New Tech Bubble in Making

Big tech companies across the world are sacking employees. Apple has sacked not just workers but also laid off around 100 contract-based recruiters this months to slow down on hiring and spending.

Chinese global tech giant Tencent fired 5,500 employees in April-June. Netflix has been dismissing 150-300 employees every month. Microsoft laid off 1,800 employees in July.

In the backdrop of the controversy over a possible acquisition by Elon Musk, Twitter fired 30% staff of its talent acquisition team in July. Meta (formerly Facebook) also started laying off in June.

The world’s No. 2 tech giant Google warned its employees this months that “there will be blood on the streets”, meaning there would be large-scale retrenchment if they don’t work more.

Declining profit margins has been cited as the reason for the lay-offs in almost all the cases.

Tech majors are not alone in bidding early farewell to their employees. The world’s biggest electric vehicles manufacturer Tesla has been laying off since July. Next month, Ford will retrench around 2,000 regular workers and 1,000 contractual workers in the US and Canada. This is besides recently closing down two plants entirely in Tamil Nadu and Gujarat. The total job losses would work out to around 8,000 this year.

Even e-commerce majors like Walmart and Shopify are also trimming down their workforce. Declining sales is supposed to be the reason for the sackings.

Rating agency PricewaterhouseCoopers (PwC) recently conducted a survey among 700 top executives of US companies and half of them were planning to cut down the strength of their workforce this year due to business downturn.

Paradoxically enough, the PwC survey found a seemingly contradictory trend as well. Telecom, media and many tech companies are also facing an acute talent shortage. They are investing more in automation to cope with the skills shortage. The healthcare industry is facing the most severe talent shortage, as per the survey, and is luring back people who recently left with more attractive pay packets.

This is not the only paradox in the global labour market. The number of workers who are quitting is much more than the number being laid off.

Unbelievably high rate of attrition and quitting

According to the US Bureau of Labour Statistics, 3.9 million workers quit in April 2021 during the peak of the second wave of the pandemic—the highest quitting rate recorded in the last 30 years. This figure included 2.8 million non-farm workers. Later, it became clear that this was not entirely due to the pandemic and the lockdowns.

The quitting rate among US non-farm workers further increased in the subsequent months in which the economy was supposedly recovering. The performance of companies is registering impressive recovery post-pandemic but employees are increasingly feeling burned out. This new crisis is acquiring pandemic proportions. It was not limited to the US. The trend is global.

Rating agency Deloitte conducts an annual survey among Generation Z (those born in 1995 or later) and Millennials (born between 1981 and 1995) working for corporate houses. The findings of the 11th annual survey, released in May, are quite revealing. In 2021, 46% of Gen Zs and 45% of the Millennials felt burned out due to the intensity of the demands of their working environments.

No wonder, as per the survey, 40% of the Gen Zs and 24% of the Millennials would like to quit within two years. This means the younger lot is more disenchanted with work in the global corporate world.

In India too, the media reported on July 8 that 1.2 lakh out of 6 lakh employees of India’s largest private employer Tata Consultancy Services (TCS) had quit in the previous 365 days. Such an attrition rate of around 20% is common among other IT majors like Infosys and Wipro as well.

Not all of them were after better pay packets. Some employees who switched jobs said that they quit earlier jobs because they found the work atmosphere too stifling. Workload and workplace bullying made it difficult to continue. Sadly, in their new jobs as well, they face similar problems, many of them admitted—this is because every company is in a mad race to make up for the pandemic loss and exhorts employees to work more.

Manifestation of an oncoming deeper crisis

Whether employees are being laid off or they forced to quit on their own, these are symptoms of a deeper crisis of a slowdown slowly engulfing the global tech world. Even as the tech industry was leading the recovery of the rest of the industry from the pandemic, it has started showing signs of the slowdown.

The recovery was impressive for many tech companies till the last quarter of FY22 but the first quarter results of FY23 show a decline in performance. While some are hoping that the slowdown would be temporary and growth would rebound, others in the industry have concluded that that the recovery was shallow and they are heading for a major crisis.

Many rating agencies have forecast that the vibrant US economy is heading for a recession. Europe and China are also showing signs of stagnation. The war in Ukraine has triggered high inflation globally, which is expected to have a very negative impact on growth soon and propel major economies into a deep recession. Naturally, early trends of that impending crisis are finding their reflection on the labour conditions in the tech sector as well.

Other manifestations of the crisis

Lay-offs are not the only manifestation. Many tech companies are cutting bonuses for new recruits and salaries of existing employees. Senior employees with higher pay packets are being packed off and new employees with matching skills are being recruited at lesser pay. Junior employees are being trained with more advanced skills in the company itself.

Many industries are being closed down as if the ease of closure is the key aspect of the ease of doing business. Hardly within a couple of years after closing its plant in Sriperumpudur, Chennai, Nokia is considering setting up its new 5G smartphone production facility in India. After closing down its fossil fuel-based automobile plants in India, Ford was toying with the idea of launching a plant for production of e-vehicles in the country. Even before the new labour codes came into force, hire-and-fire had already become the norm.

In short, the global tech industry is in a turmoil. The sharp fluctuations of the shares of tech companies on the NASDAQ and similar gyrations of their shares on the Sensex and the Nifty reflect this turbulence.

By mid-July, TCS, Infosys, Wipro and Tech Mahindra stocks were available at 30%-50% discount and Nifty IT index fell 32% since its 52-week high. The turbulence, in all probability, indicates a tech bubble and a phase of slowdown in the tech business cycle. The tech business cycle in India and elsewhere might be autonomous from the overall business cycle for a while. But ultimately, it will blend with the overall cycle and be governed by that.

In that sense, these layoffs and industry closures probably show that the tech industry is the harbinger of a full-fledged recession in the global economy ahead.

Besides job losses, there are some other factors too which are driving this turmoil.

Changing nature of the work itself

The IT industry is poised for a major labour reshuffle and displacement thanks to the prospects of a very high level of automation in the next few years due to artificial intelligence and cloud computing. Not just the IT industry, even the conventional manufacturing cannot escape digitalisation for long. Supply chains and component units need to change as per the requirement of the final assembly unit and export requirement.

Globalised production

Digitalisation comes with its share of new headaches. Often, some SMEs have to spend more than 50% of their total tech spending on cybersecurity alone. In many cases, this is a forced situation caused by the requirement of higher-end procuring companies in the supply chain. When the production itself gets internationalised, it is quite natural that there would be a pressure for parity in technology. This increases costs and competition from those companies which are financially well endowed.

Start-ups phenomenon

Economist Joseph Schumpeter’s theory of innovation boils down in practice to putting a premium on subversion! It is as if capitalism’s regeneration and sustenance are possible only through partial self-destruction. This is the premise on which tech start-ups are being welcomed and promoted. The dramatic rise of start-ups, by itself, was a product of the crisis of capitalism and, in turn, it further intensifies the crisis in other ways. In the process, they themselves land into a crisis.

When Prime Minister Narendra Modi launched the Startup India initiative, the target was to have 10,000 start-ups. Recently, he proudly declared that there are 74,000 functioning start-ups in the country. But Modi did not share with the nation the dark fact that these 74,000 start-ups have been built over the carcasses of almost half that number of start-ups which folded up—20,000 start-ups have closed down since the pandemic and 12,000 among them this year alone.

Moreover, venture capital funds, angel investors and other financiers are grabbing a good part of the earnings of the start-ups as investors/lenders and the promoters could retain only a small fraction of their earnings. An online e-commerce start-up might create 10 jobs but in the process, it might lead to the closure of 100 traditional local stores. It is still not clear whether start-ups have contributed to the net growth of the economy or net unemployment.

Inflation and declining consumer spending

Inflation has crossed double digits in the US and is fast approaching that mark in several other major economies. Russia’s war in Ukraine has contributed to this situation considerably. Central banks in all major economies are hiking interest rates, which would inevitably increase the cost of investment funds and hence hurt growth.

Cutbacks in consumer spending would also bring down the aggregate demand. Thus, inflation is a double whammy for the economy. The business cycle in many economies are reaching the stage when increased consumer spending cannot push up GDP growth as before. And huge growth in capital investment by the state too fails to yield growth dividends as before.

Pumping more money into public infrastructure projects—called pump-priming the economy—no longer sustains overall growth. Such a scenario is one of classic recession. The global tech sector might well be experiencing the beginning of one.

The writer is a commentator. The views are personal