Success Chipped Away at Silicon Valley’s Might

The recent announcement of a $2.7-billion stock offering by search-engine giant Google is a much-needed boost to the Silicon Valley’s struggling psyche.

After nearly four years of bankruptcies, the loss of more than 200,000 jobs and the slaughter of countless dreams of avarice, can the Google moment revive the valley’s economy and restore its near-mythic standing in the high-tech world?

The initial public offering, or IPO, will create another tiny cadre of young multimillionaires, but it will not make it any easier for Silicon Valley to withstand a growing number of competitors, foreign and domestic.

This isn’t to say that the valley’s lease on high-tech preeminence will expire, or that it will become the 21st century’s equivalent of the Rust Belt. The region’s residual technological prowess and financial resources are simply far too great. What seems more likely is a slow, continual downsizing of its traditionally outsized role in the world’s high-tech marketplace.

“Silicon Valley used to be the center of the galaxy in technology when there were fewer planets,” says John Sien, a former high-level executive at Hewlett-Packard. “We controlled most of everything. Now that galaxy is distributed.”

Sien contends that the valley is no longer at the core of the technology industry but has become more of a hub. The valley will continue to incubate new technological trends, serve as a media clearinghouse for the industry and be a prime source of funding for promising companies.

In short, its new role will be similar to what Wall Street does in finance and Hollywood in entertainment.

Yet it will not reclaim its former dominance in manufacturing and research and development. The bulk of new employment and many leading high-tech companies will be in such diverse locales as Arizona, the Great Plains, India and China.

The valley’s current competitive crisis grew largely out of its success.

Since the 1970s, the area between the San Francisco Peninsula and its southern suburbs has enjoyed rapid income and population growth. These developments had two unanticipated effects.

First, the transformation of a mostly rural area into a premier industrial region stimulated planners, entrepreneurs and investors to target high-technology development.

Thirty years ago, economic development officials went after manufacturing giants such as General Motors. Today, they seek ways to synthesize the “elixir” that transformed the Silicon Valley into gold.

The valley did much to promote the high-tech declustering now haunting it. The telecommunications technology and software developed there allowed for the growth of jobs and key marketing functions elsewhere. As a result, Silicon Valley has become the virtual home of many companies.

Valley companies also exported their innovative business culture. Silicon Valley-based attorneys, accountants and consultants spread the high-tech model -- critical technologies, plans for valley-style industrial parks, venture-capital financing -- around the world.

In the United States, there are valley clones operating in Greater Washington, Atlanta and Orlando, Fla., and in such smaller communities as Madison, Wis., and Fargo and Sioux Falls, N.D. More impressive is the development of technology hotbeds in labor-rich China and in India, which alone possesses roughly one in three of the world’s software engineers.

The rapid dispersion of the Silicon Valley model, says Phil Mahoney, a principal in the valley’s largest commercial real estate firm, means that even in a broad tech recovery, as much as one-third of the region’s industrial space will remain unused.

“When a company here grows by four, one will be here, one will be in Austin and two in Mumbai [Bombay],” he says.

The second unanticipated effect of the valley’s success centers on the deteriorating quality of life there. As incomes and population increased, the area became more crowded and expensive.

Twenty years ago, the Santa Clara Valley was a relatively affordable, classic suburbia. Today, even small houses cost nearly $1 million, placing the area out of bounds for newcomers, particularly younger families in their 30s.

The consequences of high housing prices and traffic congestion have become less tolerable since the late 1990s. Surveys of graduating engineering students from Iowa, a longtime source of valley talent, reveal a shift in residency preference to more affordable places such as Minneapolis, Denver and Kansas City, Mo.

Sacramento -- where roughly three in 10 new residents are from the Bay Area -- as well as Des Moines, Las Vegas, Reno and Phoenix increasingly appeal to knowledge workers, notably young couples with children.

The valley’s working-class residents shouldered the hardest blows.

In the 1970s and ‘80s, large employers -- Intel, Hewlett-Packard and Lockheed Missile and Space -- offered high-wage jobs and good benefits to tens of thousands. These workers varied widely in skill level.

At the same time, smaller supplier firms, many in basic manufacturing, employed -- albeit at somewhat lower wages -- a large portion of the growing Latino and Asian immigrant population.

The dot-com boom of the 1990s dealt a lethal blow to this highly diverse economy, largely at the expense of manufacturing workers. But only when the bubble crashed in 2000, says Leslie Parks, San Jose’s former economic director, did cities and investors finally feel the pain.

As public funds and speculative capital dried up, ambitious billion-dollar plans to transform downtown San Jose from a glorified Modesto by the Bay into the “capital of Silicon Valley” cratered.

The political climate made matters worse. Once a bastion of pro-business moderate Republicans, the region was now dominated by left-leaning Democrats.

Just as the tech market began to sag, new regulatory initiatives were imposed on business. Strict development controls, pushed by powerful environmental interests, stymied developer attempts to increase needed housing, which explains why the recent downturn did not dampen housing costs.

The convergence of politics, high living costs and a weak tech market transformed the valley from one of the nation’s most prodigious job producers into one that, over the last four years, suffered the highest rate of job loss of any major metropolitan region in the country.

These losses -- far higher in percentage terms than many other tech-oriented regions -- were not restricted to manufacturing but included finance, business and information services.

The powerful, secular trends that set in motion the decline of Silicon Valley appear to be slowing, although the region did lose an additional 23,000 jobs last year.

Companies such as Google and emerging industries including biotechnology and nanotechnology may fail to reignite the region’s former broad-based growth. Taken together, the valley’s three current corporate stars -- EBay, Yahoo and Google -- employ only about 5,000, hardly enough to offset the mammoth job loses of the last decade.

Even a wildly successful Google offering may do little more than provide a shot in the arm to the luxury home market, says Mahoney, the commercial real estate agent.

Yet the news is not all bad. Google’s success, so reminiscent of the valley’s glory days, does burnish the valley’s reputation as a peerless center for innovation.

And in the coming decade, though most tech companies and entrepreneurs may find the valley a difficult place to do business, many may still want to maintain a presence there.