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Is the U.S. losing its research edge?
By Kevin Fitchard

Jun 15, 2008 12:46 PM

Slashed engineering staffs coupled with the realities of the outsourced era have slowed the pace of innovation in the U.S.

The U.S. is facing a crisis in innovation. After a century of being the world’s telecom think tank, U.S. companies are seeing their R&D budgets shrink while applied research moves overseas, following lower salaries and pro-research government policies. If something doesn’t change soon, according to industry policy-makers and researchers, the U.S. risks becoming a follower in the global race toward telecom innovation, and the overall pace of technological discovery will slow.

Investment in R&D in the U.S. is on the decline, said Grant Seiffert, president of the Telecommunications Industry Association. Competition among the major technology vendors has forced them to scale back their research budgets and focus more on near-term development. Long-term research projects are exactly what the name implies, producing commercial products in eight to 10 years, if ever. Those projects naturally contain risk, and risk is something shareholders in a highly competitive technology market don’t want to incur.

“Wall Street does not reward you for investing in basic research,” Seiffert said. “You’re rewarded for changing the color of your phone every 10 months, but what you’re doing 10 years out isn’t.”

The effects of that shift from research to commercial development can be seen today, Sieffert said. After the telecom bubble burst in 2001, vendors started laying off engineers and basic researchers, canceling promising research projects and shifting funds to work with more commercial potential. The telecom industry in the new millennium has been innovating at a phenomenal pace: extending wireless service to the masses; bringing first broadband and now fiber to the home; feeding the rapid growth of the Internet. But those innovations had their roots in basic research done before the bubble burst. The research that would produce the technology of the next decade would’ve had to have begun after the bubble popped. While research certainly didn’t cease, it was significantly reduced.

“Where are the new innovations?” Sieffert said. “We’re starting to ask that now. If we don’t address this issue soon, we’ll be asking it much more.”

The companies that slashed their research budgets in the early years of the decade have recovered somewhat. Their location, however, has changed. Instead of hiring engineers and scientists at the traditional research campuses in Silicon Valley and New Jersey, the new research centers are more often than not in Bangalore and Chennai. Jesús León, senior vice president of corporate development for Ciena, said the company is now close to the research staffing levels it had in 2000 after years of gradual reinvestment in R&D, but about 40% of his research staff is now in India. As with all overseas outsourcing, the operational and salary costs are much lower in Asia, and the expertise coming out of India’s universities and the government support for technological development make the country a prime spot to conduct basic research for fewer dollars. But there are trade-offs, León said.

Even with the same amount of technical staff as in 2000, the efficiency level of Ciena’s basic and applied research is only about 75% of its capabilities eight years ago, León said. Cultural differences, language barriers, time differences, as well as the lack of familiarity with Ciena’s basic research model and the problems it tackles — all contribute to a less-productive research engine than if Ciena’s R&D were concentrated in a single location back in the U.S., León said. As the India labs mature and become more closely integrated with Ciena’s U.S. operations, those numbers will improve, but León isn’t fooling himself into thinking that the productivity of 2000 can ever be entirely replicated. The best he hopes for is 80% to 90% of that former level, unless Ciena chooses to increase staffing levels over those of the telecom boom days.

“If I want to call one of my researchers in India with a quick question, I can’t just dial him up at 2 o’clock in the afternoon. I have to wait until 8 p.m.,” León said. “The best R&D group is one where everyone is co-located in the same building on the same floor. That’s why start-ups are so efficient.”

Ironically, Ciena is one of the companies that developed the technology that made research outsourcing possible. DWDM allowed operators to offer gobs of capacity on the cheap, which in turn permitted the scientific collaboration between points halfway across the globe. What’s even more ironic is if the bust hadn’t happened and research into fiber transmission technologies hadn’t slowed, the U.S. probably would have developed the technologies that enable research off-shoring even more quickly. León said it’s difficult to point to specific advances that were delayed during the lean years, but he is certain that advances in capacity did suffer.

“The cost-per-bit of transmission would have dropped even faster,” León said. “Today we’re starting to see 40 Gb/s connections, but we would have seen them four or five years ago if there were no interruption in research.”

Efficiency isn’t the only thing lost by moving research overseas. As more communications technology development is done in other countries, the more they benefit to the detriment of the U.S. In a global economy with global vendors, any advance is spread to other countries as equipment-makers try to maximize sales and profits, but there is something to be gained from developing technology on home soil. Research done at home boosts the scientific resources and quality of education available as the brightest minds flock to where the problems are. The country that hosts the initial R&D more often than not hosts the trials and commercial launches of a new product. Innovation spawns more innovation. As a country’s reputation and infrastructure grow, scientific research and its attendant benefits gravitate there.

“It’s very natural that the country that innovates and develops a technology is its first beneficiary,” said Rod Alferness, chief scientist of Alcatel-Lucent’s Bell Labs. “It’s critical that the U.S. help foster that environment for research.”

China and India have both helped to foster that environment in their own countries, though both have gone about it in different ways. India has become the land of outsourcing by virtue of low labor costs, high proficiency in English and government support of the new high-tech economy that welcomes outside companies. Few major communications equipment manufacturers don’t have some form of R&D operation in India. China, on the other hand, has opened its doors to outside companies, but mainly as a source of a labor. There’s still plenty of research being done in China, but it’s primarily being done by China’s homegrown vendors — newly arrived but ultra-competitive companies such as Huawei and ZTE.

George Sun, CEO of ZTE’s American operations, said the government of China in fact doesn’t encourage research and innovation as much as the world thinks. High rates of taxation on basic research tend to reward manufacturing and punish innovation itself, a mind-set China will need to address as it moves from a production-driven to a technology-driven economy, Sun said. Still, the low salaries and high education of Chinese engineers allow ZTE and other Chinese vendors to maintain a significant advantage over their western competitors — about one-third of ZTE’s staff are engineers devoted to R&D.

“Even though we pay them top salaries in China, it is still one-fourth or one-fifth what they would get paid here,” Sun said. “Still more and more engineers are starting to be located outside of China.”

As ZTE becomes a more global company, it has to resemble its global competition, moving R&D elements to the countries where the resulting innovations eventually will be sold, Sun said. Those employees, however, are focused on the development of the overall architectures of the platforms that will be sold overseas. The core research — and ZTE’s fundamental cost advantage — stays in China.

Countries with cheap labor costs aren’t the only ones boosting their communications innovation profiles. Munir Cochinwala, chief scientist for Telcordia, said Europe, while certainly not home to budget salaries, has managed to promote such an environment through the European Commission Framework Programme for Research and Technological Development. The framework has distributed billions of research dollars for broad-based research projects, for which Telcordia and other U.S. telecommunications companies are competing more and more.

Cochinwala said that research dollars are available in the U.S. from the National Science Foundation and the Defense Advanced Research Projects Agency, but the available grants tend to be for narrow projects with very specific goals. The European framework outlines broad projects, which allow companies much more latitude to innovate.

“Other countries are spending a lot more,” Cochinwala said. “It’s not that there is no money for research in the U.S. — there are dollars. It’s that Europe is catching, and maybe they’re even exceeding the U.S. in spending.”

The U.S. is still far from a backwater when it comes to communications, but it is definitely at risk of losing its stature unless more is done to promote homegrown R&D, TIA’s Seiffert said. Forfeiting the technological lead will have only dire effects on U.S. competitiveness in the global marketplace, he added. The government already has a vested interest in communications. Washington routinely speaks of bridging the digital divide and keeping high-tech jobs at home, but it needs to back up that political rhetoric with actual policy that will foster such innovation and investment, Seiffert said.

Many of the pieces are already in place. Last August, President George W. Bush signed the America Competes Act, intended to keep the U.S. competitive in science — Congress still needs to appropriate funds for the act, however. The TIA also backs the Research and Development Tax Break, which allows companies to deduct R&D expenses from their federal taxes. Although the tax break is in place today, it must be renewed by Congress every two years and has been allowed to expire in the past. While such a tax measure would usually induce companies to plow money into research, in its current state it has produced limited results due to the long-term nature of R&D planning. Vendors can’t commit to a decade-long research program if they don’t know the tax status of those projects two years out, Seiffert said.

“It needs to be made permanent for 10-plus years,” he said. “You’re forcing companies to make short-term decisions that really should be long-term decisions.”

If it sounds like TIA is asking the government for a bailout, Seiffert said, nothing could be further from the truth. TIA is asking the government to make communications a priority, much the same way it backed the space program in the 1960s or the search for alternative fuels today. It was a government project under DARPA that led to the creation of the Internet, probably the single most revolutionary communications breakthrough in our generation. The U.S., however, failed to follow through on that initial breakthrough in the broadband age, leading to dozens of countries passing the U.S. in DSL penetration.

The U.S. can regain its technological edge by once again making communications a priority, Sieffert said. It doesn’t need to subsidize individual companies, but rather subsidize larger domestic telecom initiatives through either grants or research-friendly policies.

“We’re raising the flag and saying, ‘Don’t forget about us,’” Seiffert said. “We’re trying to rally our troops so it doesn’t look like we’re turning to the government for help. But the fact is, the government is one of the few entities that can take some of the risk out of the equation.”

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