January 19, 2011 11:23 pm

Technology: A dip in the Valley

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interactive touchscreen technology made in USA

The interactive touchscreen display of a Volkswagen AG (VW) EOS convertible is shown at the company’s Electronics Research Lab stands in Palo Alto

When Facebook was accorded a $50bn valuation in a private financing launched this month, it looked like business as usual in Silicon Valley. The suburbs strung out along the peninsula below San Francisco that comprise the heart of the US technology industry had once again turned out a groundbreaking company to take the world by storm.

To some industry veterans, however, eye-catching successes such as the social networking site – whose share offer by Goldman Sachs drew so much attention that the bank felt obliged to exclude US investors for regulatory reasons – provide little indication of the underlying trend in the country’s technological competitiveness. If anything, they help to mask a deeper malaise that threatens the American system of innovation.

Drawn by the quick profits from high-flying internet concerns, US technology investors have lost interest in the more serious work needed to sustain a lead in some of the world’s most advanced industries, says John Seely Brown, a former head of Xerox’s Palo Alto Research Center, once one of the Valley’s most renowned corporate research and development laboratories. “We’ve lost the will for patient investment. In the natural sciences, you don’t see ideas develop that fast,” he says.

Mr Seely Brown is far from alone. A deepening angst has gripped the US technology industry as the country has emerged from recession. If America is to create new, high-paying jobs, it is in the convergence of high science and entrepreneurial dynamism that much of the hope resides. But many leaders in the technology industry, which has been held up as a beacon of US economic leadership, no longer feel as confident of their own ability to deliver the goods.

“I don’t know how many Facebooks you can build,” says Bill Watkins, a computer industry veteran. Like others in Silicon Valley, he has been drawn into the region’s latest boom industry: green technology. As chief executive of Bridgelux, a company that makes low-power lighting using light emitting diodes, he is at the forefront of a promising new field – but now warns that the LED industry is fast slipping away to Asia.

The US remains the clear leader in science and technology on virtually any measure – its share of global R&D spending stands at 40 per cent, while it employs 70 per cent of the world’s Nobel prizewinners and is home to 15 of the world’s 20 top universities, according to Rand, a US think-tank.

But the balance has been shifting. By 2007, the most recent date for which figures are available, Asia’s share of global R&D spending had risen to 32 per cent, up five percentage points in the previous five years, according to Unesco. On paper, the 1.4m researchers in China now equal the number in the US, though their output has been far lower.

Silicon Valley’s magnetic attraction for entrepreneurial talent from around the world is also less powerful than it was. About one-quarter of venture capital-backed companies in the US over the past 15 years were set up by immigrants, with a heavy bias towards technology industries, according to the National Venture Capital Association. That movement of talent in favour of the US does not look sustainable. With US venture capitalists redirecting more of their money to Asia, and start-ups from elsewhere winning support from American investors – new stock market listings by Chinese internet companies on Wall Street exceeded those by local American ones last year – many immigrant entrepreneurs are feeling an irresistible pull to return home.

For US tech companies, this is not necessarily bad news. Adept at crossing borders to take advantage of new markets and tap low-cost workforces and pools of engineering talent elsewhere, their ties to their country of origin have been growing looser. But for the US itself, the risk of losing out on the next big technologies would be far more severe. As Mr Watkins says: “What’s good for American stockholders is not necessarily good for America.”

In the popular psyche, American technological leadership seems almost innate. It is seen as the product of an ingenuity, a sense of risk-taking and a hunger for the new that could only have taken root in a country as democratic, socially mobile and close to its pioneer roots as the US. But such romantic notions have lately been taking a cold shower.

Forget the loss of electronics manufacturing to Asia, which began in the 1980s, or the shift of information technology services to India, which has been the story of the past decade: the R&D and design work that goes into many areas of electronics manufacturing – bringing with it high-paying jobs – has also been moving elsewhere. And in entirely new markets such as green technology, despite strong US scientific credentials and heavy investment from Silicon Valley’s venture capital investors, the centre of gravity has been moving to Asia.

The belief that American individuality and creativity somehow assure future leadership is “a clear exposition of the arrogance of empire”, warns Michael Moritz, one of the Valley’s leading start-up financiers. Freed of “the debilitating effects of affluence”, he adds, “the need to succeed is far greater in the emerging economies”.

Nor is there any inherent resource advantage, as information and talent flow freely. “We’re not smarter than they are,” says Mr Watkins.

Some of the trends that lie behind the erosion of leadership – such as the decline of the US share of the world’s R&D spending, and the inability of its educational system to turn out enough science and technology students to feed national demand – have been playing out for decades. But the current angst has a more pointed cause. It comes from a sense of relative decline: others are catching up. The rise of China, in particular, has had a powerful psychological effect.

In many ways, this unease is irrational. “Why should I be upset that other countries are lifting themselves out of poverty, whether that’s physical or intellectual?” asks Nathan Myhrvold, a former chief technology officer at Microsoft whose current firm, Intellectual Ventures, has amassed one of the world’s biggest portfolios of technology patents.

For all the concerns, the US still has a big global lead. But that does little to erase the doubts. “Relative decline is decline,” says Robert Atkinson, president of the Information Technology and Innovation Foundation, a US think-tank. Even optimists such as Mr Myhrvold concede that, as Asia rises, Americans find themselves in an unfamiliar position. “The US is the new Europe,” he says.

There is also a growing fear of absolute decline as more parts of the US technology industry move offshore. “A company that loses its ability to develop its own manufacturing is on the road to oblivion,” says Mr Moritz.

The concern stems from the close ties between design and manufacturing that characterise the evolution of new technologies. Developing prototypes and refining manufacturing processes becomes harder when the design and manufacturing of products takes place half a world apart. As a result, the US is losing “the capabilities to build serious, complex stuff”, warns Mr Seely Brown.

The US machine tool industry has already largely been lost to other countries. Applied Materials, the world’s largest maker of manufacturing equipment for the chip industry – and, increasingly, for solar cell makers – startled US rivals last year when it announced that its chief technology officer would move to China to be closer to the company’s manufacturing plants.

The failure of the US educational system to turn out enough engineers and others with needed technical backgrounds presents a second direct threat and has become a perennial subject of complaint for tech employers. “In the short run, you can fill gaps through immigration,” says Brad Smith, general counsel of Microsoft. “But you have to question whether that’s healthy and sustainable.”

The ability of the US to win the competition for talent is no longer taken for granted. Sophie Vandebroek, a Belgian engineer who moved to the US in the mid-1980s to train, says that at the time it was “the place to be – this was where the hot research was happening”. Ms Vandebroek stayed and eventually became chief technology officer at Xerox – in spite of the low status accorded to engineers in the US: “It’s kind of at the bottom of the professions.” Now, she and others warn, US immigration rules that make it harder for foreign students to stay, along with the availability of good jobs at home, are causing the country to leach much-needed foreign workers.

Concerns about competition are most heavily focused on new industries in which global leadership has yet to be established. The pressure is most acute in so-called green technologies. China and some other countries in Asia have adopted policies designed to wrest control of these industries even before they have become fully established, US executives and financiers warn

“We invented LEDs but we’re losing the business to Asia, and it’s the same with solar,” says Mr Watkins of Bridgelux.

The game is not yet lost. For now, in some industries that are still forming, the Valley boasts an impressive array of start-ups. In areas such as electric vehicles, advanced solar manufacturing and energy storage, it has established a technological lead, says Alan Salzman, managing partner of Vantage Point, a venture capital firm that specialises in green tech. “If this is the industrial revolution of the 21st century, then this is where the jobs are going to come from,” he adds.

If it is not to become left behind in businesses such as these, the industry’s leaders say, it is time for a policy rethink. “Simply put, the US needs to decide it is ‘open for business’ and willing to compete in the global marketplace for factories and jobs,” says Paul Otellini, chief executive of Intel. “Costs are higher here, not driven by labour rates but rather by lack of incentives or tax credits that are available to US corporations in most other countries.” Without education reform, there will be a “critical engineering skills gap [that] will ultimately translate into fewer jobs and inventions in this country”.

The administration of President Barack Obama has signalled its greater willingness to consider such calls, though it is not yet clear whether powerful tech companies such as Intel will get what they want.

Silicon Valley may still act as a magnet for the world’s engineering and entrepreneurial talent. It is the place where many of the brightest Indian, Chinese and European brains still congregate. Facebook’s success is evidence that “innovation is still kicking” and the American melting pot is still happening, says Mr Myhrvold. But for the country at large, it would not pay to take that much for granted.

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