Why are there Big Layoffs in the IT Sector?

Layoffs In Big Tech Companies

Himanshu V was overjoyed to receive a job offer from Meta. He had to leave India and move to Canada in order to join Meta. The thrill, though, was short-lived because he was laid off from Meta after just two days. He was one of more than 11,000 individuals let go amid the Meta’s biggest round of layoffs. It is also anticipated that many other major tech businesses will do the same. You might be wondering why all of this is happening now. This blog post throws light on these recent mass layoffs. Read on.

What Actually Happened? 

Mark Zuckerberg in his statement announcing the firing of over 11,000 employees at Meta had to say this:

At the start of Covid, the world rapidly moved online and the surge of e-commerce led to outsized revenue growth. Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I made the decision to significantly increase our investments. Unfortunately, this did not play out the way I expected. 

Mark Zukerberg in his message to Meta Employees

This isn’t just Meta’s tale, either. All the tech behemoths share this. It was initiated by Twitter, under Elon Musk’s leadership, laying off 7500 workers. Meta then fired 11,000 people, while Microsoft fired 1,000. The reason for these widespread layoffs was that everyone thought the pandemic-induced digital push would never end. Once reality set in, the anticipations appeared to crumble. Lockdowns were implemented in early 2020 to reduce human movement after the Covid-19 outbreak hit the world. This led to a large number of people sitting at home and using digital modes to avail of various services and consume entertainment online. This has created new avenues for companies to tap into the digital universe and increase their user base. Think of Zoom, the company that most mattered to almost all of us during the pandemic. We used Zoom for meetings, school classes for our children, casual meetups, and whatnot! Zoom was a kind of elixir for many during the pandemic. There were even some movies that were entirely made using Zoom or similar tools. That was the popularity that Zoom got during the peak pandemic period of 2020 and to an extent 2021. Zoom’s popularity is also reflected in its share price peaking at $559 in October 2020. Cometh 2022, cometh the devil! Alas! Zoom is now trading at the level of $88 as I write this.

Think of Netflix. Netflix offered a few weeks of free content during lockdowns to all users worldwide to increase its user base. Netflix was successful and people loved the stock. As the demand for Netflix shares hit the roof, the share price surged to $682 in October 2021 and is now trading around $290 levels. In 2022, Netflix lost more than a million subscribers for the first time. Netflix is now rolling out ad-supported models to make up for lost revenue. 

The Case of Meta

To meet the demand for its services, Meta increased recruiting in 2020 and 2021, spurred by the global push toward digital technology. In 2022, though, it seemed like a bad idea. Online advertising is a significant source of revenue for Meta. Companies decreased their investment in digital advertising as the world almost fully emerged from lockdown in 2022. Apple’s new privacy settings meant that Facebook could not track users and, as a result, there were no contextual adverts on iPhones, which added insult to injury. All of this culminated in Mark Zukerberg having to make the most significant decision in his 18-year history of Meta. one that resulted in the mass layoff of 13% of the workforce.

Meta Share Price Tumbled More Than 70%

The Case of Twitter

The Twitter layoff is different in the sense that it was the desperate effort by the CEO to make up for the debt taken to finance the deal. Elon Musk paid a whopping $44 billion to seal the Twitter deal. Since it involved a high valuation of Twitter, even the world’s richest person had to tap into debt to finance the buyout. He even pledged/sold his Tesla shares worth $15.5 billion to bring in cash for the deal. After all these efforts, he has to find ways to make profits out of Twitter. Else, the debt will eventually take over him and his company. In order to make Twitter more profitable, Musk started offering an $8 subscription model for Twitter’s blue tick mark. On the cost-cutting side, Musk fired over 7,500 employees. All this generated negative buzz for Twitter. Also, the initial feedback regarding the $8 Twitter Blue subscription was very bad, to say the least. 

The Case of Others

Apart from Twitter & Meta, Microsoft too laid off as many as 1000 people from its workforce. Amazon will follow the suit soon, experts believe. The massive layoffs are not just restricted to the big tech companies. Even banking and finance companies like Goldman Sachs, Morgan Stanley, and Citi Bank are currently in the process of reducing their headcount. Intel is also doing the same, as per reports. Though not restricted to IT companies, gloomy weather is clearly dominant in tech companies. Why is it so, what happened in 2022 that drastically changed the dynamics of working of these companies?

The 2022 Recession Fears

Covid-19 was an extraordinary situation. Situations like these needed special efforts from countries across the globe to sail through safely. In response to the pandemic, many countries including the United States started following the easy money policy. This means that the countries started printing more money and reduced the benchmark interest rates. This led to people easily accessing the money which in turn drives the economy of a nation. Everyone thought this was the right thing to do at that time. Putting more money in the hands of people means risking the chances of inflation. Sure it did. But many central banks thought it was just transitionary and one that can be handled easily. This assumption proved costly as the pandemic led to supply-side issues leading to increased prices of commodities. This in turn led to hiked raw material prices for companies and dented their profit margins. The effect was inflation at levels that were never seen before. The west especially the US and the European Union fell to this. Naturally, central banks like the US Federal Reserve had to hike interest rates in order to bring the inflation levels to comfortable levels. 

The easy money that was issued during the Covid-19 pandemic meant that the companies could easily access money for their expansion. The startup boom that India witnessed in 2021 was the highest that the nation had seen. The easy money coming from the FIIs and Venture Capitalists explains this. However, as interest rates rise and the Federal Reserve and other central banks rise interest rates, the fears of recession crept in. The world saw what happened in the 2008-2009 recession. In order to prepare for the worst, the companies started reducing costs. Hence the layoffs. 

Implications for India

India is comparatively better placed than most western countries in 2022 to face the possible recession. However, truth be told: “when America sneezes, the world catches a cold“. When Twitter laid off its employees globally, 90% of Twitter India’s staff were laid off as well. When Meta fired people, many employees from India and in India were affected as well. Indian startup companies that mushroomed during the Covid-19 period started laying off their employees. The layoffs in the US companies send a signal to the Indian companies and startups that recession is possibly coming sooner or later. Alerted by the trends of Moonlighting, and fake experience candidates, Indian tech companies started firing their employees as well. Accenture and Cognizant recently fired employees who failed background checks. Infosys and Wipro fired employees who are following moonlighting. Start-ups like Byjus, Ola, Blinkit, Unacademy, and Vedantu to name a few, have started firing their employees. During higher interest rate regimes in the US, investors flock to the US and invest in safe instruments like bonds because they get better returns with less risk. This is the reason why India saw a huge withdrawal of money by FIIs till July 2022. This makes things difficult for startups in emerging world nations like India as Venture Capitalists dry up. Hence funding for Startups dries up. For other tech companies as most of their clients are from the west, a slowdown means a lower number of projects and lower revenues. As the west stares at a slowdown, Indian IT companies prepare to tread into troubled waters. 

What Does the Future Hold?

Well, If the US was to predict the 2008 financial crisis, would the country have allowed to let that to happen? Such recessions or slowdowns can be predicted but no one knows exactly like when they come and go. In fact, we might be in the middle of a recessionary cycle but we wouldn’t know it. As the economic data always comes with a delay, there is no way anyone can exactly predict the ingress and egress. But one thing clearly visible is the uncertainty in the IT Sector in India. Many experts believe this is a course correction for IT firms that spent extensively during Covild-19 led digital growth. However, the reduced hiring spree by IT companies and massive layoffs create an uncomfortable and uncertain environment in IT companies. India, with its huge talented workforce, will most likely sail through the rough waters safely. The ride, however, may be bumpier than we anticipate. Let’s hope for the best.