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Tech Industry

Silicon Valley: Still a boomtown?

As Silicon Valley's tech firms enter the New Year, prognosis for a fast recovery from the Asian flu is dim.

    As Silicon Valley's tech firms enter the New Year, their prognosis for a speedy recovery from the Asian flu is dim.

    Economists and analysts predict that the tech economy will continue to battle a slowdown in 1999, on the heels of a year in which exports of high-tech goods to Asia sank and job growth fell steeply compared with the previous two years.

    Adding insult to injury, Sacramento--not the Silicon Valley--was Trouble in the valley named California's fastest growing region for tech employment, according to a "California Cybercities" study released last fall by the American Electronics Association.

    Experts point to continued weakness of exports to Asia, a maturing product cycle, and a tight labor market in California as the key factors that will set the tone for constrained growth going forward, warning that relief is not yet in sight.

    "We are expecting an overall slowdown in the high-tech sectors--not large, but some," said Bruce Smith, an economist for California's Department of Finance. "But after four or five years of very strong growth, even slightly lower numbers will seem like a huge [downturn]."

    The ugliness, in fact, spread worldwide in 1998. Seven of the top 11 semiconductor vendors saw their worldwide revenue drop by at least 14 percent, according to a recent study from Dataquest.

    "Semiconductor vendors around the world are glad to see the back of 1998, a year slated to be the worst since the mid-80s," said Joe D'Elia, associate director and program manager for Dataquest's Semiconductors Europe program.

    According to analysts, exports to Canada and Mexico, which offset losses in Asia last year, will--at best--remain flat this year, offering little help to the faltering global economy. There is, however, some hope to be found in Europe and the United States. Both regions likely will continue to be strong players in the world economy, and will help to allay fears of recession in 1999.

    Still, nothing can make up for the damage already done by the Asian economic crisis.

    What goes up must come down
    Figures released last month by the California Employment Development Department show that Santa Clara County, at the heart of Peaks and valleys chart Silicon Valley, posted far weaker job growth than it did for the past two years, and was poised to fall behind the state of California's job growth rate for the first time in four years.

    Santa Clara posted a 2 percent job growth rate, based on average figures through November 1998, while the state was ahead with 2.2 percent. During the previous two years, the Valley's job growth rate was 5 percent or more.

    Meanwhile, the Valley's electronic equipment and industrial machinery sectors saw employment figures fall in November 1998, down 1,100 jobs or 4.2 percent from the year-ago period. The region's transportation equipment sector was hit even harder, losing 1,800 jobs or 12.8 percent of its workforce.

    "Clearly, softening demand, because of what is happening in Asia, is a factor for the slower growth," Smith said.

    Layoffs in the U.S. electronics industry, which includes semiconductors, alone totaled nearly 70,000 through September 30, 1998--tripling the previous year's total of 22,000 job cuts, according to employment consultancy Challenger, Gray & Christmas.

    Bearing out these figures, semiconductor equipment maker Applied Materials cut back dramatically last year, trimming its workforce by 3,500. Companies such as Intel, Packard Bell NEC, National Semiconductor, Adaptec, and many others also leveled job cuts last year.

    PC companies weren't spared, either. Hewlett-Packard, for example, instituted temporary wage reductions for executives and imposed brief plant closures in an effort to pare down costs.

    The ax falls
    Downsizing took a toll on the tech industry last year, in the form of layoffs, buyouts, early retirement offers, and spin-offs. A sampling of the bad news:
    Company Calendar
    quarter
    Job
    cuts
    % of
    workforce
    Adaptec Q2 850 24
    Adobe Q3 350 12
    Applied Materials Q2 3,500 23
    Baan Q4 1,200 24
    Cirrus Logic Q3 400 22
    Compaq Q2 *6,500 8
    HP Q4 1,825 1.4
    Hitachi Q4 400 15
    Intel Q1 3,000 5
    Lam Research Q1 1,880 38
    Learning Co. Q3 500 16
    LSI Logic Q4 1,200 17
    National Semi Q2 2,500 18
    Open Market Q4 65 14
    Packard Bell Q2 1,400 20
    Seagate Q1 10,000 10
    SGI Q2 1,000 10
    SVG Q3 1,011 29
    Sun Q2 200 1
    Symantec Q4 100 5
    Texas Instruments Q2 3,500 9
    3Com Q1 645 5
    * Compaq announced 17,000 job cuts, but only 6,500 were taken in 1998.

    Source: companies, research, and Reuters

    Looking ahead to 1999, Wall Street analysts are forecasting that Asia's economic struggles will continue to impact U.S. corporate earnings for some time.

    "We think the slowdown is temporary, but it could extend [if] Asia has a hard time recovering or [if] the U.S. economy finally slips," said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy.

    Last month, the UCLA Anderson Forecast predicted that such difficulties almost certainly will be played out in 1999, confirming that, economically speaking, things are likely to get worse before they get better.

    "The pronounced slowdown in Silicon Valley, an important factor in the weaker 1999 employment outlook for California, will likely be less of a factor in 2000 and 2001, when the state's economy is projected to increase 2.6 percent annually as measured by nonfarm employment growth," the report stated.

    It's a small world
    The Anderson Forecast's predictions confirm a study released last year by the Milken Institute dubbed "The Asian Crisis Tsunami: Trade and Other Impacts on California and the United States." The study found that the Silicon Valley region could face a particularly difficult time in 1999 due to its high reliance on exports to Asia, pointing out that nearly half of Santa Clara County's total exports go to ten Asian countries, making the region one of the most exposed to the Asian flu in the nation.

    Computer equipment, for example, accounts for 95 percent of Trouble in the valley all exports from San Jose, another nerve center of the Silicon Valley. In 1996 San Jose surpassed Detroit and New York as the port with the highest percentage of exported goods produced locally, said Ross DeVol, director of regional studies for the Milken Institute and lead author of the study.

    "Despite Silicon Valley's and the Bay Area's economic dexterity, high exposure to Asia will cause a significant reduction in their economic growth over the next several years," the Milken Institute concluded.

    As a result, analysts said, Silicon Valley companies are likely to continue imposing cost-cutting measures for as long as stalled Asian economies remain in shambles.

    According to DeVol, secondary effects from declining exports already have begun to emerge in the Valley, ranging from the general slowdown in job growth to increasing office vacancy rates and an easing of the region's overheated real estate market.

    "It's shaping up that, in 1999, there will be no job growth overall in Santa Clara County," he said.

    DeVol added that the changing economic dynamics brought on by the Asian financial crisis have presented definite opportunities for some companies, but challenges for most.

    "There will be some firms that win and some that lose," DeVol said, "and unfortunately there will be more losers than winners."

    It's the economics, stupid
    Peter Henry, an assistant professor of economics at Stanford University's Graduate School of Business, argued that not all of the tech industry's economic woes can be attributed to Asia. The normal cycle of business explains some of the slowdown as well, he said.

    "As an economy comes out of a recession, demand goes up and companies respond to that demand by producing more goods," Henry said. "At some point, if the firms over-produce, they have to cut back their production capacity."

    Smith, the economist for California's Department of Finance, agreed, noting that the computer and semiconductor industries are entering the slower stages of their growth.

    "These are industries that have attributes of a maturing -- Bruce Smith, economist for California's Department of Finance cycle," he said. "There is an increase in producers making many of the same products at increased productivity with falling prices."

    Combine that with Silicon Valley's complaints of being unable to find enough highly skilled laborers, and it spells out trouble, according to Smith.

    "Unsustainable unemployment figures are also a source of the slow growth," he said.

    But Levy, with the Center for Continuing Study of the California Economy, disagreed.

    "The labor tightness has persisted through periods where jobs grew by 5 percent," he said. "I don't think that is the cause of the dip [in growth figures] because companies are, by and large, in a hiring freeze mode or are actually laying people off."

    Every slowdown has a silver lining?
    Some industry-watchers say that Silicon Valley companies have managed to find some upside in the midst of Asia's financial woes.

    For one thing, the strength of the U.S. dollar has allowed domestic producers to take advantage of favorable currency exchange rates by purchasing key computer components from Asian producers at greatly reduced prices. Once California companies have added value to the Asian components, they then can sell those products in North America and Europe.

    As summed up by Cynthia Kroll, a regional economist at the University of California at Berkeley's Haas School of Business: "It is important to realize that trade flows both ways?. In fact, imports play a big role in California's high-tech production."

    Kroll added that lower Asian component prices enable --Ross DeVol, Milken Institute director of regional studies California producers to sell their products at lower prices and to better compete.

    But Shekar Wadekar, a semiconductor analyst at Raymond James, warned that such rosy pronouncements could be premature.

    "The exchange rate has helped us in terms of costs," he said. "But the question is whether Asia is buying anything in return."

    The other side of this argument, economists noted, is that while real exports may rise, declining product pricing actually may cause dollar-volume trade to fall, since exports are measured in current dollars.

    Smith pointed out that made-in-California exports were down 3.3 percent during the first three quarters of 1998 compared with the same period in 1997.

    But he added that he expects to see signs of growth in the Valley toward the end of 1999, and further improvement beyond.

    "We'll really see the growth in 2000," Smith said.

    Other economists agreed, noting that there is continued long-term confidence for the region.

    "Silicon Valley is still clearly the place of choice for private investors in terms of the future," Levy said. "We have seen a record level of venture capital funding in the Valley in 1998, and the area has an enormously bright future."  

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