Date: Tue, 30 Dec 2003 22:41:42 -0800 From: Norm Matloff To: Norm Matloff Subject: Mercury News fears decline (the Valley's, and its own) To: H-1B/L-1/offshoring e-newsletter Some weeks ago, Intel Chairman Andy Grove attracted a lot of attention by saying that the U.S. tech industry is at serious risk of demise, due to offshoring. (He readily admitted that his own firm is engaging in offshoring.) Though many American engineers and programmers were heartened by Grove's speaking out, I pointed out that if you look closely at his proposed remedies, there is basically almost nothing there for the workers--it's stuff that's good for Intel, not for workers. He wants R&D funds, not a policy change on H-1B or offshoring. Whatever U.S. jobs would be generated by such funds would go to H-1Bs, and there wouldn't be that many of them either. For that matter, the R&D jobs could go to India. Recall the San Diego biotech firm I cited recently, which had all its R&D abroad (and even its CFO!). And for the record, government funding for R&D is at an all-time high, contrary to what's implied here. Grove also wants more tax breaks for Intel, etc. As I said, these are mainly for Intel, and the trickle-down effects for engineers and programmers will be minor. Of course Grove also made the obligatory call for the U.S. educational system to produce more engineers and programmers, an absurdity since most of them won't get engineering or programming jobs. So, now we see the Mercury following up on this, with a roundtable discussion, one which unfortunately (but not coincidentally) has no engineers, no programmers, no one from the professional organizations (notably excluded was the new union-affiliated tech organization TechsUnite). The Merc's lack of any concern for the worker has never been more apparent. Interestingly, though, the Mercury has a lot at stake in all this. If Silicon Valley does decline, they not only lose revenue but also prestige. (They call themselves "Silicon Valley's newspaper.") Again we see a call for retraining the engineers and programmers. Retraining to do WHAT? This is one of the fundamental myths. These people reason that in past history, when an industry was lost to foreign labor, Americans would have something better to move on to. But key to that was that that new, better thing is something that the foreign workers can't do. THIS SITUATION DOES NOT HOLD TODAY. Just what is it that is of a technical nature that these people think won't be done more cheaply by H-1Bs or offshore workers? Enclosed you'll find an intro piece/editorial, then the roundtable discussion transcript, and finally an interview of Intel CEO Craig Barrett. In the transcript, here are a couple of things to look at in particular: * The exchange between venture capitalist Kevin Fong and Intel VP of Worldwide Government Affairs Jim Jarrett. Fong points out that Intel has moved its most important R&D project to India. Jarrett--whose fancy title translates to "chief lobbyist" in plain English--denies it, but his denial is nonsense. For instance, Jarrett points out that Intel has built new factories right here in the U.S. Well, factories are not for R&D. * Rep. Lofgren's remarks are disgraceful. First she uses her favorite evasive tactic, that we need more data. Then says we need retraining, when she knows full well (explained in detail in the meeting the Programmers Guild had with her) that major U.S. employers are laying off American engineers and programmers and forcing them to train their foreign replacements. Obviously it's the foreign workers who need the training, not the Americans. And once again, she can't resist saying we need American kids to study more math and science; she ignores the fact (also explained to her by PG) that there are no jobs in math and science. Lofgren then totally contradicts herself: I have a neighbor who recently was sent to India to train a whole unit. He has just been told that he's been laid off. The whole place where he works is now going to the people he trained. He's got a master's degree from an excellent university, in a scientific field. So did that neighbor not study enough math and science, Zoe? Does he need training? She knows full well that her neighbor is typical. The interview with Craig Barrett is even worse. He denies wanting corporate welfare, but that's exactly what he wants. And even worse, he is committing welfare fraud, because Intel doesn't need welfare; it's just plain greed. Here Intel is playing role in the demise of the American middle class, and instead of apologizing, he callously mines the situation for more money for Intel. No wonder all the participants here make nervous statements about popular unrest. Norm http://www.mercurynews.com/mld/mercurynews/news/opinion/7584846.htm Sun, Dec. 28, 2003 Valley's leadership role at risk GOVERNMENT, INDUSTRY MUST ACT TO REMAIN CENTER OF INNOVATION Namas Bhojani / Special to the Mercury News Silicon Valley's historic role as the world's center of technology and innovation is facing an unprecedented challenge that threatens its quality of life, its economic vitality and its prosperity. The challenge stems from the roughly 300 million skilled workers who have joined the global economy in the past few years or will join it soon. They are primarily in China and India, but also in Russia, Eastern Europe and elsewhere. They are increasingly capable of doing many, if not most, of the engineering and design jobs that have provided scores of Valley workers a standard of living that is the envy of the world. And they are willing to do those jobs for wages that are as little as one-fifth of those earned by Valley workers. The implications are dramatic, not just for this region, but also for America's technologic and economic leadership. Policymakers and industry leaders cannot afford to sit on their hands, and there is plenty for them to do. First, we share the view of most technology CEOs that the United States must decide to compete. That resolve should anchor America's response. Setting up barriers to trade will not work. It will only undermine the ability of American companies to survive. To compete successfully, the United States must live up to its commitment to provide a world-class education system at all levels. It's the only way to ensure that America's workforce remains ahead of its rivals. It also must revamp its investment in basic research and development, which has been slipping. This is the government's down payment on future innovation -- the kind of investment that helped create the Internet and scores of other life-changing technologies. And it must invest in critical infrastructure, such as broadband, or risk being eclipsed by better-equipped economies. Investments like these will help the Valley stay ahead and reap the benefits of globalization. Farming out jobs overseas could allow local companies to increase their competitiveness, and enable them to create higher value-added jobs in the United States. Improvements in productivity, profits and pay would follow. Meanwhile, growing prosperity overseas will translate to more U.S. exports. Such upward economic migration has happened here before, when jobs in the disk-drive sector left the Valley, only to be replaced by semiconductor jobs, which, in turn, were replaced by software jobs. This is not the first time that Valley leaders have called for a national commitment to funding education, research and infrastructure. Yet little has happened. The challenge the tech industry ought to shoulder is clear: It must raise its voice in unison in Washington, where the competitive threat from China and India has not been fully understood. Twenty-five years ago, David Packard laid out the challenge clearly: ``Our job as CEOs is not to sit on the sidelines to either cheer or jeer,'' he said. ``Our job is to get in the game and move the ball forward.'' Because none of the competitive investment policies will deliver short-term results, moving the ball forward will demand the sustained leadership of Valley CEOs to keep Washington's attention focused on the challenges ahead. Industry leaders have been right to lobby to preserve broad-based stock option plans and call for tax credits for certain investments. Both have been central to the Valley's success. But that's not enough. They must apply the same lobbying clout to oppose policies that bankrupt the government, such as the excessive tax cuts of the past three years. A government starved for revenue cannot invest in education, infrastructure or R&D. In the short-term, there's plenty government and business can do to help those who first suffer the effects of globalization, the scores of tech workers who have seen their jobs shipped overseas. Government ought to expand its traditional role in funding retraining programs and extending unemployment insurance. But businesses have a role too. As Diana Farrell of the McKinsey Global Institute suggested during a Mercury News roundtable, the savings that companies generate by sending jobs offshore could be used in part to help retool their workers. Some companies are already doing that, but the efforts need to be more systematic. Why should companies take on that burden? First, because it is in their self-interest. Labor-market conditions could change quickly. The retirement of the baby boomers, in particular, could create a sudden demand for workers that offsets the job migration. If that happens, as some economists predict, the companies that are perceived to have done little for their workers in hard times will not have their loyalty. Second, helping workers will help avert a growing backlash against globalization trends and the inevitable protectionist policies that would ensue. These policy recommendations may not be sufficient, but they are a good start. Over time, the public debate that is just beginning to take place will certainly yield more suggestions. As Rep. Zoe Lofgren, D-San Jose, said, that debate must be informed by better data, so we understand which job losses are due to offshore outsourcing and which to a prolonged cyclical downturn. The insertion of 300 million skilled individuals into the global workforce is a tectonic shift. The consequences of doing nothing will be grim. Downturns have come and gone, and the Valley has always risen on the wings of the Next New Thing. This time, something more fundamental is happening. And the Valley's special role is at risk. If we don't respond, the ``sucking sound'' made famous by Ross Perot will grow louder, draining more and more jobs from the Valley and beyond. As Intel CEO Craig Barrett fears, American tech workers could be facing a generation of lowered expectations. It's a future America -- and the Valley -- cannot afford to risk. http://www.mercurynews.com/mld/mercurynews/news/local/7581736.htm Sat, Dec. 27, 2003 Transcript of discussion YARNOLD: Help us define the scope of the current globalization trend, from a jobs perspective. We all know and understand that technology companies need to send jobs overseas. Cost is the primary reason. Access to foreign markets is another. Some economists believe that virtually every job that can be sent overseas will be sent overseas. Researchers at UC-Berkeley have said recently that 14 million U.S. jobs are at risk. Do you agree with that? HALLA: There's a tremendous migration of jobs to Asia -- to China, in particular. That's just part of our lives and part of the way we evolve. But we will create new jobs. Let me give you an example. It used to be just HP and Fairchild were here, and that grew into Intel and several other semiconductor companies. Today, we have a different kind of job creation. We have companies for flat-panel displays. We have graphics companies. They are all creating brand new jobs, all because of innovation in our industry. That will go on. What's happening today, however, is the technology industry is under attack from -- present company excepted -- from the majority of our politicians who are trying to eradicate stock options under the name of stock-option expensing, which makes all things not equal anymore. In China, stock options are flourishing. We fan the flames by putting a cap on H-1B visas, so we send all the Ph.D.s home where they can compete against us. DOSSANI: To give you a sense of what's happening in India, at the start of this year, in business process outsourcing, there were 170,000 jobs. By the end of this year, there will be 300,000. We forecast it to go to about a million at the end of 2005. That said, what's going offshore (is) the simpler kinds of work, stuff that's increasingly subject to price deflation, competition, automation. So I'm not really worried. I think Silicon Valley will do just fine. DE GEUS: You cannot only look at the equation of job loss, jobs transfer. You have to, at the same time, say there are two massive new markets being created -- the China market and the India market. There are 200 million Chinese along the coastal region that are all going to raise their standard of living. They will be consumers. We are all there for the work force, but first and foremost, most of us are there because of the potential business. Now the combination of the two has to rebalance itself, because these are enormous numbers that change the global balance. LOFGREN: I think that the truth is that we don't actually have any data on what jobs have gone offshore, where they've gone, the nature of those jobs. We've got anecdotal information. I think it's essential that we get a handle on the facts as much as we can. We should have some national discussion and some policy issues emanating out of whatever is going on. Without knowing what's going on, we're liable to make some mistakes. The concern I have is that investment in research and development has been declining for the last five or six years. Our ability to attract scientists and excellent students is now suffering; and our ability to innovate in the tech sector is no longer unique. I think it would be a mistake to assume that the next new thing will inevitably be ours and the jobs inevitably will be created. FARRELL: In this discussion, it's understandable that the focus is on jobs, as that's what's disturbing and distressing to people who lose them. But that's not the right discussion. A lot of what we're seeing here through the offshore outsourcing is about increases in productivity, innovations that are driving a higher level of wealth in the economy by driving increasing savings, by allowing us to innovate in the way we deploy resources, both capital and labor. That shift away from a pure job mentality is necessary to really understand the bigger picture. YARNOLD: Sure, but offshore outsourcing and productivity increases have implications for jobs in the Valley. What are they? FARRELL: Well, it's a great story for the Valley, because what the Bay Area represents in the United States is precisely what the United States is representing in the world. Productivity of the Bay Area person is twice as high as the average of the United States. The Bay Area has achieved that by outsourcing lower value-added activities. What you have here is a concentration of high-value activities that explains the very extraordinary wealth level that we enjoy. That is a microcosm of the U.S. situation, vis-a-vis the rest of the world. MORGAN: There are a lot of markets in the world that are just emerging. Part of the job movement is to move resources into the areas where the markets are, not to drop our costs. I think the ability to understand that and prepare our people to support that so that you can project capability from Silicon Valley to other places in the world is an important thing. I think we have to think about things in a systematic way. We're in a competitive challenge as a region, and it isn't the United States against China. It's Silicon Valley against Austin, it's Silicon Valley vs. Shenzhen, it's Silicon Valley vs. Bangalore. The ability of Silicon Valley to be successful (depends on its ability) to hone its competitive skills. There's a lot of opportunity here, but we have to make ourselves (a place) that companies want to do business in, because they go where they're wanted and stay where they're appreciated. FONG: We are going through a little bit like what happened in the '80s with respect to Japan Inc. vs. the semiconductor industry. High tech has been commoditized. Silicon Valley is not the only high-tech center of the world. Our market share is going down, but we can still be leaders. I've lived in the Valley for 50 years, and there was always a discussion about gee, eventually with the land and real estate here, there's only going to be Ph.D.s and people that have started companies who have the money to buy houses here. We can't be smug about the fact that we're always going to be the center; but I think we do have to look at where the value added is. This is all about where value is. HALLA: Japan is absolutely nothing like what's happening with China, because Japan is a very tiny island, and they very quickly ran out of people. Their cost of labor exceeded the United States', so they're no longer the low-cost manufacturer. Also, Japan needed the U.S. market, therefore, they had to obey our laws, particularly the laws against dumping. Taiwan, the same thing. With China, they graduate more (electrical engineers) in a year than all the other universities on the face of the planet. They have a big enough market to sustain themselves without coming to the United States. This is more like the Industrial Revolution, only this time we're Great Britain, and the great American dream is moving to Shanghai. DARDIA: That's a great segue, because I wanted to bring up the history of globalization. The second half of the 19th century saw the same kind of increased globalization that we've seen in the last 20 or 30 years here. I think your analogy is correct that the United States is to China (what Britain was to the United States). Real wages in Great Britain actually rose in the second half of the 19th century, because of market broadening. In 1980, Japan's wage level relative to the United States was 56 percent. In 2000, it was 111 percent. In the Asian (economies it) was 12 percent in 1980, 34 percent in 2000. The same thing's going to happen to China. As higher-value activity goes there, they will become more expensive. They will become consumers, and other markets will grow. Our challenge is to stay in front of that. But China's not going to remain static in its situation while sucking away all of this activity. DE GEUS: So I think it begs a little bit the question for Silicon Valley, now what do you do? And we need to understand that in high tech, there's only one pathway, which is to race forward faster. I propose that we have to pay attention to three I's: Innovation, incentives and infrastructure. Innovation is what has driven technology. There is new innovation in the Valley, but one of the ways to actually take advantage of these markets is to be the leader in that. Incentives, I think Brian (Halla) already eloquently highlighted that. If you cut the fundamental incentive driver of Silicon Valley -- stock options -- you're going to destroy a very, very unique system. And then infrastructure, I mean first and foremost education. And if you look at education, Brian highlighted how strong these other countries are. They are doing Silicon Valley plus plus, so we need to do Silicon Valley plus plus plus. BOSTROM: Just to add on to your infrastructure comment, we don't want to forget broadband either. If you look at many of the countries that the United States is competing with, they have much more extensive broadband infrastructures. Climbing the value chain YARNOLD: One of the things that has changed most dramatically over the past few years is the kinds of jobs that are leaving the United States. It used to be very low-end, and it's now moved into the engineering ranks. The presumption is that Silicon Valley is going to continue to be able to distinguish itself by climbing up the value chain. Can we do that? If not, will we simply have fewer people employed here? FARRELL: I think your question hits at the core of the concern that many people have, which is that productivity gains necessarily come at the expense of employment. So can you continue migrating, and continue generating employment? The United States is a wonderful petri dish to understand that. We have been, for a very long time, the productivity leader in almost every sector, and we have been the employment leader in almost every sector. It's the process of innovation that drives productivity gains, and it's the process of innovation that drives employment gains. And that's the beauty of this system. We can have our cake and eat it too. DOSSANI: Let me give you some background, again, looking at India. I interviewed in the last two years, about 170 (companies) in the IT and business-processing field. These companies covered about 80 to 90 percent of the value of work being done in India. We found that India is pretty much still stuck at a certain level in the supply chain of writing code. It currently does about 50 percent of the labor in a typical software project, but only about 10 to 15 percent of the revenue. So I think there's a lot of fear here that is unwarranted, in the sense that sophisticated, innovative work is not shifting. BOSTROM: I think there's a new nomenclature that's coming out with regards to outsourcing; we really use the term ``out-tasking.'' What we see in companies moving toward out-tasking, whether it be onshore or offshore, are really the lower value-added activities, or things that have been in process for a long period of time. In IT, it could be maintenance of an existing software application. The new application development could be here in San Jose or some other city in the United States. To do great application development, you have to be close to the business function that you're developing the application for. Some companies have had the experience of outsourcing a significant function and have realized they lose control and ability to innovate. And sometimes they're trying to bring (the work) back. YARNOLD: Really? It's only the low-end engineering work that's going overseas? Kevin (Fong), you have a different opinion? FONG: Take Intel. The development of the next Pentium chip is based in Bangalore. JARRETT: Well, we have several hundred people there. But we're developing all over the world. We're doing chips in Israel. We're doing software in India. We're doing software in Russia, in China, you name it. FONG: Wait a minute. One of your key Pentium designers is running the design center in India with a charter for the next-generation server processor. YARNOLD: You're suggesting that's the kind of work that would have been done in Silicon Valley previously. FONG: Absolutely. JARRETT: No. No. YARNOLD: No? JARRETT: No. No. We started our design center in Haifa (Israel) in 1974. We've been designing and doing a lot of technical work around the world for a long, long time, and we'll continue to do that. In that sense, nothing has really changed. At the same time, we're continuing to invest here, and I'm talking about the United States, not specifically Silicon Valley, to do advanced technical work and advanced manufacturing. We've just put in $24 billion in the last three years in new factories, R&D, support for education and employee training, and that's all in the United States. Government's role LOFGREN: To say that we should not have at least some thoughtful strategy to maintain a prosperous, employed nation would be a mistake. And that doesn't mean a heavy regulatory approach, necessarily. But when chips were under attack, you know, Bob Noyce went off and led an effort, and it was partly government supported, and industry driven. And it was, I think most people thought, useful. Although the economy is showing some signs of life, we are not creating jobs in the United States sufficient to even keep up with population growth at this point. The question is why? I don't know that any of us really know all the answers to that. Some of the job loss has been because of productivity gains here. Some of it appears to be offshoring of jobs. I think the policy implications for each of those scenarios is different, and what we might want to do, in terms of nurturing employees, especially the engineers that have been displaced in this Valley. We need to have a strategy so that (displaced) people are well treated instead of knocked off unemployment insurance, as we're about to do; and retraining individuals so that they can keep up to date; and nurturing American students so that they can be successful in the hard subjects, math and science. DARDIA: I think the plight of the laid-off workers is important. We certainly don't want to, in reaction to the effects of globalization, shut things down to much worse effect. One of the ways you avoid some of that backlash is certainly by attending to people displaced. That leads to the question of why (do we have a) jobless recovery? There's some good work done in distinguishing between cyclical vs. structural job losses in recessions. In the '70s and early '80s, recessions ran about 50-50 between cyclical job losses and structural job losses. In the early '90s recession, about 60 percent was structural vs. 40 percent cyclical. In the current recession, the estimate is about 80 percent is structural. Structural job losses take longer for people to (adjust), whether it's by training or just looking further afield. That's one of the reasons we see a relatively slow increase in employment relative to output. And that's why we do need to think about better ways to help displaced workers. WHITE: There's economic evolution all the time. There's dislocation associated with economic evolution, and that's definitely going on right now. The challenge when that happens is to not panic and do the wrong thing. In a situation like this, you have to have the courage of your convictions. You have to recognize that China's a great place. They've got a lot of engineers, but they've got a political system that's going to bump up against a lot of the things they're trying to do. It's going to be difficult for a dictatorial state controlled by one party to really allow the kind of sharing of information and other things that have made our economy so successful. You've got to let the market work this situation out without the government taking pre-emptive action, because there's a less-than-even chance that they're going to point you in the right direction. FONG: One other thing, which hasn't been thrown in, is intellectual-property protection. China's not going to play fair until they feel that they're at a more even footing with us. So the governmental pressure for them to play ball fairly is a pressure that has to be continued as well. YARNOLD: Whose job is that? FONG: It's the government's job. WHITE: We could do two things, focus on what the government does well, like these trade pressures, and start to peel back some of the things that we have done in the past. If you look at California in particular, the challenge we face is basically to undo the effect of resting on our laurels for a long, long time. We've loaded up the business community year after year with disincentives for them to be able to compete. We have a little bit of that at the national level, too. Choosing to compete JARRETT: The mindset that we think really has to be implanted in the United States among policymakers is that the United States really has to choose to compete. We don't see enough sense of urgency. As we look at policies like stock options and others, we need to be asking ourselves, does this policy help or hurt the nation's ability to compete? I don't think that kind of questioning is going on right now in Sacramento and elsewhere. MORGAN: Unless (we) collectively decide (we) want to compete, we keep shooting at each other about all the problems. A good example (was) Sematech. The government provided the seed, but really what was effective is that the U.S. semiconductor companies finally started working with their suppliers, the way the Japanese had been doing for decades. You had a shift in mindset and a collective competitive desire to be successful. And that made a big difference. And so the local, state and federal (governments), and the industrial interests, and the universities, and all the groups, we have to really get focused (on being) competitive. It's not (useful to) put up trade barriers. You saw what happened when you had the Iron Curtain. Those countries were just disasters, from an economic viewpoint. The only way you're going to compete is to work more effectively together. BOSTROM: High tech is driven by innovation first. Cost is something that you have to consider as part of the innovation. And so what (things) can the government be doing to help fuel innovation? And one of those things is making sure that basic R&D, which has been the core of innovation for the country, that we continue to see funding at a decent level. LOFGREN: Our investment in science research has declined 29.5 percent as a percentage of GDP. That is not good news for innovation and the technology future. We need a strategy that advances competition and technology development. Now it will never work for the local, state or federal government to say, ``Well, here's the way it's going to be.'' That isn't how the Valley grew. But that doesn't mean there's no role for the government to play. YARNOLD: But the presumption here is that you're talking about a competitive Silicon Valley. Does it really matter anymore whether Silicon Valley is competitive, to your businesses? Very often I hear CEOs say, ``We're driven by cost and by what it takes to produce the goods that we manufacture. Where the dollars end up is irrelevant to us because we're global.'' MORGAN: That may be true for companies, but that's not true for Silicon Valley collectively. If Silicon Valley wants to be competitive, to build jobs here, then we need to do some collective things to try to make it attractive to be here. YARNOLD: So does it matter whether Silicon Valley retains that leadership role? Does it matter to your companies? FONG: Absolutely. DE GEUS: No question. YARNOLD: Why? DE GEUS: Because you can improve cost by 50 percent by going to other places. You can improve your return by 100, 200 percent by innovating. That's at the basis of Silicon Valley. FONG: But I think David's point is if you could do it someplace else, would you do it someplace else? MORGAN: Our company, and me in particular, think this is (an) enormously critical resource for the state and for the country. And so it should be nurtured. FARRELL: You know, I think it's easy, in the spirit of the last year or two, to overstate the degree to which this area has lost its competitiveness. Productivity is the measure of competitiveness, and this region remains highly competitive. The things that put that at risk are the things that make it harder to attract the people who have made this the thriving innovative center of the world. That gets back to basic government issues of land use that are driving real estate prices and make it impossible for young, talented people to live here. BOSTROM: I think the belief in continued opportunity is where companies in the Valley can make a difference. Because I know one of our areas of focus at Cisco has been how do we help transition our employees, engineers or otherwise, to new, advanced technology markets. Those skill sets are slightly different; and we're saying, ``Well, we should be accountable for helping with that transition with that employee base.'' If we can encourage companies to help with that evolution, I think that's one of the things that would make people feel like there's continued opportunity in the Valley and in high tech. SNEIDER: Let me come back the global-competition issues. There's a pretty wide perception out there that gains (in India and China) are coming at our expense. That's generating already tremendous political pressure for public policies that probably everybody here would agree are not such a great idea. But in the absence of really addressing this problem, you leave the field open basically to protectionist solutions. WHITE: I'd like to take a quick crack at that, because I do think there are two things you have to focus on. No. 1, I think you're absolutely right that there's a lot of political concern about job loss. But Americans expect their country to be competitive, and they're willing to look for policies that help them be competitive. And that's what's going to prevent this job loss from being a big problem. On the Chinese front, I just want to reiterate one thing I said earlier. In the late '80s, people thought (Japan) was an unstoppable juggernaut that was just going to run right over us and keep going. The fact is that every society has its advantages and disadvantages about the way it's organized, and those catch up with you after a while. What's happened to Japan is they had some imbalances that didn't really work over the long term. One of the things we have to do is recognize that there's never been a society on the face of the earth that is as hospitable to innovation as the United States. We're doing a lot of things right. So you wouldn't want to make a dramatic change to respond to somebody like China in particular. They've got a lot of great things going on, but they also have some things that are going to catch up with them. To overreact would be a mistake. HALLA: Having been one of the few people at this table that's been through every cycle since the beginning of man, I can tell you that this, too, shall pass. If we were having this session a year from now, we wouldn't be having this session, because half the people would be late because of the traffic jams. The industry will be booming. If history is a teacher, Cisco was born here; Ebay; Google; Sun Microsystems was born here; all these creative new industries and new jobs. We are still the IQ magnet for the world. Berkeley is here, Stanford is here. In terms of government support, I agree with R&D tax credits, and (there are) many proactive ways a government can help. I'd say a good start would be (for) the government to please retire to a neutral corner and not eradicate stock options and not cut out H-1B visas, so that we can go on and continue this cycle that's been so healthy for us. This is a substantially different time for us, however. China is completely different than any cycle we've ever been through. It's an opportunity at the same time. LOFGREN: If we don't have some policies in place, and if the American public doesn't understand that we, No. 1, have an appreciation for what's happening to them, then we're going to have some reactive policies that will probably make our situation worse. I have a neighbor who recently was sent to India to train a whole unit. He has just been told that he's been laid off. The whole place where he works is now going to the people he trained. He's got a master's degree from an excellent university, in a scientific field. He is feeling not very well appreciated here in America. Becoming more insular is not the answer to prosperity. But that will be the knee-jerk reaction, unless we have a better strategy. Future of growing companies YARNOLD: I had a conversation recently with a venture capitalist who said more and more, companies that get started here have 12 people here, the CEO, the CFO, the COO, the marketing director, and a few other people. They're being asked by VCs, ``Why aren't you doing your work offshore? How are you going to drive down your costs? How are you going to be competitive?'' It raises the specter of shell companies that are founded in the Valley but don't have very deep roots or very big employment bases. FONG: All of the dollars that I raise for our funds, which is $2 billion, goes to pay for R&D only. By the time you get to the manufacturing, the company's at a different phase of life. But people from France and Israel and China still come here to start a company. People come here not just because -- we talked about IQ. Our way of doing business here is as much a key part of it. People come here for our capital markets. They can get liquidity. They can attract capital. It's all those things. I was just meeting today with a company, and they're moving from Brisbane. They're only talking about moving marketing and sales and a few of the key people here. And so it is an issue. I don't think it's a long-term, sustainability issue we have to worry about. DOSSANI: It's not such a bad thing that this is happening. Look at the U.S. disk-drive industry, which was started here. By the early '80s, it had lost a lot of market share to Japan. It was down to 30 percent. And because they aggressively outsourced, it's back up to 80 percent now. If you look at employment, it's less than half of what it was. But the value-add is very high. Market share, value addition, all these things will improve with outsourcing. What won't is employment, if you're just looking at numbers in a particular industry. YARNOLD: So the Valley's employment won't come back to its pre-boom levels or boom levels? DOSSANI: Not in that industry, but in something else. Helping displaced workers JARRETT: I think just one point I'd make about policy prescriptions to fix this problem. They tend to be sort of the policy equivalent of a hand-off to the fullback. It's very straightforward stuff, and it's very long-term. These are not quick fixes. We've been talking about increasing the basic physical sciences R&D spending by the U.S. government. That's not going to pay off tomorrow, and nobody in office is going to be able to point to it in their current term and say, ``Here are the fruits of that investment.'' But it's still the right thing to do. LOFGREN: The good news in this Valley, though, is that the citizens support those long-term investments, because our people know (they) will pay off. I think where we're really missing the boat, though, is to not take care of people who are being displaced for the first time. They're willing to do their part. They're willing to get the education. They're willing to be entrepreneurial. But there is some dislocation, and we are not handling it well. FARRELL: The magnitude of the savings that are possible as a result of (sending jobs offshore) does provide at least the basis for some shorter-term solutions that you're trying to generate here. What we need to do is help employees find jobs faster, be willing to take new and different jobs faster. That can come, not as some big, inflexible program of the government, but as a corporate program, to facilitate the change that they need to go through. Why would companies do this? Partly because it makes possible a transition that is very difficult, politically and otherwise, and partly because it matches up with a trend that we haven't brought up in this debate at all, but is critical to this conversation, which is the demographic shift that is taking place in the Bay Area and in the country, of the shrinking working-age population, and therefore the need for companies to remain attractive to employees. Having the programs in place that will help alleviate the displacement becomes a very self-interested thing that can be achieved at a relatively low cost (compared) to the savings that are being achieved. WHITE: It's so much more effective, to do that at the private level. BOSTROM: Well, we do this at Cisco. We are invested in re-skilling our work force for new market opportunities, new advanced technologies. And the reason we do is it makes good business sense. First of all, when the economy does recover, those are workers that you need. And second, we really value the culture that we've created; the people really know our products. FONG: There's something at an individual level that people in the Valley have to sign up to do, as well. In this globally competitive marketplace, you have engineers in China that go to work from 8 (a.m.) to 10 (p.m.). The company feeds them lunch, a great lunch. They have great facilities, equal to the Valley. They serve them a great dinner, and they work six days a week. They go home to be with their families during a month during Chinese New Year. But after that, they're working hard, and they're really dedicated to what they're doing. And so we have to recover from the sense of entitlement. Individuals have to want to get retrained. They're going to have to want to work hard. Sometimes I wonder whether or not we've lost that in the Valley. Corporate responsibility SNEIDER: In an interview that Intel CEO Craig Barrett did with us and a few other newspapers, he said, ``Look, as company, as a CEO, I can't resist the compelling arguments for moving jobs and moving operations overseas. But for the country, I'm not so sure this is such a good thing.'' And I don't have his exact quote, but it was something along those lines. Is there a difference between the way you necessarily have to look at this in the framework of a company, and the way we should look at it in the framework of the interests of the nation? Is there a tension there between those two, and how do we deal with that? JARRETT: I think there's definitely that tension. You wear one hat as a citizen and another hat as a CEO. We do care about the future of the country, and that's why we're out trying to advocate policy changes that we think will keep the United States competitive, long-term. At the same time, you know, we've got 70 percent of our sales outside of the United States; our fastest-growing markets are China and India and Russia and Brazil and Mexico and Eastern Europe. We've got to be there. HALLA: All of us that are CEOs have to do that which makes our companies competitive first. And, we all have community-support programs and foundations and everything else to support the community. My own feeling is that the best way to take care of a displaced worker is, if he leaves Synopsys, to be able to go right across the street to Google or Ebay and get another job, because there are many more requisitions for new jobs than there are people. And that's when the Valley is thriving again. And by the way, we're approaching that. LOFGREN: Obviously, Craig is right; I mean, his obligation is to his shareholders, not to the citizenry at large. That is the job of the people who are elected. And most of these companies, I know, are very generous. At Evergreen Valley High School, there's a whole building that Applied (Materials) built. All of you have foundations and do wonderful things. But the societal obligation to make sure that the children are in school and learning is really devolved to the school board and to other levels of government. We need to find the money to pay for it, which may make you feel not competitive, but these things do have to be paid for. So we need to set a strategy that really responds to the citizenry. That's not Applied (Materials) or National Semi's obligation, although it cannot be done without your collaboration. Three-year outlook YARNOLD: OK. You have all done a very good job of mining deeply into issues that you know very well. I'm going to ask you a very simple question that I think our readers would be interested in. What will the Valley look like in three years? What's your level of optimism? HALLA: I think we'll absolutely be thriving. There'll be new companies, and there'll be companies that are doing things in imaging and sensors and RFID (radio frequency identification tagging); and we'll continue to prosper. FONG: I'm very optimistic about the Valley. And three to five years from now, what I do hope is that China and India, the two most populous countries in the world, will also have economic gains. At the end of the day, from a global perspective, as a country our security is best served by other people wanting to come after us and wanting to emulate us and having a better standard of living. The Valley will benefit from that. BOSTROM: I'm very optimistic. If you look at the end consumer of the products that we make, there is this continued demand and interest for doing more and more, using technology as an enabler, whether it's little IP (Internet Protocol) video cameras in our phones, or whether it's enterprises that want to drive up levels of productivity. LOFGREN: I think we could have either of two scenarios. We could have the kind of roar-back that's been described, and I hope that that is what happens. Or we could continue to have a very sluggish job creation. I've lived here all my life. We've been counted out a million times. And I'm not counting us out again. But the rate of improvement, if we play our cards wrong, could be much slower than we hope. NATOLI: My guess is that the job growth is going to be modest. Economy.com thinks that in the second half of next year we'll begin growing jobs for the first time, but that the job growth will be in the 1- to 2-percent range each year for the next three years. As I look back over the last 20 years here, downturns tend to touch parts of three years. We're now three years into this thing, and there's no recovery in jobs in sight. I think this is structural. It's different than what we've had before. Job growth here has come from a combination of mostly small companies and some small companies that become quite large companies and wind up having 6,000 employees here or whatever. I don't think anybody's going to scale up to 6,000 employees here anymore. And I'm not sure that there would be enough of the smaller-company growth, at least in the next three years. I think it's going to take longer to sort of have that whole thing shake out. I hope I'm wrong. YARNOLD: But nobody saw Ebay coming either. And maybe it's the exception. MORGAN: No, it's not the exception. In 1975, you could have purchased all the companies in Silicon Valley, except for HP and Varian, for probably $350 million, including Applied Materials and AMD and Intel and all of them. A lot of them, have market caps in excess of $20 billion today. WHITE: I think job growth may be a little slower here than it is elsewhere. But if I were writing the stories that you guys are going to write as a result of this, I'd be a little careful that I don't look too foolish a year from now. We're just at the end of a sluggish time. There's been a lot of discussion about the jobless recovery. It's entirely possible there won't be a jobless recovery six months from now. http://www.mercurynews.com/mld/mercurynews/news/editorial/7558316.htm Sun, Dec. 28, 2003 San Jose Mercury News Globalization Roundtable What's the Valley's future? As the region begins to emerge from a brutal recession, questions haunt the Valley. Will the jobs come back? Will we be able to maintain our global leadership in technology? How many more jobs will be sent offshore? What must the Valley -- and America -- do to remain competitive. The Mercury News convened a roundtable discussion of CEOs, venture capitalists, policy experts and legislators to begin to answer those questions. PARTICIPANTS: o Jim Jarrett, VP of Worldwide Government Affairs, Intel o Aart de Geus, Chairman and CEO, Synopsis o Michael Dardia, VP, economist, Sphere Institute o Kevin Fong, General Partner, Mayfield o Brian Halla, Chairman and CEO, National Semiconductor o Zoe Lofgren, Congresswoman, 16th Congressional District, House of Representatives o Rick White, CEO, TechNet o Jim Morgan, Chairman, Applied Materials o Diana Farrell, Director, McKinsey Global Institute o Rafiq Dossani, Asia Pacific Research Center, Stanford o Sue Bostrom, VP, Worldwide Government Affairs, Cisco o Joe Natoli, Publisher, San Jose Mercury News o David Yarnold, Editor (Editorial Pages) and Senior VP, San Jose Mercury News o Miguel Helft, editorial writer, San Jose Mercury News o Daniel Sneider, Foreign Affairs Columnist, San Jose Mercury News http://www.mercurynews.com/mld/mercurynews/news/local/7581734.htm Posted on Sat, Dec. 27, 2003 Q & A: INTEL CEO CRAIG BARRETT U.S. MUST ALTER COURSE TO REMAIN COMPETITIVE Craig Barrett, CEO of chip maker Intel, holds a more sobering view of Silicon Valley's future than most of the participants in the Mercury News' competitiveness roundtable. Here is an edited version of his recent discussion with a group of the newspaper's writers and editors. Q: The U.S. tech industry is facing increased competition in a global economy. How do you see its prospects going forward? I always like to partition the dialogue on competitiveness into two parts. One is corporate competitiveness or company competitiveness, and I think that companies like Intel are very well positioned to compete around the world. It's a much more difficult topic when you talk about U.S. competitiveness and competitiveness of the U.S. economy. Q: Let's talk about American competitiveness and specifically Silicon Valley's competitiveness. Starting at the national level down to the Valley level, could you lay out the situation as you see it? And could you also talk about what solutions we should be considering? We probably have all read or seen a couple of books. One is Andy Grove's book where he talks about strategic inflection points, where he talks about seminal events that occur. I think one of these has happened in the world in the last few years, and that's the integration of India, China and Russia, and Russia's satellite countries into the world's economic infrastructure. Ten years ago they were absolute non-players. Today, they are active participants. If you add up their populations, it approaches 3 billion people. I don't think this has been fully understood by the United States. If you look at India, China and Russia, they all have strong education heritages. Even if you discount 90 percent of the people there as uneducated farmers, you still end up with about 300 million people who are educated. That's bigger than the U.S. workforce. So I think there's a strategic inflection point. I see the competition in jobs increasing. The big change today from what's happened over the last 30 years is that it's no longer just low-cost labor that you are looking at; it's well-educated labor that can do effectively any job that can be done in the United States. What the United States has done very effectively for the last 20 years is (it has) always taken the next level of the value chain in terms of where we concentrate our workforce. As long as everyone competes with the same educational levels, there is no place else in the value chain to go. And unless you are a plumber, or perhaps a newspaper reporter or one of these jobs which is geographically situated, you can be anywhere in the world and do just about any job. I think that the United States has to do one big thing and then four subsets of the one big thing. It has to choose to compete head on in the world economy with this new workforce, (not) resort to legislative protectionism. That is a government issue. If it chooses to compete, then there are four things any government can do: Education is one; research and development investment is the second; infrastructure development is the third; the plea that governments do no harm is the fourth. The education system -- we do more talking, more writing, more publicizing of the non-competitiveness of the K-12 education system in the United States. But it is all talk and no action. If you look at our results relative to international counterparts, we continue to stay at the bottom. If you look at how much the U.S. government spends in basic research in the physical sciences, the sort of R&D that is carried out in universities, it's about $5 billion a year and decreasing. And that's the seed corn for the future. I like to call up the comparison of what we spend in basic R&D in the physical sciences with what we spend in agricultural subsidies, (which is at least $18 billion a year). We just got rid of steel (tariffs).We still have soft lumber subsidies, we have catfish subsidies, we have tomato subsidies. We subsidize all the industries of the 19th century and increasingly de-fund research and development in the industries of the 21st century. Infrastructure is the third item. I'll use the tired cliche: We put the interstate highway system in place some years ago, but we don't have an equivalent for the knowledge infrastructure. Broadband lags in the United States. We aren't putting in place the infrastructure to compete going forward. Lastly, government should do no harm with rules and regulations. Expensing stock is a good example of doing harm. Regulations put in place in California over the last 20 years are an example of doing harm. They are making U.S. industries more non-competitive on a daily basis. It's always those four things. None of them is short term. None of them captures the interest of politicians because they are not quick fixes; they are not 30-day wonders. Q: What are the implications specifically for the Valley? Well, the Valley is unique in some respects. The Valley is an idea center. You still have major universities here. You still have ideas spinning off. But if you compare two aspects of the Valley, one where venture capital money goes, we are the biggest high-tech venture capital player in the world in terms of funding. Over half of our funding now goes out of the United States to places like India and China. So, increasingly, engineers with bright ideas (there) are going to be competing with engineers with bright ideas here in the Valley. The second thing, if you go to any venture capitalist today and somebody has a bright idea, whatever it might be, probably the first thing the venture capitalist says to the principals of the company is ``of course you are not going to do your R&D here in the States, you are going to do it in India or China or someplace where the costs are only 25 percent of what they are here.'' I don't expect Silicon Valley to disappear. But I expect it to have serious competition. Q: What will the Valley look like in three years? I look at the job growth prospects being difficult in this environment. Companies can still form in Silicon Valley and be competitive around the world. It's just that they are not necessarily going to create jobs in Silicon Valley. If the jobs lost aren't being replaced, the Valley could see a decrease in standards of living, a decrease in housing values, and things of that nature. Q: Aren't we talking about an entire generation of lowered expectations in the United States for what an individual entering the job market will be facing? It's tough to come to another conclusion than that. If you see this increased competition for jobs, the immediate response to competition is lower prices and that's lower wage rates. There is an alternate possibility, which is the California government and the U.S. government choose to be more competitive and to get more aggressive tax credits for jobs that are created here. Right now, a tax break to a company to create jobs in the United States is labeled corporate welfare. If you go to Malaysia, India, China, the Philippines, Russia, it is labeled as an investment in the future. Q: Does Intel have a responsibility to help keep the United States an attractive and competitive place? Intel first and foremost has a responsibility to its shareholders and employees to give them opportunity. Companies have to do what is required from them to be successful. But underneath that, we have an obligation to 50,000 U.S. employees to provide a competitive workplace for them, and we have a responsibility to the communities where we do business to try to improve the prospects of young people in those communities. That's why we invest in one and only one thing: We sponsor education events. Intel wouldn't invest over $100 million in education if we didn't think it was important. But if you ask does Intel have an obligation to suffer a financial disadvantage to hire more American employees, as opposed to Indian employees or Chinese employees, that's like asking does Intel have an obligation to California, as opposed to Oregon or Washington or Nevada or Colorado. Q: This administration is very business-friendly. Why haven't they heard your pleas? I don't think it's on the radar screen of Washington. I don't think they have internalized the strategic inflection point that I mentioned before. If you go talk to Alan Greenspan, he would tell you that people have been waving this flag for 100 years and the United States has always risen to the next level. And when you raise the fact that you have brought 3 billion new people into the workforce, and maybe the equation changes, his eyes glaze over. It seems that part of the problem is that the tech industry isn't in agreement about this. A lot of your colleagues feel that we will innovate our way out of this predicament. They don't share your sense of urgency and alarm. I think what is necessary is for all of us to speak with a common voice, and we haven't done that. It is extremely difficult when you see what's going on in the world not to have a sound of alarm in your voice when you talk about this.