When high-tech sags, it hits a wide circuit
When Carl Symons opened his catering business, Concordant Events, last February, he thought Silicon Valley would be a great market. And things started well enough: In March he landed a contract with Apple Computer to serve one dinner a month, at $3,500 each. He catered three dinners before the computer firm discontinued its monthly ``Apple University'' program for software developers -- and canceled Mr. Symons's contract.
``My focus was Silicon Valley,'' he says. ``But just at the moment that I thought things were coming together, the slump hit.'' He now serves residential customers in San Francisco.
The computer industry is not a kid anymore. Thousands of people and many a city depend on it, and as the industry falters, so do those lives and economies.
As recently as a year ago, when the industry was still clipping along at a 20 percent growth rate, ``every city wanted branch locations of large high-tech companies,'' says Candee Harris, who researched the computer industry when she was an economist at the Brookings Institution. Besides Boston's Route 128, there were at least 12 hubs of high-tech concentration, and more to come as cities offered tax concessions and other economic incentives to lure computer companies.
But today, says Ms. Harris, the industry's mystique has faded: ``The high-tech community is no different from other large manufacturing industries; it's large, vertically integrated, and susceptible to cycles.''
Each satellite Silicon Valley has been hit by the computer slump, which has seen profits dive and thousands of people laid off since the beginning of the year. So far this month, four major players in the business have laid off 5,400 people.
On Monday, Data General, predicting losses for the quarter ending June 29, announced it would lay off 1,300 people and shut down its United States manufacturing plants for five days this summer. Apple, which says it will lose money for the first time it became a public company, is shutting down three plants and laying off 1,200. National Semiconductor, which makes computer chips, is paring its work force by 1,300. Wang, the minicomputer maker, is laying off 1,600 and will suffer losses for the first time in its history. And although it has not announced layoffs, Hewlett-Packard said Monday it will close most US facilities during the already short Fourth of July week and ask 84,000 workers to take three days off, paid or unpaid.
If computers remain in the doldrums, analysts say, it is the more remote and less diversified high-tech cities -- not the already established hubs on both coasts -- that will suffer the most. In the meantime, cities trying to lure high-tech will find the companies are not biting, as they scale back plans to set up new manufacturing plants and even shut some down.
Though the products of each high-tech hub may vary, there is a ``tecky'' culture that tends to make computer companies cluster near each other. ``Marlborough is not different from Sunnyvale [Calif.], except for the weather,'' says Maylun Buck-Lew, a manager at Sequoia Systems, a young mainframe manufacturer in Marlborough, Mass.
``Your whole social life revolves around the company, and there's a whole subculture.'' Dr. Buck-Lew, who worked on both coasts at three high-tech jobs before coming to Sequoia, says computer people tend to flock, even in off hours. She lives in a 480-member complex that is inhabited largely by Digital Equipment Corporation and Raytheon employees.
There may be a character similarity, but there are regional differences, says Joseph Weiss of Bentley College, Waltham, Mass. In interviews with top executives of 20 big high-tech firms -- 10 in Silicon Valley and 10 in Boston -- Dr. Weiss and Andre Delbecq at Santa Clara (Calif.) University found a link between the region's values and the style and type of business in a computer company.
The executives said that Bostonians, who are often native New Englanders, tend to be more long-term in outlook, and more stable, formal, and loyal to the company and family than their counterparts on the West Coast. The professors found that Boston firms, with their deeper roots in the region and longer customer relationships, tend to be more oriented toward the end user, giving customers a full range of hardware and software products. The more transitory, footloose Silicon Valley, they said, tends to emphasize fast-paced product innovation in areas such as semiconductors.
Computer companies have economic as well as cultural reasons to cluster. It's good to keep an eye on what the competition is up to technologically, says Harris. And companies, which cannot seem to inhale young talent fast enough, go where the trained people are -- either at universities such as Stanford or the Massachusetts Institute of Technology or at nearby competitors.
Ted Lyman, associate director of public policy at SRI International, a consulting firm, throws in a few other factors: having enough land to expand and adequate infrastructure (services, highways, etc.); a friendly relationship with the local government (something the High Technology Council in Boston says is sorely lacking); a nice climate and living standard (entertainment, restaurants, culture) to lure employees; and a diverse economy so that suppliers, services, and their customers are nearby.
Places like Silicon Valley and Boston have all of these, and as the computer industry took off, so did real estate prices. According to the National Association of Realtors and the California Association of Realtors, the median sales price of existing single-family homes in San Jose (which covers much of Silicon Valley) was $125,500 in April. In Boston it was $108,600. The national median was $73,900.
In part because of high taxes and land prices, companies began to spin off manufacturing plants into other areas of the country, as well as overseas. When possible, they have wanted to keep their research and development and manufacturing plants close together: Because computer technology is changing so fast, companies need to tinker with prototypes before mass-producing them.
Massachusetts-based Digital Equipment has four plants in New Hampshire and one in Vermont; Data General has one in New Hampshire and is building another there. ``New Hampshire is lunching off of the Massachusetts tax structure,'' says Kenneth Flamm, a research associate at the Brookings Institution, whose book on the computer industry, ``Targeting Technology,'' is due out in late 1985 or early '86. ``Massachusetts taxpayers are financing New Hampshire's economic development.''
But state and local taxes are a relatively unimportant factor, says Harris, since they are usually only 2 to 3 percent of business costs. And a low corporate tax rate often flags companies away from the state, since it usually means the area is underdeveloped, has poorer infrastructure, and is too remote to attract and hold a highly educated work force.
But computer companies will likely be choosing more-remote areas for their manufacturing plants for another reason, Harris says: labor costs, which are about 60 percent of total costs. By going to areas where there is less unionization, they can take advantage of the downward pressure on wages. And unlike the steel or petrochemical industries, manufacturing in the computer industry is light and clean; that attracts women to the work force, who tend to shun unionization. That is particularly helpful when the industry slows down, since ``it is more efficient for a large company to just shut down a whole plant in outlying areas than to cut, say, 20 percent of its work force across all plants,'' she says.
This does not bode well for low-tax states, says Dr. Flamm. Low-tax, less-developed states will tend to get the manufacturing plants, while high-tax states, which have the universities and cultural amenities, will retain the R&D facilities. But as more and more manufacturing is done offshore -- particularly in Southeast Asia, where labor costs less, and in Japan, where production facilities are highly automated -- the US manufacturing plants, not R&D facilities, will be taking it on the chin.
This is in fact already happening in places like Louisville, Colo. Two of the area's largest employers, Storage Technology and Miniscribe, makers of disk drives, have been squeezed by low-cost foreign competition. Recently they laid off 5,000 and 1,000 people, respectively. Storage Technology employed 4.5 percent of the work force both in Louisville and in nearby Lafayette.
``Those economies are very hard hit,'' says William Scanlon, business editor at the Boulder Daily Camera newspaper. ``People were pretty optimistic for a while, but now they are starting to move out of town.'' In the last year, the number of houses for sale in Louisville has nearly doubled, he says. But the number sold has increased only 6 percent, even though the average price of a condominium has fallen from $75,000 to $73,000.
In the long run, however, more and more manufacturing will be coming back to the US. As plants become more automated -- like Apple's Macintosh plant in Fremont, Calif., in which labor costs are reportedly 1 percent of the total cost of production -- wages will be less important. Also, says Harris, wage rates overseas have been rising more quickly than in the US. The cost of shipping parts back and forth to Asia, for example, will eventually offset the savings in labor costs, she says.
Despite its cyclical problems, says Anthony Downs, a senior fellow at the Brookings Institution, ``No one's likely to throw high-tech out on the street. It is still a high-growth industry.''