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Silicon Valley is down but far from out

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MOUNTAIN VIEW, Calif. — If this is a snapshot of Silicon Valley during the worst of times, the picture is not half-bad.

Houses on the market are receiving multiple bids, restaurant traffic is still respectable and the chip industry is glimpsing new growth.

Yes, the nation's high-technology heartland is in its deepest recession in recent memory, after tens of thousands of layoffs, and is burdened by unprecedented gluts of office space and manufacturing capacity. But some longtimers here believe that the region is already shaking off the dot-com calamity of the past 18 months. They say Silicon Valley's extraordinary productivity — based on a foundation of entrepreneurship, venture capital and engineering talent — will revive sooner than some economists have predicted.

A report released Monday suggests that the consequences of the recent Internet commerce collapse may be less permanent than some have feared. For all it has endured recently, Silicon Valley appears to be faring favorably, compared with many areas of the country, in terms of quality-of-life measures like the amount of land designated as open space, the report says.

The region's storied innovation still has a strong pulse, as evidenced by a spate of new products that include advanced wireless phones, next-generation data equipment and the iMac pedestal computer, which Apple Computer introduced last week. Various seeds of economic recovery are manifest in the survey, prepared by Joint Venture Silicon Valley, a coalition of corporate, government and civic groups that annually compiles a broad economic index of the region.

"The world thinks we've fallen off a cliff," said Douglas Henton, president of Collaborative Economics, a research firm in Mountain View that prepared the 2002 Index of Silicon Valley, the sixth such annual survey. "But the dot-com bubble burst, and we're moving on."

California released job data on Friday that appeared to bolster the report's conclusions. The state's Economic Development Department said December unemployment in Santa Clara County — the heart of the Valley — was 6.1 percent, down from 6.6 percent in November.

The employment report is "not yet evidence of a turnaround," said Stephen Levy, director of the Center for the Continuing Study of the California Economy. "But it's evidence the downturn may no longer be escalating."

Levy, who helped review the Joint Venture survey before its release, summed it up by saying, "The downturn has not attacked or disrupted fundamental long-term strengths of Silicon Valley."

To be sure, some economists say that while the downturn may not have disabled Silicon Valley the way, for example, the aerospace collapse hit Los Angeles in the early 1990s, the Valley remains in deep shadow.

"It's not a depression, but it's very close," said Ken Rosen, a professor at the Haas School of Business at the University of California at Berkeley, who studies the regional economy. "It's the most serious recession the Valley has faced in the postwar era."

Rosen and other economists who share his gloom note that the human cost of the dot-com meltdown — the lost jobs and failed dreams — has yet to be fully tallied.

But the pain is far from universal.

"Everywhere around me I see people who have jobs and haven't lost their BMWs and who are buying cool new iMacs," said Brian Reid, a computer science professor at the new campus that Carnegie Mellon University is creating in Mountain View. Last year, Reid lost his job when Lucent Technologies closed its small research laboratory here. But several months later, he was hired as the first faculty member for what the university, based in Pittsburgh, hopes will one day become a major technical training center.

Reid's optimism is reinforced by the Joint Venture findings this year. Despite the fact that the region lost an estimated 25,000 jobs, or 1.8 percent of its total employment in 2001 — the first net job loss here in nine years — value added per employee, a key productivity measure, increased by 4.6 percent, to $170,000. That number is a striking contrast to the national average of $56,000.

And while average pay declined 2 percent last year, to $76,800, the dip came after a 22 percent gain in 2000 — and the average is still more than twice the national average of $35,300.

While much has been made of the collapse in venture capital investment the past year, Henton said the falloff simply represented a return to the more modest growth rate of the period preceding 1999. In 1998, venture capital investment in Valley companies was $3 billion. By 2000, it had soared to $21 billion. In 2001, the amount of venture capital invested was back down to a more earthly level of $6 billion.

Some venture capitalists say the worst days may be behind. William B. Elmore, a partner with Foundation Capital, an investment firm in Menlo Park, said that Foundation was now looking ahead after shutting down six of its companies last year and laying off employees at its 37 other startups.

Among the firms still actively investing in 2001 were Mobius Venture Capital, formerly Softbank.

"What's incredible here is the strength of the ecosystem," said Greg Galanos, a managing director at Mobius, who invested the firm's money in nine companies last year — mostly in the wireless "last mile" market for high-speed Internet connectivity.

"The big change between the bubble and now is everyone was in 'hog the puck' mode before," he said, using a hockey metaphor to describe his perception that investment firms are now more willing to share stakes in companies, rather than be sole backers.

One of Galanos' startups is a small company called Danger Research, based in Palo Alto. This spring, the company plans to begin selling a wireless cellular phone and data handset that is intended to permit Web browsing and e-mail. The company displayed its phone at the Consumer Electronics Show in Las Vegas last week.

"We were well received," said Andy Rubin, co-founder and chief executive of Danger. "It wasn't like the crazy energy of two years ago, but I got the feeling that there is new energy there, and it is building. The fear is gone."

The most promising segment of the Valley right now may be the oldest: the semiconductor industry.

"What we're seeing is the first phase of the upturn for the next cycle," said George M. Scalise, president of the Semiconductor Industry Association. "The order patterns are improving, the inventories are in line, and as a consequence, we're having to build to demand again."

Good news for chip makers is good news for the Valley. The semiconductor industry's four-decade history of industrial innovation has regularly created entirely new industries — from the electronic watch to the PC to the hand-held computer to whatever may lie just ahead.

The skeptics, however, argue that the fallout from the dot-com bust is still settling and will do so for at least the rest of the year.

Rosen of the Haas School noted, for example, that the unemployment figures were more damning than they might look at first glance. Not only is the rate high, he said, but it is drawn from a larger population base — meaning far more people are jobless here than were in the last recession a decade ago.

Meanwhile, the commercial real estate market is still reeling. The commercial vacancy rate of 18.3 percent in San Francisco, just north of Silicon Valley and a former center of dot-com activity, is the highest recorded by Cushman & Wakefield since the real estate firm started keeping figures in 1970. And the vacancy rate of 18 percent in San Jose, the southern tip of the Valley, is near historic highs as well, with brokers saying they are braced for even more vacancies from the business bankruptcies they expect in 2002.

But for those in the Valley still fortunate enough to be plugged into the technoeconomy, the evidence of a comeback is indisputable.

Last Thursday, on the other side of the freeway, in affluent Palo Alto, a two-bedroom house went on sale for $725,000 and sold quickly for 10 percent above the asking price.

It is all part of the regenerative cycle that has long characterized Silicon Valley and that is reflected in another recent optimistic survey of the local economy. The study, "After the Bubble: Sustaining Economic Prosperity," was conducted for three regional planning organizations. It estimates that from 1995 to 2000 the Internet commerce boom was responsible for a mere 10 percent of the productivity growth for the nine-county Bay Area, of which Silicon Valley is a key component. The other 90 percent, in other words, represented real economic improvements, and the bursting of the dot-com bubble was simply a noisy anomaly.

"The bulk of what occurred was more fundamental productivity improvement," said Lenny Mendonca, a director at the management consulting firm McKinsey & Co., which performed the study for the Bay Area Council, the Bay Area Economic Forum and the Association of Bay Area Governments. "We certainly have an overhang of commercial real estate to work off," Mendonca said, "but if you look at a three-to-five-year time frame, we are very optimistic."