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Dr Edward A. Hudson

Silicon Valley

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I spend a lot of time in Silicon Valley. It is a dynamic and exciting place. There might be some lessons that we in New Zealand can draw from the success of Silicon Valley. This note investigates the nature of Silicon Valley and whether it could be recreated in New Zealand.

What is Silicon Valley?

Silicon Valley is the name given to the area between San Francisco and, at the south end of San Francisco Bay, San Jose. At the north end of Silicon Valley is Stanford University which has a world leading engineering department. Stanford graduates have provided many of the leaders and engineers, hardware as well as software, for the Valley. Just north again is San Francisco International Airport. At the south end are the cities surrounding San Jose (being a Spanish name it is pronounced Hose-ay), with an international airport and, originally but no longer, lots of empty land for building.

More recently, Silicon Valley has assumed a more generic meaning, covering the technology sector not only of the original Valley but also in San Francisco and as well as on the east side of San Francisco Bay, in cities such as Oakland.

Silicon Valley is a centre for new technology companies, in particular in electronics, computers, smartphones and software.

The technology presence in Silicon Valley started in the 1950s with William Hewlett and David Packard, and William Shockley. Hewlett and Packard started by producing electrical/electronic instruments. Their company (Hewlett-Packard, later HP) became a leading producer of electronic equipment, calculators, minicomputers, laptop computers and printers.

William Shockley, who shared a Nobel for inventing the transistor, set up Shockley Semiconductor Laboratory. However, Shockley, although a brilliant physicist, was a bad manager and key employees left to found Fairchild Semiconductor; in turn, key employees left Fairchild to found Intel. Intel invented the microprocessor (in the early 1970s) and to this day remains one of the world’s leading microprocessor designers and manufacturers.

Other famous startups in the Valley are legion. The Homebrew Computer Club, an informal club of electronics enthusiasts, operating in the 1970s, was the original home of Steve Wozniak and Steve Jobs. Wozniak was the engineering brains and Jobs the commercial brains of what became Apple. Apple now is one of the most valuable companies in the world. Its headquarters are in Cupertino, now in an enormous building shaped like a donut (an American donut with a hole in the middle). (Google ‘apple hq’ for views of the building, you will be staggered.)

More recently software companies have taken the lead the San Francisco Bay Area. These include Google, Facebook, Salesforce, Adobe, PayPal and Airbnb. Netflix (movies), Uber (taxis), Pixar (movies) and Tesla (electric cars) are also based in the Bay Area.

Silicon Valley is large and growing. The technology sector provides around a quarter million high tech jobs. High tech jobs pay well. A combination of these jobs and incomes has created huge demand for housing. House prices keep increasing and home building has spilled over all around the Bay Area and inland, past Dublin, all the way to Walnut Creek. Traffic getting into Silicon Valley is dense, travel times are long. The main highway, US101, has only four lanes (in each direction).Companies such as Google and Facebook have parking lots around the Bay Area where employees can park then get company busses to work (using the dedicated HOV – High Occupancy Vehicle – lanes on the freeways).

Each tech job creates several additional jobs. These supporting jobs cover the range from cleaning, food services, auto mechanics, accountants, lawyers, teachers, local government, garbage collectors, carpenters, painters, police, supermarkets, bars, restaurants, and so on. The population of Silicon Valley is around four million. That is almost the population of New Zealand.

All this tech activity generates massive incomes. The San Jose Metropolitan Area has the third highest GDP per capita in the world.

There are signs that Silicon Valley’s growth might be slowing. Recent IPOs (Initial Public Offerings) of tech startups have met with some resistance – the so-called “tech unicorns”. The cost of doing business in the Bay Area is extremely high, led by house prices and rents. Congestion and travel time in getting to work is discouraging some new immigration. And President Trump’s trade war with China is restricting some Silicon Valley business. Nonetheless, Silicon Valley is an economic powerhouse and clearly the IT hub of the world.

What makes Silicon Valley so successful?

The start of the Valley owed a lot to the presence of Stanford University, the abundance of cheap land, and a nice climate and ambience in the San Francisco Bay Area. Initially, the Valley was all about electronic components and electronic (including computer) hardware. Success then became cumulative with crucial steps being the transitions from electronics to computer hardware, then to software and then to mobile devices. Technologically, these were natural progressions with one set of new products drawing on the technology, skills and markets behind existing products.

Increasingly, the Valley is software. Even Apple products such as iPhones are designed in the Valley but manufactured in cheaper places such as China and Taiwan. Similarly, Intel microprocessors, which power most PCs and virtually all servers, are designed in the Valley but manufactured elsewhere.

So, people are now the key. People create new product ideas, secure the financing, carry out the design, do the coding, do the marketing and the complex management that all this involves.

Venture capital has emerged as a key input to the growth and expansion of technology firms. Venture capital, frequently based in San Francisco, in the Valley itself and in New York, has been instrumental and allowing startups to become established and grow. Venture Capital firms provide not only finance but frequently also arrange experienced managers and directors (skills which young techies often lack).

The breakthrough innovative ideas frequently come from young people who might not even be in the Valley. Wozniak and Jobs and the original Apple, Brin and Page at Google (Alphabet), Zuckerberg at Facebook are examples of these (as are Allen and Gates at Microsoft in the Seattle area). But converting these ideas into products requires hundreds or thousands of skilled coders, designers, project managers, marketers and so on. These people are already in the Valley or else migrate to the Valley. They are young, smart, educated and enthusiastic. I recently had lunch at Microsoft’s headquarters in Redmond, Washington. (Microsoft is not in Silicon Valley but it is a similar technology company.) I, a Gold Card holder, was by far the oldest person in the vast room. Most people there were in their 20s and 30s. The majority were white males. There were, though, many white females, and many Asians, particularly Chinese and Indians. The common denominator was that these were bright and enthusiastic young people.

The Silicon Valley environment is stimulating and rewarding, both financially and professionally. This attracts more smart, motivated young people. There is a whole ecosystem of skills and resources for new technology companies, especially computer hardware and software. And, rapidly growing companies mean more jobs. If you are ambitious technically or commercially Silicon Valley must be high on your list of a place to build your future.

Could Silicon Valley be duplicated?

Could other countries create their own Silicon Valleys? Probably not. Silicon Valley arose over time by the evolution of new information technology businesses starting and growing. Success breeds success in terms of attracting smart and motivated people, of creating and rewarding attitudes of innovation, creativity and hard work. Information technology companies have enormous economies of scale and scope; these make it relatively easy for already successful companies to keep growing and keep diversifying. At the same time, it is difficult for a newcomer to enter into an established IT market (although not impossible as demonstrated by Android (Google) breaking into smartphone operating systems, a market previously dominated by Apple.)

Silicon Valley did not arise from government actions, it did not arise because simply because someone (like politicians) thought it was a good idea. It was an area whose time had come – the time was the emergence of an entirely new industry, based initially on electronics and then on software. Once established in information technology, the Valley found it relatively easy to grow, by the growth of existing companies and by attracting startups, based on the deep pool of skills already in the Valley.

Industry concentration

Silicon Valley is an example of a particular industry concentrating in a small area. This concentration is based on either or both of natural resources and human skills.

Similar concentrations have occurred in many places. In the Industrial Revolution there were concentrations of woollens in Lancashire, cottons in Manchester, insurance in London, and steel in Sheffield. More recently, there have been concentrations of finance in New York, cars in Detroit, steel in Ohio, education and biotech in Massachusetts, petrochemicals in Houston, oil and gas in Texas, casinos in Las Vegas, movies in Hollywood, defense aerospace in Los Angeles and so on. These examples all reflect the same forces at work – suitable natural resources and then the emergence of deep operational and management skills associated with particular products.

What about New Zealand?

There are information technology startups in New Zealand, especially around the engineering schools in Auckland and Christchurch. There are successful movie companies, especially in Wellington, and several biotech startups around Otago University. There are some rapidly growing software companies, such as Xero. But the New Zealand market is small. The New Zealand pool of talent is small. Continuing growth requires these companies to sell internationally. Even so, these companies remain atomistic; the New Zealand environment lacks the scale and synergies that operate in Silicon Valley.

New Zealand has its booming industries and locations, such as dairy products in the Waikato, tourism in Queenstown and winemaking in a number of locations.   New Zealand does not have an international competitive advantage in information technology. However, the sorts of advantages in IT that led to the emergence of Silicon Valley might exist in other tourism or foodstuffs industries that might create their own booming localities in New Zealand.

Can the government help in the development of these growth industries? The outlook here is poor-to-mixed. The government enabled the creation of Fonterra but got it wrong – as a supplier-focussed rather than market-focussed business, with monopoly power over farmers, it is unlikely ever to excel in international dairy-products markets. Present government policies frequently hinder the growth of innovative industries – the government at present is trying to tax tourism providers; the Resource Management Act complicates development of facilities; the emergence of race-based provisions affecting business and development (including but not limited to the Marine and Coastal Area Act) is complicating growth; while trends in labour law are raising costs, especially in hospitality and tourism industries; and the tax treatment of business is less favourable than in many of our competitors. New Zealand has its own successful industries, essentially based on using our natural resources. Helpful government policy, as in Silicon Valley, would be for the government to get out of the way and let the dynamic businesses get on with their growth.