In April 2022, when interest rates began to rise in the US and Israel and inflation reared its head worldwide, tech companies denied that anything bad was taking place in the industry. Outwardly, they demonstrated self-confidence and talked about growth in hiring, but it didn't take long until the optimism turned into a wave of layoffs that began in Israel in May with the closure of grocery delivery service Avo.
Since then Israeli tech companies and foreign development centers in Israel have laid off about 8,000 employees. Since the start of 2023, at least another 500 tech workers have lost their job. According to the "Lestartup" website, which has been counting the layoffs in Israel, hundreds more tech workers will lose their jobs here this month.
1. The causes: Not just inflation and interest rates
In their official announcements, the tech companies justify the layoffs by citing global macroeconomic developments, interest rate hikes, soaring inflation, the war in Ukraine, weaker purchasing power for consumers and companies, and the economic slowdown. It's all true, but not the entire story.
Covid brought two phenomena that have faded away. Interest rate cuts by the central banks to allow investors to pour money into the epidemic-stricken economy, and the second was the shift to home working, which temporarily boosted the growth of tech providers facilitating remote connectivity. This encouraged giant funds to raise and invests huge capital in thousands of tech companies in a binge that lasted less than two years.
This resulted in tech companies raising major amounts and hiring large numbers of employees, as they sought to increase their value. But inflation and interest rate hikes pulled the rug out from under them. The veteran tech investors, who sit on the unicorns' boards have changed their companies' priorities - from subsidized, loss-making and optimistic growth, to pessimistic profitability. The assumption is that the economy is headed for a slowdown, which will require all companies to quickly reach operational balance. Back to basics, if you will.
Time has also taken its toll. The layoffs that took place in June 2022 are not the same as the layoffs taking place in January 2023. If at first the layoffs were in small companies making losses, and without a stable business model, the trend has now spread to the entire industry - even to profitable companies that serve huge organizations. Amdocs is an example of this: the company had been boasting that while everyone was downsizing, it was still hiring, but last week it announced that 700 employees were leaving. Even profitable giant companies are not immune to lower revenue in the ongoing crisis, and the industry-wide wave of layoffs allows some companies to implement streamlining now that the opportunity has arisen.
2. How are Israel's layoffs different from those overseas
Ethosia tech placement company CEO Eyal Solomon says, "The layoffs in Israel are distinct from those we see elsewhere due to the composition of the companies here, which are dominated by startups. These make up 85% of the local industry. These are companies whose layoffs are due demands by investment funds or difficulty in raising funds, compared with the situation around the world which has been characterized by cuts at publicly traded companies. The high-tech unemployed in Israel are mainly juniors and those lacking experience - which creates the appearance of a market in unemployment."
3. The unemployed who have not found work for three months
In the macroeconomic data, there is no evidence of this yet. On the contrary, the last reported unemployment rate actually showed a decrease and tech salaries have started rising slightly. The increase salaries of programmers compared with 2021, which was a year of abundance by all accounts, is still continuing. However, the managers of the placement companies, who closely observe the layoffs and the pace of job searches, identify certain groups that are encountering difficulties.
High-tech placement company Gotfriends founder and CEO Shir Vax says, "There are designers, marketing people, human resources and recruitment people and other professions that have already been looking for work for more than three months and are in trouble - they understand that they can't know when they will find a new job. Some of them turn to retraining in other fields like product management or analysis positions."
Vax also talks about a large group of juniors who graduated from technology training, and converted to high-tech: "They managed to integrate into the industry, but were the first to be fired. They gave up their previous careers to move to high-tech and now they are left stranded."
4. The tech cuts have spread to other industries
The tech sector received most of the attention and investments during the Covid epidemic. Other sectors - such as insurance, banking and traditional industries did not grow to the same extent and therefore did not make similar adjustments. At the same time, expansion of the tech industry into a range of other industries - such as retail, real estate and industry - has 'exported' the crisis to them as well. For example, Amazon, the largest retailer in the US, has laid off 18,000 workers since November, while Compass, a digital real estate brokerage has laid off more than 500 employees since the summer. And that's just two examples.
Shrinking economies, or at any rate those whose growth rate is slowing down, lead to more and more layoffs - even in sectors not related to technology. The interest rate hikes and rising inflation leave less free money in pockets, Covid policy in China is still harming supply chains, and the geopolitical conflict between the US and China is leading to unprecedented trade sanctions. In Israel, 120 people were fired from SodaStream, and the Blades Technology plant in the Galilee, which employs 900 workers, is also still in danger of closure. In the US, Goldman Sachs plans to lay off hundreds of employees, as do McDonald's and the CNN news network.
5. Those benefitting from the crisis: the big companies
Profitable and stable companies in traditional industries, and growing tech companies with strong financial backing are benefitting from the influx of cheaper employees as competition dissolves.
In the first category are traditional sectors such as retail, commercial and defense industries, and services such as banking and insurance. The software development departments of Leumi or Hapoalim (the two big banks) are benefiting from an influx of cheaper professionals. So are defense companies such as Rafael, and Elbit and the aerospace industry.
Those laid off by tech companies, as well as recent university graduates, appreciate the economic stability and long-term employment horizons that these companies can offer after a year in which they were abandoned in favor of unicorns.
In the tech field too, unicorns and growth companies that have managed to achieve profitability are benefiting from diminishing competition. Their smaller rivals are currently seeking escape hatches from the excessively high value awarded to them last year and the current lack of funding. Those that survive, will be able to offer themselves for sale at a cheap price, one that will provide profitable companies with technology, talented teams and even new customers - all at affordable prices.
Published by Globes, Israel business news - en.globes.co.il - on January 9, 2023.
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