Is Silicon Valley insulated from the Economic and Financial Debacle

The region is intimately connected to the U.S. and global economies. It would be unrealistic to expect that Silicon Valley will come through unscathed in the current economic ordeal. It is not a matter of if, but how much?

Let us count some of the pluses that favor Silicon Valley at this time.

The lifeblood of the Valley economy is venture capital. This is the ingredient that finances and nurtures startup companies and these new companies are the drivers of the region’s economic vitality and growth. The lists of Valley startups include today’s global tech icons such as Google, eBay, Yahoo, Intel, Hewlett Packard, and Cisco Systems and others.

I have good news about venture money. In the third quarter of 2008, according to the Cleantech Group, the cleantech sector garnered $2.6 billion globally and Silicon Valley did well by obtaining $419million out of that.( The Cleantech industry includes an array of renewables that include solar, wind, biomass, and energy efficiency technologies.) For all of 2008, cleantech businesses in the Valley obtained more than $1 billion. The top five VC investors include Google.org; Kleiners, Perkins, Caulfield and Byers; and Khosla ventures. The biggest Valley VC deal in the third quarter involved the $200 million invested in the solar photo voltaic company Solopower.

The Silicon Valley’s renewable power industry leaders were much relieved when the renewable-energy tax credit was extended as an add-on to the $700 billion bailout plan. The tax credit extension is critical to the success of this vital industry. The credits were to expire at the end of 2008. Without it many of the large projects nationwide could not have been built. That would have been a major blow to the industry, which has the promise of reshaping and revitalizing not only the Valley’s economy, but also the national economy.
The investment tax credit was extended for an additional 8 years for solar power plants and for one year for wind power projects. The tax credit for solar power is 30 percent of the cost of plants. For wind farm owners, there is a 2 cents credit for every kilowatt hour of electricity generated.

From a jobs perspective the Silicon Valley has fared relatively well. Between January and August of 2008, the region added 7,400 new jobs. Between July and August of this year, the region has added a net of 300 jobs, according ot the state. This is significant when we consider that the nation, the state, and other parts of the Bay Area have continued to lose jobs steadily since the beginning of the year.

Minuses for the Valley are surely beginning to emerge.

Capital intensive semiconductor companies will also be impacted adversely because of the sever credit crunch.

According to the New York Times, AMD recently ran into trouble trying to raise hundreds of millions of dollars for its planned spinoff of its chip fabrication operations in order to concentrate on chip design because of frozen credit markets.

On Oct. 6, the Internet auction giant, eBay, reduced its workforce by 10 percent when it terminated a thousand workers. They are also planning to reduce several hundred temporary positions in order to cut costs and streamline operations. The reason for the layoff was due to slow growth in its core auctions business.

Undoubtedly the two economic giants of the Valley, eBay and Google, are concerned about the impact of the recession on their businesses as they rely on consumer spending and clicks on their ads respectively for majority of their revenues.

Belt tightening ,some layoffs, and a hiring freeze in many Valley companies will continue in the months ahead as the economy remains mired in a recession.

Barring a prolonged recession in the U.S. economy, I see only a slowdown in the Valley, not a full blown recession.

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