For tech companies, years of easy money yield to hard times

Carvana, like many start-ups, pulled a page out of Amazon’s old playbook, trying to get big fast. PHOTO: AFP

NEW YORK - Eighteen months ago, American online used-car retailer Carvana had such great prospects that it was worth US$80 billion (S$105 billion). Now, it is valued at less than US$1.5 billion – a 98 per cent plunge – and is struggling to survive.

Many other technology companies are also seeing their fortunes reverse and their dreams dim. They are shedding employees, cutting back, watching their financial valuations shrivel – even as the larger economy chugs along with a low unemployment rate and a 3.2 per cent annualised growth rate in the third quarter.

Here is one largely unacknowledged explanation: An unprecedented era of rock-bottom interest rates has abruptly ended. Money is no longer virtually free.

For more than a decade, investors desperate for returns sent their money to Silicon Valley, which pumped it into a wide range of start-ups that might not have received a nod in less heady times. Extreme valuations made it easy to issue stock or take on loans to expand aggressively, or to offer sweet deals to potential customers that quickly boosted market share.

It was a boom that seemed as if it would never end. Tech piled up victories, and its competitors wilted. Carvana built dozens of flashy car “vending machines” across the United States, marketed itself relentlessly, and offered very attractive prices for trade-ins.

“The whole tech industry of the last 15 years was built by cheap money,” said Guidehouse Insights principal analyst Sam Abuelsamid. “Now they’re getting hit by a new reality, and they will pay the price.”

Cheap money funded many of the acquisitions that substitute for organic growth in tech.

Two years ago, as the Covid-19 pandemic raged and many office workers were confined to their homes, Salesforce bought office communications tool Slack for US$28 billion, a sum that some analysts thought was too high. Salesforce borrowed US$10 billion to do the deal.

In January, it said it was cutting 8,000 people, about 10 per cent of its staff, many of them at Slack.

Even the biggest tech companies are affected. Amazon was willing to lose money for years to acquire new customers. It is taking a different approach these days, laying off 18,000 office workers and shuttering operations that are not financially viable.

Carvana, like many start-ups, pulled a page out of Amazon’s old playbook, trying to get big fast. Used cars, it believed, were a highly fragmented market ripe for reinvention, just the way taxis, bookstores and hotels had been. It strove to outdistance any competition.

The company wanted to replace traditional dealers with, as it said grandly, “technology and exceptional customer service”. Where traditional dealerships were literally flat, Carvana built multi-storey car vending machines that became memorable local landmarks. Customers picked up their cars at these towers, which now total 33.

In the third quarter of 2021, Carvana delivered 110,000 cars to customers, up 74 per cent from 2020. The goal: two million cars a year, which would make it, by far, the largest used-car retailer.

Then, even more quickly than the firm grew, it fell apart.

When used-car sales rose more than 25 per cent in the first year of the pandemic, that created a supply problem: Carvana needed many more vehicles. It acquired a car auction firm for US$2.2 billion and took on even more debt at a premium interest rate. And it paid customers handsomely for cars.

But as the pandemic waned and interest rates began to rise, sales slowed. Carvana did a round of layoffs in May 2022, and another in November. Chief executive Ernie Garcia blamed the higher cost of financing, saying: “We failed to accurately predict how all this will play out.”

Some competitors are even worse off. Vroom has seen its stock fall to US$1 from US$65 in mid-2020. Over the past year, it has dismissed half of its employees.

Associate professor of finance Kairong Xiao at Columbia Business School said: “High rates are painful for almost everyone, but they are particularly painful for Silicon Valley. I expect more layoffs and investment cuts unless the Federal Reserve reverses its tightening.”

At the moment, there is little likelihood of that. The market expects two more rate increases by the Federal Reserve in 2023, to at least 5 per cent.


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