Wednesday, May 12, 2010

Surviving The Hollowing-Out of the U.S. Tech Sector

This post is another “diary” post, as opposed to a more journalistic essay. It is also a midweek post, so I'll try to keep it short. There won't be many links, as I don't have time for exhaustive research, but I'll try to include a few relevant and interesting sources.

As I have said before on this blog, I am an engineer. The type of engineering I do involves generating plans and specifications for large-scale built structures and facilities, whether they be shopping centers, airports, rail terminals, military installations, or industrial plants. I have noticed certain trends over the years, trends which recently seem to be coming to a point of crisis.

For over fifteen years, large design firms have been outsourcing various parts of construction engineering and design. It started with CAD, and has by now grown to advanced engineering up through detailed design. The countries of choice for outsourcing are China and India. Most U.S. based major design firms now have design centers in India. (I won't name names here. I still have to live in this town.)

I know of a firm whose stock was highly valued over the last few years, and which had an impressive backlog of large clients, both military and industrial. However, the economic meltdown that began in earnest in 2008 dried up a significant portion of that backlog and of their client list. One example: someone I know was involved in designing facilities for an industrial metals mine which was operating in a region where concentrations of the metal in the ore had dropped to very low levels. In order to continue operating that mine, the operators needed a stable and relatively high price for their finished metal. The crash in commodity prices at the tail end of 2008 shut down the mine (and one of this engineer's projects).

This firm was typical of most of the large players – publicly traded, requiring constant dividend growth in order to promote increased share prices, and having a business growth strategy that often consisted of capturing market share by buying up smaller firms. 2008 was a year in which dividend growth and corporate growth were threatened by the global economic contraction. This company's management turned much more to outsourcing – in an attempt, I believe, to maintain profit and dividend growth. Meanwhile, several of their U.S. offices began to shrink.

Did the outsourcing strategy work as intended? That's a hard question to answer. The local office had regular meetings where employees were told that “although we're facing lean times now, the future looks bright!” And, “The company is doing well overall!” I think, however, that they may have missed at least one 2009 earnings target.

They began to rely heavily on outsourcing in order to boost profits and increase competitiveness in a shrinking market, but I think the best they have been able to do is to slow their own bleeding. One other problem they have is that because they are so large, their business model depends on securing long-term contracts with large clients. This is the only way they can profitably support their large cadre of middle and upper managers. Outsourcing was a way for them to lower their fees in order to win these clients while maintaining their revenue flows.

But the supply of large, stable clients with lots of construction capital is drying up. Or at least, that's what I suspect, based on what I've seen over the last year. This is a natural consequence of a contracting global economy, in which both private and government clients have become so heavily indebted that it is becoming clear that they can't repay their debts. This is something I knew about via the news and blogs I read (read the May 10 post from the Automatic Earth blog to see how this is playing out in Europe) – yet I hadn't experienced it as directly until my own work started drying up and the firm I worked for began to shrink. For I also worked at a typical large firm. The story I told you about one particular large firm applies to most of the major players, I suspect. And it goes to show that a person is not always confined to reading the news – sometimes he gets to live the news as well.

As I said, I worked (or more accurately, used to work) at a typical large firm. But I found myself at home twiddling my thumbs for several weeks this year, due to lack of work. By now I have become addicted to groceries and hot and cold running water, so I needed to find a way to support my habit. I discovered that while the large firms seem to be contracting in several regions of the U.S., there were small firms that were still able to find plenty of work. As I once said to a co-worker, “It's easier for a cat to survive on a diet of mice than it is for a grizzly bear.” All the elk and moose seem to be disappearing. I am now at a cat-sized (smaller) firm.

This firm's projects rarely exceed a few hundred thousand dollars. Many of them are in the $10,000 to $20,000 range. There's still a lot of work to be done for that kind of money. It's quick-turnaround, bang-it-out work – and it keeps me on my toes. Yet even this I do not expect to last, due to the ecological and resource constraints which initiated our economic contraction in the first place. I think the economy still has a lot of shrinkage left to endure.

Therefore, my eyes are still open to options. One such option is teaching. God willing, I will be teaching a quarter of a sophomore engineering class as an adjunct at a local college. This college also does research on renewable energy, so I'll have a chance to rub shoulders with some bright people who can educate me as to just what can and cannot be accomplished on a societal level with the renewable energy options currently available. I suspect that the application of renewables will involve asking hard-headed questions about what a particular energy source is actually good for, and whether certain applications need this source or whether they are better performed using more low-tech methods. In other words, I think that the next few years will force us to triage our industrial society and its living arrangements. I suspect that engineering in the U.S. will soon be mainly about designing small-scale systems appropriate for poor communities. The future, moreover, will belong to people who know how to do productive things, not to people who only know how to "manage." Those who can teach others how to do productive things will enjoy a special place in their communities.

By the way, if you want to read an article on the ethics of outsourcing U.S. construction engineering projects to other countries, check this out: “Outsourcing Affects Civil Engineers, Too.”


Terry said...

On The Oil Drum, on February 5th, you said "I have also been studying the adaptive strategies employed by citizens of the Third World."
I've been trying to find these posts, with no success.

TH in SoC said...

Terry, thanks for your readership. The posts where I wrote about adaptive strategies in the Third World are as follows: "Appropriate Technology and the Art of Being Poor", "A Safety Net of Alternative Systems - Small-Scale Manufacturing", "The Distasteful Truth", "Small Scale Manufacturing - Practical Resources," and "Small-Scale Manufacturing - The Japanese Example." I hope this helps. I am also checking out your cohousing blog.

ha1ku said...

Good luck to you, as you meet the challenge of leaner times. The teaching gig sounds like a fine opportunity!