This article appreciates the powerful pull of low-cost offshore engineering services. Elkay, a privately held company, employs 3800 workers at 14 manufacturing sites. For most of its 85-year history, it has made stainless steel sinks and plumbing accessories from two-dimensional drawings. In many ways, Elkay’s case highlights the forces behind the new shift to offshore engineering. While multinationals have shuffled work among remote engineering centers for decades, small and medium-size companies are just starting to tap foreign engineering talent. Access to offshore services makes many companies more competitive. Barry-Wehmiller used its Indian center to cut the cost of customizing packaging machines. Elkay used the same engineers to build a library of 3D CAD models that let it design products faster and cheaper. The auto industry is already adapting a new business model that involves collaborating in real time across nontraditional boundaries.
To appreciate the powerful pull of low-cost offshore engineering services, consider Elkay Manufacturing Co. of Oak Brook, Ill.
Elkay, a privately held company, employs 3,800 workers at 14 manufacturing sites. For most of its 85-year history, it has made stainless steel sinks and plumbing accessories from two-dimensional drawings.
When it decided to move to SolidWorks, a 3-D computer- aided design program, it had to break down 7,000 2-D legacy drawings of finished goods into their components and convert each component into a 3-D model. It also planned to add to each model such data as materials of construction, machine times, finish, and cost.
Elkay's goal was to create a library of models that its engineers could use to design new products faster and cheaper. Yet for Elkay--thousands of other medium-sized manufacturers--projects appear daunting. If it took only four hours to convert each drawing, the project would last 14 work-years. If done by engineers earning $30 to $50 an hour, it would cost $875,000 to $1.4 million.
Instead, Elkay turned to an engineering services company in India, Barry-Wehmiller International Resources, or BWIR.
This Buick Royaum may be built in Australia for China, where General Motors already sells 500,000 cars annually. Engineers in GM's Chinese engineering center helped design vehicles.
The Indian Advantage
Barry-Wehmiller Companies Inc., a conglomerate that calls itself the nation's largest packaging automation supplier, originally founded BWIR in order to provide information technology services and CAD conversions for its own divisions using low-wage Indian workers. The unit has grown to 150 engineers, who routinely tackle such complex tasks as product retrofits and designs, and an equal number of information technology specialists. BWIR now sells both its engineering and IT services to other companies.
Barry-Wehmiller thinks of its Indian operation as a way to keep jobs in the United States. "Our intent to hold onto jobs here," said Barry-Wehmiller's chief information officer, Craig Hergenroether. "The offshore component helps. In the IT arena, we get a tremendous amount of work done at a reasonable price."
The price is reasonable because Hergenroether's office has restructured its operations. On the information technology side, for example, he has replaced six or seven programmers and analysts with two project managers who used to be programmers. "They have grown in their careers," Hergenroether said. "If! lost one of those guys, I would replace him with a us. citizen because I need someone in my house to keep control of the projects."
The same organizational changes have taken place in Barry-Wehmiller's engineering operations, and Hergenroether sees a similar trend in other companies as well. "I won't say jobs don't get lost," he admitted. "Obviously, they do. But when approached in a measured way, outsourcing very much enhances the performance of our company and the careers of people inside it."
Indian engineers are not only less expensive, but well educated and productive as well. "Their willingness to put in the hours and effort are just phenomenal," Hergenroether said.
Jim Webb, BWIR's vice president of professional services, said of India's engineers, "They start preparing when they are seven to 10 years old. They'll get up at 4 a.m. to study, and study after school." Even then, India's top schools turn away hundreds of applicants for each student they accept.
Although the engineers live in low-wage India, Barry Wehmiller's managers work in St. Louis. To US. firms, working with engineers on the other side of the world feels like working with any other vendor. It just costs less. Bids are typically less than half those of US. competitors. Because it can afford to put more engineers on a project, BWIR finishes jobs sooner.
It took four months for Elkay to define its 3-D models, according to the company's engineering services administrator, Roger Lukes. "We needed to make sure we could capture all the data we needed to design and manufacture parts," he said. "Then a project manager came over from India and sat in front of SolidWorks for four weeks to develop the methodology for building the models."
The consultant also learned how Elkay manufactured parts, which helped him capture the production data. Then he returned to India to lead the conversion team.
The CAD conversion made Elkay more competitive. "We can do more designs and send CAD models to coworkers and customers so they can visualize a part," Lukes said. "Being able to instantly communicate back and forth is a tremendous savings for us."
In fact, Lukes is so pleased, he is now planning to build a 3-D CAD library of production tools to expedite tool construction and replacement.
In many ways, Elkay's case highlights the forces behind the new shift to offshore engineering. While multinationals have shuffled work among remote engineering centers for decades, small and medium-size companies are just starting to tap foreign engineering talent.
Advances in communications and software make it possible. The public Internet and new transoceanic fiber optic cables make it possible to send large data files to India, China, or Eastern Europe as easily as to the factory across the street. Equally important, today's CAD software is designed to manage collaboration among engineering teams.
This makes it possible for firms to look offshore when faced with cost pressures at home. Elkay, for example, needed to slash the cost of moving to 3-D CAD. BarryWehmiller wanted to cut the cost of customizing packaging lines. Other companies hope to speed new products to market. Still others have set up engineering centers to support offshore customers.
Like Elkay, nearly every company that sends work offshore starts with simple projects, such as digitizing paper drawings or converting CAD files. Senthil Kumar, who heads BWIR's engineering division out of St. Louis, estimates that such repetitive projects account for 90 percent of all offshore engineering work.
"We're moving to a 3-D world," he explained. "Companies that have been in business for 60 or 70 years have hundreds of thousands of 2-D legacy drawings of parts, machines, and tools. They simply can't afford to convert them to 3-D. That may be one of the reasons for slow acceptance of 3-D CAD.
According to Monica Schnitger, vice president at market researcher Daratech Inc., there are only 500,000 3-D CAD desktops compared with 5 million 2-D CAD desktops. Only about 1 percent to 2 percent of 2-D desktops convert to 3-D CAD each year.
Repetitive, low-level engineering work rarely justifies hiring new engineers. Offshore engineers give US. companies an alternative.
R.V. Rao, president of Acro Services Corp.'s offshore unit, agrees. Founded as a US. engineering services firm in 1982, Acro established Acro Global Engineering Alternatives in India to support U.S. customers who have moved factories and engineering centers overseas.
Early on, the unit did mostly CAD-related work. "Today, we are being asked to help with more complex tasks, such as creation of new parts drawings, finite element analysis, crash simulations, structural analysis, and plant layouts," Rao said.
"U.S.-based companies with no offshore presence tend to keep the offshore tasks simple," he said. "Companies with offshore engineering centers tend to want more complex services because they have their own local employees managing the projects and are thus willing to take risks."
Aside from cost, Rao sees reduced time-to-market as a key driver in the push offshore. By sending work to India, companies can establish a 24/7 engineering schedule. US. teams may make changes based on customer feedback and hand off the work to India at the end of the day. While the Americans are sleeping, Indian engineers analyze the designs and build CAD models. When it's morning back in the States, U.S. engineers return to the revised files.
The Learning Curve
One advantage of outsourcing model-related work overseas is that it requires relatively little product or process knowledge. More complex tasks, however, involve knowledge transfer. Engineers need to know about manufacturing methods, operating conditions, and other factors that influence product design and performance.
According to David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., offshore engineers and technical workers are very sound on theory, but often lack direct industry experience. "Programmers don't necessarily understand the difference between writing software for a factory and a hospital," he said.
Mechanical engineers may understand such differences, but miss the subtle factors that spell success. Take the equipment used to make corrugated paperboard, for example. According to Kumar, "A mechanical engineer can look at these machines and try to reproduce them, but these machines are dealing with wet paper loaded with chemicals. The engineer needs to understand how the paper and chemicals interact with the machinery in order to design a new machine or retrofit an old one."
Cultural issues often compound gaps in firsthand knowledge. One reason India has become such a popular location for engineering centers is that English is the nation's language in business and politics. Every educated Indian speaks it. Even then, cultural differences crop up.
According to Hergenroether, BWIR's Indian engineers can promise too much. "They'll work 20 hours a day," he said, "and when they miss a deadline, they'll say that they worked very hard."
Experienced companies have worked through such issues. Still, the best way to bridge cultural and knowledge gaps is to bring foreign engineers to the United States to work directly with customers. "We found it important to bring a person over here so he can understand the product and its background," Kumar said. "When he goes back, he can train others to carry on the work."
Thousands of foreign professionals have entered the United States under H-1B and L-1 temporary visas, according to Ronil Hira, an assistant professor of public policy at the Rochester Institute of Technology and vice president of career activities for the Institute of Electrical and Electronics Engineers. The trend is most apparent in information technology, where foreign workers on visas have replaced more expensive domestic employees.
Mechanical engineering has not yet followed IT's shift to overseas contractors. "I can't quite reconcile how so much manufacturing has moved offshore, and yet salaries and unemployment appear at their historical norms," Hira said. "My reading is that companies want to locate R&D program development closer to production. Yet offshore production facilities have not attracted higher-level engineering."
That was undoubtedly true when offshore plants in developing nations did simple assembly. Today's offshore factories are far more sophisticated. "As manufacturing and engineering grow more complex and move up the value chain, the pull toward local engineering gets stronger," said Thomas Palley, a senior economist at the U.S.-China Economic Security Commission.
John Cahoon, director of global engineering at General Motors Corp., would agree. His company sold nearly half a million cars in China during 2004. Over the past four years, GM's Chinese engineering staff has grown to nearly 1,000 employees. "We need a technical footprint in place to support our customers," Cahoon said. "We need people who understand what our customers want, how to build it, and how to work with local suppliers."
Cahoon points to the Royaum, a redesigned Buick Regal, as an example of engineering feedback. "We sell it to Chinese business executives and government officials," he said. "They all have drivers, so rear seat accommodations are very important. So our engineering team designed a front foldback seat so the rider could extend his legs into the front section."
GM's engineering center did not simply jump into product redesign. It too started with CAD conversions and FEA analysis. "They don't need a lot of automotive experience to do that, and they can use the work to learn how to apply GM engineering standards," Cahoon said. "Then they can n10ve on to more advanced developn1ent work."
He noted that GM's Mexican engineering center had 10 years' experience before it undertook its first complete vehicle development program. "We're taking the same approach in China," Cahoon said.
IT TODAY, ME TOMORROW Visa programs that allowed Indian information technology professionals to come to the United States and replace U.S. workers jumped into the headlines last year. Is this trend the future of mechanical engineering?
Like mechanical engineers, IT professionals need firsthand knowledge of customer needs, said Ronil Hira of the Rochester Institute of Technology. "The visa programs allow Indian outsourcing companies to bring in foreigners to deliver the high-level customer interactions," Hira said. "These folks also know the culture and interaction back home. They don't hire Americans."
Hira estimates that there are 900,000 foreign professiona ls working in the United States under temporary visas. Many are employed in information technology. A single Indian firm, Tata Consultancy Services, employs more than 5,000 foreign consultants in the U.S. Often, they directly replace domestic workers.
Cost is the driver. Hira points to a $15 million State of Indiana IT contract with Tata that called for 65 guest workers as programmers earning an average of $36,000 per year. This is far less than the starting salary of a newly graduated computer science major.
Indiana canceled the contract because of political pressure. Yet lower costs remain a powerful inducement to private companies. Electronic Data Services, for example, plans to eliminate 20,000 U.S. and European jobs and add 20,000 workers in low-wage nations. Other large IT companies have similar initiatives.
"We're already seeing wage pressure," Hira said. "We've expanded the supply, but not the demand. When IEEE did its annual salary survey, we found electrical engineering salaries were down a few thousand dollars for the first time since the survey started in 1972. Unemployment is at record levels for electrical and software engineers."
According to the IEEE, the In stitute of Electrical and Electronics Engineers, even when unemployment rose as high as 9.5 percent during the 1980s, it never exceeded 2 percent for electrical and electronics engineers. Yet between 2000 and 2004, employment fell 24 percent for programmers, 23 percent for electrical and electronics engineers, and 16 percent for computer scientists and analysts. The number of IT systems managers rose 48 percent, since someone needs to manage foreign workers.
Hira believes that outsourcing jobs is displacing some higher-paid domestic professionals. He is blunt about what the future holds.
"Back in the 1980s, when the Japanese were battering us with automobiles and se miconductors, companies asked Washington for protection," Hira said. "Those firms are not going to D. C. anymore. They're adapting an offshore model. An Intel is saying, 'I can hire an engineer offshore for one-fifth the price, so why not do it?' This is creating competition between U.S. and overseas workers and driving down wages."
Many of GM's vendors have followed the automaker to China, a pattern replicated throughout U.S. industry. China's economy has been growing 9 percent annually for 15 years and now has a thriving middle class larger than the total population of Germany. Unlike Japan, China welcomes foreign investment. According to Palley, 55 percent of Chinese exports are made by multinational companies.
TRW Automotive Holdings Corp. is one of many companies that followed its customers into China. In addition to auto parts factories, it also built an engineering center in Shanghai. "This engineering work would have been conducted in the United States and Europe in the past," said the facility's engineering director, Kevin Elgood.
"We're putting the human resources where the opportunity exists," Elgood said. "Having engineers in China gives us a competitive advantage in accuracy of communications and reduced lead times, and it's less expensive than pushing work to America or Europe."
TRW's Shanghai center does application engineering, adapting TRW products to local needs. According to Elgood, "They'll compile vehicle and system level specifications, size systems and subsystems, and conduct studies to modify TRW components."
Establishing technology centers in developing nations exposes companies to certain risks, such as intellectual property theft. China, in particular, is well known for knockoffs of everything from designer clothing to consumer electronics.
The highest risk, though, is staff turnover. That is especially true in Shanghai, where workers jump companies for even small pay increases. When they leave, what they've learned goes with them.
Elgood understands. After all, he staffed TRW's technology center by raiding competitors. Yet even though TRW pays no more than market wages, only one engineer has left during the past 18 months.
"The reason is that we make a commitment to our engineers," Elgood explained. "We give them a career plan that they can buy into. Their training lasts several years. They have access to our technologies and expert support. Because we're an integrated technical center, they can grow their career by getting involved in different aspects of vehicle engineering."
The experiences of TRW, GM, Elkay, and Barry-Wehmiller are snapshots of changes sweeping the engineering world. Although little statistical data exists on outsourced professional services, it is clear that many companies are outsourcing work to low-wage companies to reduce engineering costs.
Access to offshore services makes many companies more competitive. Barry-Wehmiller used its Indian center to cut the cost of customizing packaging machines. Elkay used the same engineers to build a library of 3-D CAD models that let it design products faster and cheaper.
Yet Barry-We hmiller's Hergenroether admits that he has reduced his staff, retaining managers while letting engineers go. As Elkay and thousands of other companies build relationships with offshore engineering centers, will they eventually restructure, too?
GM and TRW's push into China involves setting up offshore technical centers. Their local presence is a competitive advantage. In some ways, these multinational companies are following a pattern set when they opened their first technical centers in postwar Europe. Their new facilities have sinlply followed the migration of manufacturing to China. They may serve local markets today, but other companies are already exporting products designed and manufactured in China back to the United States.
So far, companies have kept critical technologies at home. At the Center for Automotive Research, David Cole noted, "Conceptual design is a core activity with a high intellectual content. You don't want to move it to other parts of world or you'll be training your potentially worst competitor."
Yet business has a dynamic of its own. The auto industry is already adapting a new business model that involves collaborating in real time across nontraditional boundaries, Cole said.
As offshore engineering centers grow and thrive, they are likely to take on more complex tasks. If they can continue to excel at significantly lower cost, will multinational firms begin shifting core engineering projects offshore as well?
GM, for example, has moved to a more distributed system of engineering centers. Some, like its centers in Europe, Australia, and Mexico, are now designing vehicies from scratch.
Cahoon expects to see more collaboration among its global engineering centers in the future. Will this diminish the role of its U.S. engineering center?
"There will always be a large footprint of engineers in the United States, but we have fantastic centers in Germany and elsewhere," Cahoon said.
One day, China and India may rank among them.