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October 29, 1989
"Silicon Valley is Doing Just Fine, Thanks"
San Jose Mercury News
By Timothy Taylor
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SANFORD Kane is clearly not enamored of California.

Two years ago, he was the head of the site selection committee for Sematech, a research consortium of semiconductor companies. Every place wanted Sematech, but it ended up in Austin, Texas.

Kane is now chief executive officer of U.S. Memories, a billion-dollar start-up company that will try to manufacture and sell the newest generation of semiconductors. Every place wants U.S. Memories, too, but it announced on Tuesday that it will not locate in Silicon Valley or anywhere in California, preferring to narrow its list to locations in New York, Colorado, Arizona, and (again) Texas.

Not winning this beauty contest is bad enough; not even making the finals has been a severe blow to the delicate self- esteem of California's politicians, who have been sounding like the sort of insecure adolescents who feel like their life is a failure because they are turned down for a date. But the simple fact is that semiconductor manufacturing has been leaving Silicon Valley for several years now.

The most obvious evidence is in the job statistics. Since September 1984, the number of jobs in the semiconductor industry in Santa Clara county has fallen from 89,000 to about 69,000, according to the Employment Development Department of California. Philip Kohlenberg, an labor market analyst at EDD, says that they expect the trend to continue.

Even if U.S. Memories had decided to locate in San Jose, it wouldn't have come close to reversing this decline. The press releases promised that U.S. Memories would bring 3,200 jobs, which is 80 percent of what the county has lost (on average) during each one of the last five years!

Dataquest, the market research firm that knows everything about the high technology industry, has been noticing the shift of chip fabrication lines away from Silicon Valley, too. More than a year ago, a Dataquest Research Newsletter noted:

'Although California boasts the largest number of production-based fab lines currently operating in North America (97 of 255 fab locations), the fab lines in California have approximately half of the average start capacity of their Texas counterparts." The newsletter continues: "This suggests that if someone wants to develop a start-up and a process technology, California is the place to go. If however, a company wants to bring up volume production, it should be aware that a large portion is outside California -- and most is in Texas..."

In fact, California has seen almost every major semiconductor company move its manufacturing eastward, as new capacity was required. Looking ahead, Dataquest believes that while California will continue to support more wafer fab lines during the 1990s, Texas is expected to have the highest capacity in North America.'

The trend toward less semiconductor manufacturing in Silicon Valley and in California was here well before Sanford Kane and U.S. Memories started making the news. It is not new and it should not be startling. But is it a sign of economic decline for Silicon Valley?

Probably not. The Santa Clara economy remains quite strong. In the three years since the depths of the high technology recession in 1985-86, total wage and salary employment in the county has increased by about 2.5 percent a year, which is almost exactly the same rate of increase as in the last decade. By comparison, job growth nationwide over the last decade has been running at only about 1.6 percent per year.

In addition, the manufacturing base has remained strong. Manufacturing jobs were 35 percent of the total Santa Clara county jobs in the county in 1979, and they are about 34 percent now. By comparison, manufacturing jobs for the United States as a whole have fallen from about 23 percent of total employment a decade ago to about 18 percent now, as jobs have shifted to service industries.

Within the manufacturing sector, the loss of 20,000 jobs in the local semiconductor industry has been offset by gains in manufacturing industries that use semiconductors, like the computer and instruments industries. The real story is not a case of goodbye to Mr. Chips, but a trend toward Silicon Valley shifting from being a chip maker to a chip designer and a chip user.

Silicon Valley companies have a vital need for ready access to the best quality, lowest cost chips available in the world. There is surely a legitimate fear that if push comes to shove, Japanese semiconductor manufacturers might prefer to use their most highly advanced chips in their own products, rather than selling them to American competitors.

However, there is no special reason that these chips need to be manufactured locally. U.S. Memories turned down California and Silicon Valley for the same reasons that other local companies have moved their semiconductor production elsewhere: This is a high-cost area with a highly skilled workforce, which makes it more suitable for specialized production of high-value products which depend on new research and design. The economics of this county are no longer particularly suited to mass manufacturing.

If U.S. Memories had decided to locate its plant here, it would have been a strange case of swimming against the tide. But you can bet that the phone lines and FAX machines will be humming between Silicon Valley and wherever U.S. Memories ends up.

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