Tech companies slashed over 4,000 jobs this past week, largely driven by a narrative of the need to bolster efficiency in an era of AI adoption. Cisco (NASDAQ:CSCO) led the pack with 4,250 cuts, or 5% of its workforce, preparing for reduced demand amid economic uncertainty post-Splunk acquisition.
Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and X also executed new layoffs in 2024. Amazon cut jobs in its film division and Twitch. Google downsized its Google Assistant project and other teams. X reduced its trust and the safety team and safety engineers. These actions align with ongoing cost-cutting and project prioritization.
Mozilla, the creator of Firefox, slashed 5% of its global workforce. Instacart followed suit, cutting 7%. Both cited resource reallocation for new projects.
Google trimmed hundreds of positions across various divisions in 2024, emphasizing AI projects. Under Sundar Pichai’s leadership, the company experienced over 12,000 layoffs.
So, why are these tech companies laying off people? Here are three reasons why based on some CEO commentary and that of analysts.
The Leaner the Better
Meta Platforms (NASDAQ:META) CEO Mark Zuckerberg theorized that tech layoffs persist due to recognition of the benefits of leaner operations. In an interview with Morning Brew Daily, the Meta CEO noted ongoing adjustments to the post-pandemic landscape and discussed competition with Apple (NASDAQ:AAPL) and other topics.
Amid the pandemic, e-commerce surged, boosting online ad gains. However, with the return to stores and economic adjustments, sales growth slowed, leading to ad rate normalization. According to Zuckerberg, many firms over-hiring and making significant cuts attributed to COVID-19 navigation rather than the AI boom.
Zuckerberg observed a shift: Leaner operations yield benefits beyond addressing over-hiring. Initial reluctance waned as companies like Meta found downsizing didn’t hinder progress. Despite challenges, the company rebounded post-layoffs.
Additionally, the Meta CEO streamlined management layers for efficiency. Instagram reduced technical program managers as part of Meta’s broader cutbacks. Companies, including Microsoft (NASDAQ:MSFT) and Google, downsized despite solid earnings, focusing on leaner models. While AI investment was mentioned, Zuckerberg emphasized efficiency over AI.
The Herding Effect
Despite being highly profitable, major tech companies continue to cut back on jobs. Many experts, including University of Washington Professor Jeff Shulman, noted a trend: Layoffs boost stock prices, prompting companies to continue laying down the axe on employees.
Many smaller tech startups faced financial strain and fundraising challenges, leading to layoffs. However, for larger firms, layoffs aimed to appease investors. Shulman noted that layoffs became normalized and accepted by both workers and investors. Despite interest rate increases and shifts in investment focus, experts find these insufficient to explain the recent layoff surge.
Companies imitate layoffs, a phenomenon dubbed “copycat layoffs,” influenced by market reactions. Stanford Business Professor Jeffrey Pfeffer observed that competitors may follow suit when one tech giant downsizes. That shift deflects attention from individual companies, providing cover for layoffs prompted by previous bad decisions. Thus, the trend could continue despite uncertainties in the market.
AI Is Making Companies More Efficient
The tech industry faced over 32,000 job cuts, attributing them to factors like recruitment mismanagement, ad revenue challenges and economic instability. However, the adoption of AI and large language models are also playing a pivotal role, helping companies move past economic concerns and driving layoffs.
Challenger, Gray & Christmas revealed that AI threatens white-collar jobs across various sectors like programming, management, law, accounting, finance and consulting. In January, U.S. companies laid off 82,307 employees, with finance and tech leading. Retail, food production and media also faced significant layoffs.
Generative artificial intelligence reshaped business agendas, sparked by ChatGPT’s fame. Tech giants rapidly recruited engineers. In 2023, the U.S. saw 180,000 AI job listings. Demand has continued, fueling AI advancements at Microsoft, Google, Amazon, Meta and Apple.
In January, restructuring accounted for 28,329 job cuts, followed by 14,555 layoffs tied to the closing of operations. Artificial intelligence was blamed for 381 job losses, totaling 4,628 since May 2023. While AI adoption affects jobs, it also drives demand for related skills, with 33,727 job openings in January.
That said, companies continue to invest heavily in costly chips and supercomputers for AI development. Meta aimed to procure 350,000 Nvidia (NASDAQ:NVDA) chips by year-end, each priced at up to $30,000. Google downsized its augmented reality team, while Meta reduced program managers after last year’s layoffs. Amazon’s workforce doubled in 2020 and 2021, but subsequent cuts indicate a shift in hiring strategy.
Several companies attributed layoffs to investments in artificial intelligence. Meta’s CEO, Mark Zuckerberg, mentioned shifting resources towards AI. SAP announced a $2 billion investment in AI-driven restructuring. However, computer science experts suggest layoffs stem from various factors beyond AI investments.
The Year of Layoffs and Cost Cuts
Roger Lee, founder of Layoffs.fyi, has tracked tech layoffs since 2020. Pandemic-led internet reliance sparked tech hiring until early 2022. Interest rate cuts aided tech growth, but trends reversed in 2022. Startups faced layoffs initially, later impacting Big Tech companies like Meta and X.
If this trend continues, it could mean more pain for tech workers on the horizon. That said, given the growth in AI and other hot sectors of the economy, it’s also possible that we could see some direct hiring as a result of these high-growing sub-sectors.
For the rest of the economy, the outlook remains bright for 2024. I have no crystal ball to know where the jobs market will be headed this year. However, investors in a wide range of non-AI tech sectors may want to be wary of these trends.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
