Silicon Valley may be down but not out

There is little doubt that Silicon Valley will remain the center of the high-tech universe and that the next boom in high-tech business is likely to be driven once again by the Valley and the thousands of tech companies and start-ups that call the area home.

But for now, Silicon Valley is hurting as never before. Just consider these results from the Valley's top 180 publicly traded high-tech companies

• Their combined sales in the third quarter were down 22 percent to around $40 billion.
• Profits in the third quarter of 2000 topped $3.4 billion. This year, these companies suffered a combined loss of $9.8 billion, an average loss of 28 cents for every dollar of sales.
• Telecommunications sales are down 13 percent, software is down 23 percent and the Valley's traditional stronghold, semiconductor firms, are suffering an average 32 percent sales drop from a year ago.

In addition, more Silicon Valley tech workers have been laid off this year than in any previous year. Already nearly 50,000 permanent jobs have been eliminated, 2.5 percent of the total workforce the worst job loss since 1992 recession. Not included are the tens of thousands of temporary workers companies hired through employment agencies during the boom years.

Also venture capital investments have fallen to less than $4 billion per quarter compared to $8 billion per quarter a year ago.


There have been tough times in the Valley before. In late 1985 the personal computer boom that started with the introduction of the IBM PC in 1983 came to an abrupt halt, triggering the worst decline in semiconductor sale. But that decline of 20 percent pales to this year's decline.

The Valley endured a 4-year slump from 1988 to 1992 in the aftermath of the Cold War and War with Iraq. And in 1996 the tech industry hit a wall causing massive lay-offs at chip and equipment companies.

In the past, however, some sectors of the Valley's broad-based high-tech industry were immune. While chip companies suffered in 1996 and 1997, computer equipment companies, communications and others were just getting into a boom that would last until last fall.

This time, however, almost every sector of the high-tech sectors has been hit. For the most part the current crisis was brought on by a massive over-spending on technology and infrastructure in 2000 when it seemed there was no end to the high-tech boom and the dotcom economy seemed unstoppable.

When the bottom fell out of the dotcom market, most companies supporting the frenzy, such as ISPs, found out they had expanded too rapidly and built up for a level of business that was never sustainable. Of course the events of 11 September only accelerated what was already a fairly steep decline in the high-tech and other economic sectors that was fast spreading around the world by the time the terrorist turned air liners into cruise missiles.

Global chip sales will see record declines of around 34 percent. A projected 6-8 percent drop in PC sales is three times the previous worst year-to-year decline of 1985.

In a way, however, the terrorist attacks are likely to help the economy come out its slump faster. Without the severe and immediate impact on the economy caused by the attacks, the US economy would likely have continued on a steady downward path. The attacks caused the economy to reach bottom much faster than under normal circumstances. Likely the $75 billion economic stimulus package President Bush and a rarely unified Congress approved last month may never have come to pass without the attacks.

As a result of the intense focus on helping the US economy, the recovery is also likely to happen much sooner than in a normal economic cycle.

Silicon Valley will benefit to some degree from the renewed interest in high-technology helping improve security at every level. And many defense electronics firms will see their business improve substantially as the United States is likely to take the battle against terrorism to other nations that harbor terrorism. The use of high-tech precision weaponry will continue to play a key role because of their ability to minimize civilian casualties when terrorists set up operations in or near urban areas.

The Land Warrior project, for example, has already been put on a fast track. The system involves outfitting soldiers with a broad range of tightly integrated high-tech components to increase their effectiveness in the field.

For the time being, however, it appears too early to look for a new period of strong growth in high-tech sales in the Valley. It is still too soon into the recession. While some sectors appear to be bottoming out, there is likely a 2-3 year period ahead in which business will stumble along at a fairly low level.

Inhibiting a new period of strong growth is the absence of exciting new must-have technologies. Two years ago the emerging of the Internet, low-cost cellular telephones and digital photography fueled an unprecedented period of high-tech business. Likely these and other recent products and services will drive the high-tech business with second and third-generation products, such as the new combination cell-phone/PDA that was introduced by Handspring last week.

Consumer electronics may play a major role in the next recovery as a new generation of products that are tightly integrated with the Internet reach the market.

Silicon Valley is also still crawling with hundreds of start-ups that received generous investment funds during the past two years. Many will bring new products, technologies and services to market in the next 24 months that will spark new high-tech sub sectors with high sales and earnings growth.

The significance of Silicon Valley has been written off during every downturn in the tech industry. And each time the Valley spearheaded a new period of prosperity. Chances are history will repeat again this time.