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The year started off on a sour note, with many companies like Google, Amazon, Citi and Blackrock laying off employees. This was a bit of a shock, considering that there were massive layoffs last year, and everyone thought that layoffs had come to an end. There are a couple of reasons why this is happening:
As long as the interest rates in US banks are high, it ends up smothering any attempt at growth and job creation. The Federal Reserve seems to have succeeded in choking the economy so much that they have decided to decrease the interest rates. It is currently at 5.5%. This means that any investment in any project will need to show a minimum IRR (internal rate of return) of around this number. This is too much to ask for many projects, especially in R&D, where investments pay off in 10-20 years, and there is always a risk that it will never pay off. The company management is asking questions as to why not just park money in a bank instead of investing in R&D. A US treasury bill gives a 1-month return of 5.54%. There is an argument that the US has stretched itself too far with COVID-19 handouts and getting embroiled in innumerable wars. However, even though the US economy has a gigantic debt of 34 trillion dollars, the market is still strong, and the GDP has been growing at upwards of around 2.5%, which means that the debt bugbear is still far away when it comes to investor worries.
Software companies are increasing their cash flow and cash reserves, and investing less in projects. Since the banks are offering upwards of 5% returns, the tech companies also need to offer a high return to the shareholders. They are doing this by decreasing employees, headcount and number of projects. This increases the Revenue per employee and also decreases the Employee cost, which dramatically increases the Profits. Employee compensation is the biggest cost for tech companies. Meta stock has roared back after it announced deep cuts to its employee base. Microsoft has overtaken Apple with a mixture of hype around AI and layoffs. All these companies have unheard-of valuations and are still laying off people. This is because executive compensation is tied to how much further they can drive up company stock price. Everyone is working 1.5 to 2 jobs right now because their colleagues have been laid off, and there is none to replace that work. The last two years have been bad for tech employees, and the trend will continue this year.
Even having a job is a big deal, so employees will not be clamouring for more compensation or promotions. This is a buyer’s market favouring companies right now. It used to be a seller’s market where employees got a very sweet deal, and companies struggled. The tables have turned. This is how the US brand of capitalism works. It always swings from one end to the other, with no place for the centre.
Coming to India, since most R&D companies in India are based in Europe and the US, India is suffering from internal issues in the Western economies. At the same time, this is a cyclical trend, and things will always pick up later. The fact that many Western multinationals are setting up bases in India is an indicator that US companies realize that the easiest way to cut flab without compromising on productivity is to set up bases in India. Hundreds of companies have been setting up bases in India and moving out of China for economic and political reasons.
The saving grace:
An interesting aspect of the US economy is that the big tech companies are struggling with R&D investments and hiring employees. At the same time, the traditional sectors like manufacturing, retail and logistics are doing well. They are expanding and hiring lots of people. There is a redistribution of talent. Some employees are leaving high-cost locations like the big cities and tech hubs (like the Bay area) and moving to lower-cost regions. The compensation is also lower in the regions with the traditional sectors, but at least things like buying a house and the cost of living are more affordable. Now is actually a good time for software engineers to find jobs in the Midwest and in places like Chicago. So it is not a situation of no jobs. There are jobs, but you will have to relocate for them. The jobs will not come seeking you. Many airlines and manufacturing companies are beefing up their software and data analytics talent and recruiting in a big way.
In a place like India, the same thing is happening. The bad rush for software jobs is tempering a bit. Startups and traditional brick-and-mortar companies are beginning to look at talent they historically could never afford. The “Make in India” campaign has been a big draw, and companies like Foxconn and Boeing are setting up shop in the suburbs of Bangalore and Chennai. US companies realize that the labour cost arbitrage is just too big to ignore. For the cost of a software engineer in the Bay area, you can get 5 engineers in Bangalore. In addition, India is ahead in terms of time zone, which means that work will be ready by the time Americans wake up. China was a big competitor, till their costs have gone up so much that India, with an army of trained manpower, is emerging as the biggest replacement. There is no better time to be studying mechanical engineering and supply chain management as these jobs are beginning to explode in India. The truth is that India is the only bright spot in the gloomy world economic scenario, as per most rating agencies.
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