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Taking Its Place In The Pantheon


Special Report -- Silicon Valley -- How It Really Works

TAKING ITS PLACE IN THE PANTHEON

Silicon Valley's starring role in the Information Economy isn't likely to be eclipsed any time soon

In the economic history of 20th century America, few places have achieved larger-than-life, almost legendary status. Wall Street, Detroit, and Hollywood--these names are synonymous with financial might, manufacturing prowess, and glamour. At times, they have dominated the rest of the economy, ruling over their industries and captivating the national imagination.

Now, Silicon Valley has joined the pantheon of mythic places--the first addition in more than 50 years. The Information Revolution is driving economic expansion, with computers and semiconductors accounting for some 45% of industrial growth since 1993. And Silicon Valley is the apotheosis of this revolution. Tech companies based in and around the Valley now have a market value of some $450 billion--a number approaching the market capitalization of the entire French stock market. As a group, these companies have trailblazed the business behavior and culture that define the Information Economy. (For a roster of the Valley's largest public companies, see www.businessweek.com.) In the U.S., the only locale with near-comparable economic heft is Wall Street. Like high-tech companies in the Valley, New York-based financial-services companies have an aggregate market value of about $400 billion. By comparison, the auto companies and suppliers of Detroit--erstwhile epicenter of the manufacturing economy--are worth barely $100 billion.

MIND GAME. That puts Silicon Valley front and center. What's more, if the economics of mythic places holds true in this 50-mile corridor of startups and technological creativity, it won't lose its starring role in the Information Economy. True, the cost of living and doing business are far higher than in other places. But that matters less than issues such as the deep pool of top-notch people and suppliers, the chance for individuals to get rich--often, quick--and the readiness to latch onto change. These qualities simply cannot be duplicated elsewhere. Just as Hollywood and Wall Street draw the starstruck and money-minded elite, Silicon Valley attracts the best and brightest minds in technology.

Indeed, Silicon Valley is gaining a bigger share of brainpower across a wide array of industries. Semiconductor jobs in the Valley are up by 29% since 1993, according to Collaborative Economics Inc., a Palo Alto-based consulting firm, outpacing a 20% semiconductor gain nationwide. Software jobs are up an astounding 70% since 1993, double the national average, despite the costs and congestion of the area. "We were worried that all of California's brains would go to Idaho or Santa Fe," says Larry J. Kimbell, director of the UCLA Business Forecasting Project. "But the opposite is happening."

Moreover, Silicon Valley has shown time and again that it can reinvent itself--a quality that will be key to its survival. Consider this: Wall Street and Hollywood have dominated the securities and movie industries since the 1920s by adapting to changing conditions. In contrast, U.S. auto makers, which date to the same period, became ossified and inflexible. While a substantial share of auto jobs remain in Detroit and its suburbs, the area is no longer a font of cutting-edge thinking. Foreign auto companies locate their new factories in Tennessee or South Carolina, not Detroit, while foreign technology companies are flocking to Silicon Valley.

How long can its dominance continue? Indefinitely--since it is both the engine and the model for the rest of the economy. The Valley's industrial landscape is America's dreamscape: tight links among companies and top-notch universities, unlimited access to venture capital, a roiling influx of brilliant engineers from around the world, and a diverse mix of high-tech companies, both large and small. What's more, the Valley is self-replenishing. The proceeds from one company's success are plowed back into the next generation of startups. "The wealth that has been created there stays there," says Mitchell L. Moss, an urban economist at New York University's Wagner School of Public Service.

A historic pattern also bodes well for the Valley. Mythic places, it seems, are not subject to the same cost constraints as other locales. Wall Street and Hollywood continue to thrive even though New York and Los Angeles have long been among the most expensive areas in the country.

By these standards, the congestion and high costs in Silicon Valley, as aggravating as they may be, are not out of line. Hourly manufacturing earnings are about 25% higher in Silicon Valley than elsewhere, but that's down from the 29% wage differential in 1992. Home prices this year are up sharply. Still, the gap with the rest of the country is no wider than it was in the early 1990s.

Perhaps a bigger problem is finding space in the Valley, which has long favored sprawling one- or two-story structures. Increasingly, companies cope by building up rather than out. Adobe Systems Inc. chose to build a new 18-story headquarters in San Jose. "You don't need to have spread-out facilities," says Douglas Henton, president of Collaborative Economics.

Can anything topple Silicon Valley? Its biggest strength today could be its most vulnerable point down the road--technological innovation. Here, Detroit offers an object lesson. The early auto- industry pioneers were intensely creative, with steam-powered and even electric-powered cars vying with gasoline models. Auto makers had little money for large manufacturing operations, so they relied on parts and components bought from outside vendors. Indeed, Detroit's initial competitive advantage over other areas came from its unmatched pool of skilled craftsmen, machine shops, and other suppliers. "In its early days, Detroit looked a lot like Silicon Valley," says Susan Helper of the National Bureau of Economic Research.

OUT OF GAS. But the astounding success of the big auto companies in the 1920s helped destroy the industry's flexibility. As car sales tripled from 1921 to 1929, Ford Motor Co. and General Motors Corp. started making most of their own parts, eliminating the supplier network that had nurtured the industry. Henry Ford went so far as to process his own iron ore, and he rejected using aluminum because he couldn't control aluminum makers. Bendix, which invented fuel injection for fighter planes during World War II, couldn't get U.S. auto makers to use the new technology for years. No longer open to ideas from the outside, Detroit grew vulnerable to foreign competition. Ironically, the same strategies that had increased profits and control in the past had the effect of hermetically sealing the industry from within.

If you heed the paranoid rants on the Internet about the dangers of Intel Corp.'s high-tech hegemony, you may fret that Silicon Valley is headed down the same path. Hasn't Intel extended its influence from microprocessors to motherboards, whole PCs, networking devices, and supercomputers? Isn't Intel, even now, trying to take control of the graphics-chips market with its purchase of Chips & Technologies Inc.? Could Intel, in short, trigger a cascade of events that sends Silicon Valley sliding down the same slippery slope as Detroit?

Most Intel-watchers say the giant is too shrewd to fall into such a trap. It is more likely that Silicon Valley as a whole will follow Hollywood's model. From 1946 to 1956, Tinseltown's movie industry saw attendance drop by half as television became popular. New York, home to the TV networks, was the source of most early programming. But Hollywood struck back. In 1954, Warner Brothers made the first deal to produce films for television. By 1957, virtually all the dramas on TV were coming from Hollywood. Meanwhile, it kept its original franchise. Today, almost all of the highest-grossing pictures globally still come out of Hollywood.

Wall Street has also been forced to reinvent itself. In the late 1980s, the focus of global financial power seemed poised to shift to Tokyo and London, with U.S. brokerages seeking out the biggest pools of capital. Fleeing New York's high costs, many Wall Street firms moved back-office operations out of Manhattan. Still, these companies have prospered by generating wave upon wave of financial innovation. "The search for new ways to make money is what New York specializes in," says NYU's Moss.

Like Hollywood and Wall Street, Silicon Valley embraces reinvention. Most recently, it bounced back from defense cutbacks in the late 1980s and early 1990s that cost 40,000 jobs. By comparison, Boston's Route 128 is a cautionary tale: The minicomputer companies that made the region a major technological force in the 1980s--including such giants as Digital Equipment, Wang Laboratories, and Prime Computer--all failed to adjust to changes in the marketplace, especially the personal-computer revolution.

Not Silicon Valley. The diversity of its companies and workforce creates a more complex and robust economic mix than ever existed in Detroit or along Route 128. This try-anything milieu is what enabled Netscape Communications Corp. to hurl Microsoft Corp. a curveball in 1995 in the form of its popular Navigator Web browser. Sun Microsystems Inc. has pulled off a similar coup with its Internet Java software. In the same fashion, custom-chip companies such as LSI Logic still run circles around Intel when it comes to specialty chips. "Silicon Valley's distinct advantage is to create new markets," says Annalee Saxenian, a regional economist at the University of California at Berkeley and an expert on Silicon Valley.

The Valley--and the rest of the U.S.--must remain vigilant. Left uncontained, giants such as Intel and Microsoft could yet despoil the Valley's virtuous cycle if they become so successful that they either buy up or squeeze out too many small competitors. Such an outcome, while unlikely, would eventually foul the fertility of the region. Alternatively, a deep recession, combined with a big drop in the stock market, could kill off a lot of small companies and dry up the influx of capital.

And then there are earthquakes, floods, famines, and fire. But as long as innovation, diversity, reinvention, and sheer technological elan continue to suffuse Silicon Valley, the hippest companies will find a way there--and the tech elite will follow. Such is the power of mythic places--and right now, Silicon Valley is creating legends of its own.By Michael J. Mandel in New YorkReturn to top


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