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Recession Hits Silicon Valley

January 24, 2009

After recovering from the late 90s tech bubble and subsequent bust, the global recession is now hitting Silicon Valley companies hard, as tech firms cut thousands of jobs and reduce costs to compensate for plummeting earnings and waning customer demand.

Until recently, tech sector layoffs have lagged behind other industries.  But they’re now coming at a furious pace as the recession grips Silicon Valley, the strip of land just south of San Francisco that is the epicenter of the technology industry.

Tech bellwethers such as Microsoft, Google and Intel have announced thousands of layoffs in recent weeks, while start-ups fight for survival with fewer customers and venture capital funds.

Analysts say this is only the beginning, and predict thousands more will lose their jobs this year as the economic slowdown forces the industry to cut back on marketing and capital spending.

“Organizations are saying, ‘What is the absolute nuclear winter? Let’s plan for that,’” Adam Charlson, senior partner at executive search firm Korn/Ferry International Inc, told Reuters.  Charlson’s firm works closely with the recruitment departments of many top technology companies.

“What you’re seeing now is organizations putting those plans into reality.”

The Valley lost 11,700 jobs last year, according to Steve Levy, senior economist at the Center for the Continuing Study of the California Economy (CCSCE).

And while that number may seem small in comparison to the 200,000 jobs lost after the dotcom bubble burst in 2000, that is only because the 2008 numbers don’t yet reflect the most recent layoffs yet, he said.

“The headline is that the recession has hit Silicon Valley.”

Levy said he is “substantially revising downward” his 2009 employment forecasts.

State officials announced Friday that California’s unemployment hit a 14-year high of 9.3 percent in December, far above the national average of 7.2 percent.

Some analysts view the large numbers of layoffs as preemptive acts. When the last recession hit the sector, tech companies reacted too slowly in laying off workers and reducing costs, said Edward Jones’ senior technology analyst Andy Miedler.

This time it’s different, he said.

“Layoffs and cost-cutting are unfortunate, but companies have to make tough decisions in a rough economy to preserve their own financial position,” he told Reuters.

Mark Cannice, a professor of entrepreneurship at the University of San Francisco, believes Silicon Valley has been “inoculated to some degree” after the bursting of the tech bubble.

Cannice publishes a quarterly Silicon Valley Venture Capitalist Confidence Index.

“Many firms didn’t survive – the ones that survived are much more efficient and resilient and were funded on sounder business models,” Cannice told Reuters.

However, Valley companies are not entirely immune, he said, particularly venture capital-funded start-ups.  For instance, as large companies like Google and Intel reduce spending, start-ups that supply them with software and other IT products could find themselves in trouble

With venture capital funding dropping 71 percent in the fourth quarter of 2008 from the same time a year ago, start-ups could be forced under if they are unable to sustain their business and investors no longer provide funding.

It may not be all bad news, however.  Mass tech sector layoffs may actually boost innovation as laid-off scientists, engineers and other highly skilled workers pursue their own interests, something Cannice calls “forced entrepreneurship,” which could ultimately “unleash the next wave of creative, thoughtful entrepreneurs.”

And recruiters say tech company layoffs could help drive employment in the alternative energy sector.

“It’s not that the sky has fallen entirely,” Neil Sims, managing director of executive search firm Boyden’s technology practice group, told Reuters.

He believes the “cleantech” sector will continue to grow and provide jobs.

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