Dream of Striking It Rich Fading in Silicon Valley : Technology: Severe business restructuring and recession alter face--and attitude--of electronics Mecca.
When Apple Computer announced in June that it would cut its work force by 10%, any lingering hopes that Silicon Valley would slide through the recession unscathed quickly evaporated.
Since then, layoffs have continued to sweep across the heartland of high-tech as companies struggle to cope with the double-whammy of a national economic slump and jolting structural changes in the computer business.
The visible consequences of the downturn are familiar: crowded unemployment offices, a depressed real estate market, an increase in bankruptcies, a tightening of credit and a slowdown in retail sales. These problems are increasingly being felt throughout the Bay Area, which relies on Silicon Valley for much of its economic dynamism.
Beneath the surface, economists and industry executives point to a deeper change that has been gathering force in America’s technology Mecca. The nature of the electronics business has changed so dramatically, they say, that the basic character and culture of Silicon Valley is being altered, perhaps permanently. The entrepreneurial ethos that once set it apart--the idea that with luck and hard work, anybody can take the high-tech road to riches--may be slipping away.
“Back in the early 1980s, I thought, ‘I’m going to move to Silicon Valley and make a fortune--I was thinking millions,’ ” said Ed Larsen, who left a job with Motorola and moved to San Jose in 1984.
As vice president of human resources at a then up-and-coming computer chip company called VLSI Technology, he saw the same fire in the eyes of his recruits. Workaholics were the norm; the chance of being in on the ground floor of the next Apple or Intel was worth any sacrifice.
Today, the big electronics companies are not growing very fast and many mid-size firms are faltering; their cadres of middle managers have few prospects for dramatic advancement.
Meanwhile, the increasing cost and complexity of electronics products and intense competition in all segments of the business have made building a successful start-up company far more difficult.
It is now clear to all but the most blindly ambitious that the vision of entrepreneurial riches is mostly myth. Larsen is among those who looked at the long odds and opted for a quieter life for himself and his family. He now works as a human resources consultant--in Kentucky. “People are looking for more of a balance,” he said.
No one believes that Silicon Valley is withering away as a center of innovation. Indeed, it is likely to remain a premier technology hub and a powerful economic driver for the state and nation. But many in the high-tech community agree that when it emerges from the recession, Silicon Valley probably will look more like any other vibrant industrial region rather than an awe-inspiring symbol of capitalist success.
“Twenty years ago, you could start a company in your garage, but the rules of the game are a lot different now,” said Tom Mandel, a trend watcher at the Menlo Park research firm SRI International. “It’s happening gradually, but a lot of big companies are maturing, a lot more people are stuck in middle management, the people at the front edge of the baby boom are getting older--the whole thing is slowing down.”
In conventional economic terms, that slowdown is making itself felt in waves of job cutbacks. Such electronics titans as Apple, National Semiconductor and Seagate Technology have announced large layoffs in recent months, while International Business Machines, which has major operations in San Jose, and Hewlett-Packard are reducing their work forces through early retirement programs and attrition.
The July unemployment rate in Santa Clara County stood at 6.2%, well below the statewide average of 7.6% but well above the 5.5% registered as recently as April and nearly double last year’s low of 3.4%. Phil Kohlenberg, a state labor market analyst who tracks employment trends in the county, expects the rate to continue rising.
“I see no sign that the layoffs are going to stop,” Kohlenberg said. “None of the industries are in very good shape right now.”
“It’s basically duck and cover,” said Steve Tedesco, president of the San Jose Chamber of Commerce. “(President Bush) says we’re in a recovery, but I don’t think Silicon Valley agrees with the President.”
At the heart of the problem are the radical changes under way in the computer industry. The stunning success of the personal computer and the rise of an industry-standard software system called Unix has sharply cut sales of traditional minicomputer and mainframe systems, leading to devastating sales and profit plunges at IBM, Digital Equipment, Unisys and other companies. Although these old-line computer firms are headquartered on the East Coast, most have substantial operations in California and rely on Silicon Valley producers for components such as chips and disk drives.
At the same time, the PC business--which carried Silicon Valley through the 1981-82 recession--has become a mass-market commodity industry characterized by fierce price wars and thin profit margins. That trend has hurt Apple, virtually destroyed the pioneering computer retailers Businessland and Computerland, and has put pressure on component suppliers.
Meanwhile, Japanese competition has continued to take its toll on the computer chip business, which gave Silicon Valley its name and remains the largest segment of the local electronics business.
While Intel Corp. prospers on the strength of its near-monopoly on personal computer microprocessors, all the other big Silicon Valley chip firms--including National Semiconductor, Advanced Micro Devices, LSI Logic and VLSI Technology--are struggling.
Some are optimistic that a group of small companies that specialize in chip design and subcontracts the manufacturing to the Far East can help take up the slack, but others view the emergence of these types of firms as indicators of the weakness of the U. S. industry.
A variety of other factors are also undermining the local economy. Defense cutbacks have hurt, although the effects have been less severe than in Southern California. More significant, the byproducts of success so familiar to Los Angelenos--traffic congestion, pollution, water shortages and high housing prices--have led growing companies such as Intel and Sun Microsystems to look elsewhere when they expand.
“The valley has always been the leader of the Bay Area economy, but now it’s fallen back,” said Raymond Brady, research director for the Assn. of Bay Area Governments. Contra Costa and Alameda counties, east of San Francisco Bay, are experiencing stronger job growth than Santa Clara County, he said.
Local business leaders are grumbling that city and county officials are going to have to do more to keep companies from leaving high-cost Silicon Valley.
Silicon Valley is almost sure to make a comeback. The area is still home to a remarkable concentration of talented engineers, and it retains the infrastructure of leading universities, venture capital firms and specialized support professionals such as lawyers and accountants that have been important to its success.
“There’s still an enormous amount of potential in the technologies that are out there, and as long as there is capital, smart people and technological potential, there will still be a lot of dynamism,” said Anno Saxenian, a professor of city and regional planning at UC Berkeley who has studied what makes high-tech hubs tick.
Yet, a recovery in the traditional economic indicators will not restore many people’s dreams.
Take the case of Dan, a middle manager at a large Silicon Valley computer firm who agreed to be interviewed on the condition that his full name and the name of his company not be used.
Dan came to the Bay Area from his native Pittsburgh in 1978, fresh out of the military and eager to get into the electronics business. He got an engineering degree from a local university and then held jobs at a series of small computer companies, which often rely on stock option plans to attract talent. If the company does well, employees can theoretically use the options to buy stock cheaply and then sell it at a higher price.
“All these companies offered stock options, but they were done in such a way that it was very hard to make much money from them,” he said. “The millionaire dream is really only for the founders.”
To get into the upper tier at a small company, the headhunters told him he should get a master’s degree in business administration and get some big-company experience because venture capitalists prefer to entrust their money to people who have a track record managing large budgets and departments.
So he spent his nights getting an MBA, and five years ago went to the large firm where he works now. “It’s very friendly culture, but I haven’t gotten the opportunity to move up at all because the company isn’t growing,” he said.
“A lot of my colleagues are expressing a lot of frustration. Ten years ago, we watched people move up very quickly, but it just doesn’t happen now. The myth of being a millionaire gets people to give up their weekends and their families, but people don’t examine it very closely.”
Of course, it has never been easy to make a fortune. Apple and Intel, where even the low-level employees who were around at the beginning made a killing, were always the exception. Today, most observers agree, a company such as Apple would probably never get off the ground. Venture capitalists would be unlikely to fund the likes of Steve Jobs and Steve Wozniak, who were barely out of their teens and had no business experience when they founded Apple.
“It used to be that people could start a business with a new product idea or a new technology,” said Regis McKenna, who built his own business providing public relations services to many of the early start-ups and is now increasingly involved in venture financing.
“But that’s not sufficient today--you need a strategic business plan. There’s much more emphasis on the management team. There’s still room for the shaggy-haired engineer, but he’s not expected to run the company,” he said.
McKenna and others say this is largely a result of the dramatic increase in competition in all sectors of high-tech. Because so many different players--including large, cash-rich international conglomerates--are focused on a relatively constant set of opportunities, the risk of failure is higher and the potential rewards lower.
Furthermore, the increasing cost and complexity of electronics products has made it virtually impossible to finance certain kinds of start-ups, no matter how promising the idea and how talented the management team.
“To start a classic computer company takes $50 million, and that’s above and beyond what a venture capital company can afford,” said Andrew S. Rachleff, a general partner at the Palo Alto venture firm Merrill Pickard Anderson and Eyre.
In part because of these trends, the venture capital business is in the midst of a shakeout. The amount of money flowing into venture pools dropped from $3.3 billion in 1989 to $1.9 billion in 1990, according to the research firm Venture Economics. While most consider this decline cyclic, it nonetheless means less money for Silicon Valley start-ups now.
The high costs in Silicon Valley-- and the fact that many start-ups are in software, which is less tied to the area than semiconductors or disk drives--means more newcomers are likely to be located elsewhere.
The effects of these trends on the Silicon Valley work force are difficult to quantify, but anecdotal evidence suggests that unflagging devotion to career success is far less pervasive than it once was.
Former VLSI executive Larsen, who still does employment consulting for Silicon Valley firms, says: “There’s always the question about stock options, but within the same conversation there are questions about the work environment, about what the company believes in. Before, it was ‘give me those stock options and I’m here.’ ”
Wes Patterson, chief operating officer at a successful Silicon Valley chip company called Xilinx, believes people have gotten a bit more cautious in their career choices. “People aren’t so confident that there is the Silicon Valley safety net, that if you fall off one company you’ll pick up on another,” he said, noting that this trend could be partly a function of an aging population.
Some hold onto the dream. By the time Ken Benbow was laid off from his job as an account manager at Apple, he had been looking for a job with a small firm that would offer freedom from big-company bureaucracy, more responsibility and, of course, stock options. He found just the right fit, a tiny firm that hopes to make it big in the promising market for voice recognition systems.
The company is Articulate Systems, and it is located in Woburn, Mass.
