Detroit, Pittsburgh, and the value of diversification

I just watched Anthony Bourdain's visit to Detroit for his show "Parts Unknown." Bourdain showed plenty of what's come to be known as "Ruin Porn": Abandoned, burned-out buildings and entire neighborhoods that have been leveled. He also found signs of hope and recovery, although he made it clear that he doesn't believe that Detroit will come back to anything resembling its previous form. Government corruption played a massive part in the decline of the city, but there was another factor that was far more important in leading Detroit to where it is now: An almost complete dependence on the automobile industry for the city's and region's economy.

My hometown is Beaver Falls, PA, thirty miles from downtown Pittsburgh. I went to school and college in the Pittsburgh area. When I was growing up, steel was the sole major industry in Beaver Falls and most of Beaver County. There was a Valvoline refinery in Freedom, along the Ohio River, and the world's first commercial nuclear reactor was running in Shippingport, also on the Ohio, but beyond that there was steel and steel fabrication. Pittsburgh was long known as "Steel City," and the headquarters of both U.S. Steel and the United Steelworkers Union are still there. However, Pittsburgh was almost never wholly dependent on steel. It also was the corporate center for coal; coke, made from coal, is an essential part of steelmaking, but coal was at one time used for heating and steam engines, and is still a critically-important (although rapidly declining) fuel for power generation. CONSOL Energy, one of the country's biggest suppliers of coal and natural gas, is headquartered in the city.

Alcoa (Aluminum Corporation of America,) the largest producer of aluminum in the U.S., recently moved its corporate headquarters to New York but has kept its operational headquarters in Pittsburgh. Like Alcoa, Bayer, the German chemical and pharmaceutical giant, had its U.S. headquarters in Pittsburgh until a couple of years ago, but it still maintains major operations in Pittsburgh. PPG Industries, one of the largest suppliers of paints, coatings and glass in the U.S., is headquartered in a landmark building in Pittsburgh. The city was the home of Westinghouse Electric and is still the home of Westinghouse Air Brake, both companies founded by George Westinghouse. Westinghouse Electric is now reduced to its nuclear plant division, majority owned by my old employer Toshiba, and a trademark licensed to a variety of companies by CBS. However, for decades, Westinghouse was General Electric's biggest competitor and one of the biggest makers of televisions, radios, major appliances and industrial electrical equipment, along with power plants of all types. It also owned the world's first (or second, depending on your opinion) commercial radio station, KDKA, which led to Westinghouse Broadcasting, one of the biggest non-network-owned radio and television station operators in the U.S. As one of its last acts, Westinghouse Electric acquired CBS and took the CBS name, which is why CBS licenses the Westinghouse name to others. Westinghouse Air Brake, now known as Wabtec, is still alive and well and headquartered in the Pittsburgh area.

Pittsburgh was and still is the home of H.J. Heinz. Many people in Great Britain think that Heinz is a British company because it sells so many products there, but it's from Pittsburgh. Rockwell International, now known as Rockwell Automation and Rockwell Collins, was based in Pittsburgh until 1988, and was at one time #27 on the Fortune 500. Candy maker D.L. Clark, maker of Clark and Zagnut bars, was based in Pittsburgh until 1999. It's also the home of PNC Financial, previously Pittsburgh National Bank, one of the biggest banks in the U.S., the University of Pittsburgh Medical Center (UPMC), one of the top transplantation centers in the world, and Carnegie Mellon University, one of the top 10 engineering schools in the U.S. Carnegie Mellon, in turn, has attracted Apple, Bosch, Disney, Google, Microsoft, Oracle, Seagate and Yahoo! to open R&D centers in and around the city.

My point is that Pittsburgh had, and still has, a very diverse economy. When the U.S. steel industry collapsed in the early 1980s, Pittsburgh was hard hit. Every steel mill in the city closed, but the city survived because it had so many other industries to fall back on. Today, the steel mills have been torn down, converted into parks or repurposed as offices and retail space. Other towns around Pittsburgh weren't so lucky. My hometown, and the other towns that were almost totally dependent on steel, were decimated. What were once thriving downtowns are now mostly ghost towns, perhaps not as bad as you'd see in Detroit, but close. Detroit was much like Beaver Falls, on a vastly bigger scale: Just about every business made cars, made parts for cars or sold goods and services to the people making cars and car parts. When the car industry collapsed, there was nothing else big enough in the Detroit economy to compensate.

I've read pundits who say that there should be dozens of Silicon Valleys around the world, each focusing on a single technology or industry. Silicon Valley, however, has a diverse economy--semiconductors, computers, instruments, software, online services, consumer electronics, video games, pharmaceuticals, health care, and automobiles (previously GM, Ford and Toyota, now Tesla.) The Valley is in a constant state of reinvention, because it has such a diverse set of businesses and skills. A "Silicon Valley" focusing on a single technology or industry will be as vulnerable as Detroit was.

If Detroit is ever to recover even a part of its former glory, it has to make attracting and keeping a diverse set of industries its top priority, after reliably providing public services to its citizens. Diversification is the right formula for any city or region that wants to maintain its economic viability for generations.

A peaceful alternative to the "war" for top talent?

The Wall Street Journal ran an article yesterday that merely reinforces what anyone in Silicon Valley has known for some time--there's a war going on between the startups looking for hire top developers and the established companies looking to keep them. (Example #1 of the established companies is Google, which has raised salaries by 10%, gave every employee a surprise $1,000 cash bonus and offered insane stock options to top developers to keep them from defecting.)

According to the WSJ, Okta, the San Francisco-based startup that's the focus of the article, plans to spend 80% of its $10 million Series A round on salaries, most of which will be for developers. Part of the problem is that salaries for developers in the San Francisco Bay Area are dramatically higher than in most other parts of the country; Okta is paying $75,000 for developers just out of school, and up to $150,000 for top developers, while the national median salaries for entry-level developers is $51,000, and $101,000 for experienced, senior-level developers (based on figures from Salary.com).

These costs are driven in part by the cost of living in Silicon Valley, which is higher than anywhere in the U.S. except for portions of New York City. In addition, even though there are far more developers in Silicon Valley than in any other comparable area in the U.S., everyone wants the best developers, and there are only so many of them to go around. That competition inflates the salaries that companies have to pay for talent.

In addition, the decline in IPOs has made candidates skeptical about the value of equity. In the "Dot-Com" years, startups could offer sub-par salaries, even to top talent, so long as they gave them substantial stock options. Today, when the exit strategy for most startups is to be acquired, most of the proceeds go to the angel investors, venture capitalists and founders; very little is left over for employees. So, while startups are very picky as to who they hire, the candidates demand top salaries (and still demand equity as well).

One solution to this logjam is to stay away from Silicon Valley. I've written about this many times before, but moving from almost anywhere else in the U.S. to Silicon Valley will instantly impose an operating cost penalty of 30-50% on your startup. Cities like Austin, Boston, Boulder/Denver, Chicago, Pittsburgh, Portland and Raleigh/Durham/Chapel Hill have excellent quality of life, strong technology bases, top universities and much lower costs of living than Silicon Valley.

Here's the key: These areas don't need to be "the next Silicon Valley" in order to be successful. They don't have to replicate the entire Silicon Valley infrastructure: Money and resources are now global. The biggest investor in Chicago's Groupon, for example, is Digital Sky Technologies, based in Moscow. Moscow is a long drive from Sand Hill Road.

Having lived in Chicago for two years now after 25 years in Silicon Valley, there's not much that I miss. The weather was much more to my liking, I enjoyed being able to drive to the Coast in an hour, and the seafood was far better. On the other hand, I paid 50% more for a semi-squalid apartment, virtually everything cost much more, and state income taxes were three times higher than those in Illinois. For me at least, it's a reasonable trade off.

So, one solution to the "war" for top talent is to stay out of the battlefield.

Insights from "Unstoppable": Based on the novel "Derailed" by Sapphire

I watched Tony Scott's movie "Unstoppable" last night, and learned a number of things:

• Never let fat, dumb guys drive a train.
• The train that the fat dumb guy is driving will inevitably be loaded with explosive materials.
• Television stations from Pittsburgh have an infinite number of ENG trucks.
• Even with infinite numbers of ENG trucks, you can never have enough helicopters.
• You know those fat, dumb guys? Don't promote them into senior management.
• Corollary to the previous: Executives always forget that they have insurance when adding up the costs of a disaster.
• Avoid putting a bending overhead railroad trestle right next to a dozen tanks full of fuel oil in the middle of a city.
• Fat, dumb guys notwithstanding, Pennsylvania railroads have the best-looking employees.
• While people from Pennsylvania divide the state into "Western", "Central" and "Eastern", movies about runaway trains in Pennsylvania divide the state into "Northern", Central" and "Southern".
• The best way to get your wife to lift a restraining order against you is to keep a runaway train from careening off an overhead railroad trestle into a dozen tanks of fuel oil.

All in all, it was a very educational evening.