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Following the widely publicised layoff of approximately 7,500 employees at Twitter, Meta also laid off more than 11,000 workers or more than 12.5% of the overall workforce. The FAANG companies—Meta (previously Facebook), Apple, Amazon, Netflix, and Google—are all product-based companies and are the ones most affected by the layoffs. It is important to keep in mind that while companies that provide services such as the WITCH (Wipro, Infosys, TCS, and HCL Tech) are regularly hiring, employees of product-based tech companies around the world are staring death in the face in the form of layoffs.
Indian product-based businesses like Byju’s, Cars24, Meesho, Ola, and Udaan are also impacted by the winter of layoffs, in addition to American product-based IT corporations. According to accounts, Byju laid off nearly 2,500 workers. Overall, product-based IT companies have trouble either selling their goods or keeping up with their product development in the post-COVID world.
While Apple has witnessed a drop in customer spending, Meta can’t justify its investment in Mark Zuckerberg’s grandiose initiative, ‘Metaverse’. While Netflix sees a decline in overall content consumers as a result of the growing competition abroad, Amazon is suffering losses as a result of rising inflation. Similar circumstances apply to Indian businesses; according to media sources, approximately 15,700 employees will be laid off solely by Indian product-based startups in 2022.
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What happened at FAANG?
Since tech companies are typically insulated from the common issues of the world, layoffs in the industry are a sign of worldwide recession. For instance, during the COVID-19 epidemic, when the majority of the world’s businesses were failing, the IT industry was earning significant profits. But in 2022, the majority of the IT companies across the globe are laying off workers in an effort to cut costs. This practice is occurring on such a large scale that a web portal was developed to assist the affected.
In light of the development of such a website dedicated to tech layoffs, one is unable to ignore that the winter has arrived for techies on a global scale. But, it may still be worth deliberating about what happened to the FAANG companies.
The whole fiasco started when the US central bank began increasing the federal fund rate to tackle the inflation in the country. In May 2022, the federal fund rate started the streak of increasing its interest rate that continued as recently as November.
The federal fund rate is the interest rate that banks charge other banks for lending them money on an overnight basis—typically, extra cash that is in their reserve balances.
If interest rates are not kept in check, they will soon surpass the levels seen during the dotcom bubble and the infamous 2008 recession. And as interest rates rise, borrowing costs for businesses rise concurrently—bringing about the demise of stocks that heavily rely on capital.
Since most tech companies are either unprofitable or have minuscule profits, they were unable to handle the increase in the federal fund rate. The pandemic-era interest rate cuts intended to stimulate the flow of funds into the market while also encouraging tech businesses to invest more—which ultimately turned out to be a bad move now that interest rates are at an all-time high.
How is WITCH more secure?
There is a widely-held belief that when US stock prices decline, it has an impact on other markets. There is no doubt that Indian tech companies did experience stock losses, but the stock of one of the country’s major software firms, Tata Consultancy Services, only fell 5.4% in a year compared to the 65.8% decline for Meta.
Additionally, the WITCH companies are hiring more people than ever. Till September 2022, TCS hired over 30,000 people, and this year alone, they plan to hire an additional 11~12,000 freshers. The WITCH companies recruited nearly 105,000 new professionals in the first half of 2022.
The rationale for Indian tech businesses’ continued hiring and lower rate of layoffs is their service-based business strategy. The majority of Indian IT firms offer consulting and other services to businesses abroad; as a result, the US accounts for 40–78% of their overall income, with TCS, Infosys, Wipro, HCL Technologies, and Tech Mahindra having greater than 50% exposure. About 55% of the global market share for IT services is held by Indian companies.
These companies are also the least affected by recession as a result of this strategy. Indian tech enterprises did not experience the 2008 recession as severely as other global corporations did. Since every nation is currently spending extensively on IT services, Indian IT companies are relatively safe in the face of this slow and unstable market, according to Kodak Institutional Equities. The supply-chain and retail sectors are likely to be the most impacted by the impending global recession, not the IT or financial services sectors.
While FAANG companies are trying too hard to minimise the costs by implementing harsh cost-cutting measures such as laying off a significant portion of their workforces, it’d be interesting to see what direction Indian IT companies ultimately take to tackle the worsening economic situation.
The companies in the product segment discussed before will likely witness a decline in profit during the recession and may continue the trend of laying off employees and reducing the size of their workforces, but the segment driving the Indian tech ecosystem—the service providers—may not witness a concurrent change in the strategy of operations.