Offshoring – or Entrepreneurship?

The oft-maligned trend of "offshoring": What is it, exactly? (See Offshoring, Dude!, More Offshoring: Africa's Opex Oasis, and Outlawing Offshoring?.) It comes in more styles than you think. And one of the emerging trends involves immigrant employees using connections in their homeland to start new companies.

It turns out that the wave of immigrant engineers, particularly to Silicon Valley, has created a talent pool with strong ties back to countries including India, China, and Taiwan. As those engineers' careers advance, it only makes sense that some would start companies, making use of the connections to their home countries.

In the case of Analogix Semiconductor Inc., an offshore base has translated into a design win with the Huawei Technologies Co. Ltd. The Chinese firm will use Analogix's 5- and 10-Gbit/s serializer-deserializers (SerDes) in the backplanes of future routers and switches to be sold through a joint venture with 3Com Corp. (Nasdaq: COMS) (see Analogix Claims SerDes Advance and 3Com Taps Huawei in Enterprise Battle).

Analogix's founders claim they landed that business by having a substantial engineering team in Beijing, giving them a strong foothold for stirring up business.

"Having a facility there, we have a relationship with the main systems vendors," says Ted Rado, Analogix vice president of marketing. That will allow us to gain sales there, which will help us with credibility here."

Of course, it's also saved costs.

"We've gotten products to production with just $10 million. I don't think you can find many semiconductor companies that can do that for less than three times that cost," Rado says. (The company's sole round of funding came late in 2002.)

Analogix does all its designing in California, but two thirds of the company's 45 employees are engineers based in China. They're doing the later stages of chip design, which involves the exact placement of circuits into the chip and verification that the whole thing works properly.

According to Rado, the two founders of the company are from China. They got their bachelors degrees in the U.S.

"It happens when founders know some people in another country. In that respect, it is more like trans-national founding team," writes Julien Nguyen, partner with Applied Materials Ventures, in an email.

Along those lines, BayPackets Inc., a voice-over-IP (VOIP) applications software vendor, keeps a 75-person development center in India along with its 50-person headquarters in Fremont, Calif. "We've actually had an India operation from the beginning," says Amol Joshi, vice president of marketing. "The two founders are from India, and they were able to tap a pretty good group of people."

Cases such as Analogix and BayPackets are happening more frequently but haven't become prevalent, Nguyen says. After all, the usual questions about offshoring still stand.

"The cost is lower, but this is offset by intellectual property and management overhead concerns for the VCs, so offshoring in the early stage is not an advantage for a startup," Nguyen writes. "If a VC invests, he will want to either move the founding team to the U.S., or make sure a U.S. team is hired to take over the main technology development (the crown jewels)."

Yet another scenario was pointed out by Tony Li, the former Chief Scientist of Procket (see Li Quits Procket), who met with Light Reading editors last week in Silicon Valley. (Note: An interview with Li will be published soon.) "Procket had a very small, opportunistic outsourcing program," said Li, when asked about the offshoring trend at his former company. "We had a couple of engineers that wanted to move back to India, but they also wanted to keep their jobs, so it was more of just a relocation."

The bottom line? Jobs will continue to move around. But in some cases, it's just folks going back home .

— Craig Matsumoto, Senior Editor, Light Reading
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desikar 12/5/2012 | 2:07:11 AM
re: Offshoring – or Entrepreneurship? Probably combines the best of both worlds for the folks headed to their home country, while resolving many of the concerns for the company they have been working with. Of course, provided these folks had a good track record without which this wouldn't be attempted, anyway.

Definitely an interesting angle to the movement of talent here, Craig.

myresearch 12/5/2012 | 2:07:09 AM
re: Offshoring – or Entrepreneurship? This type of setup (headquarters in the US with marketing/sales and core architecture/design team, and rest of the development team offshore) has been around for many years.

If you look at Isreal-related startups, almost all of them operate in such modes (and there are more than 100 exists today, probably more than other startups in such setup).

It is a capitalist world, and money flows to where it is most efficient. In this fast moving world, things just dont stay the same for too long ...

stephenpcooke 12/5/2012 | 2:07:03 AM
re: Offshoring – or Entrepreneurship? Craig,

I have been a consultant and an ex-pat in Europe with a home-base in North America. The business model that you have shown is a good one but what about US companies trying to open the European market? Most component companies produce items that can be used in global markets and all that is required for applicability in North America or Europe is a software switch and some different terminology on the UI.

I have seen many US companies fail when they have tried to open European markets when their product had no obvious showstopping deficiencies. What the US companies tried to do was hire a senior VP in the country of interest and build from there. This seems like a good idea, carries minimum exposure to the established management base at home and provides for a reasonable understanding of local business practices: except for one thing. To the Europeans it smacks of Americans throwing money across the pond without any respect. For success in Europe, a very class-oriented society, you have to have VPs talk to VPs, Directors talk to Directors, etc. and they cannot be puppets that were hired and given a title.

For an American company to succeed in Europe you have to physically re-locate a senior VP over there and hire a few good directors to give you the local business acumen. If senior executives (defined in these terms as ones that have clout in the head office) are not within a very close timezone difference with the customer, you are perceived to be giving them a lack of respect.

While at Nortel many years ago I happened to be on a plane seated next to George Smyth (one of Nortel's presidents at the time). He told me of how Nortel failed while trying to penetrate the Swiss telecom market. They had hired a gentleman with impeccable credentials and knowledge with a lot of drive to get the job done. Unfortunately the executives at Nortel didn't realize that, in Switzerland everyone is a member of the armed forces by law. This permiates the business world as well because, given the class-consciousness of Europe, only colonels or higher could get in to talk to generals, etc. The guy they had hired, though highly qualified, was only a captain. Hence he was left sitting in the waiting room while the colonels from the competition were shown right in.

The point is the model you have shown can work for a new company founded in the country of interest, but may not work as well for the expansion of one company into another country.
startup_shutup 12/5/2012 | 2:07:01 AM
re: Offshoring – or Entrepreneurship? The Capitalist Firm in the 21st Century:
Emerging Patterns

Indy_lite 12/5/2012 | 2:06:57 AM
re: Offshoring – or Entrepreneurship? hasnt intel relocated many senior staffers to india...sometimes giving them 1 yr US salary to sweeten the move...

It is quite a differnt story for INTEL to move engineers overseas than for expatriates to set up business back in their home country.

In INTEL's case, it is just Intel's way of exploiting more for its own benefit, think about this, the relocated engineers would finish the same amount of work, yet they get paid less. For the engineers, they'd be happy because they can live in their home country, and earn more than their countryman(even after Intel's "pay cut"). The key here is that Intel is in control.

Going home setting up business, while it is the same in the aspect of creating new jobs, is different in that they are in control.
brahmos 12/5/2012 | 2:06:57 AM
re: Offshoring – or Entrepreneurship? hasnt intel relocated many senior staffers to india...sometimes giving them 1 yr US salary to sweeten the move...
stephenpcooke 12/5/2012 | 2:06:54 AM
re: Offshoring – or Entrepreneurship? Great analysis Indy_lite!!!

The extra thing to consider here is the perception of the Indian customers towards Intel because of this approach. They may feel that they have little or no choice in the processor market so they accept it. Do you think that the same would work in the telecom space? Do you know of any that have tried it or more importantly, any that could try this with a decent chance of success?
kamalpr 12/5/2012 | 2:06:53 AM
re: Offshoring – or Entrepreneurship? Stephen,

Indian customes are cost conscious, but seldom biased in favour of products made by a company based in any one country. Lots of american companies are selling products in India -and there are no expectations that they should hire a significant no. of Indians to do so. Its not even necessary to have an Indian sales staff.
I know lucent is a seller of CDMA2000 equipment to reliance Infocomm -and that will likely be a winner [over EU based GSM technology implementors].

stephenpcooke 12/5/2012 | 2:06:52 AM
re: Offshoring – or Entrepreneurship? Kamal,

One thing I heard regarding Reliance was that they were requiring all network acceptance testing to be done in India. Do you know if this is true? I also heard of a few American contractors who went over to help with the big wireless installation for Reliance who can no longer afford to relocate back to the US (probably due to the lack of a guaranteed job in the US more than low pay in India).
truelight 12/5/2012 | 2:06:39 AM
re: Offshoring – or Entrepreneurship? Well that may be true but consider the following if they did nto join INTEL in the first palce they would be no better off than the millions of other scratchign a living. Now that they have learnt a technology trade from the west they are employed back in thier homeland yes on lower wages but that is normal.

Why pay the Chinese/Indians living in China/India US wages that would make him too wealthy and increase his standed of living better than his peers and his ability.

Pay lower wages offshore that's the reason you go there in the first place -same IQ points and education.

None of the Indians would be able to start companies unless they where employed by the Western companies in the first place - its fair price to pay.

The more that go back the better everyone will be.

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