Silicon Valley put to the test

Despite the job cuts, the hi-tech capital expects to beat the downturn, says Hilary Clarke

THE JOURNEY to work for the employees of Silicon Valley on Friday was, as ever, a nightmarish story of bumper-to-bumper traffic jams. But the tumbling of shares on New York's Nasdaq stock index over the past week has given the highly paid workers and the multi-millionaire bosses in the world's hi-tech capital more to worry about than getting to work on time.

After almost a decade of astounding growth, and an economic output last year that was bigger than Switzerland's, the Californian hothouse has hit trouble. Technology stocks listed on Nasdaq, which houses most of the Silicon Valley shares, have tumbled almost 30 per cent since their peak last July, with some of the biggest one- day falls taking place in last week's bout of stock market turmoil. And the residents of this digital nirvana are beginning to get the jitters.

"It's been a tough time for industry and our company," said John Chambers, chief executive of Cisco Systems, the third-largest US technology company listed on Nasdaq and the second biggest in Silicon Valley after Intel.

In fact, the downturn in the Valley has been signalled for some time now. In 1997, the combined sales of the Valley's 150 largest publicly traded companies rose, but at the slowest rate since 1986. Some sectors, such as computer manufacturers and semiconductor equipment makers, have actually shrunk, according to a local newspaper, the San Jose Mercury. Companies based in the area have already announced the loss of more than 30,000 jobs this year.

On Thursday, San Jose's Digital Microwave, a maker of wireless transmitters, announced that that it planned to lay off 20 per cent of its workforce, and its executives agreed to take a 10 per cent pay cut. According to the San Jose Mercury, hi-tech industries have cut four times as many jobs in the US in 1998 as they did in the same period last year - now that the global economic crisis, and in particular the slowdown in Asia, is beginning to bite. "People used to say that you don't have anything to worry about," said John Challenger, chief executive of Challenger Gray and Christmas, a Chicago-based industry research group,. "The ice seems a little bit thinner right now."

Even so, there are few signs of recession in San Jose, the Silicon Valley capital whose broad, palm-lined streets are still basking in the sunshine. "People are a bit nervous, definitely, but I wouldn't say there is panic," said one Valley employee. "If you have the right skills in the IT area, you can find a job with no problem at all."

Take 19-year-old Dan Lieberman, a systems engineer with Cisco. A self- declared computer buff from the age of six, this Seattle-born son of university academics is already earning an annual salary of $75,000 (pounds 44,000) plus share options and bonuses.

Underlining people's confidence about job prospects, one Valley employee said: "We have people come in here, take a look at the office, and if they don't like the lay-out they just walk away without even inquiring what the job is about."

With such a buoyant job market, house prices in the Valley are soaring, with the average family home costing pounds 400,000. Rents can double in a week.

Cisco, which supplies the networking systems for nearly all the data that travels over the internet, is expanding so fast that it is putting up 20 new buildings in San Jose this year. Indeed, there are new office complexes going up all over the area. Despite the downturn in Asia, Cisco recorded 31 per cent growth last year. Yet the company's shares fell for 10 straight days last week and have slumped more than 30 per cent since 25 September.

Shares in Yahoo, the internet browser company, slid last week despite announcing third-quarter earnings up by 1,000 per cent to $16.7m (pounds 9.8m) in the third quarter - described by one New York analyst as the best he had seen in "10 years on Wall Street".

Investors in Silicon Valley, and company chiefs and workers, are hoping the share falls are just a blip. Mr Chambers at Cisco said shareholders were merely shaking out their portfolios. "There is uncertainty about the economic situation. What you see, though, is people trying to figure out who are the winners and losers in the transition [to the internet economy]," he said. "I think among the internet companies we are going to see some real survivors and some real crash and burns as well."

Even though the rate of their earnings growth may slow, the likes of Cisco, 3Comm and Intel - the established firms which provide the switching and routing systems that drive the internet - will probably emerge from the global market turmoil relatively unscathed.

As companies see their capital base diminish and markets shrink, they could cut back on investment. Many may improve their use of computer systems to make cost savings. Cisco estimates that its own system saved it more than $500m last year.

"Obviously the world's economic problems are coming home to roost," Bruce Lupatkin, a former research director at Hambrecht and Quist LLC, told the San Jose Mercury last week. But he added: "When investors get a firmer view of the outlook for next year - and that could take some time - the task of separating winners from losers will become more manageable." Indeed, the current slump could provide new opportunities for investors who missed out on the initial spectacular performances of stocks like eBay, the on- line auction company, and Cisco.

Those with more cause for concern are perhaps the small start-up technology companies - or "Cisco Kids", as they are called in California - whose founders dream of one day taking their creation to the stock market and becoming the next Bill Gates. Over the past few years, venture capitalists have been pouring millions of dollars into companies, allowing them not only to survive but to pay their workforces handsomely until the profits roll in and they are eventually listed on the stock exchange or bought up by a larger company.

Fourteen of the top 150 Silicon Valley companies accounted for 90 per cent of the profits there last year, which is why they are known locally as "Gorillas". The role of venture capitalists in Silicon Valley is the main reason for the visit to the area this week by Peter Mandelson, the Secretary for Trade and Industry, who wants to see the Silicon Valley miracle for himself.

While the funds are still flowing, there are signs they are flowing less fast than they used to. Wall Street's troubles mean that these companies, which also act as management advisers to growing technology companies, will probably have less money to spend in the future as their own stock investments shed value.

Let us hope for his sake that Mr Mandelson does not arrive in Silicon Valley a little too late.

job losses in silicon valley

Company Employees Workforce

Applied Materials 3,500 23%

Hewlett-Packard* 2,500 2%

Lam Research 1,500-1,800 30-35%

Silicon Graphics 1,000 10%

Syquest Technology 950 50%

Komag 480 10%

Integrated Device Technology 400 8%

Adaptec 350 11%

Adobe Systems 240-300 8-10%

S3 220 30%

*Reductions through attrition and voluntary severance.

Source: San Jose Mercury

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