In the history of the U.S. technology industry, 2004 will be remembered as the year that outsourcing hit home. Consultancy Gartner Group figures that U.S. tech companies will send 500,000 jobs overseas this year -- and indeed, hardly a week goes by without a major U.S. tech outfit announcing a new R&D center in Asia. As outsourcing has begun to hit high-salary jobs in programming and tech services, the trend is giving rise to a wider fear -- that U.S. dominance in high tech is starting to wane.
For half a century, America has reigned supreme in technology. U.S. research institutions have been the best on the planet, and the U.S. capital-formation machine has turned their discoveries into one breakthrough after another in transistors, communications gear, computers, and just about every other key high-tech field. Players such as IBM (IBM), Intel (INTC), Hewlett-Packard (HPQ), Texas Instruments (TXN), Microsoft (MSFT), and General Electric (GE) have risen from this culture to dominate world markets in their businesses.
Now, life at the top suddenly seems a lot less lonely. In fact, although the U.S. is still the undisputed champ in technology overall, in a handful of key areas it already appears to be falling significantly behind foreign competitors.
"ON THE VERGE." The Nordic countries lead the world in designing and making cell phones. Israel easily competes with the U.S. for the top spot in information-security technology. Japan is beating America in a number of crucial fields, including optical electronics, robotics, and semiconductor-making equipment. And European aircraft consortium Airbus Industrie's market share should pass Boeing's (BA) sometime this year. "We're on the verge of losing the commercial airline market," says Duane Shelton, president of the International Technology Research Institute in Baltimore. "At one point that was our largest foreign-exchange market."
Some of this competition comes courtesy of the industrial development policies of foreign governments. Unlike the U.S., such countries as China, Singapore, and Taiwan are happy to co-fund tech startups and offer them 5- or 10-year tax holidays. The government of Singapore will pay 35% of the cost of new ventures -- as much as several hundred million dollars, says Curt Carlson, the CEO of SRI International, a Menlo Park (Calif.) nonprofit research and development organization.
"With the government supplying significant funding, it's a different world," Carlson adds. "They're doing it to bring high-value innovation into the country. [The U.S. isn't] as aggressive about that kind of co-funding. We should make it easier for small companies on a lot of fronts, including that one."
TOO TIGHT A FOCUS? Washington's priorities may be another factor making it hard for the U.S. to stay on top. Under the Bush Administration, federal spending for science and technology research and development have soared, rising to their highest level in 37 years as a percentage of domestic discretionary spending. But Shelton points out that the U.S. is falling behind other countries in per capita spending on R&D.
And in any case, the Defense Dept. has been the primary beneficiary of U.S. budget increases, and it has spent most of its funds on weapons development, not research, according to the American Association for the Advancement of Science (AAAS). Outside of Defense, research funding has largely been concentrated on the life sciences and info-tech research.
While those are worthy fields, such a tight focus has left out key disciplines such as chemistry, materials science, and physics, which may play a vital role in future economic and technology growth. Materials-science breakthroughs helped spur the development of the semiconductor and the computer revolution that followed. "It's true that we're spending more money than ever on research," says Kai Koizumi, director of the AAAS's R&D Budget Policy Program. "But for most disciplines, the picture isn't rosy."
LONG-TERM INVESTMENTS. Adds Craig Mundie, chief technology officer (CTO) of Microsoft (MSFT): "To some extent the country has significantly diminished its investment in fundamental, long-term research. I think this is producing a long-term weakening in the [scientific base] of the U.S."
It certainly can damage the chances of making discoveries by serendipity. Teflon, Velcro, nylon, X-rays, and penicillin are just a few examples of products that arose from lab accidents. "We have to remind ourselves that support of basic research that's curiosity-driven is an extremely good investment in the long run," says David Goodstein, a well-known physicist and vice-provost at California Institute of Technology. "It consistently pays off in unexpected technologies and discoveries."
The Bush Administration argues that worries over U.S. competitiveness in technology are overblown. John Marburger, director of the White House Office of Science & Technology Policy and a respected physicist and research administrator, says lots of security-related R&D spending is going to projects with dual-use potential -- that is, for civilian and military applications. Marburger also points out that on a historical basis, government spending on science R&D is comparatively high, at nearly 14% of total domestic discretionary spending.
"I think a close look at how the money is being spent will reassure people who feel that research has been deflected into defense," he says. "There's a lot of money out there to compete for."
LESS ALLURING OVER HERE. Even if he's right, though, trends are showing up in science education that could hurt the U.S. over time. According to the National Science Foundation, American universities awarded 220,000 bachelors degrees in science and technology in 1999, vs. 322,000 in China and 251,000 in India. As recently as a two decades ago, China and India were handing out only a fraction of that number of degrees.
Experts now say their lead will widen as the share of Asian students who go to college rises over next two decades from the current 4.6% to closer to the U.S. figure of 32%. "There's a risk that a couple of decades from now the numbers won't add up in terms of the basic skill sets our education system produces," worries Greg Papadopoulos, CTO of hardware and software maker Sun Microsystems (SUNW).
For the first time in recent memory, foreign graduate students are accounting for smaller numbers of science degrees from U.S. universities. Traditionally, this group has received 30% to 50% of doctoral candidates in hard sciences such as chemistry, physics, and computer sciences. But a February survey by the Association of International Educators found that 47% of some 250 U.S. universities reported a decline in foreign grad student applications for the academic year starting in the fall of 2004. Among the respondents were 19 of the top 25 research institutions in terms of foreign student participation.
SPENDING STALL. The AIE survey attributed most of the decline to more stringent visa policies still in effect, thanks to homeland-security concerns. But another reason may be improvements in universities in India, China, and other countries. Shelton says Asian countries are furiously upgrading their schools in an attempt to stop a brain-drain to the West. So now more than ever, top Asian students feel they can stay home and still get a first-rate education.
"You go to Taiwan and these guys are building strong universities," says Henry Kelly, president of the Federation of American Scientists. "You have dozens of countries with information-technology education systems now."
While other nations are ramping up their spending on education, the U.S. isn't. Since the 1990s, increases in state and federal funding for public universities has significantly lagged behind inflation, and tuition at these institutions has soared. According to a 2002 study by Washington (D.C.) think tank Brookings Institution, state appropriations for higher education fell from 7.3% of total spending in 1977 to 5.3% in 2000. The result? State universities, key players in the research universe, are struggling to make ends meet.
RECORD TRADE GAP. That may help explain what appears to be a relative decline in U.S. research. According to Thomson ISI, which tracks information on global R&D, in 1999 European Union scientists surpassed those in the U.S. in terms of the total number of papers published in leading scientific journals such as Nature and Science.
Just as sobering, key statistics seem to point to America's growing inability to dominate markets for tech equipment. In 1992, the U.S. exported about $35 billion more in high-tech equipment and goods than it imported. By 2002, according to the American Electronics Assn, the U.S. racked up a record trade deficit of $54 billion in tech goods. That coincided with a 10% drop in U.S. tech employment from 2000 to 2002.
The increasing competition the U.S. faces is to an extent a natural outgrowth of the global information economy, better communications networks, and evolutionary forces. "It's a natural consequence," says SRI's Carlson. "The U.S. has only about 8% of the world's scientists. It's inevitable that centers of excellence will spring up elsewhere."
STILL TOPS. Even so, the U.S. still has the lead in the technology business, plus many advantages when it comes to trying to keep it. America's universities continue to attract the best and the brightest students without breaking much of a sweat. Go to China, Europe, or India and the talk isn't of global dominance but of stopping the exodus that has sent top innovators to the U.S., where they generally stayed. "We're still the world's leader by any measure," says CalTech's Goodstein.
Experts even see evidence of America's strength in the telecom, software, and other high-tech gear sold by Chinese networking company Huawei and the mobile phones sold by Nokia (NOK). "If you look at those examples, the technologies are built atop an architecture from the U.S.," says Sun's Papadopoulos.
He expects U.S. researchers to now focus on broader issues of technology architecture that will add greater value than merely designing a faster chip or a better material. "I see no indications that China or India or anyone else is going to drive the next wave of conceptual thinking," he says. "So unless we fail to invest properly in education or to exploit the culture we have, I don't see a threat to our ability to shape what the global technology ecosystem will look like."
WORLDWIDE RACE. Presumed threats to the U.S. economy in the past -- most notably, the Japanese challenge in the 1980s -- have yet to deliver on the doomsday scenarios that were painted at those times.
Yet never before have so many countries in the world sought to emulate the U.S. system of innovation. As more brilliant researchers steer clear of the U.S. and more and startups appear in emerging economies, a worldwide technology race is taking shape. And it promises to be a marathon. By Alex Salkever, Technology editor for BusinessWeek Online