Wednesday, November 28, 2012

The Economics of Austerity, Silicon Valley Style

The election is over and, for those of us that haven't been making mad money on all of the campaign advertising, we're back to the realities of our current economic situation. And while many now associate Silicon Valley with software companies like Google, Facebook and Twitter, there are still some of those old school businesses that design and produce actual silicon. Unfortunately, the economy is not really smiling on the semiconductor industry these days.

Semi is notoriously cyclical, but what we're seeing now is in many ways part of a larger evolution that is reshaping the industry. Over the past year and a half, there's been some consolidation among the larger manufacturing equipment players -- the merger of Lam Research and Novellus, the acquisition of Varian by Applied Materials -- that speaks to the dwindling opportunities at the root of the ecosystem.

There are fewer fabs. CapEx news releases are sporadic. There are still a lot of questions about when, if, and how much these manufacturing facilities will invest in next generation process technologies. Further upstream, you don't have the pull of a Moore's Law fueled PC industry driving waves of new system purchases each year. Sure, there are ICs being designed, chips being sold and devices being built, but there isn't the same momentum.

But the biggest boon to the industry in the past five years has been things associated with green technology. While the technology for photovoltaics and LEDs have been around for a long time, the push for innovation and broad scale implementation spurred a host of new businesses, new equipment and industry transformation. All of those things meant investment, spending, and new opportunities.

So here's a quick history refresher. In 2008, we had the collapse of the economy courtesy of the financial markets, the sub-prime and all of that. Then 2009 was a bleak year -- everything was down. That was also the year when the government pushed through the stimulus with a push towards green tech. But things started to come back in 2010 and by midway through the year, the Semi industry motor (and emerging green tech) was going. In 2011, you started to see some shake-out, consolidation and the collapse of Solyndra, price wars happening in solar panels, and the market starting to pucker. And now 2012 has been another year of poor performance.

So what happened? Well, on the one hand, if we look at things from the not-a-big-enough-stimulus perspective, it looks like we poured gasoline in the carburetor for a few minutes of action, but we didn't getting the car running. Add to that the Congressional Republican's efforts to bring government to a halt and make Obama a one-term president, and you basically have limited government incentives to drive the market for green tech. Instead, you had conservative media pushing climate change as a hoax and Solyndra being pumped as a scandal. Green tech became a political liability.

However you want to frame it, the simple reality is that the economics of austerity -- the cut, cut, cut, and cut that we've been subjected to since 2010 -- has choked the life out of our economy. Instead of investing in growth and a strategic future, we've been railroaded down a path of zero investment wrapped in 'thrifty, debt-conscious' packaging.

Governments have unique powers to influence markets. By defining incentives for strategic goals, they drive fuel from the investment tank into the engine of the economy. By establishing incentives like mandating that all buildings meet certain levels of green compliance or all residences add solar panels, governments establish a pull that draws energy and investment into the market. In the same way, if the government codified a mandated goal of having 1 Gbps universal broadband, it would spawn a surge in many tech markets.

Keep in mind that this is not like the government saying, "we need a million Justin Bieber dolls". Nobody is pushing for frivolous investments. Things like green technology, broadband, and transportation infrastructure are CapEx investments in the future of the country and in the future of the economy.

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