSoft Partners. "When consumers in India get higher wages from these new jobs, the first thing they do is spend it on consumer products, and they want American products." Things like washing machines, clothes dryers, cars, and microwaves. "The second-order effect of this will more than offset the short-term loss of jobs," Gupta says.

Is there a risk? Of course there is. Think back to the 1970s, when American companies unloaded the manufacturing of consumer electronics products to factories in Japan. Today, those Japanese companies—Sony, Matsushita, Sanyo—dominate that industry, even though the United States remains the largest consumer market for TVs, stereos, and other gadgets.

That precedent is what worries venture investor Gary Morgenthaler. "It may be shortsighted to teach engineers in China to compete with us. Once they know how to build high-tech products, they will develop more advanced technologies. They'll sell first into their own markets and then enter our markets to sell against us. It is the epit-ome of arrogance for us to assume they won't."

That's the conundrum. If tech companies resist offshoring, they forfeit dramatic cost efficiencies that let them compete globally. Higher costs yield lower growth, then lower investment, then death. Yet if companies send jobs overseas, they risk giving away the keys to the kingdom.

What's your pleasure: survival or survival? The Valley's answer: "You go wherever you need to go to get the job done in the best and cheapest way," says Kramlich. "Here we are, we've been trying to export capitalism and democracy, it's been one of our national goals, and now that we've succeeded at it, we're awed and even afraid of it! That is the greatest irony of all this."

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