Tech Jobs Become State’s Unwanted Big Export
From Silicon Valley to Boston’s Route 128, technology companies are waiting for a rebound in business spending to pull them out of their slump. But when the Bay Area and other regional hotbeds emerge from the deep hole left by the technology crash, they’ll find that the landscape looks a lot different. Many of the jobs lost will not be back.
The global tech bust has forced a dramatic restructuring of the industry as firms struggle to return to profitability. Companies have shed thousands of jobs in the United States and Europe while shifting production to lower-cost countries, mostly in Asia.
Like makers of apparel and toys before them, technology companies say their survival depends increasingly on performing all but the most sophisticated tasks offshore.
From its peak of 5.7 million jobs in early 2001, U.S. technology employment has plunged by about half a million. More than 100,000 of the job losses have come in California, according to figures from the American Electronics Assn., a Washington trade group. Most of these positions have been in high-tech manufacturing, in which the average wage tops $70,000 a year.
“A lot of those job losses are permanent,” said Daniel Wilson, an economist with the Federal Reserve Bank of San Francisco. “The natural cycle of companies moving production offshore got accelerated.”
Experts say tech companies that weather the shakeout will emerge leaner, meaner and more profitable for their pains. And few doubt Silicon Valley will remain a world leader in innovation.
Still, the transformation poses serious challenges for states such as California, which have looked to the technology sector to generate employment, exports and tax revenue.
“California is not a low-cost place to do business,” said Walter Reichert, director of international relations and trade policy at Hewlett-Packard Co., which has shed 16,000 jobs as part of a global restructuring triggered by its merger with Compaq Computer Corp. “Like our colleagues at IBM and Sun, we tend to keep our engineering here. But for any kind of assembly work, we’ve got to look at other possibilities.”
Although many believe the worst is over, the cuts still keep coming. In recent months, big names such as Hewlett-Packard, Advanced Micro Devices Inc., Sun Microsystems Inc., Applied Materials Inc. and Agere Systems Inc. have announced layoffs totaling more than 12,000 jobs here and abroad. In early August, IBM Corp. confirmed it had slashed 15,600 jobs from its workforce this year.
Plunging global demand for technology equipment, coupled with production shifts offshore, have wreaked havoc on U.S. exports. Shipments of computers and electronic products, which account for one-quarter of America’s exports, dropped 16% in 2001.
California’s exports have been walloped even harder. Technology is the state’s No. 1 export, accounting for more than half of its sales overseas at the height of the boom. After reaching a record $61.4 billion in 2000, California’s exports of high-tech goods plunged 18% in 2001 and are down 23% through the first three quarters of this year.
“California technology firms have to outsource to stay competitive -- that absolutely makes sense,” said Ross DeVol, director of regional and demographic studies for the Santa Monica-based Milken Institute. “On the other hand, these production activities are increasingly taking place abroad. We’re losing employment. We’re losing income. We’re losing the tax receipts.”
Indeed, the meltdown in California’s tech sector has huge implications for the state’s economy. Although California’s drop in overall employment has been milder than that of the nation as a whole, a disproportionate share of its declines has come in high-paid sectors such as information technology, telecommunications and computer services, leaving the state much worse off in terms of income than the rest of the country.
Lawmakers in Sacramento used a variety of gimmicks to cover a $24-billion deficit this year, only to find themselves faced with another $20-billion-plus chasm heading into the next budget cycle. That’s partly the result of the state’s heavy reliance on tax revenue from capital gains, stock options and bonuses. At its peak in 2000, revenue from these sources soared to $17.6 billion -- accounting for 25% of California’s general fund.
But those revenues have fizzled with the bursting of the tech and stock market bubbles. State officials, who committed to billions in new spending when coffers were flush, found themselves staring at a yawning deficit almost overnight.
“It was a 100-year bonanza ... and we spent it,” said Ted Gibson, former chief economist for the California Department of Finance, who is an economic advisor at Metropolitan West Securities in Sacramento. “Now it’s reality-check time.”
Gibson says the eye-popping gains in personal income and job growth that characterized the late 1990s in California are unlikely to be repeated anytime soon. Silicon Valley remains mired in what may be the worst downturn in its history.
The San Jose metropolitan area alone has lost more than 100,000 jobs since its pre- recession peak in December 2000, while unemployment has risen to a 19-year high of 7.9%. The Silicon Valley Manufacturing Group, an alliance of technology firms, projects that it will be at least five years before employment in Silicon Valley returns to its previous peak.
“Any of us who think we’re going to have the kind of prosperity and instant wealth and job creation we saw in the late 1990s is really kidding themselves,” said Rick White, chief executive of TechNet, a Palo Alto-based technology industry lobbying group. “There is still a lot of overcapacity and restructuring” ahead.
The turn of fortune has been brutal for workers such as Richard Jerry. The former technician at Applied Materials once earned nearly $30 an hour building test fixtures for the Santa Clara, Calif., semiconductor equipment maker. Laid off for more than a year, his savings and unemployment benefits exhausted, Jerry recently moved into a Bay Area homeless shelter. Still, the 43-year-old harbors dreams of returning to “the best job I ever had.”
“All we need is another upturn” in business, he said.
Chances are, it won’t be so simple. Experts say what began as a cyclical slump has forced permanent structural changes to the U.S. industry that won’t be undone when business revives.
Companies such as Hewlett-Packard, Cisco Systems Inc. and Motorola Inc. for years have outsourced production to contract manufacturers such as Flextronics International Ltd. and Solectron Corp., which in turn are rapidly shifting their operations to lower-cost foreign facilities as profits have plunged.
Customers are being squeezed, “so we’re being squeezed,” said Jim Sacherman, the San Jose-based chief marketing officer for Flextronics, which has cut thousands of jobs and closed plants. The multinational company announced Friday that it would shutter a plant in Irvine that makes printed circuit boards.
“Even when things turn around,” Sacherman added, “it’s not like all of a sudden we’re going to pick up all that and bring it back.”
Others are following suit. After growing 50% to 60% a year during the boom times, Milpitas, Calif.-based Solectron has shed 35,000 jobs in the last two years, most of them in North America and Europe, while expanding production at its three facilities in China.
And the list goes on. Fiber- optic equipment maker JDS Uniphase Corp., with headquarters in San Jose and Ottawa, has beefed up its Chinese operations while sacking more than 20,000 workers in the U.S. and Canada. Santa Clara-based National Semiconductor Corp., which has shed 1,100 employees and contractors, most of them manufacturing employees in the U.S. and Scotland, just broke ground on a new chip plant in Suzhou, China, that will employ 500. Motorola Inc., which slashed 7,000 jobs this year, has aggressively shifted its chip production to contract manufacturers in Asia. The Schaumberg, Ill.-based company plans to invest $1.3 billion in research and development facilities in China during the next four years.
Some say the U.S. has no choice but to keep climbing the knowledge ladder, focusing on production of higher-value software and services and pouring billions of dollars into new arenas such as biomedicine, nanotechnology and the wireless Internet.
“Manufacturing is not just people with dirty hands in a grimy building making widgets,” said Doug Henton, president of Silicon Valley-based Collaborative Economics. “It could be people at a computer manufac- turing software.... We’re still making things. But what we make is different, and how we make it is different.”
Yet others say California’s high costs and inhospitable business climate have helped accelerate high-tech manufacturing’s move away from the Golden State. Carl Guardino, president of the Silicon Valley Manufacturing Group, said too many state officials seem unable to grasp that much of the technology wealth created in California has come not just from design of computers and other high-tech products but from their production and export.
Cut too deep into the manufacturing base, and Silicon Valley could lose its ability to maintain its technological predominance, he warns.
“I feel like renting a horse and dressing up like Paul Revere,” Guardino said. “Too many folks are taking for granted what is at stake here.”
Still, the state faces huge challenges in retaining, much less expanding, its high-tech production. California’s tax structure motivates sales-tax-hungry communities to favor strip malls and auto dealers over factories. Lofty electricity rates, workers’ compensation costs and real estate prices have made the state’s business costs among the highest in the nation. And looming budget deficits mean that businesses’ fees and taxes are likely to go up in the near term, rather than down.
Although the recent job losses largely have been in lower-cost commodity goods such as semiconductors, cell phones and computer components, even higher-value products face stepped-up competition from places such as China and India, which have invested in scientific education and other infrastructure crucial for technology firms.
What’s more, it’s not just production jobs going abroad. A growing number of U.S. companies, including Dell Computer Corp., General Electric Co. and Citibank, have shifted call centers and other information technology service operations offshore to slash costs.
A recent report by Cambridge, Mass.-based Forrester Research projects that 3.3 million positions, in activities from credit card processing and back-office accounting to software development, computer programming and engineering, will migrate to countries such as India, Russia and China in the next 15 years.
If the United States wants to stay on the cutting edge, it must do a better job of educating its workforce, particularly in science, mathematics and physics, said William Archey, president and chief executive of the American Electronics Assn.
“We’ve got to do something that makes the idea of engineering and science far more attractive to young kids,” he said. “I have jokingly said, instead of ‘L.A. Law,’ we need ‘L.A. Geek.’ ”
Unless some difficult choices are made, experts warn, the U.S., and particularly states such as California, could be left on the sidelines of producing the next “new thing.”
“We’re not going to be able to stop production from leaving the state, but we’ve got to make some decisions about what we want to keep here,” said DeVol of the Milken Institute.
“If we just throw our arms up and say, ‘It’s the inevitable sequence of events that this production goes to low-cost countries,’ then that’s what will happen.”
