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Silicon Valley Slump Shows Shift of U.S. Technology

April 5, 2010 at 12:00 AM EST
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Correspondent Spencer Michels reports on how the economic downturn has hit Silicon Valley and what it means for the future of U.S. technological innovation.
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SPENCER MICHELS: Starting in the 1960s California’s Silicon Valley, named for the material used to make most computer chips, became the booming technological hub of the country, and perhaps the world. Companies like Apple were selling the future.

NARRATOR: Our Macintosh is here. The future is better than you expected.

SPENCER MICHELS: This was home to many hot companies and exciting innovations: microprocessors, software, biomedical devices, the Internet, smartphones and much more.

Investments, profits and employment soared, and the Valley became known as the engine sparking the U.S. economy. But, today, there are clouds on the horizon, and the denizens of the Valley know it.

RUSSELL HANCOCK, Joint Venture: Silicon Valley Network: Our topic this evening is Silicon Valley itself. What’s happening to Silicon Valley?

SPENCER MICHELS: Russell Hancock, whose group Joint Venture: Silicon Valley Network co-sponsored a new study of the economic health of the region, hosted a recent radio show with two economists. Doug Henton did the reports’s research and laid out the problems.

DOUG HENTON, Collaborative Economics: We lost 90,000 jobs. So, it was a tough year for us in terms of employment. Our real per capita income has been falling at a faster rate than the nation.

SPENCER MICHELS: And Steven Levy at the Center for the Continuing Study of the California Economy at the Center for the Continuing Study of the California Economy said Silicon Valley, like the rest of the country, is feeling the pain.

STEPHEN LEVY, Center for the Continuing Study of the California Economy: The country is in a fierce competition with countries like China and India and others who are educating and investing and competing.

SPENCER MICHELS: Hancock says Silicon Valley can’t afford to rest on its reputation.

RUSSELL HANCOCK: Silicon Valley used to be the center of the universe. No question, we were the epicenter. No longer the case. To meet stiff competition, you have to have your act together. You have to be firing on all of the cylinders. And we can’t say that in Silicon Valley right now, because there are so many things that are not working for us.

SPENCER MICHELS: Signs of the downturn are hard to miss. You can see the vacant buildings on both sides of Highway 101, the so-called main street of Silicon Valley.

From 2008 to 2009, vacancies in commercial real estate jumped 33 percent. Parking lots are empty where spaces were recently hard to get. The downturn is topic A for practically everybody.

Some of that talk occurs on the four-mile hiking loop around the Stanford dish, a radio telescope near the university. It’s a favorite place for Judy Estrin to walk with colleagues. She’s Cisco’s former chief technology officer and the author of “Closing the Innovation Gap.”

And she agrees, Silicon Valley is losing its edge.

JUDY ESTRIN, author, “Closing the Innovation Gap”: We have lost our balance. We have lost our way in terms of the health of that ecosystem, as I call it. We have what I call an innovation deficit, in that we are harvesting the seeds that were planted 10, 20, 30 years ago, but we’re no longer planting seeds at the right rate.

SPENCER MICHELS: She says that long-term risk-taking, which spurred America’s high-tech industry, is eroding.

JUDY ESTRIN: Everybody has become very short-term-focused. Everybody but — wants rewards instantly. And, so, they tend to go to the things that can pay off in a year or two years or three years, as opposed to working on things that may fail or may pay off big in 10 years.

SPENCER MICHELS: Currently, 60 percent of scientific talent in the Valley is foreign-born. Highly educated workers from abroad used to flock here to go to school and then stay to work. But the numbers are down. It’s harder to get a work visa, and expanding high-tech industries in China and India are using more homegrown talent.

RUSSELL HANCOCK: We’re not granting as many degrees to the scientists and engineers coming from China and India. They’re finding Silicon Valley a less attractive place to be. Their home economies have become far more attractive.

SPENCER MICHELS: And California schools aren’t picking up the slack by churning out top high-tech workers.

RUSSELL HANCOCK: So, the question becomes, if they’re not coming from other places, do we have a homegrown work force that can move in to those highly creative, highly skilled professions? And our indicators are not good.

SPENCER MICHELS: And homegrown engineers are scared off by Silicon Valley’s notoriously high housing prices. Jaron Feriante, a Stanford engineering grad, works in his father’s company installing foam roofs and solar panels.

JARON FERIANTE, Dura-Foam Roofing: I’m really concerned about the future of the Valley. I grew up here. And it turns out that most of my — the guys I went to high school with moved to different parts of the United States, as it turns out it’s really hard to afford a home here. And I earn about the median income. I can’t afford a home. I’m renting. So…

SPENCER MICHELS: For those who remain here, the downturn can be devastating. State employment centers are busy trying to help highly educated techies whose companies have laid them off at a time when high unemployment also plagues the non-tech sectors.

We talked with several of them, including Rich Ballacera, a graphic designer.

RICH BALLACERA, graphic designer: My mortgage is underwater, yes. And I have been out of work since — since the beginning of June.

SPENCER MICHELS: Paul Brunemeier, a Ph.D. in physics, tried to figure out what went wrong.

PAUL BRUNEMEIER, physicist: The Valley has certainly changed character in the time that I have been here. And there are things going in our nation that are working against us, tax laws that favor sending operations overseas, not having to pay taxes on it.

RICH BALLACERA: We can’t rest on ideas that we are the king of the microchip.

SPENCER MICHELS: Some remain positive, like former document manager and high-tech salesman Robert Weinstein, and project coordinator Pat Furaganan.

ROBERT WEINSTEIN, former document manager: I’m an optimist.

ROBERT WEINSTEIN: It has to get better, because it can’t get much worse, right? I mean, these things tend to be cyclical.

PAT FURAGANAN, project coordinator: Even though, yes, we’re kind of — it’s kind of down right now, and — and people are leaving, everybody is kind of looking for the next great thing.

SPENCER MICHELS: Furaganan’s former employer, Applied Materials, figured the next big thing was green energy. One of Silicon Valley’s oldest and biggest companies, with 12,000 employees, it laid off 10 percent of its work force and moved almost all manufacturing overseas.

Originally, Applied Materials was a maker of machines that manufacture chips, the brains in computers. But, today, says chief technology officer Mark Pinto, the company is also successfully building machines that make these advanced solar panels. And it is such a large presence in China that Pinto himself and his family are moving there.

MARK PINTO, chief technology officer, Applied Materials: There’s been a lot of investment in energy in startups. We’re one of the few, I think, big companies that have made a bet in this area. But it’s already paid off. We have had, last year, a billion dollars of revenue in solar, after getting in the market really in three years.

SPENCER MICHELS: But venture capital, money raised from private and institutional investors, which has been the lifeblood of Silicon Valley startups, is in short supply, with venture capitalists unwilling to take risks like they used to.

Judy Estrin says, all this is hurting the national economy.

JUDY ESTRIN: The Valley is a very critical part of the overall national ecosystem. It’s one of the strongest sparks in the country. It’s very important to the country to have Silicon Valley thrive. And I would argue that it’s very important to the global ecosystem to have the U.S. thrive.

SPENCER MICHELS: If and when the national economy improves, Silicon Valley expects things will get better here as well. But whether the Valley remains the innovative engine it once was remains to be seen.