Silicon Valley Faces An Escape Crisis
By: Arslan Mirza
Tags: Technology, Silicon Valley, Tesla, Texas, California

The Governor of California Gavin Newsom took the initiative to give Airbnb co-founder and CEO Brian Chesky and the co-founder, and CEO of food delivery platform DoorDash, Tony Xu, called separately. On the phone, the governor congratulated the two entrepreneurs on the recent listing of their companies and also wanted to know their opinions on the business environment for entrepreneurship in California.

To Newsom’s satisfaction, both entrepreneurs assured the governor that they would not leave California.

The Silicon Valley Escape crisis

Obviously, the recent Silicon Valley Exodus has made Governor Newsom a little uneasy. In the past few months, Tesla, Oracle, Hewlett-Packard Enterprises, Palantir, and other well-known technology companies have moved their headquarters out of Silicon Valley.

The Giant Business leaders such as Musk, Ellison, and David Karp (Palantir co-founder and CEO) have left Silicon Valley

The California government is facing a “public relations crisis.” Musk even publicly bombarded the California government’s high taxes and corporate regulations, saying that “California is like a winning team and seems to take everything for granted. They can’t always win.” In response to these situations, Newsom obviously wants to hear Listen to the ideas of the corporate world.

Although companies leave California every year, these recent runaway companies are all iconic companies.

Tesla is currently the hottest new energy car company in the United States

Although the shipment volume this year is only 500,000, which is less than a fraction of the traditional car companies, Tesla’s stock price has increased sevenfold, and the current market value of more than $600 billion is even the sum of the seven traditional car companies.

Musk has also become the world’s second-richest man worth more than 130 billion US dollars.

While high-profile opposition to the California government’s suspension of the epidemic this summer, Musk chose Austin, Texas, to build Tesla’s second assembly plant in the United States, and received tax relief of up to $46 million from the local Travis County government.

At the same time, Musk also announced that Space X’s headquarters will also move from Los Angeles to Texas, where there is their rocket’s assembly and launch base

Hewlett-Packard Enterprise’s predecessor, Hewlett-Packard Company, is a living fossil that has witnessed the history of Silicon Valley. Founded in 1939, this veteran IT company is the origin of the Silicon Valley garage culture and the yearning of Jobs when Silicon Valley was young.

Its status in Silicon Valley is like the current Apple. Oracle, founded more than 40 years ago, is the second largest in the US enterprise software field. Ellison, 76, lived in seclusion on Lanai Island in Hawaii after the outbreak of the new pandemic, where he bought 97% of the public land there.

Although “Escape from Silicon Valley” has become a hot word in reports, the relocation of technology companies to Texas is not a phenomenon that only appeared this year.

In the past ten years, Intel, AMD, Dell, Hewlett-Packard, Oracle, and dozens of Silicon Valley technology companies have built parks in Austin, Texas, and other places.

For Oracle, the so-called “relocation of headquarters” this time just changed the registration of the headquarters from Redwood City, Silicon Valley to the address of the Austin campus.

Realistic benefits behind the relocation

For the Californian government, it is a big embarrassment for companies to escape, and it is a double embarrassment for them to go to Texas. California and Texas are the two states with the largest economy and population in the United States, and there are also open and secret struggles between them.

In terms of economic policies and values, California and Texas are the two major bases of the Democratic and Republican parties, holding high the banner of liberalism and conservatism.

The California government favors a European model with high taxes and heavy regulation, while the Texas government supports a small government model with low taxes and light regulation

So, why do technology companies move out of California and go to new parks in Texas?

Companies are not interested in political positions, they care about actual interests. Technology companies have built new campuses in Austin because Texas has lower taxes and can save a lot of money.

Austin, the capital of Texas, has the title of “Silicon Hills”, just like a lively scene of a small Silicon Valley, the fastest-growing metropolitan area in the United States.

Last year, Apple also announced that it would invest the US $1 billion here to build a new campus that can accommodate 15,000 employees. Hewlett-Packard Enterprise moved to Houston, Texas long before it announced the relocation of its headquarters.

The highest corporate state income tax in California is 8.84%, while the highest in Texas is 0.75%

The labor and land costs in Texas are also significantly lower than in California. According to statistics last year by Joe Vranich, a corporate relocation expert, a total of 13,000 companies have left California in the past eight years.

Moving from California to Texas can save 30% of operating costs.

Image by lauramba from Pixabay

Oracle’s Austin campus opened in 2018 when it planned to have more than 10,000 employees.

According to Oracle’s commitment to the local government, the average salary of employees in the Austin campus will reach US$ 67,000 in 2020

And according to Glassdoor data, the average salary of employees at Oracle’s Silicon Valley Redwood City headquarters is the US $115,000. Tesla promised to the local government of the Austin factory to solve 5,000 local jobs, but the starting salary is only 35,000 US dollars, which is only half of the Silicon Valley factory.

It needs to be pointed out that these “so-called escaping from Silicon Valley” companies only changed their headquarters from Silicon Valley to Texas to enjoy Texas’ low tax treatment.

But this does not mean that they will close the Silicon Valley campus and move all Silicon Valley employees to Texas. This means that Oracle and Tesla still need to pay the California government the real estate tax and employee payroll tax.

High housing prices are not easy in Silicon Valley

For the executives and employees of technology companies, moving to Texas also has very realistic returns. California has the highest state income tax in the United States (up to 13.3%) and the highest capital gains tax in the United States (also 13.3%).

Texas simply doesn’t have these two taxes. This year because of the soaring Tesla stock price, Musk, whose assets soared by 100 billion US dollars, moved from California to Texas.

The most realistic return is that he saved more than one billion US dollars in taxes

Moreover, due to the impact of the epidemic this year on business operations and the decline in government revenue, the California government is still planning to continue to increase the income tax rate for high-income groups.

According to data from the California Department of Treasury, 45% of California’s personal income tax income comes from 1% of the wealthy.

The departure of super-rich people like Musk and Ellison means that the California government has lost a large amount of income tax revenue.

For ordinary people, relocating to Texas means a direct improvement in the quality of life. Compared to California, the cost of living in Texas is lower and housing prices are far cheaper.

Take the house sales data in October this year, for example, the median price of a single-family house in Santa Clara County, Silicon Valley is $1.44 million, while the figure in Travis County, where Austin, Texas is located, is only $430,000. And still in the case of an increase of 20% year-on-year.

The anonymous professional social networking site Blind surveyed more than 1,500 people in the Silicon Valley technology industry earlier this month.

More than 60% of respondents said that they are willing to move with the company. Even in FAANG ( Facebook, Google, Apple, Amazon, And Netflix) Among giant employees, 58% are willing to relocate.

Image by ExplorersInternational from Pixabay

Although the epidemic has caused a sharp contraction in the US economy, it has not affected the growth of housing prices in Silicon Valley. The sharp rise in the U.S stock market has significantly appreciated the assets of employees who hold stocks in technology companies.

The listing of several star startup companies has once again created a new batch of tens of millions and even billionaires.

In October of this year, the median house price in Santa Clara County still increased by 16.8% year-on-year, continuing to hit new highs.

Driven by actual life pressure, Californians have flocked to Texas. Statistics from the US Census Bureau show that 86,000 people moved from California to Texas in 2018.

An increase of 36% year-on-year, while the number of people who moved from Texas to California in the same year was 38,000

When Californians can’t stand high taxes and high housing prices, Texas is always their preferred place to move, followed by Arizona and Washington State. The number of Californians who moved to these two states in 2018 was 68,000 and 55,000, respectively.

California unions are strong

Strict supervision is also one of the reasons why companies choose to stay away from California. Musk and the California government’s open exchange of hostility stems from his strong dissatisfaction with the company’s shutdown policy during the epidemic.

In early May of this year, Musk bombarded the home order as a fascist

Without the permission of the local health department to resume work, he forcibly started the production of Model 3 at the Tesla factory. Because of the star status of Musk and Tesla, the California government and local governments have acquiesced to his violations without any punishment.

Even so, Musk still announced that he would move Tesla and Space X to Texas, which happens to be one of the states with the most relaxed shutdown orders in the United States.

After comparing Austin and Oklahoma Tulsa and other cities (tax relief treatment), Musk chose Austin to build a new super factory.

Just a few weeks after He and the governor of Texas jointly announced the project, the Austin plant has begun construction

This speed may not be realistic in California. If it is in California, the construction of a Giga factory may be litigated by environmental protection agencies and residents, and then it will go through a two-year litigation process before it can officially begin.

In terms of environmental protection, California is the US government closest to Europe. Recently, Tesla’s Giga factory project in Germany was also forcibly stopped by the court due to environmental protection reasons for deforestation.

Jim Wunderman, president of the Bay Area Council, said, “California regulators are very difficult to deal with. Not only are the procedures lengthy and expensive. Although many companies and entrepreneurs are talking about these issues, they are now. They are really thinking about leaving, and the remote work caused by the new pandemic has accelerated their departure.”

California has the most stringent labor laws in the United States

The interests of trade unions are often given priority. Due to its refusal to form a union and long-term demands for overtime, Tesla’s Silicon Valley factory has been subject to protests from workers’ rights organizations.

In contrast, Texas labor laws are much more business-friendly. Tesla’s Silicon Valley factory is a ready-made factory bought from Toyota in 2010.

This is also the only car assembly plant in California, Toyota, and General Motors, have closed their production lines in California.

Driven by the power of the union, the California Legislature issued a law last year requiring ride-sharing giants such as Uber to treat platform-signed drivers as full-time employees to provide welfare insurance benefits.

This law was strongly resisted by Uber and other sharing economy companies, who did not hesitate to fight a lawsuit with the California government and threatened to shut down California operations

After spending more than $200 million on lobbying, these sharing economy giants were finally exempted in this year’s California referendum (without complying with the aforementioned labor laws), avoiding the two defeats of closing their headquarters in California.

If the referendum fails, maybe Uber, Lyft, and Doordash are now also considering relocating to Texas.

Diversification is also the regulatory pressure faced by California companies. According to California’s 2018 law, the board of directors of listed companies based in California must include two women by the end of next year.

Similarly, Silicon Valley technology companies are also facing accusations that their employee composition is not diverse enough. Many companies have publicly promised to recruit African and Latino employees to create greater career space for them.

Policy stance is difficult to change

Although Newsom attaches great importance to the recent issue of technology companies who are leaving Silicon Valley and proactively contacted entrepreneurs to understand their views, the real reason why technology giants moved out of California cannot be solved by Newsom and the California Democratic government.

The governor does not have the ability and willingness to change California’s high-tax, heavily-regulated leftist policy

The Democrats cannot ignore the demands of labor unions, and the continued rise in housing prices will also help local governments increase fiscal revenues (annual real estate taxes).

As long as these issues remain unchanged, more companies and people will still choose to leave California and move to places such as Texas or Florida with low taxes and low housing prices.

Although Silicon Valley has been the center of science and technology in the United States for the past 50 years, the real Gentrification problem is the wave of Internet and mobile Internet entrepreneurship in the past two decades.

In this wave of entrepreneurial and wealth creation myths, batches of emerging technology-rich and wealthy have directly pushed up the housing prices and cost of living in the San Francisco Bay Area, making residents in non-tech industries unable to afford them and forced to leave.

Helpless residents directed their anger at the technology giants and continued to protest against these companies.

Their vote pressure has also prompted Democratic politicians to increase the tax burden on technology companies and high-paid wealthy individuals.

Image by tunnelmotions from Pixabay

San Francisco, the northernmost point of Silicon Valley, has become one of the most obvious cities in the United States.

On the one hand, housing prices and rents have risen, a large number of upstarts have moved in, and old residents have been forced to move out.

On the other hand, the number of homeless people has continued to increase, and they have gathered in the bustling city Districts have brought serious social security problems such as theft, drug abuse, and robbery.

Gentrification may be a crisis faced by every prosperous metropolitan area

The sharp appreciation of real estate will inevitably lead to the loss of social diversity and the loss of population. Even within California, residents of the San Francisco Bay Area are migrating to Sacramento and other areas with slightly lower housing prices.

The population of the San Francisco Bay Area increased by only 0.42% last year, the slowest growth rate in the past 15 years.

According to data from the California government, the population growth of the five counties in the San Francisco Bay Area has dropped significantly from 102,000 in 2013 to 38,000 in 2018.

Moreover, the new population in the Bay Area is almost entirely from foreign immigrants, and the number of residents moving out of the Bay Area far exceeds the population of other parts of the United States moving to the Bay Area.

The telecommuting caused by the epidemic has indeed liberated many young people in Silicon Valley

They no longer need to endure high rents and live in the San Francisco Bay Area. Instead, they can choose to move to areas with lower rents and living costs such as Sacramento and Reno, Nevada.

You can drive to the company for a few hours even when you need it at work.

In the past six months, rents in San Francisco have fallen by 7%. Before the pandemic this year, the median rent of a one-bedroom apartment in downtown San Francisco exceeded $3,700.

Silicon Valley is still the center of entrepreneurship

Will Silicon Valley lose its status as the center of American technology innovation because of this escape boom?

Over the past few decades, the US technology industry has been steadily looking for new entrepreneurial bases. Silicon Hills (Austin, Texas), Silicon Beach (Venice Beach, South Canada), Silicon Prairie (Dallas, Texas), and Silicon Harbor (Boston, Massachusetts) have emerged.

Silicon Alley (Manhattan, New York), and many other new names imitating Silicon Valley. However, the development of these emerging technology centers has not affected Silicon Valley’s status as a technology center.

In 2015, 20% of US patents came from the San Francisco Bay Area

Under the rush of “Escape from Silicon Valley” in the past few years, the population of the San Francisco Bay Area is still growing slowly.

How many technology companies and residents move out of Silicon Valley because of unbearable housing prices and high taxes, and how many immigrants and young people pursue it.

Dreams of entrepreneurship and success come here.

Even Musk, who bombarded the California government, the R&D departments of Tesla and Space X are still in Silicon Valley and Los Angeles.

Musk’s remarks also triggered heated discussions in the Silicon Valley technology industry. Those entrepreneurs who left California and moved to Texas undoubtedly expressed their consensus with Musk in practical actions. But some people have spoken out against Musk.

Joe Matthews, a well-known California media person, wrote a comment in the Los Angeles Times last week to thank “Texas for taking Musk away” in a satirical tone

He accused Musk of enjoying California’s many policies that support innovation and new energy to achieve success, but he has packaged himself as an innovator who succeeds entirely on his own.

He has no gratitude for everything that California has created for him and publicly undermined California’s pandemic prevention and control work does not hesitate to sacrifice the health of workers to meet his performance goals.

Jeff Lawson, co-founder, and CEO of Twilio, a cloud computing company with a market value of nearly $60 billion, said euphemistically that California does have many problems such as high housing prices and heavy taxes.

He understands those who leave California for their families and lives. But Silicon Valley also provides entrepreneurs with the best environment (venture capital, contacts, culture, talents, incubators, mentors), cultivates the world’s most successful and innovative technology companies, and also creates many billionaires.

In Lawson’s view, these entrepreneurs who became billionaires because of Silicon Valley shouldn’t leave California for tax relief

They will abandon Austin sooner or later, who care about their immediate interests. Lawson called on the CEOs of Silicon Valley technology companies to publicly pledge to stay in the San Francisco Bay Area, invest in the construction of communities here, and help the people at the bottom through the difficult stage of the new pandemic.

Image by raphaelsilva from Pixabay

Believe in young dreams

According to Molly Turner, a lecturer in technology and society at the Haas School of Business at the University of Berkeley, California companies have been complaining that the business environment here is not friendly enough for the past few decades, but this obviously has not stopped California has become one of the world’s largest economies and continues to attract entrepreneurs.

Musk, Ellison, and others left California only to avoid taxes

Venture capital is still gathering on the hills of Silicon Valley, and high-tech talents are still flowing to Silicon Valley, as long as the venture capital environment in Silicon Valley remains unchanged, the hard-earned Silicon Valley remains the world’s best place for entrepreneurship.

Even the major technology companies that have moved out of Silicon Valley have mostly established IT companies that have been growing slowly, emerging Internet companies have not yet moved out of Silicon Valley.

During the call with Governor Newsom, the young billionaire Chesky assured that neither He nor Airbnb would leave California

In Chesky’s view, although some star entrepreneurs and technology giants have recently moved out of Silicon Valley, it is still the center of American entrepreneurship and innovation.

Tony Xu of Doordash also made the same promise to Newson.

Chesky on Twitter said, “When I came to San Francisco, I was moved by the unique culture here. People here believe that everything is possible, and they are willing to believe in the crazy ideas of a 26-year-old young man and his two friends. Strangers live together. If it weren’t for the people I met in California, I didn’t think I could be successful.”

Chesky comes from a small city in central New York, and his parents are social workers.

In 2007, at the age of 26, He came to San Francisco to find a job in industrial design. Because He couldn’t afford the high rent in San Francisco, He could only share an apartment with his friends.

At the Industrial Design Conference in San Francisco in October 2007, almost all hotels were full. Chesky, who wanted to make a little money, bought an inflatable mattress and rented out his apartment to share with strangers.

This is the source of Airbnb’s entrepreneurship (Airbnb is a combination of air mattress and breakfast).

In early 2008, Chesky and two classmates and roommates co-founded Airbnb. In August of that year, the website was officially launched, aiming to provide a cheap overnight option for young people who could not book a hotel or were shy in their pockets.

They soon joined Y Combinator, the startup incubator of entrepreneurial mentor and venture capitalist Paul Graham, and received seed investment from Sequoia Capital.

After 12 years of business, Airbnb is on Nasdaq Going public, the market value is currently approaching 100 billion US dollars.

Chesky also went from a small-town youth to a super-rich man worth more than ten billion dollars.

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