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NATIONAL ISSUE
SILICON VALLEY: A ONE-HORSE TOWN? Recent
High-Tech Job Cuts Making Some Nervous
Date: 4/27/98
Author: Anna Bray Duff
Some of Silicon Valley's signature companies - such as Intel Corp., National Semiconductor
Corp. and Netscape Communications - have recently said they would have to cut jobs.
While many of those layoffs won't actually happen in Silicon Valley, the job cuts have made
some
wonder whether Silicon Valley hasn't put too many of its eggs in one basket.
For such a large economy, the Northern California area depends heavily on one industry: high
technology. In fact, the San Jose area's industrial base ranks as the least diverse of the country's
15 biggest metro areas.
To be sure, the concentration of high-tech companies in one area has so far been a huge asset
to
the region, powering job and wealth gains faster than most analysts would have ever predicted.
And the term ''high-tech industry'' is itself a bit misleading, as it masks a wealth of diverse
industries.
So far during this economic expansion, the high-tech mecca has proved an engine for growth
throughout the whole state of California. And to a lesser extent, it's aided national economic
growth.
But could this asset become a liability?
''Silicon Valley is a one-horse town,'' said Joel Kotkin, senior fellow at the Institute for Public
Policy at Pepperdine University in Malibu, Calif. ''But it's a great horse to have.''
Worldwide demand for high-tech goods and services has spawned a sustained job boom in
Silicon Valley. Since the depths of the last recession, the region has tacked on almost 200,000
net new jobs, according to figures from Joint Venture: Silicon Valley Network, a nonprofit group
in San Jose.
Joint Venture defines Silicon Valley as Santa Clara County and nearby parts of San Mateo,
Alameda and Santa Cruz counties.
Much of the job growth there has come in high-tech industries, including software, computer
hardware, semiconductors, communications, biotechnology and tech-related services.
Overall, nearly four in 10 of Silicon Valley's private-sector jobs are in high tech - a staggering
share. No other tech center, including the Boston corridor, has such a high concentration. Only
about 5% of private U.S. jobs are tech-related.
And the trend is toward greater concentration. Since '95, 67% of the 118,000 net new jobs in
Silicon Valley have been in high-tech industries.
''It's not just that Silicon Valley has more technology jobs than any other area,'' Kotkin said. ''It's
the fact that that's all there is.''
An exaggeration? Not really.
At least one consulting firm, West Chester, Pa.-based Regional Financial Associates, measures
industrial diversity. It found that even supposed ''industry'' towns, such as Detroit and Houston,
have more diverse economies than the San Jose metro area.
''The area's economy lives or dies by the high-tech industry,'' said Mark Zandi, RFA's chief
economist. ''That has been the case over the last quarter century. Fortunately for them, the
high-tech industry has been growing quite fast and should do so for a long time.''
So far, that has been a boon for the area. ''That's why Silicon Valley is known as the premier
high-tech region in the world,'' said Becky Morgan, president and CEO of Joint Venture.
The clustering of many different high-tech companies may help feed the pace of innovation,
creating a kind of virtuous circle of growth and innovation, says Doug Henton, president of
Collaborative Economics, a consulting firm in Palo Alto, Calif.
But then again, history suggests virtuous circles can turn into vicious cycles. Look what
happened
to the Los Angeles-Long Beach area.
The aerospace-defense mecca was hammered when the Cold War ended and defense contracts
dried up. Making matters worse: Japanese real-estate investors went home.
The area went through a profound slump that lasted far longer than the nationwide 1990-91
recession.
Los Angeles was hurt even though just one in 10 jobs was in aerospace. What's that say about
Silicon Valley?
Not much, says Kotkin. He doubts Silicon Valley is vulnerable to a Los Angeles-style bust,
noting other factors like the '92 riots and the Northridge quake.
Zandi is not so sure.
''High-tech industries are driven by technological change, and that could slow,'' Zandi said. ''It
may seem as though we get a new- generation chip every year, but that's not a fundamental law
of nature. Things can go wrong -usually when you least expect it.''
But while the industries that fall under the ''high tech'' umbrella are related, they are actually
quite
diverse. And it's clear that Silicon Valley's economy emerged from its last recession with a much
broader base.
''Silicon Valley has changed over the past 10 years,'' Henton said. ''Back then, there were really
two high-tech industries: semiconductors and defense. We still have a lot of hardware
manufacturing, but there's been a huge structural change. The biggest driver . . . has been
software.''
In fact, some of the region's strongest growth areas have been in industries that didn't even exist
back then, such as networking and the Internet.
''There's a lot more diversity than meets the eye,'' Henton said.
Nor do the parts of the high-tech economy all move together.
''Just as we're seeing a downturn in semiconductors and computer equipment, now we have
networking and biotech coming in to pick up the slack,'' Morgan said.
While few expect demand for high-tech goods and services to slow suddenly enough to change
Silicon Valley's fortunes overnight, it's clear that the region's economy is taking a breather.
For starters, Silicon Valley is highly exposed to Asia's economic woes, the effects of which have
yet to work their way fully through the U.S., Zandi says.
Alone, Silicon Valley accounts for some 40% of California's exports - and slowing or canceled
orders from Asia were cited in recent layoffs.
It is also highly dependent on the stock market. A good market helps create a positive climate for
initial public offerings and also supplies investors with gains to reinvest.
The number of Silicon Valley-based IPOs fell last year, possibly in response to the fourth
quarter's stock- market correction. Last year, there were 39 IPOs from the area, down from a
peak of 73 the year before, according to Joint Venture estimates.
Employers there are also highly exposed to a market crash.
Recruiting high-tech talent has relied heavily on dangling stock options. Jobless rates in the
region
stand below 3%. The labor shortage makes such incentives critical to continued growth.
''If there is ever a stock-market downturn, Silicon Valley will be second only to Manhattan in
terms of the impact it will see,'' Kotkin said.
In spite of last year's market correction, venture funds going to Silicon Valley continued to soar -
rising to $2.7 billion last year from $1.8 billion the year before.
''This level of venture-capital funding is something we've just never seen before,'' Henton said.
''Whether it's an anomaly or will continue remains to be seen. One thing we do know is that it's
not just a function of the stock market.'' |
