Thank you, John. And thanks to all of you for making time to be with us today.
What is “high-tech?” What is all this “New Economy” stuff, and should we be mindful of it? To try to discuss these issues, we have to recognize a few things. Some things don’t change; the fundamental basis of business will always be the creation of value for others. However, much does change – in this case, what constitutes the creation of value. In recent years, the creation of economic value has shifted, away from manufacturing and the manipulation of matter, and instead toward research, design, and the creation of intellectual property. I think it’s widely recognized that “brains” have indeed replaced “brawn,” but I think what is not fully recognized is how far that transformation has already gone. These changes have also involved a shift from large organizations to small organizations, and the natural development of global associations of those small organizations. These developments have also spawned a supporting infrastructure, perhaps most saliently exemplified by the burgeoning growth of venture capital into a nearly $100 billion-per-annum global business.
Perhaps the best specific example I can provide comes from my own industry, the semiconductor industry. Until recently, the semiconductor industry was dominated by large companies which were “vertically integrated” – that is, such a company controlled virtually every aspect of the production of any particular integrated circuit – R&D, design, wafer fabrication, packaging, etc. To start a semiconductor company in that environment was extremely difficult, with large staffing requirements and a need for a huge initial capital outlay.
However, during the 1990s, a new business model appeared on the scene – the fabless semiconductor company. A fabless company, as the name implies, has no manufacturing capabilities. The company is created and exists to develop great new ideas and design them into silicon. Manufacturing of these “silicon chips” is actually done at one of a number of dedicated “silicon foundries.” These foundries specialize in manufacturing, and concurrently serve a large number of fabless customers. At its inception, this business model met with much derision in the industry. However, because the key players – the design houses – were talented, nimble, and energetic, they eventually began to run circles around their larger, more stodgy competitors.
As the industry trade group the Fabless Semiconductor Association notes in its mission statement, “Our success can be measured in the dramatic evolution of the attitude toward fabless – from criticized, to respected, to preferred.” Today’s semiconductor industry, particularly in the United States, is dominated by fabless companies. These companies are based on the pursuit of next-generation designs, and rapid, effective response to the marketplace. At the same time, silicon foundry capabilities have grown in both quality and quantity – “pure play” foundries such as Taiwan Semiconductor Manufacturing Company (TSMC) are now the world’s leaders in silicon manufacturing technology. As a result of this marvelous “ecosystem,” the energy of the semiconductor industry has gravitated to fabless design companies. The barriers to entry for a new fabless company are virtually nil – with a large supply of risk capital still available, the only real barrier is finding talented and motivated people.
Some observers have compared this shift in the semiconductor industry to the momentous evolutionary shift from dinosaurs to mammals.
Please note: In this business eco-system, the real action – and the high-paying jobs – are on the design side, with its intellectual property content. Semiconductor manufacturing is no longer “high-tech.” A company like Intel, which has the volumes and the profit margins to justify its own manufacturing, has long since relocated its fabrication facilities away from California and toward lower-cost regions such as Oregon and New Mexico. “Silicon Valley” no longer manufactures silicon – it designs it, and owns the intellectual property associated with those designs! Even in Taiwan, which has become synonymous with the word “foundry,” the goal now is to move up the value chain into design and intellectual property, while manufacturing plants are increasingly located elsewhere. For example, Malaysia is now emerging as a location for both existing and new silicon foundry companies.
I guess what I’ve been trying to demonstrate here is the following: Today, “high-tech” implies activity which is driven by high intellectual property content. If something is driven by cost, it’s no longer “high-tech.”
Based on these observations, you can perhaps understand why I don’t regard the “high-tech” situation in Vermont as particularly good. Virtually none of the infrastructure exists here – practically no start-up companies, precious little risk capital, a vanishingly thin talent pool in both technical and management skills, and none of the trappings which both encourage and support new high-tech ventures. Vermont finds itself up against the old saw that “nothing from nothing has yet been born” – in other words, the classic chicken and egg problem. Try as we might, it’s very difficult to get any of the aforementioned pieces of the puzzle to appear in the absence of the others. Doing something about this will be neither simple nor quick – this is probably a 10 or 20 year project, if we’re lucky.
Are there economic numbers to back up this contention of Vermont being well behind the curve? Two sets of figures will probably fill the bill. This past December, the noted economist (and St. Johnsbury native) David Hale pointed out that during the 1990s, Vermont’s annual GDP growth consistently underperformed U.S. GDP growth by about 1%, which is a relatively large difference. This observation is both quanitatively and qualitatively significant. Also, Vermont Business Magazine has noted that Vermont per capita income as a percentage of the national average rose through the 1980s – from 86% in 1980 to a peak of 95% in 1989. However, this situation deteriorated throughout the 1990s; by 1997, the percentage had retreated to 91%, and has continued to decline. Even more startling are the numbers once public-sector jobs are factored out. Private sector wages in Vermont peaked in 1990 at 87% of the national average, but declined steadily and stood at 84% by 1996. These numbers clearly tell us that Vermont is an “economically-challenged” state which has consistently underperformed the nation for a considerable length of time.
One message I hope I can get across today in this forum is that the Vermont situation viz-a-viz “high-tech” is both weak and deteriorating. Based on experience, I don’t see anything that could possibly be done in the public policy sector until these unpleasant realities are recognized. Expectations of public policy are usually overinflated anyway, and when it comes to technology, public policy, in and of itself, rarely can do much good but can easily do considerable harm. I’ll only note that while the rest of the United States, and much of the rest of the world, has gotten on with the job of building a prosperous high-tech future, Vermont has gone in the opposite direction, becoming more isolated, uninvolved, and inward-looking. To be blunt, I really wish that folks around here got out more. It’s refreshing and encouraging to travel around our nation and see how so many places have, determinedly, re-invented themselves and moved into the mainstream of the modern economy. There are many success stories out there which provide important lessons, as well as models to follow.
Will Vermont re-join America? I can’t answer that question on my own. However, I can state the following – that in the present form, Vermont is on a course of increasingly untenable choices, where an increasingly larger burden is being blindly placed on a sub-par economy.
I recently stumbled across a comment by the French historian and scholar Jean-Louis Margolin, in which he notes that some societies bog themselves down in what he calls “late antiquity” – to quote, “that is, a state of affairs which persists while the rest of world has moved on.” I can’t think of a more concise statement of the challenge facing us.