WSJ employment cheerleading

March 2, 2006 View from Silicon Valley- More employment cheerleading A friend sent us the following Wall Street Journal article, asking for our opinion. While we agree Silicon Valley employment is no longer rapidly declining, reports of its recovery have become quite exaggerated. With apologies to long-time readers who may be tiring of our opinion in this area, we embedded comments in the article below, then concluded with the following: In short, this is another fluff piece pretending to use hard data (all conveniently supplied by the company or industry tout). As we have repeatedly written, and as one this article's graphs confirms, local employment is still lower than 1995 levels. Since 1995 Silicon Valley has gained people but, magically, unemployment is reported as lower --you do the math. The real genius of Silicon Valley is how a couple years of free money have been leveraged into much higher housing prices ($700K median!) and demand for consumer gadgets. This credit-induced binge has made people think the valley is "recovered." As Paul Krugman wrote a couple days ago, and we commented in September, 2004, "It all depends on 'where' you are" (http://www.viewfromsiliconvalley.com/id99.html). The "riches" are going to the top few percent of people. If you work at a big company like Sun, Cisco, Juniper, Intel, Nvidia or the government, you're "OK." They mostly maintained employment for the last couple years. Your stock options haven't done much but you haven't missed a paycheck. As an aside, despite marginal performance, the upper management at these companies continues to rake in big bucks. Witness Sun's re-hired CFO, the guy on whose watch Sun's earnings and stock values initially tumbled. He comes back to get $700K/year plus millions of stock grants. Sun is not even pretending he has some risk of getting a big payday. They have him grants, not options. If you got "in" at Google, eBay, Yahoo you're getting paid AND getting "PAID!," as they say. Pretty much everywhere else, it's a crap shoot. The last three years, your company stood a good chance of failing, downsizing or off-shoring, or even all three. If you were "lucky" your company was acquired AND you survived the resulting purge. We're all for capitalism and rewards for success. However, since I still need to take risks if I hope to reap big rewards, I need accurate information. The article below is not fulfilling this role.

Market Is Hot
For High-Skilled
In Silicon Valley

By PUI-WING TAM

Five years after the dot-com bubble burst, job growth has returned to Silicon Valley. But it's a different kind of growth than in past recoveries, favoring higher-skilled workers.

Netflix Inc.'s hiring shifts are typical. During the tech boom, the online movie-rental service created 100 customer-service jobs near its Los Gatos, Calif., headquarters in the heart of Silicon Valley. After the tech bust in 2000, Netflix eliminated half of those positions. But the total headcount at Netflix's Silicon Valley offices has grown 20%, to nearly 200 staffers in the last few years.

That's because Netflix, while shedding some lower-end jobs, has aggressively created new, higher-level jobs. It's adding jobs in departments such as Web engineering and product development: That groups' hiring of engineers jumped 20% to more than 50 people in 2005 alone. "Our new engineers have an average of seven to 15 years experience," says Patty McCord, Netflix's chief talent officer. "Five years ago, we hired people with three to five years of experience."

--which are they screening for, skills or experience? Many of the web-expertise type jobs mentioned in this article barely existed five years & were not yet invented 15 years ago. There is a lot of mis-information in this portion of the article.

Past tech recoveries tended to bring new lower-skilled jobs as well as high-skill jobs. This time, tech firms -- from big companies like Hewlett-Packard Co. to mid- and small-size firms such as Netflix, Adobe Systems Inc., and SanDisk Corp. -- have moved lower-skill jobs out of the Silicon Valley area to cheaper locations, or outsourced them to foreign countries. The new jobs they are creating locally often require specialized skills in engineering and design. Young companies like Google Inc. are simply starting out hiring at the high end, further shifting the overall balance.

A study last month by Joint Venture Silicon Valley, a nonprofit group representing businesses and government agencies in the area, found the nation's tech capital had a net increase in jobs in 2005 for the first time in four years. Most of the growth came in the category of creative and innovation services, including firms in research and development, scientific and technical consulting and industrial design. In total, the number of Silicon Valley jobs in these areas grew 4% from 2002 to 2005, reaching 72,734. At the same time, the number of jobs in electronic-component manufacturing -- which tend to involve assembly and other repetitive tasks -- dropped 28% to 23,772, while jobs in semiconductor-equipment manufacturing fell 23% to 58,133.

Overall, 14% of all the jobs in Silicon Valley today belong to a sector called core design, engineering and science. That exceeds the comparable 9.3% slice of the work force in Austin, Texas; 8.7% in Seattle; and 8.3% in San Diego, according to the study.

Doug Henton, an economist and co-author of the report, says with the growth in these creative engineering jobs, a new face of Silicon Valley is emerging. "Ten years ago, this was an engineering Valley that pumped out chips and computers," he says. "Now it's all about creative tech and staying on the cutting edge."

The shift highlights how Silicon Valley is working to establish a competitive advantage, as lower-cost geographic rivals chip away at its strongholds. The Silicon Valley region has taken the tack of moving up the skills curve before: As competition in chip making became more heated in the 1970s, Silicon Valley chip makers relocated their assembly and manufacturing overseas but retained their core design facilities in the region. Today these chip makers, such as Intel Corp., remain dominant.

--Intel's chip designers are mostly in Oregon. Intel quit hiring locally over 10 years ago.

Silicon Valley's changing employment makeup does have its downside. Wages are once again creeping up, making it more expensive to do business in the already pricey area. Average annual pay in Silicon Valley hit $69,455 in 2005, up 2.7% from 2004, though it remains below the heights of the average $80,000-plus that the region's workers earned in 2000, according to Joint Venture Silicon Valley.

What's more, as operations and lower-skill tech jobs leave the region, Silicon Valley has a narrower base of industries. That makes the area more vulnerable should another downturn occur, says Steve Levy, an economist at the Center for the Continuing Study of the California Economy in Palo Alto, Calif. "Los Angeles has a far more diverse economic base, with Hollywood, biotechnology, plastics and toys," says Mr. Levy. "But high-skill tech is all we're left with."

Tech companies say the shift toward the top end of the skills spectrum has largely been positive for them -- particularly in productivity. Consider SanDisk, a Sunnyvale, Calif., supplier of flash memory products. SanDisk had 300 operations and manufacturing jobs in Silicon Valley in 2000. The company moved about half of those jobs to Asia over the past few years, but the headcount at its headquarters jumped to 747 people by the end of 2005.

--The net productivity increase has almost all been from off-shoring, not magically-productive new hires. It's a one-time boost & productivity "increases" will drop off if additional, incremental cost reduction via off-shoring or other measures (headcount reduction?) are not repeated each year. (So add a slowdown in off-shoring, to a slowdown in housing to your list of recession triggers.)

SanDisk's fastest-growing job category has been product development and research, where the company is now hiring "at the master's level and Ph.D. level," says Judy Bruner, SanDisk's chief financial officer. "We can't take just a general engineer."

--How do you realistically tout Silicon Valley employment as widely recovered when one of the best examples you can find references a place only hiring PhD's & Masters Degree holders? With the cost of tuition ratcheting up, even as student loan terms become more stringent, this will make it extremely difficult for the average middle-class person to attain these jobs.

While Ms. Bruner acknowledges average compensation at SanDisk is rising, she says higher-skill workers have helped the firm get more done. Last year, each SanDisk employee generated an average $2.4 million in revenue, up from around $1.5 million per employee in 2002.

--Of course. As an earlier paragraph touted, they now use more contractors and fewer employees! Any productivity gain is not due to the genius being applied by the remaining employees. This is another example of reporters just writing down what companies say without actually questioning them. (Perhaps I unfairly assume he didn't actually read their financials. Anybody want to bet?)

Palm Inc., which makes hand-held computers and cellphones, has seen a similar productivity boost. Teresa Toller, the Sunnyvale, Calif., company's director of staffing, says Palm beefed up its engineering teams by 70% to more than 400 people in all over the past two years. The company has sought engineers specializing in wireless technologies, such as Bluetooth and Wi-Fi. Palm's average revenue per employee was $1.61 million for its fiscal year ended June 3, 2005, almost double the fiscal 2002 level or $788,000 per employee.

---For 3+ years, I drove by the new Palm offices where I marveled at all the empty parking spaces. A minute or two later on my daily drive home, I passed the old, and empty, 3Com/Palm campus (now sold to Marvell). Even if Palm really has 400 new, employee (non-contractor) engineers (which I doubt), their total employment is still only a small fraction of what it was during the boom. They don't even fill the office buildings they down-sized into during 2001 or 2002. (And this is common throughout the valley. Even well-established companies have plenty of parking. This was not the case is 2000, nor in 1990 nor even 1980.)

Google is doing more specialized hiring in areas such as mechanical and electrical engineering, says Alan Eustace, senior vice president of engineering at the Mountain View, Calif., search company. Last year, Google brought 2,659 new employees on board, pushing its total work force to 5,680. "We definitely hire for creativity, since creative people look at problems a different way and come up with the most interesting solutions," Mr. Eustace says.

--Assuming Google really added 2,659 net, new employees, this is equivalent to nearly 90% (!!) of the net, newly- employed Santa Clara County residents captured in 2005 statistics.

The type of Silicon Valley employee now in demand looks something like Simon Smith. The 36-year-old Mr. Smith, who works at software maker Adobe, doesn't have a typical engineering background: He has degrees in architecture and ran a Web development company before becoming creative director of software firm Macromedia Inc. in 2002. Adobe, which makes software programs such as Photoshop and Illustrator, bought Macromedia for $3.4 billion last year.

--We agree this is a perfect example of the Silicon Valley job market. We would only call it a complete example, however, if it also included the percentage of Macromedia employees who "survived" the merger and are still employed at Adobe. We suspect this nunmber would suggest to the average reader Mr. Smith's example is actually atypical.

At Adobe, Mr. Smith heads the world-wide user experience practice, a 12-person consulting team that works with outside clients to design mobile and Internet applications using Adobe technology. "We want to usher in a whole new era of design for our clients by leveraging Adobe technology," says Mr. Smith. He says he plans to expand his team over the next 12 months, with job candidates ideally coming from design firms such as Frog Design Inc., a Palo Alto, Calif.,-based company that helps design products such as Micron's PCs, Dell.com's Web site and Symantec's software packaging. A Frog Design spokesman says the company takes it as a compliment that tech firms are trying to recruit from it, but says its work force remains stable and has grown to 275 employees at the end of last year from 200 in mid-2005.