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California Dreamin'...

By Rajeev Srinivasan
Last updated on: August 22, 2003 17:52 IST
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It has been startling and brutal, the change in California's fortunes, especially that of the Silicon Valley. Just three years ago, it was the center of the universe, its so-called 'New Economy' challenging gravity and the laws of supply and demand, and there were all those college-dropout-instant-gazillionaires. What a fall it has been! Today, unemployment is about the highest in the nation, and Arnold Schwarzenegger may become the new governor after the October recall election. From Governor 'Moonbeam' (Jerry Brown) to Governor 'Toast' (Gray Davis) to Governor 'Terminator'? 'Throw the rascals out' is usually popular when the economy is in a mess.

For the California Dream has turned into a nightmare. If this is the future of America, it is rather bleak, although I am sure the Valley will recover. The Valley of Hearts' Delight now looks like an old rust belt town, if not in appearance, certainly in sentiment. I am sure the ghosts of the old prune and apricot farmers of the region, like at the McCarthy Ranch -- now a huge shopping mall -- must be shaking their heads, wondering at the rise and fall of the Silicon Valley.

But there are still silver linings. Many people have found that their houses have appreciated, even if prices have come down from the stratospheric levels of a few years ago. It was all paper profit anyway, for you couldn't sell your house because you couldn't afford to buy another, unless you moved out of town. On the plus side, the commute across the Dumbarton Bridge to Palo Alto is no longer an hour long, and it is possible to get a table at a popular restaurant like Il Fornaio.

Maybe all this is not such a bad thing: people are now taking a bit of a break from their hectic lives. Some of my Stanford Business School fellow-alumni, former high-fliers, are now 'between jobs.' One of them told Fortune about her classmates: '[some are] wealthy and retired and living the American dream because they invested in eBay or followed Warren Buffet… [but others] don't have the time to rebuild their wealth, and in fact, are slipping backward.' I suspect many are taking a long, hard look at their lives and re-evaluating what is really important.

Those of us who did not take risks view all this with a little schadenfreude. Being a conservative investor, I did not jump into the hottest new startups and all the associated Tulip-mania, and I kept my money in liquid assets, not trusting those incredible P/E ratios. So I made hardly any money, but I lost very little as well. Some of my friends did very well indeed, Dame Fortune smiled on them: and I am happy for them. But is all this gloom and doom the end of the Valley as we know it?

I remember how the minicomputer industry died on Route 128 near Boston: Wang, DEC, and Data General sank without a trace. But I think the Valley will recover faster. The very factors that fed the excesses in the Internet boom -- venture capital, entrepreneurial culture, R&D activities at Stanford and Berkeley, the cluster effort of a large number of related companies --all this will help in sunrise industries: biotechnology, nanotechnology, advanced materials.

The Economist compared the Silicon Valley meltdown to a forest fire in Yosemite. Amidst the charred trees, there are the shoots that will grow into the next-generation kings of the forest: similarly, those few companies that are able to survive may well be the new champions. There's something Schumpeterian about all this 'creative destruction.' But that's tough indeed for all those burnt-out old tree-trunks.

At the moment at least, the giants of the Valley are being pummeled. The center of gravity of the PC industry has moved away to Seattle and Austin, home of Microsoft and Dell; Hewlett-Packard, despite having consumed Compaq and Digital, is now focusing more on its digital imaging leadership. Sun Microsystems and Cisco are hurting in the computer market, but IBM is doing well.

And the enterprise market, in general, is not where the action is: consumer electronics is doing much better. Results from major Asian manufacturers in the last few weeks show this: Canon, Pioneer and Fuji, with digital cameras and DVD players, are doing well; Toshiba, Fujitsu, NEC and Hitachi are doing much worse with their portfolios of computing equipment. The Valley has yet to show its prowess in this consumer electronics, even though Apple's new advances in sharing music may be the exception.

Furthermore, the Bay Area companies most in the news for the moment are Oracle and Peoplesoft, going through a brutal hostile takeover attempt. The real winner, whatever the outcome, is likely to be Germany's SAP, already by far the biggest player in the enterprise resource planning marketplace. Also in the news are Red Hat and its flagship Linux, under attack from SCO alleging trade secret infringement, although many consider SCO's claims frivolous and motivated.

Overall, the outlook for the Silicon Valley is quite grim for the moment.

The 1990's experience of the Valley boomtown is being replicated in Bangalore, and I use the city as a metaphor for the best India can offer in competition to the Valley. I am startled that some old landmarks have simply disappeared from Bangalore. For instance the Victoria Hotel where I used to go for an alfresco Sunday brunch of appam and stew: nostalgia really isn't what it used to be. There is a huge glass-and-chrome commercial block under construction where the Victoria and its lawns used to be.

On Bannerghata Road there are the IBM and Oracle buildings, among others. On Brunton Road, there is the glass-skinned Cisco building. Near Ulsoor Lake, there is the lavish high-rise Philips building; further out, on Hosur Road, there are the fabled campuses of Infosys, Wipro and the like. Bangalore is booming. It is my favorite city in India. It is cosmopolitan, superficially so, perfect for former Californians. The climate, again like the San Francisco Bay Area, far more salubrious than any other that I know of.

Bangalore is a lot like California: a magnet for the adventurous from all over; not to speak of refugees from the foul weather elsewhere. Throw in a supply of defense labs and research establishments, along with the Indian Institute of Science, and a few visionaries (like Ashok Soota then of Wipro), and hey presto, you have a world-class technology city on your hands. And once they come, they will stay on: whether it is research labs or people. Only a meltdown makes things bad.

Unfortunately, just as in the Valley, this has involved an evolution of sorts where pleasant and bucolic suburbs were transformed overnight into high-rise office parks with too many automobiles and attendant pollution. The electricity situation is pathetic; and there are times when there is a water crisis. Sounds more and more like California, with the major problems with electricity that we witnessed a while ago.

Bangalore has a number of Silicon Valley characteristics, but so do several other places: Austin, Texas; Cambridge, England; Tel Aviv, Israel; Hsinchu Science Park, Taiwan. And there are pretenders such as the Malaysian Multimedia Supercorridor. They all seem to have some of the magic ingredients.

Bangalore lacks, other than the Indian Institute of Science, world-class universities of the nature of Stanford and UC, Berkeley. And it does not have a Xerox PARC, one of the world's great industrial labs, although one that famously made no money over seminal inventions such as the graphical user interface, the mouse and the Ethernet. Nor does Bangalore have a Sand Hill Road, home of roughly one-third of the US' venture capital.

So Bangalore is vulnerable; it is a cliché, but it is nevertheless true, that there is still relatively little value-add in India in IT. It is just the 'backoffice of the world,' dependent on the cost-cutting needs of multinationals. It is true that there is a great deal of money to be made and jobs to be had in the BPO and IT services sectors. In the long run, though, Bangalore is exposed until 'Made in India' IT products start becoming world-class.

So far, the only real product that I can think of is I-flex's financial package, and they probably could not have done it had they not started off as a Citigroup subsidiary, and managed to build on their parent's marketing connections. This has to change.

I don't want to be a Cassandra, but it is worth keeping in mind that Bangalore could be subjected to the same boom-and-bust cycles that California went through. Welcome to globalisation, I suppose. The fact that there are jobs in Bangalore when the technically skilled are struggling in California has not escaped the attention of various hiring managers. There was a remarkable job fair at the Santa Clara Convention Centre recently, where a number of companies, mostly multinationals, were looking to staff up their operations in India.

This was the first job fair of its kind, and it was quite well received. A large number of Indian-origin techies showed up, and so did some non-Indians. It is now clear that because of the purchasing-power multiplier, a salary of about $20,000 in India -- the going rate for a project manager -- is roughly equivalent to a $100,000 salary in California in terms of standard of living; therefore Bangalore is looking increasingly attractive to the Indian diaspora, especially those of us who live uncomfortably 'under two flags'.

I wrote about eight years ago in the San Jose Mercury News that Asians were beginning a reverse brain drain back home as economies were starting to improve. At the time, it was only Taiwan that was attracting its wayward children. But now, as the California dream has soured, Bangalore and other cities in Asia are beginning to look that much better.

There has been a downside to the anything-goes laisser-faire attitude of Californians, too: a serious dumbing-down of the state, as well as the country, for Californian-made video and films dominate the airwaves. Mainstream (read: WASP) Americans have neglected the pursuit of academic excellence by their children. Only the Asians are doing well in school. At Berkeley, Stanford, UCLA, Asian children -- Indians, Chinese, Koreans -- coming from families that value education, shine.

Today, it is clear that school districts with substantial Asian populations -- like Fremont -- have better scholastic results than those that do not. It will soon reach a stage where the well-to-do Asians will conclude that schooling back home is better than dumbed-down Californian schools; in which case, the reverse migration will start in right earnest. And given the fact that 'Johnny can't read' and 'Johnny can't add' either, this spells disaster for the country's research labs and its current dominance in high technology.

But California is too resilient a state to not bounce back. It had successive gold rushes, ranging from the original one when gold was found in 1849, to the land- and water-grab, to the aerospace boom, and finally to the high-tech boom of recent memory. It has, among other advantages like balmy weather, a high rate of immigration still, from Latin America and Asia -- everyone from Sikh almond farmers to Filipino factory workers -- and as the rest of America ages, California's demographics may prevail, as well as its cultural affinity for entrepreneurship and risk-taking. Bangalore had better take detailed notes.


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