Published Sunday, March 11, 2001, in the Miami Herald

Downturn hobbles Silicon Valley swagger

BY CHARLES PILLER AND JOSEPH MENN
Los Angeles Times Service

SAN FRANCISCO -- There's no longer a waiting list for Porsche Boxsters at Carlsen Motors in Palo Alto. Some recent paper millionaires can't make house payments. And for the first time in years the cash invested in new Silicon Valley firms has slowed dramatically.

The domino effect of Internet failures has already triggered one of the largest Nasdaq stock market meltdowns ever. And now the first warning signs of an economic slowdown have hit Silicon Valley -- technology's epicenter.

In an ominous bellwether for future growth, The San Jose Mercury News, Silicon Valley's hometown newspaper, suffered a $2.5 million drop in help-wanted ads last month and is planning some layoffs, according to a memo Monday from Publisher Jay Harris.

Signs of caution have also begun to infect the area's hyperinflated housing market. Even though Santa Clara County homes reached a median price of $505,000 in January, the increases should slow this year, according to John Karevoll, an analyst with DataQuick, a real-estate data firm.

Lucky tech professionals who sold stock at the right time still make all-cash offers for new homes. But sellers no longer automatically list homes for more than the last comparable sale, brokers say.

``It's not the frenzy it was before,'' Woodside real-estate agent Jayne M. Williams said. ``At an open house, we used to have 100 people. Now we're getting half that.''

The cooling real-estate market has been noted -- with evident satisfaction -- by San Francisco neighborhood activists. They had bitterly resisted Internet companies that swept up from grid-locked Silicon Valley to San Francisco in the past few years. The migration drove up city rents and drove out nonprofit arts and community organizations.

But the waves of dot-com colonizers have begun to recede. For-rent signs are multiplying in San Francisco, and some of the big office projects that displaced small businesses stand empty.

``It's been like this huge economic acid trip for a lot of people (has finally ended),'' said Debra Walker, an artist who fought to limit developments in San Francisco's multicultural Mission District. ``Nobody's under the illusion that they're going to be millionaires anymore.''

In January, 53 Bay Area dot-com firms shut down, compared with 42 in all of 2000, said the market-analyst firm Webmergers. Scores of others downsized or were gobbled up by stronger companies.

The ripples from failed Internet ventures and sagging stock prices are prompting layoffs at established Silicon Valley firms. Hewlett-Packard plans to cut 1,700 jobs, while network-equipment maker 3Com, and ExciteHome, a high-speed Internet-access firm, announced layoffs of 1,200 and 250 workers, respectively. Microprocessor giant Intel joined the list Thursday, saying it would cut 5,000 jobs.

Venture-capital funding of new Silicon Valley firms dropped 27 percent in the fourth quarter of 2000, the first quarter-to-quarter downturn in nearly three years, said market researcher VentureOne.

Any economic downturn would be a sharp change from a dizzying growth rate. The unemployment rate in Santa Clara County, which comprises most of Silicon Valley, was an astounding 1.3 percent as of December -- the lowest since 1949. Although preliminary data shows that figure edging up to 1.6 percent in January, last year Silicon Valley firms added a net 39,200 jobs.

``There's a tendency to think . . . that when the dot-coms go down they bring everyone with them,'' said Doug Henton, president of Collaborative Economics, a Palo Alto consulting firm. But most failing companies are small, and ``our region has the most diverse tech industry in the country,'' he added.

Most people in the area earn the same salaries as before, but with their stock options under water, they are no longer rich on paper and buy less, Henton said.

``People are more careful with their money,'' said Mario Chavez, vice president for engineering of Menlo Park-based Cuica Corp., which operates an online advertising exchange. ``We go out to dinner pretty often, and the restaurants are pretty full. Where I've seen a difference is in the big-ticket items.''

A year ago, Carlsen Motors sold a Porsche a day; customers would buy a used car at the same price as a new one, rather than wait six months due to the order backlog. ``We've definitely noticed a downturn in sales, particularly the Boxsters,'' which lag 10 percent off 2000 figures, salesman Christopher Bearman said.

So while few people are panicking, the famous Silicon Valley swagger is less apparent. Rampant job hopping to bid up compensation packages is subsiding in today's more cautious climate.

``People still can't hire engineers fast enough, but the reasons are different,'' Chavez said. ``If you have a job, you're not as likely to jump. A year ago it was `Who has the best offer?' ''

A modicum of common sense has returned to the local job market, said John Malone, chief executive of Equest, a job-posting service. ``The market was full of itself, making irrational hires and paying irrational wages,'' he said.

Cosine Communications, a networking company in Redwood City, is delighted with that change. As it did last year, Cosine interviews up to 40 job candidates a week. But now it has better luck closing the deal. Recruiting manager Carmen Jacinto recently interviewed a man who rejected a Cosine offer last year. This time the tables were turned.

``We offered the same salary as last year, but with half the stock (options),'' she said. ``And he's coming on board.''

The touted tech-driven ``permanent economic boom'' is rarely mentioned these days -- as state officials have grimly observed. They estimate a drop in capital-gains taxes of $2 billion this year.

Technology rapidly speeds up the economy in good times. But changes in consumer confidence and shrinking demand can have the opposite effect almost as rapidly, given sophisticated inventory-tracking and communications systems, said Amy Dean, executive director of Silicon Valley's AFL-CIO Labor Council.

``The New Economy hasn't eliminated the business cycle,'' she added. ``It has increased its gyrations.''