Chips and Dips : Silicon Valley Poised for Computer Boom

Recession or no recession, signs of strength abound in Silicon Valley.

Eclipsing several Japanese rivals, Intel Corp. last year climbed to the top of the global heap as the leading producer of semiconductors.

Personal computer makers are scrambling to keep up with demand, and software is coming out by the basketful.

Yet price wars and the stubbornly sluggish economy have delivered one-two punches as well, and the bruises are clearly evident.

“Employment stinks, but productivity is great and profitability is not so bad,” said Richard Carlson, chairman of Spectrum Economics, a Palo Alto consulting firm.

Indeed, employment in Silicon Valley and other high-tech pockets around California has been devastated by the sour economy and global competition. Computer giants such as Apple Computer Inc., IBM and Tandem Computers Inc. have been forced to pare their California work forces, control costs and battle aggressively on price, despite the battering that has meant on profits.

But there’s good news in all that “re-engineering,” economists and computer executives say. These companies are poised to compete better in increasingly ferocious global markets, and they stand first in line to reap the windfall from corporate America’s renewed emphasis on productivity.

“More companies are saying it makes sense to automate to drive their costs down,” said Jim Brill, chief financial officer of Merisel Inc., a computer distributor based in El Segundo. “That has driven people to buy microprocessors or upgrade. It’s a lot cheaper than hiring people.”

With new, more powerful software inducing companies to buy better machines, and with computer makers broadening their distribution networks, Brill said, the market does not appear to be reaching saturation.

“Every time we plan for it, it doesn’t seem to come,” he said, adding that Merisel’s sales this year are expected to jump to $3 billion from $2.2 billion in 1992.

Dataquest, a San Jose market research firm, also believes that the string will not run out anytime soon on manufacturers of personal computers and semiconductors, the chips of silicon that serve as a computer’s brain. Intel and other chip makers are thriving, racing to build new plants to meet soaring demand for more powerful products.

“Dataquest is very bullish on its PC forecast and extremely bullish on semiconductors,” said Skip Miller, the firm’s vice president for North America.

However, many technology companies are in trouble. Some makers of computer disk drives and sound boards are suffering from oversupply and price competition.

Borland International Inc., a software company based in Scotts Valley, Calif., temporarily slashed the price of its Quattro Pro spreadsheet program to a bargain-basement $49.95 in a bid to grab market share. In response, the company’s stock took a beating.

he software price war is likely to claim a number of victims before it’s over, but the good news is that California software “boutiques” have a big stake in the action. Although the hits driving the video game software market, such as Super Mario Bros., originated in Japan, most new video game development is coming out of the United States.

Electronics and instrument makers dependent on defense are hurting. But even there, Silicon Valley companies have fared far better than Southern California counterparts. Silicon Valley’s emphasis on space communications, satellites and electronic instrumentation has helped insulate it from Pentagon cuts.

For companies with prominent sales overseas, economic sluggishness in Europe and Japan has taken a toll.

In July, Cupertino, Calif.-based Tandem reported a third-quarter loss of nearly $550 million, including $451 million to cover the costs of a broad overhaul encompassing layoffs and plant closings.

Tandem--which makes big-ticket “fault-tolerant” computers designed to continue operating even if a component fails--put off the corporate reworking as long as it could, said James G. Treybig, president and chief executive. On top of an initial 600 layoffs, this round will erase 1,800 jobs from the company’s total work force of 10,500.

But sales have stalled in Europe and Japan, which account for 40% of the company’s sales. Meanwhile, companies have been shifting to networks of smaller computer systems and away from giant machines such as Tandem’s.

Scrambling to meet the new demands, Tandem recently introduced the Himalaya Range--systems that Treybig said are far more powerful but one-fourth the cost and roughly one-fifth the size of previous mainframe products, which sold for up to $10 million.

“I’ll have to sell four times as much just to get even,” he said.

Even so, many in the industry see Silicon Valley benefiting from the forced restructuring and the rush to innovate.

“Most of the high-tech companies have slimmed down to fighting trim and are able to compete much more effectively against offshore competitors,” said Daniel L. Klesken, senior semiconductor analyst at Robertson Stephens & Co., a San Francisco investment firm.

Despite the long-term optimism, the recession has cooled the heated atmosphere of growth that once permeated California’s high-tech heartland.

The median price of residential housing in the greater San Jose area has taken a wild ride since January, 1987, when it was $142,500. It soared to $237,000 by August, 1989, but has since dropped about 9%, to $216,000.

John V. Pinto, who owns a real estate agency in San Jose, noted that buyers get a lot more for their money these days. Four years ago, he said, a buyer might have purchased a 1,500-square-foot house for $245,000 in a San Jose suburb. Now someone can buy a 1,900-square-foot home for $218,000 in the same locale.

“I’ve been living here 20 years, and 3.7% unemployment is irrevocably etched in my brain,” Pinto said. During the recession, however, Santa Clara County’s normally low unemployment rate has ranged as high as 10%. Many more workers, Pinto figures, are worried about being laid off.

Several of Pinto’s clients have had to renege on purchases after losing their jobs. On the other hand, he noted, “I also get a lot of business from people who are forced to sell.”

With the employment picture so dismal, one casualty has been the maverick behavior so characteristic of Silicon Valley since its early days in the 1970s. Job hopping and pay increases are down. Temporary work is on the rise.

Hardware has become more of a commodity. Increasingly, computer companies are “outsourcing,” hiring independent manufacturers to build their machines for them. One such contract manufacturer, Solectron Corp. in Milpitas, sees sales growing as much as 120% this year.

Despite the robust pockets in the industry, further job losses are expected as hard times drone on in California, Europe and the Far East.

“The pressure on prices . . . continues to be phenomenal, and now the key is cost controls,” said Richard C. O’Brien, Hewlett-Packard Co.’s corporate economist.

“We, like everybody else, have got to hope that the economic outlook in Japan and Europe improves,” O’Brien said.