Alternative Views: Reality hits the new-economy stars

This article first appeared in Forum, The Edge Malaysia Weekly, on November 14, 2022 - November 20, 2022.
Alternative Views: Reality hits the new-economy stars
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In the last two years, IT graduates the world over commanded better salaries and enjoyed higher employability compared with other degree holders. In Malaysia, it was common to hear of an engineer or accounting graduate starting off at a lower salary than an IT-trained graduate.

Working in a start-up where everything was flexible, from working hours to office attire, was more appealing than in offices with regular workday regimes. The perks in the more successful start-ups were much better compared with conventional offices. Meals, ping-pong tables and time for recreation were part of the work-life balance incentives.

Investors put money in Bitcoin, which does not have any underlying value and is far from replacing conventional currency. Valuations of technology companies offering services such as ride-sharing and delivery of goods went ballistic even though they were loss-making.

Valuations of technology companies were much higher than those of banks or construction companies stuck in the old-economy whirlpool. For instance, Vitrox Bhd, a company in the business of testing semiconductor products, won the coveted award for The Edge Billion Ringgit Club last year for its outstanding performance. It beat the banks and other old-economy companies in a contest among heavyweights.

Vitrox is one of the many new shining stars of Bursa Malaysia taking advantage of the demand for high-quality semiconductor products catering for the new economy.

But the higher interest rate regime in the US has brought companies in the “new economy” down with a thud.

The higher cost of funds does not allow for excessive spending. And the worst to be hit are service producers in the new economy such as Meta Platform Inc and companies producing discretionary electronic products such as personal computers and handphones. Malaysian technology companies that enjoyed the boom caused by the rise of technology companies in the US are feeling the heat.

In their latest quarterly results, most technology companies posted lower growth compared with a year ago. The buzz in the Malaysian electronic sector that started in the second half of 2020 and continued until early this year fizzled out quickly.

It began with the sudden collapse of memory chip prices in the middle of this year. The price of Dynamic RAM (DRAM) peaked in May before falling by 36% in June and another 21% in July, according to The McClean Report, a semiconductor industry publication.

The steep drop in the price of DRAM, an important component of semiconductor products, came just two months after the Federal Reserve started to raise interest rates in the US. Starting from between nearly 0% and 0.25% in February this year, the fed fund rate is now between 3.75% and 4%, and is expected to increase further until early next year.

The immediate impact of a higher interest is reduced spending on discretionary items such as consumer electronic goods. With the exception of the automotive and telecommunications sectors, consumer electronic segments are likely to face headwinds until the cautious spending mood goes away and inventory build-up of memory chips depletes.

In the latest development, the Fed is expected to decelerate its hike in interest rates following lower inflation numbers. Anticipating a slower rate hike in its subsequent meetings, stock markets went up last Friday.

But it’s still too early to celebrate.

The reality of higher interest rates being the new norm is only now starting to have an impact on the economy and Big Tech companies in the US. 

Alphabet Inc, Meta Platforms Inc and Twitter Inc have all started to slash their workforce. Meta, previously Facebook Inc, was a US$1 trillion company some 15 months ago.

Today, Meta has lost more than 60% of its value and is in the process of a mass lay-off of its employees. The other Big Tech companies have also started to lay off employees to reduce operating costs.

One of the reasons is because revenues, largely from advertising, have started to fall. As revenues and profitability fall, Big Tech companies are forced to reduce their cost to prevent further erosion in value.

The Big Tech companies are also taking away the perks offered to employees. Twitter, under Elon Musk, has insisted that employees clock in 40 hours in the office. He has done away with remote working. Twitter is also laying off some 50% of its employees. 

Major job losses may not happen in Malaysia. But there will be some companies laying off their workers sooner rather than later. 

The first signs of trouble are already showing.

The market capitalisation of the rising stars in the technology sector has been erased by between 26% and 63% from the beginning of the year. Vitrox, the best performer among them, has shed 26% in market capitalisation since January. Among the worst performers is Greatech Technology Bhd, which has lost more than 60% of its value.

The valuations have dropped because growth in earnings is trending down. To save the bottom line, the natural step is to cut down costs, which means a freeze on employment and reducing the number of employees.

In today’s world, microchips are considered as the new “oil” because of their extensive usage. Microchips are in every piece of equipment, from cars to home electrical appliances and even weapons. A disruption in the microchip industry affects the manufacturing sector.

Apart from the oil and palm oil industries, the manufacturing sector plays an important role in the Malaysian economy. Within the manufacturing sector, the electronics industry is a major contributor to its growth.

In the US, the slowdown in the economy due to cautious consumer sentiment has started to take effect on companies such as Micron Technology Inc, which is among the world’s largest producers of memory and storage chips.

Micron has put a freeze on hiring and even cut down on its employee numbers.

Malaysia does not have companies such as Meta or Alphabet. However, it has seen a slew of companies that have benefited from the euphoria of the new economy in the US. It is only a matter of time before the technology sector in Malaysia feels the pressure to cut headcount to maintain profitability.

Since the dotcom bubble burst in 2000, there have been four other instances when the prices of DRAM dropped steeply. In each of the instances, the decline lasted between five and seven quarters.

This time around, industry experts expect the decline to continue until the second half of next year. However, even a rebound after that would not lead to a significant turnaround in demand for memory chips.

The McClean Report expects an overall 6% drop in sales next year. This means the consolidation stage for the technology sector in Malaysia still has some way to go.

M Shanmugam is a contributing editor at The Edge Malaysia

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