The tech industry is known to be relatively resilient to recessions. Tech companies are not necessarily invulnerable to economic downturns, but they usually survive and even become stronger after emerging from a period of economic decline.
Most of the biggest tech businesses at present have been through multiple recessions. Google, for one, survived the speculative dot-com bubble of the early 2000s and the Great Recession, and will most likely weather the COVID-19 crisis. Even more impressive are Microsoft and Apple, which are set to prevail over at least seven recessions.
So what can we learn from these companies? How did they prepare for turbulent economic conditions? What did they do to overcome the challenges of recessions?
Diversification is something companies need to do when they have the resources to do it. Google did not engage in activities outside of web search only when faced with the threat of a falling economy. The company now known as Alphabet acquired 26 companies from 2001 to 2006 when it was in a good position to bring other businesses into its fold. While many of its other ventures such as Knol and Wave ended up failing, Google remains strong thanks to its many other successful diversified businesses.
Another good albeit less successful example of diversification is Sony. What was once one of the world’s most influential consumer electronics companies is now only a small fraction of its former glory. Still, it remains standing because of its many businesses. Sony runs movie and TV production, camera, smartphone, video gaming, and even financial service divisions. The company has already survived 11 recessions in the United States.
Diversification is not just about distributing risks. It is also essential in achieving sustainable growth, something that is necessary for companies to survive severe challenges like COVID-19, which can cripple entire industries.
Even without recessions, tech companies have been at the forefront of automating their processes to become more efficient and productive. Notably, tech business automation is not just about using robots for manufacturing activities on the hardware side. Automation can also be software-based like in the case of business process, marketing, sales and lead generation, HR, and customer support automation.
Automation, however, only works with a well thought out and already efficient system. It does not automagically make a poorly-designed process efficient and productive. As Bill Gates aptly pointed out: “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.”
In other cases, automation is something tech businesses use to help others do better with their investment, trading, or other business activities. Fintech company Jubilee Ace, for example, offers an automated way to take advantage of arbitrage trading. “Technology helps us to identify the arbitrage opportunities fast and enter a trade whenever available. Humans can manually do so as well, but we cannot do so fast enough,” says Tony Jackson, CEO of Jubilee Ace.
You can only profit from arbitrage trading if you are quick in spotting opportunities, buying assets in one market, and selling them to another for a higher price. “Speed is the key when it comes to arbitrage as opportunities are often available for a short period of time. So technology will come into play,” Jackson adds.
Innovating and providing alternatives
Who would have thought Skype, Facebook Messenger, and other popular messaging platforms would be sidelined by a relatively obscure platform like Zoom? Competition among tech companies also imparts a lesson on innovativeness. Pandemics and recessions can provide opportunities for companies to thrive by giving room for something new and in tune with the times.
Zoom offered an enticing alternative to connect people with its free 40-minute conference calls for up to 100 participants. No other teleconferencing platform offered something this attractive before. Plus, it is extremely easy to use. Meeting participants do not even have to log in.
Many other tech companies demonstrated innovativeness in response to the pandemic, especially when it comes to retail trade. Supply chains are set to consolidate into resilient ecosystems with many platforms for creating virtual/online stores and facilitating order deliveries. Digital bureaucracies will eventually become mainstream. All these are happening because tech companies are innovating to help themselves or help others in surviving the pandemic and recession.
Former Intel CEO Paul Otellino shares an encouraging tech investing insight: “Recessions come and go, and some are worse than others. While some companies might hunker and slow down their research and development, Intel had no intention of doing that. Intel would increase its R&D budget in preparation for a time in the near future when demand for the company’s products would rise again.”
Tech companies naturally see decreases in demand, which hurt their bottomline. However, in the long run, the investments allow them to become more competitive. Forward-looking companies are more likely to earn the trust of lenders and attract government subsidies, which help them to stay in business amid serious temporary profitability concerns.
Forward-thinking goes a long way
For decades, high-profile tech companies rarely became the subject of bailouts. A number of tech CEOs, interestingly, have argued against government bailouts recently. The tech sector is known for being dynamic and future-centered. This could be a factor in how tech companies are managed and as they emphasize the need for diversification for sustainable growth, automation, innovation, and more investments.