Over the past few months, the tech industry has experienced several waves of mass layoffs. This affects not just startups and small companies but some of the biggest companies in the tech industry.
Recently, Intel announced a significant layoff in the company’s workforce, continuing the trend affecting the tech industry lately.
Layoffs at Intel in 2023
It is still not sure how many jobs and what business units will be affected by the layoff at Intel, but sources informed Bloomberg that Intel might lay off thousands of employees as part of its cost-saving plans.
Tom Hardware, Intel’s spokesman, said that “Intel is working to accelerate its strategy while navigating a challenging macro-economic environment. We are focused on identifying cost reductions and efficiency gains through multiple initiatives, including some business and function-specific workforce reductions in areas across the company.“
Intel reported that the revenue was down 36%, while the gross margin decreased by 16,2% compared to the previous year’s first quarter due to the reduced demand for chips. The drop in Intel’s financial result did impact its stock price, as it is currently lower by 30% compared to the last year’s same date.
The cost-cutting measures did not happen unexpectedly. Intel already revealed in October last year that the intention is to reduce expenses by $3 billion in the current year and achieve an annual cost reduction of $10 billion by 2026. It is obvious that they prepared for the decrease in chip demand and were aware of the global economy and the sector’s changing landscape.
Tech companies’ layoffs
Taking one step back and observing the tech industries, this trend hit the whole industry. Employees’ number being laid off in 2023 is 168,243, according to Layoffs.fyi. Although it is only May, the tech industry’s layoffs number in 2023 already exceeded the total number of tech layoffs in 2022.
If we look at the companies, some of the major players in the industry already announced several rounds of layoffs.
But what factors influence the tech industry, and why are there many layoffs?
The 7 main reasons behind tech layoffs
There might be many reasons why a company decides to cut jobs. It can be a restructuring plan, expecting lower revenue growth, or just wanting to achieve efficiency gains like Intel. However, there are also the same economic conditions that affect all the tech companies.
High revenue expectations
Given the circumstances of the pandemic, many people were forced to move online for work, shopping, and entertainment. Based on Statista’s data on the yearly revenue growth of the biggest tech companies in 2022, there were quite impressive figures.
Alphabet had revenue growth of 41% compared to the last year, while Twitter and Meta accomplished a 37% growth. These tech giants, even startups, and smaller companies expected to continue this growth rate and prepared their projections based on this assumption.
“At the outset of the pandemic in 2020, the world rotated overnight towards e-commerce. We witnessed significantly higher growth rates throughout 2020 and 2021 than before. As an organization, we transitioned into a new operating mode, and both our revenue and payment volume have since grown more than 3x. The world is now shifting again.” (Stripe CEO Patrick Collison)
Significant revenue growth was a general trend during this time, but it did not go well for every tech company. In the case of Intel, there were signs of slowing down in 2022 as its revenue dropped from $79.02 billion to $63.05 billion.
Excessive hiring during the pandemic
The latest job cuts in the tech industry are partly the result of the excessive hiring during and right after the pandemic. As the demand for online services experienced a considerable boost, tech companies hired new employees to keep up with the competition and increasing demand aggressively.
Many people predicted this would be a long-term growth that would continue even after the pandemic. However, there was a shift in working and living methods after the pandemic, which negatively affected many tech companies’ financial results.
“As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that.” (Salesforce)
Due to the reduced projections for revenue and growth, many tech companies are now undergoing major layoffs to reduce costs.
Artificial intelligence priority
While startups and small tech companies may struggle to acquire new rounds of investment or turn it profitable to keep their employees’ jobs, some of the big companies in the tech market dedicated their resources to AI development.
For instance, Alphabet announced laying off 6% of its global workforce on January 21 to allocate workforce and capital to develop its AI. Microsoft also laid off an entire team of 10,000 people dedicated to the AI’s ethical, responsible, and sustainable outcomes and simultaneously announced that it plans to invest $10 billion in OpenAI.
Related Post: Microsoft Layoff: Understanding The Reasons
While certain tech companies choose to develop their own AI capabilities, others opt to acquire promising AI startups. While the most reputable AI startups reached Series A, B, or C funding, most are in their early phases, seeking seed or pre-seed funding.
Higher interest rate
Federal Reserve raised interest rates in 2022 to discourage individuals and businesses from spending too much. Higher interest rates can directly impact a significant number of startups and other companies that rely on funding from venture capitalists.
As the cost of borrowing increases, these investors may become more cautious about where they put their money. This can make it more difficult for startups to secure the funding to grow and expand.
Changed investor expectations and pressure
The investors changed how they evaluate companies and what their priorities are. When there is a market boom and the revenue growth is fast, investors care less about profit.
However, the economic conditions are changed, and investors are more cautious and tend to focus on profitability rather than aggressively expanding and investing in growth. Also, investors typically expect companies to take steps to maintain or improve profitability, including cost reductions.
This affects all the tech companies, but it has a powerful influence on startups and smaller tech companies. Read more how the changed economic conditions affect startup funding in 2023.
Despite many layoffs nowadays, there are mixed opinions on its efficiency, and there is no solid evidence to support that layoffs can help improve profitability.
Companies often react with layoffs to revenue problems rather than cost problems. But having several rounds of layoffs will not increase revenue but rather decrease it in the long term.
Before deciding on mass layoffs at the top tech companies, they regularly calculate the decision’s influence on the stock prices.
According to the data analyzed by Bloomberg, the Big US tech companies, including Alphabet Inc. and Salesforce Inc., experienced, on average, a 5.6% increase in their stock price after one month of announcing the layoffs.
It is essential to remember that many factors, such as interest rates, geopolitical events, shifts in consumer behavior, and various other elements, influence stock prices. These factors can all play a significant role in determining the price of a specific company on the stock market, but it seems that notable layoffs impact the prices.
Overall, the question is whether the investors will view it as a positive or negative move, which can depend on several factors, including the reason for the layoffs, the size of the layoff, and the purpose of the layoff.
Silicon Valley Bank collapse
Before its collapse, Silicon Valley Bank played a significant role in funding tech startup companies. The vast majority of startups were not well-prepared for Silicon Valley Bank’s collapse in May 2023.
Based on a survey, 59% of founders think the fall of Silicon Valley Bank collapse will make an already challenging fundraising environment even tougher. Startups running out of cash and needing help managing to acquire capital from existing investors might face severe layoffs.
The tech layoffs continue
Tech companies are currently experiencing a massive wave of layoffs, affecting not only startups and small companies but also some of the big companies in the industry.
The general reasons behind this trend include excessive hiring during the pandemic, changing investor expectations and pressures, and shifting priorities toward AI development.
Many of the biggest tech companies’ CEOs have decided that about 6% of the workforce is a magic number when it comes to layoffs. As most of the tech companies already reached this number, the intensity of the layoffs may be slower, but it will stay with us for a while.