Silicon Valley Nation
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jeremybennett
Well that wouldn't be my recipe for a solution. I was just pointing out the ...
Michael.FlieslerQA
Silicon Valley Nation: California's slow bleed
Brian Fuller
10/5/2012 2:45 PM EDT
SAN JOSE, Calif.-- Either cry babies or canaries in the coal mine?
You could approach the rising chorus of gloom and doom here about the future of California, and Silicon Valley, with that question.
Intel CEO Paul Otellini this week, quoted in a Wall Street Journal story by Deborah Gage, bemoaned the state of State of California, summoning the dreaded comparison to Greece:
“Oh, God. I was born and raised here. I’m fifth or sixth generation. It’s one of the nicest pieces of real estate on the planet, and we’re so close to screwing it up, it’s pathetic. I’d like to be bullish, but I worry that we have to hit the abyss before we can fix things, and I worry that the abyss will be more like Greece.”[Get a 10% discount on ARM TechCon 2012 conference passes by using promo code EDIT. Click here to learn about the show and register.]
For another perspective, I chatted byphone with Cypress Semiconductor CEO T.J. Rodgers, as he munched his lunch in his office here.
Rodgers seldom pulls punches: "California is one of the most hostile places to do business on the face of the earth," he asserted.
These aren't new sentiments, and you could argue that the captains of industry are raising hell to lower the cost of doing business and ultimately boost profits. But you never heard that in the 1960s from Dave Packard, despite the turbulence of those times. In the 1930s, there was the Great Depression and enormous labor strife up and down the West Coast, yet business still came west. Hewlett-Packard emerged from its garage. The Varian brothers and so many other startups flourished in that and subsequent decades.
Somewhere, though, we cut ourselves and began a slow bleed we've ignored. Today, for example, there's no silicon in Silicon Valley, as Rodgers likes to say. Manufacturing's gone. Packaging and test? Gone. Rodgers was the last man standing in Silicon Valley when it came to having his own packaging facility. He finally moved it overseas when costs got to be too much.
He had a fab too, at the company's North First Street location here. He sold it. The company that bought, just closed it. Slow bleed.
"People are on the street and the lights are off," Rodgers said.
Today, just 500 of Cypress' 3,500 employees work in the Silicon Valley. Down the street at Altera Corp., the percentage of San Jose-based engineers is higher, but the businesses have their differences, their different staffing requirements. Nevertheless, at one point, both companies had 100 percent of their employees in the Valley. Slow bleed.
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John.Donovan
10/5/2012 7:34 PM EDT
Otellini and T.J. are both right. I'm a 3rd generation San Franciscan who moved from Los Gatos to Austin when it just got too expensive to live in the Bay Area. With no state taxes and little bureaucracy Texas has been pulling in tech companies for years, most of which are coming from Silicon Valley. If you can redistrict California to break the gridlock in Sacramento; stop voting yes on endless bond issues; and move to less expensive areas but be allowed to telecommute to jobs in back Silicon Valley; then I'm hopeful. And if not, not.
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joyhaa
10/5/2012 11:53 PM EDT
is this because CA is becoming a socialism/Welfare state under Dem?
I somehow feel CA vs TX is like Socialism vs Capitalism, and the winner is, TX.
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DataMuncher
10/6/2012 3:26 AM EDT
Two comments on this insanely myopic article, looking at the world from TJ's point of view.
1) Most of the fabs moved away from Silicon Valley a long time ago, driven by cheap capital/subsidies and land prices. Huge subsidized foundries in Asia, Dresden and Malta NY, fabricate a huge percentage of the non-Intel chips. And for lower volumes, chipmaking has been replace by use of FPGAs. Is that a slow bleed - No, it's a major change in market structure.
2) Taxes and regulation are a puny factor in the costs of Silicon Valley. Housing and office space costs are phenomenal because of limited geography, a concentration of financial success, and an unwillingness of local communities to densify (no regulation, but local politics in action). The success of Google, Facebook, Linkedin, Apple, and others are simply crowding out lesser performing entities like TJs companies. Try finding office space in Mt. View. Try finding a home under 1M$ within 5 miles of Google.
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Arcs_n_Sparks
10/6/2012 5:46 AM EDT
Good article. Once you have the fabs, you have them. What drove them away was increased regulation by the state, and soaring energy costs. California going "green" ended up with a lot of greenbacks leaving. Similar thing happened to aerospace in Southern California. Guess we never learn. Just about any survey puts California at the bottom in terms of business friendliness. Add the logic-free zone called Sacramento, and there are no surprises here.
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Traces
10/6/2012 7:46 AM EDT
Seriously? You think fabs left Silicon Valley because of overzealous business licensing restrictions, rather than land is essentially free, wages are 1/20th, and government-backed loans are sub-real or even free (forgiven) in China? All of this compounded by a complete lack of a US industrial policy designed to retain manufacturing jobs?
I realize this was intended to be a puff piece, but it's actually worse than that: it's an embarrassment to engineering. Engineering is supposed to a be profession; it's supposed to be able to provide meaningful guidance to governmental policy. Your job as a technical journalist is to be the mouthpiece for this effort: hop to it.
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JCBond
10/10/2012 12:13 PM EDT
How about taking a look at the obvious? Can the state pay its bills? Are individual professionals leaving the state in droves for the lower taxes and business-friendly attitude of Texas?
CA's a pretty patch of country,but it has a well-earned reputation for being hostile to business. And a key part of this is hostility to smaller businesses. Apple and Google can always threaten to take their high-profile jobs elsewhere if they don't get tax breaks, subsidies, etc. But small business is where most people are employed. If they don't grow, unemployment remains stubbornly high. I can sum up the dichotomy of big business love/small-medium business hostility in one word: Detroit - the city I grew up in. CA's got more going for it, but long-term things don't look good.
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Steve Schulz
10/6/2012 10:46 AM EDT
This honest article is really a service, not an "embarrassment". The fiscal sustainability problems of CA are talked about frequently around our industry -- believe me he is correct about that. It has been good for EE's to have a healthy "center of gravity" rooted in Silicon Valley. The tree in Brian's closing paragraph is a prophetic "wake-up call" for fiscal responsibility. I live in Austin, where many hi-tech businesses are now re-balancing workforces here from CA. While Austin has it's own challenges, the bottom line is that economics always drives action and opportunity, and the trend is already clear. Please do not wait until the tree falls over.
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Roadman
10/7/2012 12:31 AM EDT
TJ has bigger problem then CA biz environment, he has biz that is not cutting edge, but is trailing edge, which end up competing with companies in China that sell parts for commodity markets at 20% , where TJ has to deliver a 60% GM biz. So with this in consideration , he should relocate himself and his execs to Africa. So i do not buy his crying about CA biz as hostile, instead I challenge him to his Biz.
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John.Donovan
10/7/2012 9:43 AM EDT
California's hostile business environment is hardly subject to debate; if you even open a storefront operation there you get taxed on every dime you make worldwide ('unitary tax'). Cypress makes high value-added parts that are yet to be knocked off by Chinese firms, but getting beaten up on price when selling into China is hardly just their problem. Finally, the problem with Silicon Valley is that it's gotten very expensive to live there. TJ's taking the only sensible course by having most of his employees live in satellite centers around the country and the world.
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Traces
10/7/2012 3:13 PM EDT
No one is doubting that it's harder to get a business license in Silicon Valley than in Austin, but we're talking about why fabs fled the US: it's a non sequitur
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Bert22306
10/7/2012 4:56 PM EDT
I don't find this the least bit surprising. Since WWII, California became the place where people flocked from other states, to go work for high tech industries. For reasons that have been discussed ad infinitum, e.g. the lower cost of manufacturing in Asia, California has more recently become the place where immigrants arrive to escape poverty and conflict from overseas. And the high tech jobs have been moving out.
http://www.library.ca.gov/crb/99/notes/v6n5.pdf
http://longevity.stanford.edu/wp-content/uploads/2011/11/California-Demographic-Overview.pdf
This has a spiraling effect, where social services costs go up and up, and to compensate, the tax structure becomes ever more hostile to the deep pockets, i.e business.
So it's not surprising. Through the 1980s, California brought in high tech, high paying jobs, mostly from immigrants from other states. Then this trend changed. Immigration is now primarily lower income people with lower educational backgrounds, not chasing after those lucrative high tech jobs. You'll note in the above links that both unemployment and poverty increased markedly. Even before th housing bubble burst of 2008.
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Frozen_One
10/8/2012 2:25 PM EDT
Much agreed, Steve,
When comparing California with Texas, U-Haul says it all. As of today (10/8/2012), to rent a 26-foot truck one-way from San Francisco to Austin is $1,962, and yet the one-way charge for that same truck from Austin to San Francisco is just $752.
I don't see an end in sight if CA (and other states) does not stop indoctrinating in it's universities that (a) those who profit are evil and (b) the lie of entitlement: that you don't have to work to have what you want/need; you deserve everything for free (everyone gets a trophy)
If the people do not change, they will continue to elect powers that continue toward this eventual suicide.
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Brian Fuller2
10/8/2012 3:09 PM EDT
Bring back manufacturing and you cement the future of design engineering in the valley. (We're starting to wake up to what we've lost on the design front by off-shoring manufacturing):
http://hbr.org/2009/07/restoring-american-competitiveness/ar/1
Otherwise, things bleed away.
There's always a balance and a tension between a growth a region enjoys because of a business explosion and the needs of the populace as served by its government. More regulation is not always a bad thing.
But, take your eye off the fact that nurturing manufacturing and entrepreneurship is the key to longterm regional growth, and you end up like Detroit.
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Bert22306
10/8/2012 3:30 PM EDT
I don't even know that "manufacturing jobs" per se must be brought back, although that probably can't hurt. What has to be brought back are HIGH VALUE jobs, jobs that bring in the best and the brightest, as they once did. Manufacturing jobs may not necessarily be that, in the future. Or at least, not just manufacturing jobs.
As if it's not bad enough that high value jobs have been moving out, California is also demanding more and more social services. So for example, pregnant women can go on disability, these days. Isn't that nuts? Just one example of the sort of largesse California cannot afford, and is making matters worse by scaring off corporations and wealthy people with punitive taxation.
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Duane Benson
10/8/2012 6:23 PM EDT
It's interesting reading this article right after reading "Samsung seeks to reinvent itself in Silicon Valley" here on EETimes. And, not all fabs have left the country. We still have a pretty big silicon fab footprint up here in Oregon.
I don't know that there has ever been a time when business people haven't complained about taxes, regulations and healthcare costs so I really don't know how much of that is the real issue or is just a reminder that it's been more than a business person would like for my entire life.
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any1
10/8/2012 7:46 PM EDT
California is somewhat a mirror of the US in general. There are pockets of general prosperity like the bay area along with grinding poverty like the central valley. The legislature is gridlocked and there no easy way out of entitlement spending that is sucking away the vast majority of state and local government budgets. Historically Californnia has been a leader of trends in the US. Maybe they can find a way to lead the way out of this morass for the rest of the country.
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jeremybennett
10/9/2012 6:10 AM EDT
To an outsider this all seems terribly inward looking from a highly successful economy. Perhaps the biggest risk to California is turning inward and losing its confidence in dealing with the world.
When I ran a business with offices in both the UK and Mountain View, I didn't find the legislation or the taxation onerous. Sure there were differences, but that's the same with any country. Taken as a whole, similar to the UK.
As an overseas employer, I found three BIG downsides.
1) professional salaries are high compared even to the UK, let alone emerging economies.
2) health insurance is a big additional expense.
3) employment "at will" hugely increases uncertainty in the business - will a key member of staff leave today?
I enjoy working in California. I have lots of friends there and wish you all well. It seems if you can fix the three issues above, you will become a more attractive place for overseas investors.
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Brian Fuller2
10/10/2012 6:30 PM EDT
Jeremy, thanks for the reality check. We do live in a bubble in Northern California and it's good to be reminded that it's a pretty special bubble relatively speaking.
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I_B_GREEN
10/11/2012 12:02 PM EDT
He but we can turn our neighbor in for not registering his out of state car.
yay that will fix things...
But he/she doesnt want to dump money registering in california only to be laid off and have to move to the next state promising stable employmen.
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Michael.FlieslerQA
10/15/2012 12:29 PM EDT
Jeremy,
I am curious about your analysis. It sounds like the recipe for lower costs is
1. Offer low salaries
2. Do not offer benefits such as health insurance
3. Tie employees to fixed-term contracts.
You may not get very many takers in the US, where we expect a living wage, benefits, and freedom of choice.
"Employment at will" works both ways, as many laid-off US Cypress engineers have found. Cypress shrank CA workforce and expanded in India and China. The downside of that has been lower productivity (products take longer to get to market), and (in China), risk of IP "leakage".
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jeremybennett
10/16/2012 3:55 AM EDT
Well that wouldn't be my recipe for a solution. I was just pointing out the differences I observed as an overseas businessman with an operation in California.
It's not the job of a European to tell Californian's how to fix the problem. But at the risk of straying into politics, I can give my thoughts in case they are helpful.
High US salaries (as felt by overseas investors) are a consequence of your exchange rate, which is part due to macro-economic policy and part due to global politics (China buying all those US dollars). The current Federal Reserve policy is driving a weaker dollar, so you are going in the right direction. A weakening Chinese economy is similarly helping.
On health, I observe that in the UK we spend as a proportion of GDP less than half what the US does on healthcare, while automatically covering all the population. That means as an employer healthcare is covered through general taxation, but takes a far smaller amount of money than it does in the US.
In the UK all employees have a contract, usually permanent, but sometimes fixed-term, with defined periods of notice (typically 1 or 3 months). It gives both employer and employee a cushion through uncertain times. The tendency of all competent staff to jump ship at the first hint of uncertainty makes running a business in the US very difficult.
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