http://www.upi.com/view.cfm?StoryID=20031114-052912-7678rAnalysis: Is U.S. tech self-destructing?
By Martin Hutchinson
UPI Business and Economics Editor
Published 11/14/2003 5:46 PM
WASHINGTON, Nov. 14 (UPI) -- "Is high-tech offshore outsourcing a threat to innovation and economic prosperity?" asked a New America Foundation forum on Thursday. Rather the question should have been: Given outsourcing, the relative cost structures, and its current modus operandi, is the U.S. tech sector headed for long term decay?
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Outsourcing research and development, or high level software, or complex engineering, or middle management integration between different elements in the "value chain" of tech products has very different implications from outsourcing low level manufacturing operations. Whereas the workers in say an assembly plant in Malaysia are unlikely to develop the capability to compete with the plant's U.S. owner, Indian software engineers and researchers, with education very nearly as good as that in the U.S., and with experience at a responsible level in a U.S. company, will quickly acquire the capability to compete with the U.S. The largest semiconductor manufacturer in the world, in terms of volume, is no longer Intel but Taiwan Semiconductor; there can potentially be many more such stories in the future.<snip>
Of course, many factors are required for business success beyond entrepreneurial ability. Professor Michael Porter has identified the tendency of regions to form a "pole" of excellence in a particular activity, whose residents will dominate that activity worldwide, providing the majority of the activity's innovation and new business, as well as a high proportion of its overall revenues and employment. Naturally, in the tech sector, this factor has tended so far to favor the United States. However, as higher-level functions are outsourced overseas, "poles" of capability are gradually built up in overseas locations. Once such "poles" have been established, new competitors in the industry are as likely to arise in the new "pole" as in the original one. Two excellent examples of such "poles," both of which have arisen in the last decade are Taiwan in semiconductor manufacturing and Bangalore in software. In both cases, there are plenty of opportunities for new competitors in those locations, and little competitive advantage for U.S. companies against such competitors.
The real advantage that overseas competitors may have against their U.S. counterparts in the tech sector, however, is the cost of top management. In the United States, this can run into the billions, even the billions per person. John Chambers, for example, not the founder of Cisco but a professional manager brought into the company in the early 1990s, cashed in $38 million worth of stock options Friday, but this still left him with options worth $363 million at today's prices, all of which he has received since 2001. In total Cisco's stock option plan has issued 321 million shares, with a total value of $7 billion -- considerably more money than the total earnings of the company since its formation. Except for social security tax, of course, none of this money has been reflected in Cisco's income statement, only in its balance sheet, where the company is buying back shares at a frantic rate -- more than $7.8 billion of scarce cash has been spent on share buybacks since 2001, in years of a tech downturn......In other countries, needless to say, such largesse is unnecessary.<snip>
The short-sighted greed of U.S. tech management, and the foolishness of a (accounting) regulatory system that has allowed them to hide the true costs of their overpayment, will bear true responsibility for this development.