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Tech industry braces for ‘nuclear winter’

Written on
Jan 30, 2009 
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Reuters Group  |
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Tech industry braces for ‘nuclear winter’

pinkslips_small.jpgReuters — The recession turned up late on Silicon Valley’s doorstep but is likely to stay awhile, as technology companies slash thousands of jobs and rein in costs to make up for shrinking earnings and tight-fisted customers.

Job cuts in the technology sector have trailed other industries until recent weeks. Now they are coming fast and furious as the economic downturn grips the Valley, the strip of land in northern California that is home to household names like Google Inc and Amazon.com Inc units.

Tech giants like Intel Corp and Microsoft Corp are laying off thousands of employees, while start-up companies are firing in smaller numbers as they struggle to survive with fewer customers and venture capital dollars.

And this is just the start, analysts say, expecting thousands more to lose their jobs this year as the recession forces the industry to slash marketing and capital spending.

“Organizations are saying, ‘What is the absolute nuclear winter? Let’s plan for that,’” said Adam Charlson, senior partner at executive search firm Korn/Ferry International Inc, who works closely with the recruitment divisions of top tech firms. “What you’re seeing now is organizations putting those plans into reality.”

Last year, Silicon Valley lost 11,700 jobs, according to Steve Levy, senior economist at the Center for the Continuing Study of the California Economy. The number is small compared to the 200,000 jobs lost after the dotcom bubble burst in 2000, but that is because the 2008 numbers don’t reflect recent layoffs yet, he said.

“The headline is that the recession has hit Silicon Valley,” Levy said. As a result, he said he was “substantially revising downward” employment predictions for 2009.

California’s jobless rate hit a 14-year high of 9.3 percent in December, significantly above the national average of 7.2 percent, according to state officials.

ONCE BITTEN, TWICE PREPARED

Some analysts said they are reading the mass layoffs as preemptive acts by tech companies. When the last recession hit, tech companies were too slow in cutting costs and laying off workers, said Andy Miedler, a senior technology analyst at Edward Jones.

But not this time, he said. “Layoffs and cost-cutting are unfortunate, but companies have to make tough decisions in a rough economy to preserve their own financial position.”

Mark Cannice, a professor of entrepreneurship at the University of San Francisco, said Silicon Valley has been “inoculated to some degree” after the dotcom bust.

“Many firms didn’t survive …. The ones that survived are much more efficient and resilient and were funded on sounder business models,” said Cannice, who publishes a quarterly Silicon Valley Venture Capitalist Confidence Index.

But he said Valley companies are not entirely immune — especially venture capital-funded start-ups. As large companies like Microsoft and Google cut back on spending, start-ups that supply them with software and other IT could run into trouble.

With venture capital funding falling 71 percent in the fourth quarter of 2008 from a year ago, start-ups could be forced to fold up if they can’t sustain their business and investors cannot fund them any longer.

But mass layoffs in the tech sector need not necessarily be all doom and gloom. They could actually boost innovation as laid-off engineers, scientists and other highly skilled individuals decide to pursue their own ideas.

Calling it “forced” entrepreneurship, Cannice said he was optimistic that the current layoffs would “unleash the next wave of creative, thoughtful entrepreneurs.”

Layoffs in the traditional tech sector could also spur employment in the alternative energy sector, recruiters said.

Neil Sims, managing director of executive search firm Boyden’s technology practice group, said the so-called “cleantech” sector — which employs environmentally friendly technologies — will continue to grow and offer jobs.

“It’s not that the sky has fallen entirely,” he said.

Reuters Group

Reporting by Anupreeta Das

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