TIME: Almanac 1993/TIME Almanac 1993.iso/time/111891/11189915.000

Text File | 1992-08-28 | 9.7 KB | 234 lines

                                                                                ECONOMY, Page 90

CALIFORNIA

How Gray Is My Valley


The land of high tech suffers a wrenching mid-life crisis

BY SCOTT BROWN


    Silicon Valley: the place is synonymous with bright
ideas, fresh fortunes and sunny forecasts. But right now the
mood in this region 40 miles southeast of San Francisco suggests
a name like Gloomy Gulch. Gone are the days when development
spread like brush fire across the region and upstart businesses
leaped from garages to the FORTUNE 500. Absent are the
fuzzy-cheeked genius entrepreneurs, the companies hungry for
workers and a city so wealthy it once considered giving back $1
million in tax revenues to its citizens. Says Lawrence Stone,
a city councilman in Sunnyvale, which no longer has a surplus,
as he recalls the glory days: "Instant millionaires. Every day
there was a firm doing a public offering and spin-offs being
created. Everyone was on a high-tech surfboard. It was a lot of
fun."

    Today the double whammy of a lingering U.S. recession and
a maturing of high-tech industries has made life in Silicon
Valley considerably less buoyant. Employment, profits and
housing prices are down, traffic congestion is up, and the
occasional layer of smog now looms overhead. "The vision we've
had about this place has changed," says Stone. "Economically,
we're a region at risk." In what is probably the ultimate
indignity, some residents say the area is becoming like Los
Angeles. "The Valley," notes Thomas Mandel, a futurist for the
consulting firm SRI, "is going through a mid-life crisis."

    Nothing provides a better testament to the past decade's
growth binge than the headlong rise and subsequent stalling of
home prices in Santa Clara County. From March 1985 to March
1990, the median price of homes zoomed from $125,000 to
$235,000. Real estate appreciation ran at 3% a month, and most
listings attracted multiple offers within 72 hours. Today 8,700
homes (median price: $226,500) languish on the market. "In Santa
Clara County, it's a sacred thing: property values go up," says
San Jose Realtor John Pinto, a Brooklyn native who came to the
Valley believing it was the best place in the U.S. to live. He
stops to wave at the lone pedestrian he can see through one of
his plate-glass windows facing a main street. Though it is rush
hour, the boulevard is eerily quiet. "This is as bad as it's
been," says Pinto.

    The Valley has gone through slumps before. Recession
buffeted the region in 1981-82, but the explosive growth of
personal computing brought the ailing industry charging back.
In 1985 foreign competition, mostly from Japan, made serious
inroads into the semiconductor market. From late 1984 to early
1986, the region lost nearly 33,000 jobs, or 4% of the work
force. Just a year later, those jobs and more were reclaimed
when a surge of new products and an infusion of venture capital
helped rekindle the region's growth. Regis McKenna, Silicon
Valley's pre-eminent marketing consultant, says he has seen half
a dozen recessions in his 31 years in the Valley. "Every three
years we go through these cyclical changes," he says. "In the
course of them, people predict that the Valley is changing or
coming to an end."

    This time, however, many people believe the outcome will
be different. Short of a product revolution, nothing on the
horizon promises to bring a quick fix to the area's economy. "In
the past, our recessions have been shaped like a V," says
Richard Carlson of Spectrum Economics, a Mountain View
consulting firm. "We dropped down sharply but came back roaring.
This time it looks more like an L." Unemployment in Santa Clara
County, once stuck perennially at about 3%, now stands at 5.5%.
In the past year, two of the valley's pillars -- Apple Computer
and National Semiconductor -- announced worldwide layoffs in the
thousands.

    Some of the dramatic decline in revenues can be attributed
to the recession. But defense spending, which fueled many of
the area's businesses and made Sunnyvale the state's second
largest recipient of federal contract dollars (after Los
Angeles), may never come back to 1980s levels. In another sense,
the Valley is suffering from its own success. The rising cost
of doing business in the area has ignited an exodus of
manufacturing operations to foreign countries and to other parts
of the U.S. ranging from Idaho to the Carolinas. And in the
final cutting irony, the revolution in personal computing has
turned the PC into a relatively low-priced commodity, so that
electronics firms now face greater competition for shrinking
profits.

    The culture of entrepreneurship is fading fast. The most
telling sign of that is the route that venture capital, the
lifeblood of new growth and technologies, now takes through the
Valley. Simply put, it has stopped flowing into the fledging
businesses that spawned the success and defined the culture of
the region. Though overall investment has increased in Silicon
Valley, most seed money is now conservatively parked in
middle-aged operations. Meanwhile, the costs of underwriting a
new venture have skyrocketed. "There were days when $10 million
would take a company from start-up to an initial public
offering," says Robert Miller, chairman of MIPS Computer Systems
in Sunnyvale. "Today the average is $40 million to $50 million."
Adds Carlson: "The companies that were going to be the Apples
of the '90s are in Chapter 11 now."

    That doesn't mean that people have stopped dreaming. They
have just learned to dream smaller. Phil Sih, 33, is managing
director of his third start-up company in seven years, a small
electronic-communications firm called DBC Associates. Sih is a
true believer in the Valley's potential for entrepreneurs, but
he acknowledges that finding investors to seed innovative
visions is no longer the easy ride it once was. "There's still
a tremendous degree of entrepreneurial spirit," he says. "But
the days of people taking huge amounts of venture capital and
turning it into `burn-and-go' start-ups is less of a reality.
You have to be much better now than you did then."

    Complexity and competition are two prime reasons. Personal
computers that were designed in garages have been supplanted by
immensely powerful workstations that can do the work that
million-dollar mainframes once did. Individual microchips now
wield the processing capabilities of desk-size computers of the
mid-1980s. Developing such sophisticated products can be far
more expensive and risky than it was just a few years ago, so
it has increasingly become the province of multibillion-dollar
global behemoths.

    Not all the upstarts have surrendered. One of the best
success stories belongs to T.J. (for Thurman John) Rodgers, the
latest entrepreneur to serve as the region's enfant terrible.
The sandy-haired, squarely built former Dartmouth lineman
remains bullish about the Valley's future. In eight years
Rodgers has built Cypress Semiconductor Corp. into a $300
million concern specializing in high-performance specialty chips
and featuring fanatical cost controls that include a careful
monitoring of dinner tabs from employee expense reports (dinner
limit: $50). "I don't think Silicon Valley has changed at all,"
says Rodgers, dismissing the gloom as "the lingo of losers." He
adds, "It's the story of the Valley that's changed."

    In Rodgers' view the future potential of the region should
not be judged on the basis of the slumps being experienced by
Valley big guns such as National Semiconductor and Advanced
Micro Devices, a collection of companies he calls "the dinosaur
club." Rodgers contends that these firms have failed to stay
hungry and competitive. As a result, they have led people to
believe the electronics industry requires protectionist
legislation and subsidies to survive. "We should not equate
their lobbying as lobbying for Silicon Valley," he says bluntly.
"This is still the center of the technology world."

    For all the current woes, that distinction remains true.
At the end of 1990, Silicon Valley had three times the number
of jobs and twice the number of electronics firms with sales of
$5 million or more as the next largest technology region, the
area along Massachusetts' Route 128. While sales of computer
hardware may be struggling, software is booming. Several
software companies -- among them Adobe Systems and Symantec
Corp. -- have lately posted record profits. But how much
dynamism will remain in five years? With manufacturing moving
out to cheaper areas, many locals fear that the Valley may
simply end up as a research-and-development backwater. Moreover,
at a time when American investors remain wary of committing to
new companies, more and more Japanese companies are funding
start-ups, which prompts worries that foreign ownership may
eventually characterize the region.

    Two decades ago, the notion that bucolic, orchard-filled
Santa Clara County would become the world's capital of anything
would have seemed ludicrous, especially to its residents.
Sunnyvale councilman Stone remembers how concerned one of his
campaign workers was in 1975 because her son had dropped out of
college to tinker away in the garage. Stone advised Mrs. Wozniak
to be patient, that the boy would soon tire of his pursuits and
return to school. But Steve Wozniak co-founded Apple Computer
instead. "Silicon Valley snuck up on us," Stone muses. "Now it's
a modern legend." But will the Valley remain the stuff of
legend? All it needs is a few more revolutionaries again -- the
kind who sort of sneak up on you.