Serious Slump Hits Key Firms in Silicon Valley

Yahoo and Amazon.com may be riding the stock market into the stratosphere, but key sectors of the once-high-flying Silicon Valley high-tech industry have suddenly crash-landed.

The Asian economic crisis, an unprecedented glut of computer memory chips, the rise of the under-$1,000 personal computer and slower PC sales have created havoc in the high-tech mecca.

In recent months dozens of companies--from Intel Corp. to Netscape Communications Corp.--have seen their profits, sales or stock prices plummet.

Even the highly diversified, normally stable Hewlett-Packard Co. took the unusual step this week of ordering a three-month cut in pay for 2,400 mid- to upper-level managers, beginning today--the first such reduction the company has instituted since 1985. On the same day National Semiconductor, a leading maker of microprocessors, the brains of computers, announced a 10-day furlough for its entire work force. The company also recently cut 1,400 jobs through layoffs and attrition.

These discouraging signs followed downsizing this spring by chip industry giant Intel, storage drive leader Seagate Technology and a host of smaller companies.

The trends have hit the overall state economy hard, said Jack Kyser, chief economist of the Los Angeles Economic Development Corp.

“Northern California for much of 1996 and 1997 was leading the state in terms of employment growth. You now see that Southern California is leading,” he said. The computer and chip industry “is definitely slowing things down. We’re looking for much slower growth in the state’s economy in the second half of 1998.”

A Problem for the State’s Economy

The situation is a real problem for the California economy, said John Rossi, managing director of BancAmerica Robertson Stephens, a technology-oriented investment bank based in San Francisco. He argues that this cyclical slump in the chip industry will take another year or more to play out.

“It’s not just a zero-sum game in that some companies lay off and other companies hire,” Rossi said. “Most of the layoffs are occurring in the . . . blue-collar part of the industry. As jobs contract there, most of those people won’t have other opportunities” in the software and Internet companies whose stock prices and employment rolls have been growing dramatically in recent months.

“When the jobs reappear, they tend to reappear in lower-cost areas overseas or across the border to Mexico at the very least,” he added. “We’re going to experience a net loss of manufacturing jobs.”

Irene Amaya, a quality assurance inspector at KLA-Tencor, a maker of inspection equipment for semiconductor firms, said she was notified June 30 that she was among 70 employees to be laid off unless they agreed to relocate.

“People who had been there 14 years, 12 years, 10 years were laid off. They never saw it coming,” said Amaya, 46. Without job training, she added, “I’d have to go into a sweatshop where they make cables and PC boards.”

Recent layoffs have also taken some members of the professional work force by surprise. The youthful, well-educated core of employees who have only known boom times suddenly finds itself prowling Silicon Valley’s industrial parks in search of jobs.

Indeed, this turnaround has resulted in a booming business for another valley industry--job and career counseling.

“Our membership is going up, and our counseling appointments and workshop attendance are at an all-time high,” said Carol Varnie, spokeswoman for the Career Action Center in Palo Alto, the epicenter of the electronics industry. The job counseling center now logs 50,000 client visits a year.

‘People Know They Can Regroup’

However, although many of those clients may be taking a hit in the sagging value of their stock options, they don’t fear long-term unemployment, said Betsy Collard, director of strategic development at the center. Regional unemployment rates are still low, and there are many opportunities for skilled professionals.

“If they are affected by a layoff, people know they can regroup,” Collard said. “But I do see some people who are really questioning the pace and the complexity of what Silicon Valley companies entail.” They are getting weary, she added, of the constant transformations in computer technology that have led to many of the recent layoffs.

A combination of factors has turned a typical periodic slump into the current industry malaise, analysts say. The Asian economic crisis has slowed demand for semiconductors, exacerbating a glut of computer memory chips. Bill McIlvaine, managing editor of the trade publication Semiconductor Business News, calls 1998 “the worst year since at least 1985.”

“We had an unprecedented period of prosperity from 1991 through 1995, and now we’ve had an unprecedented three-year period of downturn,” said Jonathan Joseph, a chip analyst with NationsBanc Montgomery Securities in San Francisco.

The semiconductor business--a bellwether of the entire industry’s health--declined 9% in 1996, grew only 4% in 1997 and will shrink about 10% this year, according to Joseph. “Since 1996 we’ve had excess capacity and a slowdown in demand. Then PC demand slowed in late ’97 and early ’98 . . . so it’s a compound effect.”

Meanwhile, the rise of the under-$1,000 personal computer has meant that PC companies have had to make do with much less profit per machine sold. Those manufacturers have exerted tremendous pressure on the suppliers of chips and other PC components, severely squeezing their revenues as well.

“If we look at the retail desktop computer market, prices were $1,141 on average in June of 1998,” said Matt Sargent of ZD Market Intelligence in San Diego. “That compares to June of 1997, when prices were $1,405.”

PC Makers Feel the Pain of Lower Prices

All of the PC makers have been feeling the pain of those lower prices. “Whenever you increase price competition at this level, it’s going to be hard to succeed,” Sargent said.

How low can prices go, and how much more can firms be squeezed?

“No one knows,” Sargent said. “It stops when companies can’t efficiently sell products anymore.”

But there may be signs of relief on the horizon--partly in the form of rising demand for computers projected for the last half of this year. Still, analysts agree that the chip industry slump will affect overall employment in the Silicon Valley for some time. “We think we’re seeing the bottom, but the upturn may be quite gradual,” said NationsBanc’s Joseph.

Kyser cautioned that the Northern California economy was so overheated early this year that it had some inflationary effects--such as rapid increases in housing prices. Silicon Valley real estate agents say they routinely got multiple offers on houses and executed sales within 24 hours.

“Things have slowed down; there’s been a cooling period,” said Aretha Houghton, a broker with Red Carpet Realty in San Jose.

Barry Hill, manager of Hi-Tek Real Estate in San Jose, attributed the change to the difficulties faced by the computer industry.

“Three months ago or less, you were getting multiple offers on properties, and they would be selling in 24 hours or less,” Hill said. “And now it takes at least a week or longer.”

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Silicon Valley Slump

Many Silicon Valley companies have recently announced downsizing or furloughs. Slack demand as a result of the Asian economic crisis, a general downturn in the microprocessor industry and slowing growth in the personal computer market have hit companies in the chip and personal computer industries particularly hard.

Intel Corp.

* The world’s leading microprocessor maker cut 3,000 jobs through attrition and early retirement; 1,700 workers were affected by temporary plant closings.

National Semiconductor Inc.

* Chip maker cut 1,400 jobs--about 10% of its work force--through layoffs and attrition; all employees are required to take a 10-day furlough during the second half of 1998.

Hewlett-Packard Co.

* The company is requiring 2,400 managers to take a three-month, 5% pay cut; all employees worldwide will get a mandatory four-day furlough this year.

Seagate Technology Inc.

* Storage drive maker early this year laid off 10,000 workers--about 10% of its worldwide work force--mostly in Southeast Asia production plants.

Silicon Valley Group Inc.

* Semiconductor equipment maker announced a reduction of about 700 workers--21% of its work force.