Job cuts and falling shares: how did it all go so wrong for the US tech sector? | Technology

Job cuts and falling shares: how did it all go so wrong for the US tech sector? | Technology

Amazon announced 18,000 job cuts, Apple’s share price fell below $2tn (£1.7tn) and there was more bad news from Tesla: it has been another tough week for big US tech firms.

But this has not been a one-off. The ongoing drama at Twitter since its takeover by Elon Musk in October has taken place against a backdrop of global economic uncertainty, retrenchment from aggressive expansion plans and China’s disruptive transition from Covid lockdowns to rocketing case numbers as restrictions ease.

In fact this week’s events have been a continuation of a downward trend for tech over the course of 2022, during which Tesla’s share price fell by 65%, Mark Zuckerberg’s Meta by 64%, Netflix by 51% and Apple by 27%. Here we look at some of the factors behind the sector’s woes.

Overexpansion during the pandemic

Amazon expanded planned job cuts this week from 10,000 to 18,000 as its chief executive admitted “we’ve hired rapidly over the last several years”. Andrew Jassy added that an “uncertain economy” was a key factor, as pandemic-related corporate growth meets a US and global economic slowdown.

In March 2020, Amazon’s global workforce was 628,000 but it surged to 1.5 million as consumer habits became even more online-oriented during the pandemic. The latest wave of cuts will be centred on its stores division – which covers online retail, warehousing and its physical outlets – and human resources.

Also this week, the business software firm Salesforce said it was laying off about 8,000 employees, or 10% of its workforce. Marc Benioff, its chief executive, said the company had overexpanded.

“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,” Benioff wrote to employees.

Mark Zuckerberg, the chief executive and founder of Facebook and Instagram’s parent company, Meta, announced plans to cut 11,000 jobs in November and admitted he had expanded the business during the pandemic on the assumption that the increase in online activity would continue. “Unfortunately, this did not play out the way I expected,” he said.

Tech firms laid off more than 150,000 workers globally last year, according to the website Experts expect more to come after overexpansion and the US and global downturn.

“It is likely that this layoff trend will continue in tech, especially since the market response to companies with moderate layoffs seems to be positive – investors see these as prudent cost-cutting measures,” says Joshua White, an assistant professor of finance at Vanderbilt University in the US.

A troubled US and global economy

The CEO confidence index, a monthly survey of US bosses, has hit its lowest level since the 2008 financial crisis. According to James Knightley, the chief international economist at the banking group ING, that is a harbinger of job cuts among businesses. Tech firms are already reflecting this.

“When CEOs are this pessimistic it suggests corporate America is looking to batten down the hatches, which implies a growing threat of job losses and falling capital expenditure,” says Knightley. He adds that advertising, which supplies the vast majority of revenues for the likes of Meta and Twitter, will be an additional cost-saving for many firms.

He suggests aggressive interest rate rises around the world – including in the US, UK and EU – should achieve their aim of damping down inflation but, for now, the cost of living remains high in major economies and is eating into household spending power. This is a problem for tech companies on a range of fronts, including demand for electric cars and streaming subscriptions.

“Therefore we have a situation where households are already feeling pain from the rapid increases in the cost of living, and this is only going to be compounded by higher borrowing costs and the concern that businesses are starting to adopt a more defensive posture with job losses likely on their way,” says Knightley.

The resulting fall in household spending will have an impact on tech firms. “With consumers increasingly concerned about the economic outlook then we are going to see cuts to discretionary spending, of which online consumer goods and services makes up a significant proportion.”

Problems in Covid-hit China for Apple and Tesla

Apple dipped below its $2tn market capitalisation this week, a year after it became the first ever company to hit a $3tn valuation. Its shares have been hit by lockdown-related disruption to iPhone production in China, its main manufacturing hub, which led to a downgrade of analyst expectations for sales during the lucrative festive period due to a lack of high-end models such as the iPhone 14 Pro.

The lockdown has been lifted in Apple’s main production hub of Zhengzhou but investors fear the company will break a 14-quarter sales growth streak for the three months to December.

The electric car maker Tesla has also been affected. On Friday it lowered its prices for its Model 3 and Model Y cars in China, the world’s largest electric vehicle market and the source of about 40% of Tesla’s sales. Deliveries of Teslas made in the country hit a five-month low in December, according to the Chinese Passenger Car Association.

A weaker consumer environment in China plus increased competition are a problem for Tesla, says Jeffrey Osborne, an analyst at the US financial firm Cowen, but he adds that investors are concerned about elsewhere, too.

“The investor concern is about all markets as the long-term valuation for the bulls assumes the company is the size of Toyota by the end of the decade at 8m-9m cars a year.” Tesla delivered 1.3m vehicles last year.

Elon Musk and Twitter

Twitter’s problems require a separate analysis because of the Musk factor, even though his recent focus on the social media platform has also affected the share price of Tesla, where he is chief executive.

Musk bought Twitter for $44bn in October and immediately axed about 3,750 staff, or nearly half the workforce. Employees were told this was being done to “place Twitter on a healthy path”, reflecting the fact that the company has made a loss for 10 of the past 12 years. Musk has also hinted at overhiring, saying there were too many managers, while he has also warned of a looming hit to advertising from an economic downturn.

So there are similarities with other tech firms, but there are also self-inflicted issues. Twitter is heavily indebted after nearly $13bn of borrowing, which will cost more than $1bn a year to service and thus put pressure on costs, while Musk has admitted that concerns over his stewardship of the platform have triggered a “massive drop” in advertising revenue. It can be argued that Twitter is a unique case.