CEO Roundtable
Some of the industry’s most powerful executives sit down to talk to Reed Electronics Group’s analysts and editors. The wide-ranging conversation covers everything from China to communications and from strategy to Silicon Valley.
-- Movers and Shakers, 8/15/2003
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WHILE THEY MAY BE PICTURED HERE IN BLACK AND WHITE, our CEOs have not been left in the dark. Armed with a renewed sense of vision and sound corporate strategies, some of the industry’s most powerful executives sat downto talk to Reed Electronics Group’s analysts and editors. The wide-ranging con-versationcovered everything from China to communications and from strategy to Silicon Valley. When the night was over, it was clear that with leaders like this,the industry is poised for a comeback that will make it stronger than ever.
Q: At the first Movers & Shakers dinner four years ago, there was elation. At the next one there was a little bit more deflation. At the next one people said, 'Well it's going to get better.' And now we're sitting here again almost worse off than we were when we were sitting here a bit over a year ago. So I'd like to talk to you a little bit about how you deal with that on a daily basis. How do you adjust to the changing environment? Do you ever see that business is going to come back, or when do you see that happening? Brian Halla (National Semiconductor): This is the longest sustained recession we've ever had. During this period of time, and maybe a few years earlier, I think the whole industry has bifurcated into companies that absolutely have to chase Moore's Law in order to participate in their base business and companies that don't. I feel pretty good being in the analog business. In the analog business we don't have to do that.The other thing that's happening now, with so many of these devices, is that they are accessing and projecting real-world signals, which at the end of the day are always analog. For a while, everybody wanted to kill analog and replace it with digital because that was the magic, but I don't think it worked. Now analog is having a resurgence. So look, the short answer is analog is on an upswing just because of better battery life, better radios, better graphics, and better portability. I think that's the theme of tonight's get-together: Analog. Roy Vallee (Avnet): We've all been through these cycles before, but as Brian has just said, this is unlike any cycle we've ever seen before. I think that in addition to the magnitude and the duration of the cycle, we also have some fundamental shifts occurring, like the migration to Asia. We have been downsizing our organization around the world. We've been reducing working capital, generating cash, and paying down debt getting ready for the next cycle. But at the same time, we've had to manage the business. We've had to discipline ourselves to manage the business by region and by business unit, so that as the recovery unfolds, we have the right sort of mix in place. We have the resources in the places where growth is going to occur, and we don't find ourselves holding onto resources in places where the growth is simply not coming back or not going to come back at a robust rate. I would say that we've transitioned from adjusting the infrastructure cost of the company and downsizing to really reshaping the company and reinventing it for the next cycle. Pat Brockett (Zarlink): I think there's one thing that we should fess up to. For 30 years, we've seen a compound annual growth rate of something like 15 percent. My personal opinion is, that is over. We're going to see more like 7 percent, 8 percent, or maybe 10 percent. But if I can see 7 percent, 8 percent, or 10 percent opportunity in a $150 billion market--I'll take my chances with 7 percent or 8 percent in a $150 billion market. I don't think we're going to necessarily see 13 percent. I mean, you're going to see the usual cycles, but I don't think we can sustain 13 percent, 15 percent, for the next 30 years. But 7 percent or 8 percent on $150 billion? I'll take some of that, absolutely. Eric Benhamou (Palm): I feel a bit like the odd man out here because I'm not really a semiconductor person, and all of you run semiconductor companies. My closest association with semiconductors is that I chair the board at Cypress. So I'm basically one or two levels downstream from the world of semiconductors. Even in that part of the world, the recession has been extremely hard-felt, and it is absolutely the worst that I have seen in 30 years in the business. In our view, in order to pull ourselves out of this, you have to fundamentally reexamine your business model, but also, you have to innovate even more. The only way to innovate better--better than we did in the late '90s--is we have to have a far better process for innovation. When I look back at the '90s, our industry has done a few bad things, but a few good things too. We have really learned to manage the supply chain far, far better than before. I think we manage inventories, plants, and so on through better tools. We do this with really good discipline. Yet when it comes to innovation, a few companies have really put in a tight innovation process that has high yield. But I think many companies who are in the system and software business, who build devices like Palm, really have to have far better and more focused innovation and generate fewer ideas, because you can only afford to fund a few. They'd better be extremely well thought out and well aligned with customer outcomes. One thing that this recession reminded us is that if you go ask a customer, 'If I build a widget for you that has this feature, that feature, and that feature, and if I sell it to you for $400, will you buy it?' And if he or she says yes, you don't even know anything. You don't learn a thing because customers are not paid to design products for you. If you ask customers, 'What outcomes do you want to achieve?' Then you at least have a much better chance of getting to the true picture. This is the start to more of an outcome-based innovation process. So if I try to look at the silver lining of the three or four bad years, I think we're coming out of it far, far better-managed, with the same kind of discipline about innovation that we have about managing the rest of our assets. In general, I think the management of all of our companies is far, far tighter. Anyone who wants to cast a dark light on this silver lining, we're also coming out of it with a much greater governance burden. And by this, I'm not just referring to Sarbanes-Oxley and all the laws. In general, we have become a much higher transaction-cost society. The way we manage our businesses, the way we manage our communities, in general, is far, far more expensive than it was just a decade ago. And this is in part why I completely agree with you, Pat. We're not going to be able to sustain the same kind of growth rate that we've had. As a world, we've become a high-transaction-cost world. We pay the price in some ways. That better quality of management may be paid in slower growth
Brian Halla (National Semiconductor): The transition to Asia is the most fundamental, most significant thing that's happened to the high-tech industry since the industrial revolution. The transition of people, of jobs, of technology to not only Asia, but China.Sarbanes-Oxley, of course, if you talk to anybody with a public company here, they'll tell you that their D&O [director and officer] insurance this year alone probably went up 4X to 6X. The auditors' fees went up dramatically. We know of course that post-Enron, our politicians are scrambling to eradicate stock options. While in China, stock options are being given out where the strike prices are par value, and there's no capital gains tax on exercise. And there's a brain drain. It's almost reversed itself from 1990 where 75 percent to 80 percent of the PhDs go back to China. What's wrong with this is that, first of all, any vote that goes down 89 to nothing--or whatever it was--is not a vote. It's an outcry. It should have been looked at that way. Nobody has come back and said, 'What is the cost of Sarbanes-Oxley to corporate America?' 'Will it really find all the next perpetrators?' Or 'What is the cost of shutting down IPOs and forcing them all to be acquisitions because you can't do an IPO now unless you have a $75 million run rate, because of all these other costs.' Anyway, I think it's a serious problem. It's a serious problem affecting our industry. Meanwhile, Eric is absolutely right. We've learned how to cross the Ts and dot the Is. I don't know what you do, but I spend at least five or six meetings a quarter just going through every line of the 10Q and whatever I have to sign my name to, verifying the accuracy of the data. Pat Brockett (Zarlink): I'm a Brit. I've worked for three American companies: Texas Instruments, National Semi-conductor, and the company that I'm now with. In my experience, these are very straightforward, honest companies. And this burden that is politically being put upon us, if they took all the money that we're spending on additional fees to our auditors, etc, and used it to go prosecute these SOBs that are clearly crooks and throw them away for 25 years, we would in this room stand and applaud. We'd rather have that than this nonsense that's going on, which isn't going to solve anything. There are perfectly adequate laws in this country. Enforce them. And people that are crooks? Stick them away. Don't slap them on the wrists and give them a fine of half of whatever it is they gained. Stick them in prison for a long time. That's what they do in this state [California]. If you shoplift three times, you go to jail, maybe for life. White-collar crime has been allowed to pay in this society, and it has to stop. And Sarbanes-Oxley will never stop the crooks. Sticking them away for a long time will.
Graham Siddall (Credence Systems): I'm another Brit, and I came over here in 1976 for one year, and my year isn't up yet. What really impressed me about the United States when I came over from England was that in Europe, if someone was successful, the attitude seemed to be, 'How can we take this away from them?' It was a culture of envy to someone that made money, particularly if they didn't inherit the money.When I came over here, I was really surprised--pleasantly surprised--that the attitude is, 'Well, I want to be like Bill Gates. I really want to start a company and perhaps become the richest man in the world.' I thought. 'This is a very healthy attitude.' But now what I see is almost the reverse. Britain seems to be moving more toward the American view of things, and the US seems to be more of an envy culture now. I was hearing yesterday that granting restrictive stock is a much better deal for the employees. The employees are really going to appreciate this. But the fact is, we're going to have one-third or one-quarter the amount of stock, so a lot of employees won't get any stock, right? The reason why Silicon Valley is so vibrant and successful is because people have been able to join companies and they've been able to be successful, pay off their mortgage, pay their children through school. Then in the end, they give a lot of it away. In Europe, you don't see the donations, the private donations. If you look at all the institutions here, you just don't see that in Europe. I was amazed to hear that the wealthiest people are still in Europe, but they're not giving the money away. I think it's really an unhealthy trend. Silicon Valley is still one of the most exciting places to work on earth. It's the most diverse area. We have every nationality here, and anyone can make it. I think what we're seeing is we're moving more towards this envy culture simply because people associate stock options with greed. Well, you associate money with greed or stock with greed. It doesn't matter if you stick to stock or whatever. I agree with Brian too, in terms of Asia. A lot of our best people now, they're going to go and want to work in Shanghai or Taiwan. They're not going to be able to get the same opportunity that they could have in the Valley a few years ago, simply because some people feel they're fixing the wrongs of Enron and Tyco by putting in place these rules. When the Enron thing came out, I remember companies were looking at, 'You've got to have a statement of ethics for the company. It's very important.' I went home one evening and I showed my wife this statement--it was like a three-page statement of ethics. And I showed her, and I said 'What do you think of this?' She said 'I think it's really terrific.' I got it from the Enron Web site. It was the Enron Statement of Ethics. It's wonderful. Everything is in there. What effect did it have? Zero. Brian Halla (National Semi-conductor): Mike [Splinter, of Applied Materials] and I both grew up at Intel. I'm probably wrong about this, but I can't think of another company on the face of the earth that's generated more wealth for more people that were shareholders than Intel. Yet 47.5 percent of their shareholders decided to whack them--to vote for the stock-option expensing. After they came out with the most compassionate plea I've ever seen Andy [Grove] do, saying please don't do this. Forty-seven and a half percent of the shareholders turned on Intel. I cannot think--well maybe it's Microsoft--of a couple more companies that have generated that much wealth for people. Mike Splinter (Applied Materials): I could tell you lots of stories about that, but...I'm going to make two comments. One, to get back to the downturn and upturn, while I agree that many of our companies have learned to manage inventories better, I don't think that there is anything that has fundamentally changed in the industry that is going to stop the cycles that we go through. In fact, I think the next upturn cycle is going to be crazier than the last one. I think so because people have not put in capacity. Everybody is very conservative, with a mindset about managing inventory down to its lowest level. That can be good if you can respond in the back-end with capacity quickly, so your pipeline is fast. If the pipeline isn't fast, it's going to create demand scenarios and missed-demand scenarios, excess double- and triple-ordering like we've had in the past. Followed by yet another huge downturn. Who knows how long that will be. The other thing about managing conservatively, which I think many of us have done, we have much smaller companies today in terms of human resources than we did a few years ago. And we don't have much of an intention to hire in an upturn. If we do have an intention to hire in an upturn it won't be here, in Silicon Valley. It will likely not be in the United States. It's not just the Chinese PhDs that are going back to China. Other people are going back there because many of our companies are sending people there because we all want to take advantage of cheap software engineers in India, the high quality of low-cost manufacturing in China. So what happens in this next upturn in the US is hard to tell, but it could be a jobless upturn, or not the kind of upsurge in employment that we've seen in past upturns, with quality jobs, big professional jobs, high-paying manufacturing jobs. I think that's a huge concern for this country. I have yet to hear a politician or someone in the government talk about it. If there aren't significantly more jobs, is there going to be significantly more consumption? And will it sustain itself over more than just a very, very short period of time? I think it's a big concern for us.
Q: Is there any company here, though, that will not benefit from doing business in China? Ray Bingham (Cadence Design Systems): I think the answer is no, if they put themselves in a position to do business in China. For me, the way I would respond to the question of what's different about this environment and how am I operating in a different way, I would say that there's an important feature of all these important comments that hasn't yet been touched on. And that's about setting the expectations of the people, the customers, and the vendors that we lead.A lot of the people that I deal with every day want to believe that the changes that we all have to make to address the important forces that we're talking about here, are not necessary because the new economy will come back and bail us out. I think what we're describing here is that that new economy is gone, and there's a new, new economy that we all have to deal with. A lot of our dealing with it is setting expectations with the people who are responsible for it. And that's not trivial. Yet what it means is that we have to figure out how to compete in a slower-growth world, perhaps--or at least until the next thing bubbles up. We have to figure out how to deal with all of this business friction, from Sarbanes-Oxley to financial markets to figuring out how to leverage ourselves in an economy and a society--India, China or elsewhere--that we don't necessarily know that well. The list goes on. I think it starts with the teams around us, and getting them to a place that they can operate with that kind of expectation. Brian Halla (National Semiconductor): By the way, I don't think anybody said China is the enemy or that we don't want to do business there. We all take advantage of that. We've been through this before. Several cycles, Japan was the enemy. Korea was the enemy. Taiwan was the enemy. This time we're going up against China, and we're not going to have stock options. Robert Swanson (Linear Technology): I agree with almost everything I've heard tonight, especially the part about analog is forever. I believe there's a dramatic shift to Asia-Pacific. I think, regarding Sarbanes-Oxley, that there's this modern mentality that we need to burn somebody at the stake. I think it's destructive. It's not going to help. One of my hot buttons is that I think the cycles are actually going to be more...the amplitude is going to be higher. One of the things that I don't agree with is this supply-chain-management thing that people are talking about. I actually think it's part of the enemy. I think it's part of the cause. I think it's a euphemism. Because the cycles are getting so high from peak to valley, who can we stick with the inventories? As the chip guy, I spend all kinds of time trying to figure out why I should be responsible for the implications of an OEM giving me a forecast that he takes no responsibility for. So, I don't think we've made a lot of progress with supply-chain management. I think it's actually driving some of these amplitudes. Mike Splinter (Applied Materials): So you think it's just moving the ball around? Robert Swanson (Linear Technology): Yes. I think what's happened is in this last cycle, we've created a--well we didn't create it, but a philosophy or a culture was created where if a big OEM under-forecasted their demand, somebody at the OEM got his ass kicked. If he over-forecasted, that was my problem. And I think that's going to contribute to the swings back and forth in the cycle. So I'm not so sure that we're not going to see another snapback at some point. I think it's going to end in the same kind of bust. I wonder about the person who has to take responsibility for the forecast that drives all of our factories.
Q: Is the move to contract manufacturing just going to make that a whole lot worse than it was the last time? Robert Swanson (Linear Technology): I think the contract manufacturers and the distributors during the last cycle basically stood up to the bar and said 'I think we can handle this.' I think they've both discovered that it's an impossible thing to try to manage it. How can a distributor or how can a contract manufacturer know what it is that a big OEM needs? Especially if the OEM won't take responsibility for the actions of his forecast. If he's wrong it's somebody else's problem. I think both the distributors and the contract manufacturers who got hurt this last cycle, I think they're offering more resistance, and I think that's actually healthy. Eric Benhamou (Palm): I think you're probably right. And at the same time, I do think that collectively, as a global industry, we're better at managing the supply chain, because there is less inventory from the top of the food chain to the bottom of the food chain. At the same time, there's greater concentration of market power. For example, if you deal with a Dell, there's only one way that you're going to deal with a Dell as a supplier to Dell. You can own the inventory. Robert Swanson (Linear Technology): Yes, but I think what it does is that bad forecast, and that responsibility, ripples all down the chain. George Perlegos (Atmel): I think we all agree here that we have many changes happening. Things are going overseas. They have an advantage now, but it's going to come back, and we're going to be on top again. We have cycles with downturns. We've had them since 1972, since I started working in this industry. This one is much longer. I think it's much longer because we grew a lot in '99 and 2000. We grew so much and we put so much capacity that today we're shipping so many--we're probably shipping more units than we shipped in 2000, but we're making a lot less money because there's too much competition. Manufacturers are going to China, but the markets are here in the US, and the people in the US are buying most of the products. That's where most of the money is spent. What we have to look for is to develop products that are more integrated. We're looking for new solutions. Let's say companies like Palm introduce devices that utilize more and more chips to absorb this capacity. They will give you a handheld product that has Internet on board, video, GPS. As they implement all these things into their systems, this capacity will be eaten up. But what's taken so long for this cycle, in my opinion, to come about is it's taken us much longer to implement all these new solutions at a very low price. As a consumer, you can only spend, let's say, $100 for a cell phone. You want all the features, but you only want to spend $100. You want a PDA with all the features, but you only want to spend $500, or a PC for $500. But that's happening, and it's going to come, and it's going to turn this industry around. The next thing we need to work on and figure out is: What's the next stage? Where do we go next? We went to the PCs, we went to the cell phones. We went to the DVDs and so forth. But we have to go somewhere else. Mike Splinter (Applied Materials): Hey George. I don't know that we have to go anywhere else. I just take a look around this Valley. I'm so frustrated. I don't know why we want to buy an advanced phone. I can't get a signal. I have a GSM phone with a camera, and I can't send a picture because the networks don't match. I have a phone that gets on the Internet, but I can't get on the Internet in three-quarters of the places in this valley. You can't get broadband here. We don't even talk about broadband like they do in Korea. You can't even get like a few hundred kilobits per second. That's not broadband. Eric Benhamou (Palm): It's not just an overbuild of manufacturing capacity that we suffer from. It's also overbuilding in the telecom infrastructure. It was an overbuild combined with a build of the wrong things. We pulled millions of miles of fiber through the ground. Those are 1 percent or 2 percent lit. We did not complete the build, to have the on-ramps and off-ramps at broadband speeds. The paradox is that we were the leading country when it came to Internet access through the mid to late '90s. And now we're No. 3, soon to be No. 4 in broadband access after Korea, after Japan, and some other Southeast Asian countries are going to pass us. Mike Splinter (Applied Materials): Well, Shanghai is big enough to be a country, and we're behind Shanghai for sure.
Eric Benhamou (Palm): Let me speak about this because I'm kind of the networking guy here. To the point I made earlier about being a high-transaction-cost society: One of the reasons--there are many, many reasons--but one of the reasons why we fell behind in broadband is because we have a federal and state system. The state controls the right-of-way permit. And this right-of-way permitting process has actually been a great opportunity to levy additional taxes. The cost that a local carrier has to endure in order to pull cables, in order to dig trenches or erect a tower, is about five to 10 times greater than it would be in most Southeast Asian countries, certainly China. And it's not just the cost--it's the length of time it takes.If you really want to get broadband going again, not only will it take great leadership, it's also going to take great leadership on the state level to open up, deregulate, and speed up so many of the mundane things that we think are normal. They're not normal. We're substantially behind other countries. It turns out that just this morning, TechNet [a coalition of CEOs focused on public policies favorable to technology development] published the broadband state index. We sought to rank the states of the union in terms of their broadband policies. There's a broad spectrum. It turns out that California, which should be first, is about 15th. Michigan, of all places, is No. 1. The reason we did that is to shed some light on where we're screwing up in terms of our broadband policy. Now sure, the telecom industry has a lot of things to do. They're undercapitalized now and they have too much capacity at the center and not enough at the periphery. But at the state level, there's a great deal that we also screwed up, and I think it's time to shed light on what states are doing right, and what states are doing wrong. Mike Splinter (Applied Materials): I think this is going to take central leadership from the federal government to get enough states to understand the issue and do something about it.Eric Benhamou (Palm): Yes, it takes a great deal. They actually have just taken some of the first steps by starting to deregulate broadband and to not mandate the unbundling of the network elements.Pat Brockett (Zarlink): We work primarily in wired and wireless network infrastructure in the first mile, last mile. Anecdotally, for the US, our business last year didn't grow. Our business in Asia grew 35 percent. This was not people moving subcontracting activity offshore. This was China building its infrastructure. This was Korea building its infrastructure. We're all sitting here in the middle of Silicon Valley figuring out how the hell we get DSL. And every home in Korea today has an opportunity to get it.Mark Larson (Digi-Key): It's interesting, during this downturn, you've got a lot of the production business down as much as it is, but the engineering and design segment has stayed extremely strong. We've gained customer base and sales to some extent during this period. It's got to lead a person to believe that it's got to be a very strong leading indicator and a positive sign of things to come.Of course I don't know what technology is going to drive and what industry segment is going to drive the next cycle, but we're talking about dealing with customers that are getting tens of thousands of designs. I can conceivably see it as being very broad-based with maybe a few more outstanding areas that would be drivers, but just a general proliferation and increase in the use of all kinds of electronics and all kinds of applications. Even though the market is down, I think there's a real undercurrent of positive activity. Q: If you look back a year ago, everybody was so gung-ho about China being an opportunity. Everybody was going to take advantage of it. Now everybody is sitting around worrying about it. What's changed? Pat Brockett (Zarlink): I think you're getting the wrong message. I don't think we're worried about it at all. I mean, we grew tremendously, as I'm sure a lot of people in this room did, in China. The issue is that there is a clear competitor to the jobs that we have here in Silicon Valley and in North America. What happens over the long haul? We've exported a lot of our high-value manufacturing jobs to Asia. What's going to happen to this country as we export a lot of high-value knowledge work to Asia, because that is the next potential phase of this cycle.Q: Can we compare to Europe's strategy, for instance. European companies are moving less contract work into China than we are in North America. Europeans are manufacturing more in Europe. Eric Benhamou (Palm): They have less to lose also. I think what's happening is that all of us are based in Silicon Valley. In a substantial way Silicon Valley is going through an identity crisis, because there's a whole category of jobs that used to be somewhat unique in Silicon Valley that are not so unique. And not only are they not so unique, but they're high-priced. There's a whole range of tasks that 10 years ago would be performed only by sophisticated engineers in Silicon Valley that can now be performed by any one of 4 million PhDs coming out of the Shanghai-Beijing region or the equivalent around Bombay. Europe never had the kind of concentration of high-tech talent that we had around here. It was more dispersed. There was nothing--despite many attempts--there was no Silicon Valley of Europe.
Q: So you're thinking engineering-wise we're in danger? Eric Benhamou (Palm): The manufacturing jobs were already moving there before the downturn because it was taken for granted that you had to have low-cost labor in manufacturing. The really new thing here, the scary thing, is that jobs that used to be viewed as high intellectual capital are really moving out. This is not just support jobs, software QA jobs. You can actually do original developments in Asia.Ray Bingham (Cadence Design Systems): I think the question about China is not whether it's something to be enthusiastic about or not. The question about China is what kind of an opportunity does it present for you, and are you willing to grasp that opportunity?It's different for some of the people around this table than it is for my business. For many it's a product market. For me it's a source of engineering talent. Either way, it's a tremendous resource that has to be leveraged, and the question that I think faces each of us is whether or not we'll participate in that opportunity. To talk about it as a bad thing is a little like going back a century and looking at the shoe industry in New England, or furniture in the Mid-Atlantic states, and saying 'Oh my gosh, all those jobs are moving someplace else. What are we going to do?' The success model that I would point to is the pharmaceutical industry. Once upon a time, most of the technology came from [the German and Swiss pharmaceutical companies]. Now it comes from wherever it comes from. And still those German and Swiss pharmaceutical companies are thriving, and it's benefiting their local economies. It just doesn't happen to be benefiting the local economies in terms of the laboratories that used to be in those countries exclusively. What we have to think about as businesspeople is whether or not we can participate in these markets, and in these resources on a global basis. It doesn't mean that things here will be bad. What I think it means is that, as with any other revolution, we have to be able to grasp change and find a way to recycle resources in this particular locale as members of this community. Brian Halla (National Semiconductor): China is just part of the evolution. China is no different than all of the other markets and the evolutions we've faced before. It's not that China is the enemy. It's that things are happening now vis-a-vis a brain drain and not being able to take advantage of students that were educated over here, with PhDs and master's degrees, because we're shutting off H1B visas and we're eradicating stock options here. China is no different from Taiwan, Japan, and Korea. We were able to overcome all of those threats. It's just that this time we're a little bit hamstrung.Pat Brockett (Zarlink): You're right. I mean, you can move millions, tens of millions of dollars of revenue in the belly of a 747 cargo, so we can up stakes and go anywhere the hell we want to design and build products. But as businesspeople, we have a responsibility to think about the communities that we operate in.While I was at National, I'd go down and look at the graduating class that we just hired in from the universities, and I would say 90 percent of those faces were Asian in the engineering groups. I've talked to the university professors here and asked why our own kids are not getting into these engineering courses at Berkeley and Stanford and whatever. The truth is they're not making the grade. I think as businesspeople we need to be conscious of that. If our high schools are not turning out competitive students, which they are not, to get into these top engineering jobs, then this is a flag that as businesspeople we're responsible to bring up to the societies that we operate in. It's a big problem. Q: One of the big things about moving into a global economy is, looking at the business from both Arrow and Avnet's point of view, is it even manageable on a global scale? William Mitchell (Arrow Electronics): I think that's an interesting question. Certainly one of the debates that we've been having is, how do you not get into the trap of trying to be all things to all people in all places in all times? So it's a matter of focus. You can do what you're saying and be global. You can provide that capability, visibility, service, and support. You can't do it at all places at all times. I think part of the learning that we've gone through is to try to make sure that you focus on where you can connect the technology companies, of which there are many around the table here tonight, with a set of customers and provide a set of services that would not be able to be provided in another way. But that doesn't mean you're trying to be a universal solution, and I think that was part of the lessons of 2000.Q: Can we go back to the brain drain and the China thing for just one other question? Those of you who are in the chip business, I understand that you try to take advantage of trends like China. But are you fearful that your next competitor will be a startup there? Is it to that point? I just don't see any competitor to match Linear, or Zarlink, or Atmel that has cropped up in China and put products on the market. Pat Brockett (Zarlink): Oh, I can show you a couple, for us anyway in our business. I don't think that's the issue, as Brian mentioned earlier and other people have mentioned. We've had the Japanese and the Koreans and whoever. One thing that's great about this industry and keeps it going is that there will always be vociferous competition somewhere. So that's a fact of life that we've all had to deal with and we'll continue to have to deal with, whether it comes from China or little green men on Mars. That's one of the spurs that drives it along.I think the thing that we're thinking about is 'What are the implications?' We've watched all the manufacturing jobs go out of the Valley. What happens if all the engineering jobs go out of the Valley? Maybe biotech will move in and take it over. I don't know. But it's something, as a society and as an industry, that we should be thinking about.
Q: What do you think the implications are? Because they could be rather dreadful. Pat Brockett (Zarlink): Well, somebody mentioned industries moving out, and you can go to a whole bunch of ghost towns across Europe, with shipbuilding, with shoemaking. We all sit here and think the world is like Silicon Valley, and the fact is, it isn't. If you go up to northeast England or the northeast US where the shoe factories were and the steel mills were, there are still wastelands. I don't think we should be so smart to think that Silicon Valley couldn't become a wasteland--because it could.Eric Benhamou (Palm): It's a possibility, but a more optimistic scenario, which I'd like to try to describe, still requires a fundamental transformation. The more optimistic scenario starts with the fact that there's incredible intellectual capital in this region that is unequalled anywhere else in the world--despite numerous attempts on the part of many other countries to emulate Silicon Valley.It is true that biotech is an emerging industry that offers great promises and there are many, many biotech companies that are headquartered here. There's also nanotechnology, which is yet another field. And in fact, you have something even better than that. You have a whole new range of opportunities at the intersection of these three areas: IT, biotech, and nanotech. Oftentimes when you have an intersection between two fundamentally different fields, you have great new opportunities. So this Valley has a chance to lead in this whole new array of opportunities that tend to be high value-add, high innovation. You could envision 10 years from now the Valley being no bigger than it is today, but with a fundamentally different set of jobs, where you don't have run-of-the-mill software engineers, chip designers, and so on, but you have really very, very smart researchers. People who really understand far-out things. Business planners, strategic planners, people who can also understand business and interact with a venture-capital community of Sand Hill Road, and entrepreneurs. Robert Swanson (Linear Tech-nology): Relative to China, I don't see China as a threat. I see it more as an opportunity. I have lots of really talented Chinese engineers that work for us. They're a high percentage of our total workforce. If I'm training them to be my competitors anyplace I'm training them in Milpitas, not the people that I hire in Shanghai. So I think that's always a lever. I'm not pessimistic about Silicon Valley.Q: Could you expand a little more on whether you're seeing chip design moving? You were talking about jobs that are moving out of the Valley besides manufacturing. Eric Benhamou (Palm): Let me give you some examples. In the mid-'90s, if you wanted to design a new protocol for the Internet, something that would become the eventual standard, this was the place to recruit the software engineers to do that. Today, a networking equipment vendor in China, which we have a very significant joint venture with, has people who know as much about the Internet as anyone else who attends the IETF [Internet Engineering Task Force] meetings. Similarly, if today you want to build a 50,000-gate ASIC, chances are you could build this with an ASIC lab over there as well.If on the other hand, you try to figure out what is the truly innovative way by which consumers will manage their electronic equipment in their households in three years, after they've accumulated all these PVRs [personal video recorders], digital cameras, and hopefully Palms, chances are the breakthrough ideas will come from here. The way to connect these ideas to business and market will come from here. Q: So Silicon Valley will just be like a big think tank? Eric Benhamou (Palm): That's almost a pejorative way of describing that, but in a sense, yes.Q: One of the beauties of the Internet is the fact that now everybody can collect intellectual capital from around the globe. It's no longer centralized. Why does it have to be in one place anymore? Eric Benhamou (Palm): There's something that the Internet has not replaced and has not solved, and that's why Silicon Valley is so essential. There's nothing that can replace the chance-encounter, face-to-face discussion between businesspeople from slightly different areas, from slightly different perspectives. You cannot convey passion and excitement even across the high quality of videoconferencing as you can here face-to-face. Serendipity plays a role in creating great ideas. Often these breakthroughs occur in high-spirited meetings between passionate people. You can live 5,000 miles apart and never see each other, these meetings will not occur as often and they will not create the same sparks.There's been many other attempts around the world where you try to put the same ingredients together. So you have great research and universities and you have tax breaks on a high-tech corridor and you have a government encouraging investment and so on, and yet, it's at best a pale imitation of Silicon Valley. It's the same thing as being a great chef. You can put the same ingredients in the sauce, but it doesn't come out the same way. |
“This is the longest
sustained recession we've ever had. I think the whole industry has
bifurcated into companies that absolutely have to chase Moore's Law
in order to participate in their base business and companies that
don't. I feel pretty good being in the analog business. In the
analog business we don't have to do that.” Brian
Halla, National Semiconductor
“This is unlike any cycle
we've ever seen before. I think that in addition to the magnitude
and the duration of the cycle, we also have some fundamental shifts
occurring, like the migration to Asia.” Roy
Vallee, Avnet
“I think there's one
thing that we should fess up to. For 30 years, we've seen a
compound annual growth rate of something like 15 percent. My personal opinion
is, that is over. We're going to see more like 7 percent, 8 percent,
or maybe 10 percent. But if I can see a 7, 8, or 10 percent
opportunity in a $150 billion market--I'll take my chances with 7
percent or 8 percent in a $150 billion
market.”Pat
Brockett, Zarlink 
“Our companies
are becoming more efficient in the way we spend our R&D dollars.
In 2000 we saw companies sold for billions of dollars, and they
didn't even have a product. But today, I think everyone looks very
hard at whether this is a really meaningful use of the money. I
think next year is going to be a good year for the semiconductor
business. I think it may surprise us on the upside.” Graham Siddall, Credence Systems
“I don't think that there is anything that has fundamentally
changed in the industry that is going to stop the cycles that we go
through. In fact, I think the next upturn cycle is going to be
crazier than the last one. I think so because people have not put in
capacity. It's going to create...missed-demand scenarios, double-
and triple-ordering like we've had in the past. Followed by yet
another huge downturn." Mike Splinter, Applied
Materials
“I think innovation is about change. Innovation doesn't
happen if things don't change. Change the way you think about
things. Change the way you focus. Change the way you assemble the
things that you work with. Something has to change in order for
innovation to happen.” Ray Bingham, Cadence
Design Systems
