The End of Silicon Valley: Is the San Francisco Bay Area Doomed to Become the Next Detroit?

The End of Silicon Valley: Is the San Francisco Bay Area Doomed to Become the Next Detroit?
Silicon Valley top view. Patrick Nouhailler / Flickr

The forthcoming decline of the cluster of innovations has been being discussed by the experts for years  startups are leaving the area, and the urban environment is becoming less and less livable. How reasonable these expectations are?


From the Valley of Heart's Delight to Silicon Valley


The Heart of Silicon Valley. Jitze Couperus / Flickr

The San Francisco Bay Area has been a prosperous industrial cluster since the 1930s. At that time such companies as Hewlett-Packard, and later Eitel MacCullough and Litton Industries, laid the foundation for the industrial competencies of the area through development of the electronic component manufacturing businesses (vacuum tubes). In the late 1940s and in the 1950s such companies as Varian Associates, which developed a prototype model of klystron, and Fairchild Semiconductor, which took out a patent for the planar process, started the semiconductor revolution. In the 1960s venture capital came to the area, San Francisco became the country's significant business hot spot and began to catch up with such strongholds of "old money" as Boston and New York. The Valley became famous thanks to the success of Intel and Apple having their headquarters there.


Intel Headquarters in Santa Clara / Sixflashphoto


Today's reality is the change in the USA economic geography associated with uprising of the western "center of force", so it's not so important how long ago the pre-conditions for growth had been laid down in the Bay Area, which had transformed from the Valley of Heart's Delight to Silicon Valley over few decades. In the late 1980s and early 1990s the Silicon Valley model based on the strong social ties between companies and entrepreneurs, venture capitalists, and such competency centers as universities (Stanford in the first instance) was recognized as a new standard  in contrast to vertically integrated corporations of the East Coast and to all and any other hierarchically intermediated communication systems, this kind of structure provides for free flow of the essential business information. Flexible labour market, specific forms of employee rights protection (options instead of union contracts), as well as cultivation of tolerance to failure and risk - all these factors, along with the possibility to pool skilled people from all over the world, are the key for success of Silicon Valley during tech booms late in the past century. More cautious stories from the area's economy evidence the long-lasting process of generation of the industrial cluster elements -accumulation of production and managerial competencies, which started away back in the 1930s thanks to the local amateur radio culture (ham radio) and continued during the Cold War via defense contracts. Anyway, Silicon Valley was and remains a success - in 2018 its economy was rated 19th in size in the world (it surpassed the economies of Switzerland and Saudi Arabia). Today the question is how sustained will this success be?


Will the Valley be Able to Survive the Success?


One of the cafeterias at Google headquarters in Palo Alto, California. / Pxhere


According to The Economist, it is likely that the economic and cultural influence of the Valley is near its climax  therefore it is going to decline in the years since. As reported by the magazine, the number of the area residents, who are going to leave it in the nest few years, has increased from 34% in 2016 to 46% in 2018; alongside with that the geography of investment is being redesigned: while in 2013 the Valley capital providers invested a half of their cumulative funds in the area, by now this figure has come down to 30%. These processes are partly the result of a tremendous success of the startup economy of the San Francisco Bay Area: the superefficient companies operating in the area, along with luxury lifestyle of the venture capitalists and technology guru, contributed to the overall rise of the cost of living in the Valley  a startup operating in this iconic area is four times more expensive than in most other US cities. As a venture capitalist from Mithril Capital said, today it is unlikely to emulate the success of Hewlett-Packard, who originated in a garage: median price for a house in the Valley is $940,000 (2018), which is 4.5 times higher than the average price in the country. In this context even an unpretending garage will cost the startupers a significant amount of money.


Place where Silicon Valley has originated - a garage in Palo Alto, California.

Raneko / osaMu / Flickr


High prices is an important factor in shaking one of the pillars of the Silicon Valley success  pooling "talents" from all over the world. But this is caused by the deeper underlying problems of regional development. The former startups, which are big techs now, are changing the Valley economic system in several aspects. High salaries and corporate loyalty are destroying  entrepreneurial spirit and openness, which had been the key factors contributed to the technological success of California; today's platform companies tend to be self-sufficient, and that was the thing that prevented the Eastern corporations from winning the competition in the 1980s-1990s. A brainy developer will think twice before choosing an option contract with a company, which is to be build yet, instead of salary of about $240,000 a year (this was a median salary at Facebook in 2017). Besides, platform business models with their trend to monopolization leave a little chance to startups - for instance, who is really going to compete with Amazon in retailing today? On the other hand, innovation technologies like AI or biotech are low-margin businesses as compared with Internet services, and the Federal Government is not willing to invest in R&D the same amounts as it did during the Cold War (0.6% of GDP in 2015 vs 1.8% in 1964).


Global Competition vs "Regional Strength'


Amazon Books. Shinya Suzuki / Flickr


Thus, taking into account the existing communication opportunities and work allocation with the help of network messengers and crowdfunding, the "regional strengths" of the Valley associated with the concentration of capital, competencies and technologies are much less attractive for investors and entrepreneurs. It is no wonder that other cities and areas are becoming the centers of startup activity in a number of technological spheres  Pittsburgh and Phoenix in Texas (self-driving cars), New York (new media), London in the UK (fintech) and Shenzhen in China (hardware). Ironically, Silicon Valley, the birthplace of the technologies which have made the competition for capital and brains truly global, has created the instruments, which boomeranged.


In its prime the Valley was not only economically, but also culturally and environmentally attractive  its mild climate and inclusive social environment harmonized with countercultural traditions of California. In the 1960s talented engineers and inventors left big corporations with their hierarchy and met with gifted financial professionals there, who were tired of bureaucracy and formalism of the Eastern corporate life but retained the ties with the representatives of "old money" ready to invest into innovation technologies of the time. Artistic freedom and eccentricity complemented competencies and expertise - not least due to the cultural diversity of San Francisco. Today there is a threat that the dominance of high-tech corporations, which have their "campuses" in the area, will make the greater San Francisco a kind of "monotown" (company towns in the US - the term known in the years since the Wild West era). The processes of gentrification are contributing to homogenization of the urban environment and increasing wealth inequality between the employees of the high-tech companies developing future technologies and a crowd of service staff consisting mainly of women and people of color.