Bay Area's future in green tech, Mendonca Says

October 5, 2008

In the past two weeks, the business world has endured bank failures, collapsing markets, congressional quagmires and multibillion-dollar bailouts.

What better time to sit down with someone like Lenny Mendonca, a longtime business leader in the Bay Area serving a two-year term as chairman of the Bay Area Council.

The council represents 275 of the largest employers in the region. Those companies' top executives are members of the group. From his vantage point atop that influential organization, Mendonca has a unique perspective on what's happening locally, as well as nationally.

It doesn't hurt that Mendonca's day job involves being a director at the San Francisco office of McKinsey & Co. Inc., one of the world's largest consulting firms. Add in the Half Moon Bay Brewing Co., of which he is owner and founder, and you get the picture of a man whose experience spreads from small business concerns to globalization strategy.

Here's an edited version of a conversation a group of Chronicle Business section staffers conducted with Lenny Mendonca last week.Q: These have been some of the most turbulent times we've ever seen in this country, from a financial and economic perspective. Tell us your view of the situation from the Bay Area Council's perspective. How is the regional economy faring in relation to the national crisis?

A: Obviously, given the turbulence on Wall Street and Washington, D.C., we're in a period of extreme volatility and uncertainty. No matter how it plays out, we're going to enter into an environment where credit is going to be more difficult to get, where you'll have returned to more traditional spreads, in terms of risk premium, where you will have an environment where businesses are going to be forced to be focused on real value delivery, not just benefiting from the winds of a strong economy and easy credit.

And I think you're going to have a period of uncertainty about how deep and long a downturn's going to be. The Bay Area has performed relatively well through this. To the extent that there's saving grace in the Bay Area, it's the fact that we have more so than most other parts of the country, a very substantial dependence on connections to Asia and a growing Chinese economy. This has been very good for the Bay Area because of our export position.

Q: You always hear about the Bay Area ties to the Pacific Rim. Give our readers some concrete examples of the Bay Area economy benefiting from a boost in the Chinese economy?

A: Sure. A lot of the technology companies in the valley benefit from the fact that their intellectual capital is being exported in ways that can help build businesses in China and support growth there.

For instance, the Bay Area Council is co-hosting a couple of events in Shanghai and Beijing in November that are really oriented toward trying to build the scientific and commercial connections between the regions, particularly focused on environmental technology.

The opportunity to help solve some of the world's substantial environmental and climate-related issues is a shared interest between the two countries and the two regions. And so there's a fair amount of interest in trying to help bring creative, technology-oriented solutions to help ensure that China continues to grow, but does so in a productive way in terms of their use of energy and the carbon-intensity of that growth.

And that's what I think is the most interesting intermediate and long-term connection. The Chinese economy needs to continue growing but they also need to do it in a way that uses less oil and has less carbon emitted as result. And the Bay Area, in particular, has technologies that could be very beneficial to the Chinese.

Q: So do you think there's a danger now that our economy's sliding, the Chinese economy could go with it? And could that hurt the Bay Area in the long run?

A: Well, I think there's no doubt that we're slowing down and that has an influence on Chinese growth. But the bulk of Chinese growth is Chinese domestic growth. It's hard to see how the Chinese economy won't continue to grow and at a much faster rate than the U.S. or the Bay Area's.

More than half of the growth in the world in the next decade under almost any scenario is going to come from developing markets. The U.S. is still going to be the largest aggregate growth, so the health of the U.S. economy matters a lot. But the growth in developing markets, particularly China and India, where the Bay Area has a close connections, is really, really important.

Q: You said that credit was going to be more difficult to get. At what point to do you start to see jobs being lost?

A: I think it is a concern. The U.S. economy in the last five years has had unusually low risk premiums and spreads on credit. We're now heading back to more normal times in terms of credit availability and spreads. The process is going from a highly leveraged environment to one that's not that way.

It can't help but to spill over into some elements of the real economy and jobs. We're already seeing it in anything that's closely related to the real estate markets and the lower end of the lending businesses.

How fast does it turn around? I really can't say. We're in an environment now where this is as much about business confidence in investing and consumer willingness to spend as anything else. And some of that willingness to spend is ability to spend. We've clearly lost substantial portions of home equity and wealth in general, which is going to be a challenge.

Q: New York investment banks took a huge hit in recent weeks. To what extent is that affecting San Francisco's banking community?

A: Because we are not through it yet, how it all plays out is not entirely clear. The Bay Area obviously is not as dependent on investment banking as New York. We're more dependent on retail banking, commercial banking and venture capital.

Q: Green technology is fairly young in Silicon Valley, and as a result, very reliant on capital. If credit is harder to get, what happens to that industry?

A: Well, obviously there's a tremendous amount of early stage and later stage capital going into green businesses these days.

Some of them will succeed and hopefully some of them will succeed really big because we need that technology to deal with climate change and other issues that work around energy. How they fund themselves, and what that market looks like, is really challenging right now. But good businesses - that have real, sustainable growth-creation potential - will be able to fund themselves in the long term.

This is really more of an equity and short-term risk problem than it is a fundamental shortage of capital.

Q: There's long been a perception of California not accommodating business. What's the reality?

A: The challenge facing California is that we've been living off of our legacy, not investing in the future, whether that's in our health care system, our education system and infrastructure more broadly. Transportation, in particular, has not been invested in at the level that we need to sustain a good business environment.

Q: The Bay Area Council is proposing a constitutional convention in California to reconsider how the state is governed. Isn't that a pretty radical idea?

A: The Bay Area Council has been exploring the possibility of convening a constitutional convention that would create an opportunity to explore a range of provisions that are in the constitution and put it back to the people. The council is exploring both the political and legal mechanisms about how that could happen.

Q: What are some of the things your group would like to change?

A: Some of the issues being explored are things like a two-year budget cycle rather than a one-year budget cycle. And open primary systems. Or ways to make (legislative) seats more nonpartisan, through a redistricting process. That is obviously part of Proposition 11, but there are other ways that that could be done.

We're interested in some sort of steady funding for infrastructure. And greater funding for education.

Q: One might argue the core issue in California is revenue. Would your group reconsider Proposition 13 (the statewide initiative that caps residential property tax)?

A: We haven't gotten to specifics to that degree. But you would have to discuss how things are funded - what's the right way to do it.

We're convening constitutional and political scholars to consider all the issues.

Q: Getting back to Bay Area economics, you mentioned a trip to Shanghai earlier. You folks are going in November with a group of local politicians and businesspeople. What's going to happen on this trip?

A: This is the second time there's been a delegation - a substantial one - that's gone to China from the Bay Area. And the Chinese delegation's come here a couple of times, as well. This November, there's two different events. One will be in Beijing that's more oriented around government and education. The event in Shanghai is more oriented around business. We hope to share what we know about building businesses and creating the right kind of connections between government, education, institutions, research institutions and other sources that help build new businesses.

Particularly, the discussion will be oriented around clean tech and environmental technology.

Q: Overall, how do you assess the health of Silicon Valley as we head into this era of uncertainty and globalization?

A: The valley, and the Bay Area as a whole, tends to look at problems and say, "How do we find solutions to them?"

I'm extremely optimistic about the possibilities that some of the solutions to the biggest problems facing the region and country are going come from the valley, whether that's clean tech or from social innovation and other advances. I'm terminally an optimist about things.

Lenny Mendonca
Title: Chairman of the Bay Area Council; director, McKinsey & Co.
Inc.
Age: 47
Board memberships: On the boards of the New America Foundation and Common Cause, trustee for the Committee for Economic Development, member of the advisory council for the Stanford Graduate School of Business. He serves on the boards of Children Now, Donors Choose and the California Business for Educational Excellence Foundation, and he is a member of the Alliance for the San Francisco Unified School District.

Education: He received his master's of business administration degree and certificate in public management from the Stanford Graduate School of Business. He holds a bachelor's degree, magna cum laude, in economics from Harvard College.

Family: Lenny lives with his wife and two daughters on the Half Moon Bay coast, where he is the founder and owner of the Half Moon Bay Brewing Co.