Thursday's twin salvo of massive layoff announcements from tech giants Microsoft Corp. and Intel Corp. was a "cold slap" of reality for many Canadian IT businesses still in denial about the recession, according to industry analysts.
"I suppose the announcements hit a lot of organizations by surprise. People thought something like this would go down in March certainly not in January," said Jennifer Perrier-Knox, senior research analyst for Info-Tech Research Group, in London, Ont.
"There have been rumours but these companies have been holding their cards close to their chests. There is definitely going to be some shock effect among many smaller organizations in Canada," she said.
IT Job Universe
Redmond, Wash-based software maker Microsoft announced it was laying off 5,000 employees Thursday after announcing an 11 per cent drop in net income. The report was closely followed by Intel's announcement that is was shuttering four chip-making plants and letting go of between 5,000 and 6,000 workers worldwide.
Analysts laid the blame for Intel's actions on weak PC sales combined with tight-fisted consumers choosing low-cost models such as netbooks. They also said impressive new CPUs from rival Advance Micro Devices Inc. were a factor.
Monday's CPU price cuts by Intel, as much as 40 per cent on some high-end desktop chips, were aimed at "stimulating demand to consume [chip] inventory," said Ian Lao, an analyst with In-Stat. "Fabs are already scaling back but there is always a buffer effect from when a change is started until we see that change on the street. They are trying to match the fab capacity to help limit job cuts if possible."
The price cuts were just the beginning. On Wednesday, Intel said it would close close two assembly and test facilities -- one in Penang, Malaysia, and another in Cavite, Philippines. It said it would also stop production at two wafer-production plants: Fab 20, an older 200mm wafer fabrication plant in Hillsboro, Ore.; and D2, a facility in Santa Clara, Calif.
The changes will affect between 5,000 and 6,000 employees worldwide, Intel said. Not all those employees will lose their jobs, however, as Intel plans to offer some of them positions at other facilities, the company said.
Domino effect
The announcements tailed a long parade of dire news which include among others IT spending cuts, job cuts at Sun Microsystems Inc., AMD's lay off of 1,100 workers, Nokia's continued slide and, in Canada, Nortel Networks' call for bankruptcy protection.
"Canadian IT companies are now bracing for a domino effect," says Carmi Levy, senior vice-president for strategic consulting at AR Communications Inc. in Toronto.
The announcement, Levy said, highlighted the fact that market giants are not immune to the effects of the recession. "Microsoft is a market leader in the software industry, while Intel is a hardware stalwart. They might be in a better position than most to weather the slowdown, but they still feel the impact."
He said many Canadian companies that are struggling as well as those on top run the risk of being affected by the global economic downturn.
"When those domino chips start toppling, it's hard to say which companies will remain standing," Levy said.
Up until now, Canadian firms have been largely insulated from the economic turmoil south of the border, says Perrier-Knox.
"We can count on a bit of lag time before closures and layoffs in the States hit home, but it will hit eventually," she said.
She said Microsoft and Intel were victims of an almost universal decision by many companies to cut back on tech spending. "When companies decide to refresh their IT software and hardware after five or six years rather than three or four years, market leaders like Microsoft and Intel take a big hit."
There have been many rumours about the layoffs, but because both companies kept generally quite about the matter, other IT businesses were lulled into believing the job cuts were far away, Perrier Knox said.
"A lot of companies were in denial until this cold slap in the face," she said.
She said Canadian firms will likely attempt to keep layoffs as a last resort.
"Culturally, we tend to see cutting workforce as a last ditch-effort," she observed.
When Canadian layoffs come, the Info-Tech analyst said, if will probably start with Canadian branches of U.S. companies or organizations with close ties to business south of the border.
She said many financial analysts predict that the economy will reach its lowest point sometime in April this year.
"Hopefully, we will be heading for a slow recovery by nearing the end of the year," she said.
-- With files from Eric Lai of Computerworld US