Changing market will prolong woes in Silicon Valley

PALO ALTO, CALIF. PHC IPB — PALO ALTO, Calif. -- Questioned a year ago, many local computer executives would have told you the recession was having little effect on their businesses. Ask them today, and you'll get a much different answer.

The economic recession of 1990-1991 has helped change the computer business, and Silicon Valley, forever.


The valley has shone through several recessions in the past, most notably a regional turndown in 1985 when tens of thousands of high-tech workers in the San Francisco Bay area were handed pink slips. Companies disappeared overnight that year. But when the economy rebounded in 1986, so did the computer business.

The Intels, the Apples, the National Semiconductors saw revenues and profits resume their annual gains of 20 percent to 50 percent. Many more jobs were created on the rebound than were lost in 1985.


But this downturn is different for one simple reason: When it's over, Silicon Valley will find it much more difficult to get back on its merry way to prosperity.

That's because the very nature of the personal computer business is changing -- a transition that would have occurred with or without the economic woes.

What's happening is this: Personal computers have become commodities, like fax machines, like copiers. Since most PCs are the same, no matter who makes them, corporate buyers are shopping for bargains rather than technology. This trend was inevitable as the industry matured, but the recession sped things along.

The recession has also resulted in corporate buyers -- the heart and soul of the industry -- purchasing fewer machines. Revenue growth in the PC industry this year is expected to be only 5 percent to 7 percent, vs. 20 percent several years back. Again, however, the recession is only partly to blame. The PC market was already nearing saturation before the economy headed south.

The result of both these trends is that computer companies are changing the way they do business. No longer can the IBMs, Compaqs and Apples charge premium prices for their computers, a happenstance that allowed these companies frothy 40 percent or 50 percent gross margins. All three have had to lower prices, and profit margins have fallen accordingly. In response, the companies have laid off thousands of workers and changed their businesses to operate with less fat.

Another change from the past is that much of the San Francisco Bay area's economy has come to depend on the health of the personal computer, and less on defense contracts and manufacturing.

If PCs don't sell, or if they sell at super-low prices, the effects rumble through the high-tech food chain. For example, if Compaq Computer Corp., based in Houston, isn't selling as many PCs as before, then it doesn't build as many of the machines. In turn, it orders fewer disk drives from the likes of San Jose-based Conner Peripherals Inc. Lagging PC sales also means fewer Intel microprocessors are needed. If chip sales slow, than Applied Materials Inc. sells less chip-making equipment. Computer dealers sit on their hands.

Silicon Valley will be affected by this recession in another way.


When Apple decided to expand its customer service and support operation, it did so in Austin, Texas, not the bay area. When it needed more manufacturing capacity, Apple headed to Colorado and Ireland. Advanced Micro Devices Inc. and Applied Materials also have expanded elsewhere.

The message is clear: Profit-starved computer companies can no longer afford the high price of operating in the bay area. They'll keep their corporate headquarters here, and probably their research and development, to take advantage of local universities. But manufacturing, service and support jobs are flying out of California.

Luckily, this has not been a severe recession. If it were worse, people would stop buying computers altogether. Also on the bright side, computer companies are learning to run more efficiently, to bring products to market more quickly and to offer more services to customers. All three will help U.S. competitiveness in the long run.

But the valley has been shaken. There will be no more business as usual.