The California Texodus

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A wave of corporate departures raises concerns for Silicon Valley’s future.

In December 2020, as the curtain drew closed on an extraordinary year in Silicon Valley history, the region suffered a final shock when Oracle Corporation and HP Inc. both announced the relocation of their headquarters to Austin, Texas, in quick succession. When legendary investor Peter Thiel and entrepreneur Elon Musk also disclosed that they had decamped to Texas, some political and economic observers reacted with profound concern, seeing a “red tsunami” rolling toward the Lone Star State.

Others dismissed the moves as unimportant ripples in California’s vast ocean of economic activity. Could such significant corporate flight out of the Bay Area be explained by the boisterous election cycle, in which the sharp divide in economic and policy models of Texas and California came into sharp focus? Why did California state leaders fail to foresee these exits and take steps to prevent them? Does Silicon Valley face the start of a long-term exodus and decline? How should individual cities respond?

Answers to all these questions are complex and, it turns out, have been concerns in policy circles for decades. Competition between California and Texas long predates today’s battle of sound bites between the states’ governors, Democrat Gavin Newsom and Republican Greg Abbott. For progressive-minded California tech executives, Texas—formerly a slave state of the Confederacy, formerly an independent republic with a reputation for insular ruggedness, for decades solidly Republican in choices for most state and national offices—seems an odd choice to call home.

Yet between 2010 and 2018, at least two dozen large California companies moved headquarters to Dallas, Austin, San Antonio, or other cities, including the former Silicon Valley stalwart Raytheon. Texas was the top destination for corporate moves nationwide in 2019 and 2020.

Not a New Rivalry

Government professor Dr. Kenneth P. Miller of Claremont-McKenna College chronicles the states’ long rivalry in a 2020 book titled, aptly enough, “Texas vs. California,” pointing out that since 1990 a surprisingly large number of companies have left California, and not all in tech: Toyota USA; Occidental Petroleum; McKesson, the nation’s largest pharmaceutical distributor and sixth-largest company; Fluor Corporation and Jacobs Engineering Group, two major international design and construction firms; Charles Schwab & Co.; Jamba Juice; Omnitracs, a company that manages operations for the trucking industry; Core-Mark, a convenience store supplier; and at least two dozen more. As important as these companies were to California, the loss of an iconic name like Hewlett-Packard, and a local landmark like Oracle, hurts even more.

“I am deeply concerned about corporate flight,” said Jim Wunderman, President of the Bay Area Council, an association of local businesses formed in 1945. “This is not the way to go in a strong economy, and it’s hard to tell how deep and how far it will go. Post-pandemic, all bets are off, and no one can say whether companies will continue to value California’s advantages or pursue growth elsewhere. The decision to move a headquarters is huge for a company, and it means not only direct losses of employees, but also movement of growth and philanthropy.”

According to Wunderman, the council has responded by starting to build a statewide coalition to address policy changes to improve the California business climate. While the council has not traditionally advocated for changes in state tax policy or labor policy, now those concerns loom large.

A Cycle Repeated

Countering Wunderman’s concerns is California’s remarkable overall economic resilience in the face of losses of entire industrial sectors. Oil and gas, aircraft and aerospace, auto manufacturing, and financial services all once dominated the California economy. Lockheed Missiles & Space in Sunnyvale and General Motors in Fremont once were the area’s largest employers, long before Google and Apple. But virtually all auto plants and aircraft plants have closed, energy production is weak compared to other states and continues to decline as a target of the progressive politics of Sacramento. Even semiconductor development and fabrication, which bestowed the Silicon Valley moniker on the region, have moved offshore. Is information technology the next industry that California will lose wholesale?

People are right to worry, says Wunderman. “We are in a new era and the post-pandemic world will be different than the Fourth Industrial Revolution that we thought had just started. California took 10 years to recover from the 2001 dot-com bust and lost 400,000 jobs over the next two years. We needed six to eight years to recover from the 2008 mortgage meltdown.

“It is far easier to lose jobs than create them,” Wunderman continued. “We face tremendous competition from Texas and others and with remote work, it’s not clear that California’s geographical, climate, and cultural differences will win out. So why would we be our own worst enemy?”

Backfilling for Losses

One reason, Miller suggests, is just because the state can be. “California has seen constant reinvention in response to the loss of industries,” Miller said. “Policy makers, having seen this time and again, seem willing to stress-test the economy in ways that other states would not attempt.” Simply stated, the governor and other state leaders may think they can ignore the issue and other businesses will fill any gaps.

What’s the root cause of corporate flight? In interview after interview for this story, commentators all mentioned the same thing—housing—because when workers can’t afford to live near their employer, the business must go elsewhere to find talent.

As Miller observes in “Texas vs. California,” the state housing market has become profoundly stratified—accessible for the top-paid tier of workers who can afford to buy at what would be luxury prices in any other state, somewhat available for the lowest working class who may benefit from government support or affordable projects, but virtually impossible for the middle class.

No wonder city streets up and down the Peninsula are lined with recreational vehicles as drywall workers, tile installers, cooks, cleaners and other trade workers have been forced into non-traditional but affordable quarters.

There’s no question that housing units have failed to keep pace with Bay Area job creation. In 2019 the median cost of a home in San Francisco hit $1.7 million, a stunning amount in any market. And the region has made land use choices over decades that artificially constrain supply Every acre bought and warehoused by the Peninsula Open Space Trust, for example, has become another acre on which affordable housing can’t be built.

Lowering Housing Costs

The mention of housing problems gets Wunderman up in arms. “We need to build what we need. We need to totally reconsider whether all existing housing regulations are appropriate. We have to create a clear path so builders don’t face endless lawsuits whenever they want to build. We’ve got to revamp cost structures to slash all the exactions and fees that impose such high costs before a shovel ever reaches the ground.”

Corporate flight could benefit the housing situation, of course, by reducing demand. Renters may see a long-term decline in lease rates. Rental costs in San Francisco already have dropped about 15% in the past year, and while the primary effect has been employers’ long-term willingness to accept remote work and keep offices closed, job losses attributable to corporate moves will have to have some effect eventually.

Meanwhile, selected Bay Area cities have adopted far more business-friendly tactics than others and have not shied away from incentivizing housing. Both Miller and Wunderman note that cities have limited options because they are incapable of directly changing tax policy or labor policy—yet they have a key role to play in creating housing, changing land use policy, and reducing rules and costs that hold up development.

Redwood City Housing

Redwood City Mayor Diane Howard commented that the city has seen over 2,000 residential units added in recent years and has aggressively required commercial developers to concurrently build housing units as conditions for large office projects. “We continually talk with developers about the need to build middle-income and lower- to very-low-income housing.”

She pointed to the Sequoia Station project, which was significantly revamped when the city pushed back against the developer’s original proposal for only a small number of low-income housing units. Howard also noted that a city’s pursuit of different industry sectors can significantly affect quality of life.

“The city has been clear that it needs more housing and less office, and more life sciences companies,” she said. “The life sciences sector requires fewer employees for the same square footage, which means fewer cars and less congestion.” Abbott Laboratories is a notable pharmaceuticals company with a large presence in Redwood City.

Permanent Changes

Even if large company departures have grabbed the headlines, Howard pointed out that small business starts have remained strong. “In 2020 we issued more business licenses than we saw businesses close,” she said. The city continues to explore several business-friendly tactics such as the permanent closures of selected downtown streets to support dining and other services and permanent outdoor parklets.

In February the city held roundtable business meetings in the interest of improving dialog with business owners, resulting in strongly positive response and a request to hold similar meetings more often. “Maintaining communication appears to be the key to retaining companies in the area,” Howard said. Incentives also may help: The city is developing a “shop local” marketing campaign that appears to target consumers’ large-scale shift in basic shopping to powerhouse online sources like Amazon.

While these steps sound positive, Miller noted that some cities may need to consider a far broader change in attitude, providing a reminder that pre-pandemic, San Franciscans showed a measure of outright hostility to the technology sector—protesting gentrification, changing neighborhoods and cultures. Miller suggests that cities may have to become more accommodating in response to the sting of a corporate loss.

Thorny Labor Issues

Beyond addressing housing costs, Miller thinks California labor policy represents the major inflection point for corporate relocation decisions. As the state attempted to advance Assembly Bill 5, to force gig-economy companies like Uber to classify workers as employees rather than independent contractors, organized labor faced off against high-tech in an uncomfortable conflict between institutions that otherwise are aligned with progressive values.

AB5’s author Assemblywoman Lorena Gonzales, a strong ally of organized labor, escalated a personal conflict with tech sector leaders including Musk, on Twitter. In so doing, the Oceanside Democrat pitted the state’s dominant political force against one of its best-known technology leaders. Only Musk knows if a dispute of that sort catalyzed his Texas move. As the tech sector faces increasing pressure to make changes in labor policy, it may become increasingly dissatisfied with California.

More Than Prestige at Stake

The loss of a headquarters can have cascading consequences. Losses are reflected when the federal Office of Management and Budget changes the government’s list of “metropolitan statistical areas,” or MSAs. The greater the number of large employers and employees, the higher a city may rank in MSAs. Cities that can tout their position in a growing MSA can have a marketing advantage in attracting conventions, new businesses, and relations into the community.

Those reclassified as “micropolitan” areas look weaker and less competitive. And several housing, transportation and Medicare reimbursement programs are tied to communities being metropolitan statistical areas, or MSAs, so a change designation can cause direct losses to future city budgets.

And is Texas really the Western Shangri-La that Thiel, Musk, and corporate CEOs apparently believe? Two recent visits to the Austin area revealed an imperfect paradise. People in the airport, retail stores, and other public areas reflect a friendliness, optimism, and level of community concern that seem hard to find in the hyper-competitive, locked-down, tech-focused Bay Area.

But during a weeklong series of winter storms starting near Valentine’s Day this year, much of the area lost power as ice took down power lines, froze wind turbines, and burst cooling pipes across Texas. Utility regulators, who control a grid not connected to the rest of the nation, saw wholesale rates skyrocket, saddling some consumers with massive bills just for maintaining basic services.

Lots of Land

The supply of flat, buildable land with water is huge, so opportunities for enlarging key Lone Star cities abound. Even so, demand in Austin far outpaces supply as highly paid California workers rush in and compete for purchases. One property recently offered at an upper-middle price point received what the listing agent could only guess to be “80 to 100 offers,” leading her to advise a hapless buyer, “Don’t bother submitting another.”

Lacking an extensive freeway or rail network, Austin is struggling to build out transportation options to keep pace with growth. Now the nation’s 11th largest city, in normal times Austin suffers difficult commute-hour traffic jams. It isn’t free of homelessness driven by drug culture; groups of tents and have appeared near many highway intersections and other chunks of open land.

Still, Texas has succeeded in forming at least two significant clusters of related companies, in petrochemicals (centered in Houston) and aerospace (Dallas-Fort Worth). These clusters trace roots to the Texas oil boom of the early twentieth century, and the need for massive numbers of aircraft to fight the Second World War. And they are similar to the Silicon Valley ecosystem—exchanging labor talent over time, spurring innovation followed by spinoffs, and attracting a concentration of capital that ensures new ventures can invest in emerging technologies. If Texas can sustain two non-tech engines of industry, why not a high-tech one?

Miller writes that Texas has clear cost advantages as California’s high tax rates and regulatory costs long ago became comparatively non-competitive. When California grabs 13.4% of corporate capital gains, and Texas takes nothing, incentives to invest in Silicon Valley are diminished.

A Tale of Two Cultures

Yet at the state level, Miller notes—in likely an understatement—”there is an imperfect fit between California tech culture and Texas statewide culture.” Others have characterized Austin progressive politics as “a blueberry floating in the tomato soup of Texas.” The cultural clash of Silicon Valley and conservative Texas came to the forefront when Apple Inc. CEO Tim Cook personally lobbied the Texas legislature to kill a law confining the use of public restrooms by transgender persons to the facility associated with their birth gender, with Cook threatening to pull Apple labor relocation and capital investments. According to Miller, battles like this could cause central Texans to question “whether our values are more important than their dollars.”

So the failure of Texas to manage cultural changes could be the one way for the state to fumble the opportunity presented by corporate moves. And maybe the persistent refusal of California progressive politicians to cut taxes, reduce housing impediments, and address labor policy problems will continue to drive business movement out of state.

Or, perhaps both states have a unique moment for synergy, or even that most elusive of political goals—unity. Say California’s true-blue progressives bend a little on taxes and regulations, and red-dyed Texas conservatives give a little on social issues, with the result that workers across classes achieve housing affordability and businesses draw from a broad available labor pool. The state making the best choices wins.

Two Paths Forward

Refocusing on moderation in this manner, or seeking replacement industrial clusters if December’s departures are the harbinger of a broader Silicon Valley exodus, look to be California’s main choices. For Miller and others, the loss of HP and Oracle wasn’t surprising, looking only at cost of living and cost of labor. California always will have a superior climate, great cultural amenities, and the proximity of like minds culturally and professionally.

But the Golden State may have become, in the words of Elon Musk, an overconfident sports team. “If a team has been winning for too long, they do tend to get a little complacent, a little entitled, and then they don’t win the championship anymore,” Musk has said. “California has been winning for a long time… and they are taking it for granted.”

Leaders like Redwood City’s Mayor Howard appear dedicated to working to maintain a local edge, keeping businesses from feeling neglected or even unwanted. Without those steps, and others at the state level, more departures seem inevitable.

And the moves by HP and Oracle spurred a vocal backlash: Just a day after those announcements, CEOs at Airbnb, DoorDash, and Twilio all recommitted to staying in the Bay Area, including two who acted after concerned calls from Gavin Newsom. For now, Silicon Valley is left to wonder to what extent policy emanating from Sacramento threatens the economic prosperity of the state, and to what extent California’s industrial engines will continue to generate.

Christopher J. Palermo is a Silicon Valley native who works as a patent attorney in Palo Alto and has worked with high-tech clients for 30 years.

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