Saturday, July 31, 2010

Silicon Valley Is Dead - a critique and why Ireland's current plans are doomed to failure

Silicon Valley Is Dead

This article explores the problematic relationship between technical innovation as a driver of economic success, and the question of depending on such innovation to rejuvenate job growth. As the article suggests, it doesn't work that way: much of the manufacturing that lies behind such innovation has long since vanished from the US, even hugely successful companies like Apple now only have 25,000 employees remaining in the entire US. Compare that to Siemens in Germany, which still employs 126,000 out of its total of 420,000 in the Fatherland. In comparison, Apple has only 34,000 employees in total - most of the manufacturing and supply chain management is entirely outsourced and offshored.

The initial few paragraphs discuss the trend whereby most industries in Silicon Valley have experienced about a 20% net drop in total employment over the last decade, although the average wage has rised. The writer points out that what is often forgotten is manufacturing, which has been almost entirely offshored or outsourced or both. The main comparison is Foxconn, which now numbers 800,000 employees, yet most people have never heard of it. Similarly, companies which are now household names are no longer merely crossing the Atlantic, they are being moved to cheaper locations, and even moved again if even cheaper locations emerge. Hence the massive haemoraging of jobs in the multinational sector in Ireland as companies race to the bottom.

Why does it even matter?
I know what you may be thinking -- as long as our employees are getting paid well, what does it matter if the lower-paid jobs move abroad? Well, with unemployment at 9.5%, I think there are a lot of people out there who care.
It matters not only because there are a vast number of people who are out of work and don't have the wherewithal to obtain a knowledge-based job, but because the U.S. as a whole has forgotten that innovation doesn't just mean high tech. Complex manufacturing and having a presence in mature industries helps provide opportunities for future innovation. Our lack of manufacturing has not only cost us assembly-line jobs, but future knowledge-based jobs as well.

The danger of a massive loss of complete industries is much larger in Ireland, where there is a long historical tendency to become dependent on just one or two industries. With much lower economies of scale, its more than likely that the current push towards higher innovation will only deliver a tiny few jobs in limited sectors, for highly skilled workers. Part of the danger of this also, is that the greater the push towards "high skilled" workers, the greater the likelihood that moderate or unskilled workers will be bumped down or shut out of the workforce entirely.

In fact this is already the case in Ireland, partly fuelled by a folklore regarding skill levels and educational standards in Ireland that are fuelling the negative comparisons between Ireland and emerging economies: if you can get a steady stream of well qualified workers for one third of the salary, why continue to attempt to struggle on in hyper high cost economies like Ireland? But a bigger issue in Ireland is that unlike most of the rest of Europe, perhaps Luxembourg excepted, there is no such thing as a "low cost" region, even rural, undeveloped regions demand massive premia for everything from a cup of coffee to the price of leasing an office suite.

This is the real tragedy in Ireland: rural communities that were promising massive returns from inappropriate developments are now not only staring as masses of vacant commercial and residential units, but cannot even start to consider utilising them at reasonable cost because the developers who control them are still desperately trying to manipulate what is left of the market by witholding vacant units rather than selling or renting below cost. This is crucifying Ireland's economy as it is simply imposible to capitalise on reduced costs because they are still being kept artificially high, even in a market saturation phase, by tacit refusals to rent at - never mind below - cost. Developers are allowing themselves to move towards inevitable bankruptcy and market stasis rather than allow the natural demand/supply rules to take control. And its working, with a consequence that unemployment is now heading towards 500,000.

The Dell EMF 3 closure should have provided a valuable lesson in how not to manage employment trends in a region. As the myth persisted that workers in such organisations were "high skill", its closure told a different story. Far from being "high skilled graduates", those laid off were unskilled, low education workers who had spent years clinging on to such jobs as their only hope of a reasonable living. The construction industry was of course, the ultimate: its manly, macho, highly paid structure concealed a real world of unskilled workers, partly unskilled because employers in Ireland, no matter how much they are subsidised by the tax payer, and under no obligation to pay back by upskilling the worker they can pay a discounted salary to. For example, in 2000, the average subsidy level stood at around 12k - most of Dell's entry level staff at that point earned between 10 and 15k - good pay in those years, but effectively the company got its employees for free for a couple of years as there was a near 100% attrition rate in The Cherrywood office in which I worked, meaning that it was not until 2001 that the true costs started to kick in, an event which Dell welcomed with the first of many rounds of staff cuts. While packages of up to 6 weeks per year seem generous at face value, many employees served such short spells many got only a small payout.

But you cannot simply blame employers for the true low level of skills, workers and the government colludes. While there is a significant hard core of eternal upskillers, effortlessly earning accreditations, professional memberships and traditional formal qualifications out of hours, there is a huge group who see themselves as entitled, and wait expectantly for huge wages. Some months ago, an idiot with little more than a leaving cert and a single MCP moaned about how his salary in Cork was a "pittance." That "pittance" turned out to be 44k. He was not only the lowest performer in terms of productivity out of a group of 200, he was also one of the least qualified while simultaneously one of the highest paid.

Unsurprisingly, he now languishes on the dole, wondering what hit him.

Whats worrying also is the pressure to be an "entrepeneur" doesn't come with equal pressure to be an accredited, certified professional. Many people are starting out mickey mouse businesses on low skill levels, putting their clients in danger at worst, and at best often charging clients for information thats often free elsewhere or at low costs from professional organisations or charities. Trends are evident - while there is a lot of new business in food industries, this does tend to come from skilled professionals and experienced people - ex agricultural workers, food scientists, qualified chefs and usually with a wealth of experience behind them. It is not surprising this is remarkably sucessful. On the other hand, a slew of maca-ya endeavors from fashion consultants and beauty specialists, as well as the usual con artists who sell "social marketing" despite having no sales or marketing backgrounds or skills and the usual lfe skill peddlers (life coaches, mentors etc). No wonder the queues to get means tested for JSA are so long.

Ireland needs to invest more carefully in training and development. There is a real opportunity for working with existing groups working in fields such as accounting, taxation, HR, marketing and other groups. Their advice and support is invaluable. And consumers also need to be protected against exploitation by unskilled startups which offer little more than common sense and a bit of barefaced cheek.

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