How does offshore outsourcing affect the high-tech industry?

June 1, 2004
I recently participated in a panel discussion at a university alumni meeting about offshore outsourcing, the future of high-tech industry, jobs, and entrepreneurship.
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I recently participated in a panel discussion at a university alumni meeting about offshore outsourcing, the future of high-tech industry, jobs, and entrepreneurship. The following questions reflect some of the issues discussed.

Q: What are the impacts of offshore outsourcing on high-tech industry?

A: The panel debated over this mega issue but the overall consensus about offshore outsourcing was more positive than negative. Most agreed that we are in a global economy and that this is a trend that cannot be reversed. It is causing a lot of disruption and pain to individuals but, given that we have the largest domestic market and the strongest economy, it is not a dire situation.

The solution takes coordinated effort and requires more than "we can innovate our way out as we've done in the past" because the scale is significantly larger. The level of outsourcing will likely rise as countries we outsource to strengthen their manufacturing infrastructure to offer advantages beyond just low-cost labor. And as we lose manufacturing know-how and supplier base, it is going to become increasingly difficult to bring manufacturing back. High-tech jobs are not immune—witness the number of software development jobs lost and the number of companies setting up R&D facilities overseas.

There are no quick fixes and everyone must contribute to the solution, from companies to individual initiatives, with an enabling, supportive government policy. And to come up with constructive solutions, we have to conceptually view offshore outsourcing as system optimization on a global scale. That is, each of us capitalizes on our strength to do what we do best so more is being produced to share with everyone. Wealth creation is not a zero-sum game; we can all win.

Individually we are being challenged to produce more and waste less because ultimately our living standards are determined by our productivity. Times of change present opportunities—those who can cope do well, those who cannot, suffer. It is important to develop a career strategy to become really good at what we do to compete for better paying jobs.

Companies have to invest in R&D because all products become commodity in nature over time. Successful companies stay close to customers to establish working relationships and to get product ideas for new applications. Companies that require overseas outsourcing should outsource judiciously and maintain a level of manufacturing sophistication to avoid embarking on a path of no return.

The long-term solution to creating more jobs is entrepreneurship. More than any other part of the world, the United States has the culture and supporting infrastructure to create new companies, and that's the opportunity we should capitalize on.

Q: What area are VCs investing in actively?

A: The response ranged from biotech to enterprise software, wireless, and, not surprisingly, a VC firm that invested in a nanotech company that has filed an IPO liked that technology area. I noted that Incubic is committed to investing in optics and photonics because it brings us opportunities in a broad range of application areas.

Q: What are the key criteria for venture investments in today's post bubble environment?

A: It is back to fundamentals. The entire business model must make sense, with technology being one of the components. The application must serve a need with a large addressable market; there must be a sound financial model, and there must be a strategy for maintaining sustainable competitive advantages. Most VCs also emphasized the quality of the management team and view that as the most important criterion.

About the Author

Milton Chang

MILTON CHANG of Incubic Management was president of Newport and New Focus. He is currently director of mBio Diagnostics and Aurrion; a trustee of Caltech; a member of the SEC Advisory Committee on Small and Emerging Companies; and serves on advisory boards and mentors entrepreneurs. Chang is a Fellow of IEEE, OSA, and LIA. Direct your business, management, and career questions to him at [email protected], and check out his book Toward Entrepreneurship at www.miltonchang.com.

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