The tech industry should be prepared for the next two years to be challenging and face more roadblocks before it recovers, said Microsoft (MSFT) CEO Satya Nadella.
The industry's setbacks will continue for at least the next two years before tech companies will experience a rebound, he told CNBC TV18.
Growth in the tech industry will occur after the tech slump and investors can expect a rally, Nadella said.
Tech Industry Faces Slowdown, Conduct Layoffs
The tech industry has experienced a decline in growth as the economy is expected to contract. Tech companies have responded by conducting massive layoffs after a hiring spree - Amazon (AMZN) CEO Andy Jassy said in a blog post on Jan. 4 that the number of positions eliminated at Amazon has increased to a total of 18,000.
"Between the reductions we made in November and the ones we’re sharing today, we plan to eliminate just over 18,000 roles," he said. "Several teams are impacted; however, the majority of role eliminations are in our Amazon Stores and PXT organizations. S-team and I are deeply aware that these role eliminations are difficult for people, and we don’t take these decisions lightly or underestimate how much they might affect the lives of those who are impacted."
Microsoft was not immune from laying off its employees, though the percentages have been relatively small. Last October the tech giant eliminated less than 1% of its workers. The company said lower growth from sales of Windows licenses for computers led to the layoffs.
Tech companies have been cutting back on costs and numerous other companies have slashed their headcount, including Salesforce (CRM) and Meta Platforms (META).
Global Slowdown in Economies Expected
The demand that rose during the global pandemic caused by covid-19 has started to decline and contractions occurring in several countries have led to "normalisation," Nadella said.
IMF director Kristalina Georgieva recently warned that the world faces a “tough year” ahead. A global recession could occur if the U.S., China and the European Union fall into a slowdown simultaneously, she said.
The tech industry will likely rebound in two years after a massive slowdown, said Nadella.
"I would say the next two years are probably going to be the most challenging, because after all, we did have, you know, a lot of acceleration during the pandemic, and there is some amount of normalisation of that demand," Nadella he told CNBC-TV18. "There is a real recession in large parts of the world. And so the combination of 'pull forward and recession' means we will have to adjust."
Microsoft intends to be "cautious" in its outlook for 2023 even though there are countries that are still generating growth such as areas of India, the Middle East, Latin America and some Asian countries, he said.
"I think we're going to have a supply cycle that's going to persist and a classic demand cycle; there will be some economies that will go through a recession — some deep, (others) minor — then inside of that there will be pockets of growth like India," Nadella said.
Tech companies need to react to the global economy contracting, he said. The massive decline of the valuation of tech stocks such as Apple's (AAPL) stock falling by 28.5% during the past year is demonstrating lower growth. Microsoft's valuation has fallen by 29.6% during the past year and 16.3% during the past six months.
"The markets are smarter than us all," he said. "And I think they are reflecting on where the growth is coming from."
The amount of growth in the economy is crucial and will impact the future of the tech sector, Nadella said.
"If we believe software and digital infrastructure is going to be important in construction, energy and manufacturing, then long-term, you have to be long on tech industry," he said. "Will we have to go through our own cycles around productivity? Absolutely, like anybody else. But in the short run, what we have to focus on is our own productivity and making sure we are efficient."
Companies need to examine whether they can be more efficient, Nadella said.
"I think overall, quite frankly, whether it's for us at Microsoft or the tech sector, it's going to be very important to look inside and say, 'Are we as efficient as we need to be to be competitive?'" he said. "I mean, at the end of the day, just because we are a technology company doesn't mean that we are the most efficient at what we do."
The cloud business has a promising future as well as the overall tech industry which gained jobs. Tech is now used more widely in the retail and energy industries.
"Overall, tech jobs actually increased," Nadella said. "Tech jobs now are coming in financial services, in energy companies, in retail, even in manufacturing and that's healthy, because in the long run, all those employees are going to consume more tech infrastructure," Nadella said. "When we think about our cloud business, long-term, we're bullish, because of the fact that there's more employment outside of the tech industry. That's what we're banking on."
Nadella is bullish on India's prospects since it ranks as the second largest country for its number of software developers and is number one for artifical intellgence projects.
"And so... this next phase is going to be an AI age (and) you have to be long on India," he said.
