Tech Companies May Face Major Adjustment – Analysis
By He Jun
According to a March 14 report from the Business Insider, Meta CEO Mark Zuckerberg announced plans to lay off tens of thousands of employees in the second round of job cuts. Zuckerberg attributed the layoffs to difficult economic conditions, stating that “higher interest rates lead to the economy running leaner, more geopolitical instability leads to more volatility, and increased regulation leads to slower growth and increased costs of innovation”. He also stated that the company’s cost-cutting actions will continue for many years. Zuckerberg also announced that the company will cancel 5,000 unfilled positions and dismiss some members of the recruiting team. He believes that the surviving employees will be more efficient.
In November last year, Meta had already laid off 11,000 employees. In fact, recently, many American tech giants have announced similar layoffs, including companies such as Amazon, Google, and Microsoft. Google announced layoffs of 12,000 people in January of this year, while it was 10,000 people for Microsoft in the same month.
Since the second half of last year, American tech firms have carried out large-scale layoffs, and executives attribute them to capital market adjustments, as well as to the Federal Reserve’s tightening monetary policy. However, researchers at ANBOUND believe that the issue is more complicated than this. It is worth noting that Meta’s second wave of large-scale layoffs occurred around the same time as the collapse of Silicon Valley Bank (SVB), which specializes in serving tech companies. From a corporate decision-making perspective, it may be independent, but the two events actually have an internal logic. ANBOUND’s researchers are of the opinion that behind the large-scale layoffs of these tech companies, especially internet technology companies, and the collapse of SVB, the core problem is that their innovation ability has dried up. These companies no longer produce innovations, and their business models have become outmoded and less appealing to the capital market.
During the past two decades of the internet and digital age, tech companies have experienced a golden period of growth. An active “tech-finance” ecosystem has formed, consisting of tech firms, venture capitals, investment banks, investment-oriented commercial banks like SVB, and capital markets. Capital has played a significant driving role in this process. The substantial growth of tech companies over the past few decades has been primarily attributed to the foundation of low-interest rates and excess liquidity. After the first internet bubble burst in the early 2000s, the internet industry emerged even more prosperous and vibrant, driven by excess capital. Even the global financial crisis in 2008 failed to contain the wave of capital frenzy. Instead, to respond to the crisis, central banks worldwide increased liquidity, implemented extremely low, zero, or even negative interest rates policies, and covered up the previous bubble burst with a more extensive capital bubble. This logic among central banks throughout the world has been the same for the past 14 years since the financial crisis.
The flood of excess capital has led to a scenario where technology companies can maintain long-term prosperity in the capital market, even in the absence of any significant technological breakthroughs or revolutions in industrial technology applications. This has resulted in the emergence of successful technology companies like FANNG (i.e., Alphabet, Amazon, Apple, Meta, and Microsoft), the star performers in the U.S. stock market, and Tesla, which rose to prominence later, owing to the current wave of excess capital.
However, once the Fed tightens monetary policy due to high inflation and the resulting interest rate hike process gradually raises the cost of funds, the era of easy access to low-cost funds comes to an end. This has significant consequences for the U.S. economy, including the risk of recession, as well as a fundamental shift in the foundation and rules that underpin the tech-finance ecosystem. In this new environment, the previous growth and success of tech companies are being threatened, resulting in plummeting stock prices, declining asset valuations, and decreased liquidity. As funds dry up, tech companies pass along the negative effects to banks that rely on such an ecosystem, leading to the collapse of certain institutions like SVB.
What researchers at ANBOUND would like to point out is that, although there is always technological progress in the long term, considering the speed of innovation and its impact on the economy and society, technological development and innovation are cyclical. Following major technological breakthroughs and their industrial applications, the technology industry enters a period of stagnation, resulting in a “mediocre period” lacking significant innovation. The history of technological progress reveals that the economic growth of humanity over the last 250 years can be attributed to three industrial revolutions. The first industrial revolution occurred between the 1760s and 1840s, characterized by the advent of steam power, the mechanization of the textile industry, and revolutionizing of the metallurgical industry. The second industrial revolution spanned from the 1860s until before World War II, marked by the invention and application of electricity and internal combustion engines, as well as the emergence of new industries such as petroleum chemistry and household appliances. The third industrial revolution, which began around the 1950s and continues to this day, introduced computers and transformed the information and communication industry.
In 1925, Soviet economist Nikolai Kondratiev proposed the theory known as the Kondratiev waves, which suggests that there is a long-term fluctuation of 45-60 years in Western capitalist economies. Kondratiev speculated that the existence of long economic waves was related to waves of technological revolution. This theory divides the scientific and technological system into three levels: scientific principles, technological principles, and applied technology. The development of scientific principles determines the development of technological principles, and the development of technological principles cannot surpass the limits determined by scientific principles. The development of technological principles determines the development of applied technology, while the development of applied technology is also limited by technological principles. This cyclical theory attempts to reveal the relationship between the periodicity of technological development and the cycle of productivity. According to this theory, the cycle of productivity is determined by the cycle of scientific and technological development.
Moving from history and theoretical analysis to present reality, the current state of innovation fatigue among tech companies can be viewed as a gradual decline following the transformative impact of the large-scale applications of information technology. At the micro level, various prominent technology companies, whether operating in the virtual economy like Google, Meta, and Amazon, or in physical industries like Apple and Tesla, display varying degrees of fatigue in innovation. Indeed, many of them are simply relying on their past achievements. When technological innovation enters cyclical low points, and tech firms experience exhaustion, alongside a contraction of excess capital, what will the combination of these three factors bring? This is likely to result in a significant cyclical adjustment for tech companies, initially seen in the capital market, yet this may extend to other markets as well. If the world were to face major disruptions such as a larger-scale war or a cold war-style confrontation and nation-bloc isolation, this could escalate into a significant shock to the global capital market.
Final analysis conclusion:
The significant layoffs in tech companies and the bankruptcy of Silicon Valley Bank are important warning signals. As things stand, global tech firms are now facing a major cyclical adjustment.
He Jun is a researcher at ANBOUND