Banking on Optics Valley

The Old Pueblo has high hopes for high tech, but little time.

ARRIVE AT TUCSON International Airport and a sign welcoming travelers to "Optics Valley" greets you. Soon you'll see billboards touting the Old Pueblo's Optics Valley status -- a status Business Week magazine bestowed on the area in 1992. Tucson's move into this high-tech New Economy is geared to high-end, high-paying jobs with an eye toward the optics industry as a growth commodity over the next 50 years.

This national marketing campaign led by the Greater Tucson Economic Council (GTEC) revolves around the slogan "Come for the technology, stay for the lifestyle." The optics industry is banking on an expo to be held in Tucson January 22-26. While last year's optics expo drew some 40 exhibitors, Expo 2001 is expected to attract over 100 exhibitors and 3,000 visitors. Organizers hope Expo 2001 will stimulate attention from the national media, new companies and venture capital--all crucial elements in maintaining Tucson's lead as Optics Valley.

The sense of urgency is palpable, since the road to the high-tech New Economy is being traveled by many other communities. The competition is fierce with Boulder, Austin, Salt Lake City, Portland, Reno and Albuquerque. The pressure is intensified by one estimate that if Tucson doesn't gets it done in the next three to five years, other, more aggressive areas will pull the Optics Valley welcome mat out from under us.

"Obviously we have other clusters here, but we aren't world leaders in those. We really are recognized as world leaders in the optics industry," says Robert Gonzales, former president of GTEC. "We really made optics a hallmark of our marketing efforts, to take what is unique in Tucson--and that's the optics industry--and use that as a marketing strategic objective."

The seven high-tech industry clusters being promoted include aerospace, plastics, teleservices, optics, bioindustry, environmental technology and information/ software technology, but optics is considered the crown jewel.

"I think there's tremendous potential," says forecasting project director Marshall Vest at the University of Arizona's business college. "Most of the firms we have here are small and entrepreneurial. They are inventing new products, and if any of these companies hit on a product and manufacturing follows, there could be thousands, or tens of thousands, of new jobs for this community."

Who gets those optics jobs is a bone of contention among those who still view the area as a low-wage nightmare. Arizona's commitment to supporting the industry has fallen far short of other states. The local optics industry is concerned about the lack of support from the state legislature, citing steep business taxes and an under-funded educational system, as the main issue hampering Tucson's future tenure as a high-tech Mecca.

Another problem is local indifference. Those pushing Tucson into the New Economy feel it would be a shame if the Old Pueblo's piece of the technology pie went stale on account of sloth.

"I would hazard to guess that there are people in Tucson that don't recognize what the capabilities of our optics community or the university have been or will be," complains John Grabo, interim president and CEO of GTEC.

FIRST AND FOREMOST OF THE immediate problems is job skills. After all, Tucson isn't exactly the intellectual center of the universe. One sore point that underscores this issue is that Tucson recently lost a high-tech call center offering 1,000 $16-an-hour jobs because the skill level to support the center wasn't readily available. New Mexico, which won the deal, did so by offering $3 million more in job-training funds than Arizona. Robert Breault, co-chair and founder of the Arizona Optics Industry Association, thinks education of the workforce is the number-one priority in pursuing the New Economy.

"It is critical in the New Economy. We are knowledge-based, agile and fast," points out Breault, who is also chairman of the optics firm Breault Research, and considered the area's biggest cheerleader for the optics cluster concept.

Tucson now faces a critical shortage of workers for optics companies like Breault's. The high-paying ($20-$30 per hour) positions in the optics industry are not easily filled by the local intellectual pool. Upgrading local education is a real factor if these high-tech jobs are to be filled by current residents; this in a state that has consistently ranked last in education spending.

FOUNDED IN 1992--THE SAME year Tucson was dubbed "Optics Valley"--the Arizona Optics Industry Association (AOIA) is a non-profit organization dedicated to bringing together optics-related businesses and fostering growth of the state's optics industry.

According to AOIA, the optics industry began in Tucson in 1942, based around the area's large number of telescopes. Within 100 kilometers of Tucson there are more square centimeters of astronomical glass pointed out toward the universe--including the recent $80 million Mount Graham International Observatory--than at any other location on earth.

Today, optics are more than just eyeglasses and telescopes. The technology is used in everything from check-out counters and hand-held CD players to fiber optic telecommunications, missile guidance systems and the semiconductor industry. Optics is the backbone of the new information-based economy.

The state has more than 187 optics firms with over 6,900 jobs, 66 percent located in the Tucson area, working on everything from fiber-optic modems and digital camera systems to software support products and optical storage devices. Currently, there are more than 4,500 optics workers at Tucson's 136 optic firms. How much of this is based on migration of workers from other states is debatable.

The optics revenue in Tucson has grown from $500,000 dollars in the early 1980s to $750 million by 1998, second in the U.S. only to Rochester, N.Y. In securing Tucson's place in the high-tech arena, area business leaders are establishing industry alliances with high-tech groups in Singapore and Ottawa. The alliance with Ottawa is interesting in that Ottawa houses 90 percent of Canada's telecommunications industry, an industry that has converging ties with the optics industry.

The UA's Optical Sciences Center has been recognized as the best in the world for its research efforts. Annual expenditures for sponsored research and research cooperatives exceed $17 million; the center offers students a comprehensive educational experience in both the technical and problematic aspects of optical science and engineering. "The fact that we have this optics program here and the fact we have a lot of expertise in optics, I think is attracting more companies here, and that will help the economic base," says James Wyant, director the UA Optical Sciences Center.

THE HYPE AROUND TUCSON as Optics Valley is an interesting phenomenon. All the area's seven high-tech economic clusters--with optics "the crown jewel"--have become a world model in cluster economic development. A week does not go by without representatives from around the world arriving to view the Tucson cluster model. On the other hand, nobody locally seems to be aware of this distinction--or care--other than those who understand the field's economic potential.

The problem here is the level of local misunderstanding of not only Tucson's economic goals, but also how many accolades this area is receiving outside the state for its economic development strategies.

Everybody out of town seems to be talking about Tucson, and the powers-that-be are using this newfound attention to prop up our New Economy image.

According to a 1999 report from the Progressive Policy Institute, a Democratic think tank based in Washington, D.C., Arizona ranks 10th in the country for moving into the New Economy and fifth in the number of business start-ups and failures.

Earlier in 1999 the Milken Institute released a report ranking Tucson 22nd out of 300 metro areas in terms of having an economy based on high technology (Phoenix ranked 30th). According to the report, the Old Pueblo employed 24,040 high-tech workers and produced goods and services worth $2.5 billion in 1998.

In 2000 Tucson was ranked 20th among 316 metropolitan areas in the United States in the El Paso-based Business Opportunity Index for most positive business location, and Inc. magazine ranked Tucson as the 10th best small metro area for starting a business.

Such national and international recognition has given local business groups like GTEC something to crow about. GTEC was created in 1989 to provide leadership in the area's development, particularly the seven high-tech clusters, under the Greater Tucson Strategic Partnership for Economic Development, which is set up to bring business, government and education institutions together to promote the area as a business center.

An estimated 18,000 new people made Tucson their home in 1998, and close to 21,000 came in 1999, making Tucson the 11th most rapidly growing area ranked among cities with 750,000 jobs. The state ranked fifth in the top five fastest growing states in the nation in terms of job growth. In fact, Pima County led the nation in job growth through the first half of 2000 and is expected to outpace Phoenix this year, according to a report from Arizona State University's Bank One Economic Outlook Center. Today, unemployment is down to 2.7 percent (nationally, 4 percent is considered full employment), but both local and national economists are reluctant to put a timeline on Tucson's current growth cycle, according to the Tucson Metropolitan Chamber of Commerce.

FOR THE OPTICS CLUSTER, which is on an up-spin, the problem will continue to be skilled workers. The high-paying ($20-$30 per hour) positions in the optics industry are not easily filled by the local intellectual pool. Even the University of Arizona's nationally renowned Optical Sciences Center can't pump out graduates fast enough to fill the local positions. "UA has probably produced only a few hundred engineers, so the engineers for these new jobs have to come from somewhere (else)," notes UA forecaster Vest.

When faculty and staff approached the University of Arizona in 1964 with the idea to develop optics research, it's doubtful anyone could have known that the science would branch out into the areas of telecommunications, health care, energy, national defense and manufacturing. At the time, scientists from the Advanced Research Projects Agency were looking at the Optical Sciences Center as a way to support the Steward Observatory and Kitt Peak National Observatory. When a funding crisis arose at the UA in 1967, the Air Force stepped in with a five-year contract and the University of Arizona Foundation agreed to build the Optical Sciences Center as collaboration between academia, government and industry.

In January 1999, James Wyant took over as the center's fifth director. Wyant, who has been an optical sciences professor since 1974 and helped develop WYKO Corporation (now a division of Veeco Instruments), says the program currently has 165 graduate students, with another 70 enrolled as undergraduates. But funding hasn't kept pace with the center's enrollment or reputation, according to insiders. While the UA is credited with spawning the optics industry in Tucson, one of the problems is that the UA's per-student budget is 20 percent lower than the national average and the state doesn't seem to see the advantage of increased funding.

The search for qualified high-tech workers has become a nationwide epidemic culminating in the federal government recently authorizing an additional 80,000 H1B work visas (in addition to the estimated 115,000 granted each year) to encourage more overseas workers to enter the country to fill the engineering positions. Nationwide, the high-tech industry clamors for some 300,000 overseas workers per year. According to GTEC's John Grabo, 100,000 jobs currently go unfilled in Silicon Valley.

"We simply aren't graduating enough engineers in the U.S. as a percentage of our overall degrees," he says. According to Grabo, in 1997 the U.S. awarded 1.1 million bachelor degrees, of which only 65,000 were in engineering. Compare that to China, which awarded only 500,000 degrees, of which 250,000 went to engineers.

Training has always been tagged as a floundering point of Arizona's economic development, and a reason many of the New Economy jobs are not going to local residents. "Absolutely," says GTEC's Grabo. "The job-training dollars as a grant from the state can put our local people in a better position to improve their skills for these new job opportunities."

UA economic forecaster Vest agrees: "What we can do, through workforce development and job training, is help bring the skills of the resident population up so they could hold those jobs and thereby improve the standard of living for the people who already live here."

To that end GTEC, under Gonzales, was instrumental in securing from the state a workforce development and job training funding increase from $3 million to $18 million. But compare that to Texas, which spends $108 million a year on job training.

"We asked for $30 million; we've been asking for $30 million for five years," says Gonzales. The state's original funding level was $3 million, creeping up to $5 million and then $6 million. In 1999 the state legislature tried to return the funding to $3 million, but the governor's office stepped in and secured $18 million per year for the next 10 years.

The other reason cited for improving education is to tempt those high-level engineers who are considering Tucson, but may have other offers. According to GTEC's Grabo, good local educational facilities and opportunities attract knowledge-based businesses, and the workers who follow those jobs place a high priority on the quality of their kids' education; they will certainly relocate out of the area if those facilities suck.

GTEC HAS RECRUITED MORE than 100 companies into the Tucson area in the last six years. About 25 percent of these are New Economy companies, with only five involved directly in optics. Still, according to the University of Arizona, those companies accounted for 32,000 jobs, almost $1 billion in wages, almost $3 billion in sales revenues and $32 million in city, county and state tax revenues.

The organization also played a role in changing legislation to improve the area's business climate, including $10 million in business tax cuts for 1999 and $30 million for 2000. This includes a 2- percent reduction in the corporate income tax rate and lower personal property taxes. Two years ago the state also eliminated the tax credit cap on research and development. During this fiscal year, the City of Tucson upped its funding of GTEC by 42 percent, or $220,000, while the county increased its funding by 37 percent, or $136,000.

GTEC's current $4 million capital campaign's goal is to attract 120 new companies with 30,000 jobs to greater Tucson. This is a substantial increase, especially over the last couple of years. But recruiting new companies, rather than helping local start-ups, may actually slow down Tucson's lurch into the dazzle of the 21st century's New Economy. To GTEC's credit, there seems to be less interest in the old-school idea of attracting big-box outlets than companies that export products and bring new money to the area.

Late in 1999, then-GTEC president Robert Gonzales was ostracized for a passive recruitment style that succeeded in luring only three companies to town. After seven years at the post, Gonzales resigned early last year and GTEC is rethinking its recruiting strategies. But unlike other cities in search of new firms, Tucson now refuses to play the game of offering companies economic incentives, which opponents decry as corporate welfare.

"Part of it is a philosophical thing," says Steve Jewett of the governor's office. "Once you get into a bidding war, where does it end? What we have found, generally speaking, is that corporations will use that if they think they can get money out of you, even if they were planning on being here anyway."

"It's controversial when you offer incentives," says UA college of business' Marshall Vest. "What this state--and Tucson in particular--has decided to do is not get into a bidding war to attract a firm, not to give up significant tax revenues or any other financial incentives that some other parts of the country use, but rather invest in the labor force through job training."

Dishing out corporate welfare also harms a city's basic maintenance. "If you give away too many concessions, then you can't take care of your own infrastructure because you're giving away the money that would normally go to building schools, and roads, and communications," says Vest.

Former GTEC president Gonzales says that companies like optics firms create wealth in a region, and that wealth is always followed by the big retailers, boosting the service economy as well. And above all, he says, because optics companies are export-based in their products and services, their high-growth potential will create that wealth the fastest.

Tucson was recognized in 1994 by the Council of Urban Economic Development for this strategy of infrastructure strengthening, rather than offering incentives and tax holidays to attract new companies. This tweaking of public policy includes everything from the recent elimination of export taxes to securing direct flights to Seattle and San Jose in support of Optics Valley's interaction with the silicon chip and semiconductor technology businesses in which optics plays a huge role. Securing those direct flights is a big perk for high-tech companies considering relocating here, as well as start-up companies whose main market will undoubtedly be the Silicon Valley.

But it's nurturing the start-ups that's falling far short of what took place in the early days of Silicon Valley, and continues there today thanks to a high level of available venture capital. During the second quarter of 2000, Silicon Valley received over $6 billion in investment dollars, while the entire Southwest received only $336 million. Of the $19.5 billion in venture capital invested nationwide, 95 percent was in technology-based companies.

With the Southwest's dismal investment showing, one would think Tucson's Optics Valley would be screaming for the area's economic development elite to lure more venture capitalists to the area to help home-grown companies. Robert Gonzales, who now consults optics start-up companies, says the strategy should not be "to attract a Microsoft and move their headquarters from Seattle to Tucson, but to create our own Microsoft companies that grow very big, and Tucson becomes their headquarters."

WITH THE WEALTH OF breakthroughs coming out of the University of Arizona in optical sciences, you would think firms would be formed every week by enthusiastic faculty and staff. And because the optics center is aggressively recruiting the best-of-the-best students, the brain power there is pretty intense. But getting at that technology isn't made easy by the university administration; critics charge that the university's policy on technology transfer from laboratory to business is archaic and slow.

GTEC's Grabo says the system needs to change so it promotes growing our own technology locally, rather than having to import it: "They need to create an incentive to move ideas into commercial application, and one way you do that is to make sure you don't have an obstacle-ridden system that makes the movement of that technology prohibitive." Grabo says that streaming the university's transfer of ideas into the business community would ultimately create new business ventures. And those kinds of jobs and those kinds of companies generally stay where they were born.

While the area's optics industry has seen an 18.3-percent rise in employment during the past year, there has been a decline in start-up companies during the past five years--an eternity in the high-tech New Economy. To those close to the Optics Valley issue, the need to attract more venture capital, increase education funding and get the UA to lighten up with its technology transfer is all too clear if the Old Pueblo doesn't want to get kicked in its crown jewel. As fast as the industry is moving, anything done now could be too little, too late. Still, there are some hopeful signs.

While the Legislature continues to underfund education and job skill development, the local attempt to pick up the slack in technology-based education is being led by the newly formed Southern Arizona Institute of Advanced Technology, an outgrowth of Pima County's "High Tech, High Wage" program. The institute, using instructors from Pima Community College and local high-tech companies, teaches the math and science skills necessary to land even the basic, entry-level New Economy jobs.

More customized training should ensure that the industry clusters have a steady, local supply of skilled workers. But again, the enemy is time: The 17,000-square-foot institute isn't expected to be up to full capacity for three years, an eternity in the New Economy.

Mayor Bob Walkup, Pima County Board of Supervisors chair Sharon Bronson and University of Arizona president Peter Likins have formed a high-level committee to guide Tucson into the New Economy. Likins' involvement will, the high-tech clusters hope, usher in a new era of technology transfer from the UA. But considering the UA is ranked last among research universities that turn research into commercial products, time may run out before Tucson establishes true dominance in the optics industry.

GTEC's John Grabo is cautious about Tucson's future as an optics nerve center. "Companies are going to go where the human resources and ideas are, and right now that's Tucson as far as optics are concerned," he says. "But if we don't look to advance ourselves as a community and state--and other states do--then it should be of no surprise to anyone in 10 years when Business Week dubs someone else 'Optics Valley,' because we'll have no one to blame but ourselves."