Indian WITCH vs US MAANG

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It's that time of the week again when we regale you with our latest collection of musings and insights. So grab your beverage of choice, put on your favourite playlist, and settle in for a ride on the wild side with Weekly Olio.

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Today’s, Publisher’s Parmesan talks about the Indian tech outsourcing companies collectively known as WITCH and what has allowed them to thrive when the storied MAANG seem to have lost their way.

While product-based tech companies have struggled with cost-cuts, funding slowdown and layoffs, the Indian WITCH companies have continued to grow and add new employees.

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How founders should think about cash management - by Andreessen Horowitz

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We have to accept that wherever there is judgment, there is noise. Just as you would want to reduce bias—even if you cannot completely eliminate it—reducing noise is a good thing. It improves accuracy.

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Indian WITCH vs US MAANG

MAANG companies are trying too hard to minimise costs by implementing harsh cost-cutting measures. However, it's worth noting that many Indian IT companies have been successful in navigating difficult economic conditions, and have demonstrated resilience and adaptability in the face of changing market dynamics.

All product-based tech companies are facing the storm. Apple has experienced a decline in customer spending, and Meta is struggling to justify its investment in Mark Zuckerberg's ambitious project, 'Metaverse'. Meanwhile, Netflix is seeing a decrease in overall content consumption due to increasing competition, while Amazon is facing losses as a result of rising inflation.

And this is visible in the recent layoffs.

Both Twitter and Meta (previously known as Facebook) carried out layoffs, with Twitter letting go of around 7,500 employees and Meta laying off more than 11,000 employees, which amounts to over 12.5% of their total workforce.

Similarly, other product-based tech company employees around the world are facing the looming threat of job cuts.

Not only American product-based IT companies, but Indian ones such as Byju’s, Cars24, Meesho, Ola, and Udaan are also feeling the effects of the current wave of layoffs. Reports indicate that Byju’s has let go of almost 2,500 employees. The wider issue for product-based IT companies in the post-COVID world is the challenge of either selling their products or keeping up with product development.

So what happened at MAANG?

The fact that the IT industry is experiencing layoffs, despite being typically immune to common world issues, is a sign of a global economic downturn. In the early days of the COVID-19 pandemic, when many businesses were struggling, the IT industry was still making significant profits. However, in 2022, many IT companies around the world are resorting to layoffs in order to cut costs. This has become such a widespread practice that a dedicated web portal has been developed to assist those affected by the layoffs.

Given the scale of these layoffs and the development of a dedicated website, it's clear that the tech industry is facing a winter on a global level. It's also worth considering what has happened to the MAANG companies in this context.

The root cause of the current situation can be traced back to the US central bank's decision to raise the federal funds rate in order to address inflation in the country. This streak of interest rate hikes began in May 2022 and has continued as recently as November.

The federal funds rate is the interest rate at which banks lend each other money overnight, typically from the excess funds in their reserve balances.

If interest rates continue to rise unchecked, they could soon surpass the levels seen during the dot-com bubble and the 2008 recession. This, in turn, could lead to an increase in borrowing costs for businesses, ultimately causing the downfall of stocks that heavily rely on capital.

The interest rate cuts during the pandemic were aimed at increasing the flow of funds into the market and encouraging tech businesses to invest more, which they did. But, since most tech companies are either unprofitable or have very small profit margins, they were not equipped to handle the increase in the federal funds rate.

And so Big Tech crashed.

On the other hand, a set of few Indian service-based tech companies, WITCH, are frequently hiring. Huh? What? 🤔

Yes, WITCH. Essentially, it includes, Wipro, Infosys, TCS, Cognizant and HCL Tech. 😜

But how is WITCH more secure? Or is it not?

It is commonly believed that when stock prices in the US decline, it can have a ripple effect on other markets around the world. While Indian tech companies did experience losses in their stock prices, the decline for one of the country's major software firms, Tata Consultancy Services, was much less severe than that of Meta, with a 5.4% drop over the course of a year compared to a 65.8% decline for Meta.

In contrast to the layoffs seen in some product-based tech companies, the WITCH companies are actually hiring more people than ever. For example, TCS hired over 30,000 people by September 2022, and plans to hire an additional 11-12,000 freshers this year alone. Across the board, the WITCH companies recruited almost 105,000 new professionals in the first half of 2022.

Indian tech companies' continued hiring and a lower rate of layoffs can be attributed to their service-based business model. Most Indian IT companies offer consulting and other services to foreign businesses, with the US accounting for >50% of their total revenue.

TCS, Infosys, Wipro, HCL Technologies, and Tech Mahindra have more than 50% exposure to the US market. Indian IT companies hold approximately 55% of the global market share for IT services. This focus on services rather than product development means that Indian tech companies are less affected by the increasing federal fund rate, as their revenue streams are not solely dependent on the success of a particular product.

In a nutshell…

MAANG companies are attempting to reduce costs by taking severe measures such as large-scale layoffs, in response to the deteriorating economic conditions. It remains to be seen how Indian IT firms will respond to these challenges and what strategies they will adopt to overcome them.

It is expected that the product-based companies previously mentioned will experience a reduction in profitability during the recession and may continue to lay off employees and downsize. However, the service providers, which are a driving force in the Indian tech ecosystem, may not need to change their operational strategies in response to the economic situation.

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Peeyush and Mohit

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