Ray Zinn, the longest serving CEO in Silicon Valley, discusses the history of silicon as only he can, having watched it from Shockley to Facebook.
In Part X, Ray, Goldman Sachs analyst Peter Marchetti, and Silicon Valley vet Guy Smith, cover the the rapid changes that the Internet put upon Silicon Valley, telecommunications, consumer gadgets, and thus the semiconductor industry.
Peter Marchetti has spent the past 20 years as an advisor to some of the most significant families and foundations in the country. He joined the Goldman Sachs team in 2000 after receiving his MBA from the Haas School of Business at the University of California, Berkeley.
Ray Zinn: Well, hello, everyone. Welcome to another in our series of the history of Silicon Valley with me today, I have Guy Smith. Who is my private client banker and also Peter Marchetti, who is my director of marketing for Tough Things First and kind of where we left off last that we’re the build the buildup to the Y2K. There’s a big fear and big concern of what the Y2K was going to do. Cause they thought, honestly, the whole internet was going to shut down that we’re not going to be able to place orders that everything was going to go to heck in a handbasket. And there was a lot of big fears about that because of the .com thing was really just on fire and it was really just rocking and rolling and so people were worrying about deliveries.
It’s kind of interesting compared to today with the pandemic, the COVID pandemic, that we got same fears. There’s a little shortage of inventory. The automotive guys are screaming and concerned because now they’re plans are being affected by the semiconductor part deliveries and they’re asking the government to step in and see what they could do to help improve the supply and we have a similar story going on, kind of history repeating itself with this Y2K thing. There was a big fear that someone … the whole internet was going to collapse … there was going to be a trigger and we call it the Y2K debacle, which didn’t happen. I remember having to check in at midnight on Y2K when the clock switched because they wanted to make sure we were all still connected and it was kind of weird everybody trying to make sure we’re all linked up together. But anyway,
Guy Smith: Well, what the funny side [inaudible 00:02:49] about the whole Y2K thing is that there were billions of lines of ancient COBOL code on mainframe computers around the world, and some gray beard COBOL programming friends of mine they had a daily watch list of how much money you could make as a consultant if you had that particular skills and we saw guys who were struggling to make a living before Y2K, who were suddenly in the mid six digits because they were so in demand in so few in number.
Ray Zinn: This was more of a conspiracy than a reality. But that only exacerbated this buildup of inventory. Because all of our customers were saying, well you got to make sure you have this much, and this much that you had to have this product available and so that really spurred this whole problem that ended up being the .com implosion.
Peter Marchetti: Ray on that front with all the buildup that was happening. Could you tell us a little bit about what were the industries or in products that were kind of driving that demand?
Ray Zinn: It’s infrastructure, internet infrastructure. This fiber optic pipeline and just the whole host of products supporting the internet is what was driving it? I think one of the biggest consumers was AT&T and there was a [inaudible 00:04:14] demand for product. And of course the cell phones were just doing extremely well, but a lot of transitioning going on in the way cell phones were moving from a true telephone to more of a PDA combination, cell phone PDA kind of product. Anyway, it was just a really interesting time, just explosive growth. We’ve never seen growth like this. The net worth or the market cap of my company at Micrel quadrupled in just a month and there’s a huge demand.
We’re seeing a similar problem today and semi-conductors on the stocks and the NASDAQ looking at just the high growth of the semiconductor companies in terms of their market cap. Anyway, same thing was happening back in that timeframe. Lots of enthusiasm this whole internet thing was just going crazy and a lot of companies were storming up supporting the internet with routers and modems and that sort of thing and of course, cell phones, cell phones were coming off the rollers as you would.
Peter Marchetti: Well, I have a question about the Y2K then, now we know that the semiconductor industry is just amazingly cyclic, was the Y2K chip rush an amplification of an existing cycle and did that spell kind of a bigger bust on the back end because it was a cycle amplified?
Ray Zinn: But generally the fourth quarter is really a kind of a slowdown because you got Christmas inventories are already built up and so there’s really no demand. And that Q4 ends up being a very soft quarter Q1 again, starts out very soft, ends up strong, but Q1 tends to start off soft and this is different in Y2K because you had the exact opposite. You had more demand actually toward the end of the year, more demand going into the first quarter than we normally see this is countercyclical, Guy.
Peter Marchetti: On that front then Ray, how much do you think the eventual kind of popping of the bubble was directly related to the Y2K buildup? Because it was in probably March of 2000 that we started seeing the market sell off pretty considerably and inventories starting to really build up.
Ray Zinn: Yeah, well, again, it was a conspiracy as you would for example, a problem they’re having down in Texas with the [inaudible 00:07:09] the stores there was just nothing in the stores or even when we talked about when the COVID thing hit, all the toilet paper was gone, a lot of the normal stuff you want to buy in the store it was not available and you had that huge demand and huge buildup that really is not there. It’s just more conspiracy or it’s not a real demand. And that’s what was happening with this Y2K or the internet buildup, the demand that they thought was there really well, actually it couldn’t even handle it. When we found out it was at AT&T’s warehouses, were just jam packed they couldn’t move the product from the warehouse out into the field to do the fiber optic construction and just the whole build-out of the cloud servers.
And they just weren’t able to handle the amount of product that was coming in. They just turn the valve off instantly. And when that valve shut off that just caused a domino effect throughout the entire industry. And then we had the collapse of the industry actually, which began in late January of 2000, and then just precipitated in 2001 and really the whole thing began to unravel toward the end of 2002. It was just 30% over demand over supply is what happened. Double ordering, triple ordering, quadruple ordering. It was just way, way demand was way off. The supply was now had built up and had just saturated the demand. And so a lot of companies shut down. A lot of companies just closed their doors and layoffs and it was a terrible time the .com era, we call it the implosion, which began in 2001, it just really hurt the entire industry.
Peter Marchetti: I was going to ask you Ray of your customers at Micrel. I mean, how many of them just went away during that period?
Ray Zinn: Well our biggest one Nortel went away and a lot of them shut down. It’s mainly these calm companies, these Datacom companies were just hurting because they had way too more supply than they had demand. When supply and demand get out of whack that’s the problem. And even today, this COVID problem, this pandemic is causing it to get out of whack also. I heard on the radio today that what’s going to happen to Amazon and Walmart and some of these others, once people get back to their normal lives. What’s going to happen? What’s going to happen to people like Zoom and others that have benefited from this pandemic, what’s going to happen to them? And that’s a real question. The same thing was happening back in 2001 the demand really wasn’t there. They thought the demand was there and it was just a bad prediction of a real demand.
Guy Smith: Well, it was definitely a gold rush scenario. I remember in the days after the implosion, there were auctions for bandwidth on dark fiber that was run all over the globe. There was just way too much build out and not enough demand. So out of curiosity, how long did it take the semiconductor industry to reabsorb all this excess supply in the market?
Ray Zinn: It takes about a year and a half? That’s a normal cycle, in other words, when it starts down, it takes about a year and a half to get back to its normal self. And we started seeing that in 2004, we started seeing the recovery 2005 was better because the cell phones were doing well. And it recovered in about a year and a half, two years is a kind of a normal recovery period. Because the industry is able to really correct itself, just being by nature of the way that the manufacturing goes, it’s able to correct itself pretty readily and
Peter Marchetti: What sort of industries kind of let it out of the doldrums, Ray, you talked about what kind of pushed it into it, overbuild in certain areas, but were those same areas, the ones that were kind of like helping the semi’s recover?
Ray Zinn: Yeah. Mainly I would say the cell phone market was going well, the build-out of the LTE.
Peter Marchetti: Yeah. I can see the iPod came out around that time too, like 2000, 2004.
Ray Zinn: Right, yeah. Okay. Games, the PDA products we’re helping and then automotive started, we started seeing some of the automotive companies began to use a lot more electronics in their products. But what I want to talk about really quick here before we end this particular podcast is what happened to the semiconductor industry during that time. We had a lot of consolidation taking place. We had a lot of the fabs were shutting down because of the Y2K they actually just shut the fabs down. That caused more companies then to rely on fabless boundaries and Asia. And that kind of started the beginning of the end of semiconductor manufacturing in Silicon Valley because of the .com implosion. And it’s interesting how these cycles had the boomerang effect and the closing of these fabs and then going to more of a fabless model.
We have all these big fabless companies starting up Xilinx was a big one, Broadcom, Marvell just the whole host of these semiconductor companies that really were fabless. AMD went fabless [inaudible 00:13:57] started cutting back. It was just, I think, a real shock to the industry to have to go through this .com implosion and shutting down all these facilities because the industry does move quickly when it comes to stuff like that. They can close things down pretty quick and I think this is one of the concerns that bothered me at Micrel was all these fabs are shutting down and moving out of the Valley. And a lot of process engineers and designers started losing their jobs. In any case, this was a, I think a real tragic time.
We had the 9/11 thing happened and that caused a lot of consternation and problems in the country itself, it was tough time. The early 2000’s were not a great time for Silicon Valley or for the industry. Well, with that, let’s wrap this guy up and we’ll schedule our SQL to this in a week or so. Anyway, good to have everybody here thanks Peter for being here and Guy, and we’ll keep rocking and rolling on the history of Silicon Valley. Hopefully we get all of you back to listen to our broadcasts. You can find us on toughthingsfirst.com, all of our podcasts if those that you’ve missed. Also look at Tough Things First you can get that your book retailer or Amazon, my book Zen of Zinn and I have a new one coming out a new Zen of Zinn coming out in another few months to pick that up. Look forward to have you guys back and we’ll have another exciting, the history of Silicon Valley.