SINGAPORE (July 3): With the Covid-19 pandemic causing unprecedented disruptions, many companies have been compelled to respond with new ways of working and doing business. In hindsight, many are more certain of the need for digitalisation and transformation, whether seeing earlier investments now paying off, or recognising that they could — or should — have done more.
Earlier this year, CEO of Microsoft, Satya Nadella, reported that the technology giant has seen two years’ worth of digital transformation in two months. This reflects the urgency felt by many executives to enhance digital capabilities so as to maintain resilience in volatile times.
Suffice to say that no industries will be left unscathed, but the extent of impact will vary, with some likely to fare better than others. We are clearly in different boats in the same storm. We expect industries to emerge from the crisis in one of these four states: strong, transformed, reshaped or uncertain.
The strong
The outlook for the consumer technology, e-commerce and healthcare industries is expected to be positive, with the pandemic driving a surge in demand for their products and services. For example, super app payments, e-commerce and OTT media streaming companies, have gained popularity with shifts in customer habits and lifestyles.
E-commerce companies have seen huge growth in transaction orders and Gross Merchandise Value (GMV), in spite of challenges with supply chain disruption and last mile delivery. A number of large e-commerce platform players are likely to turn profitable in the next 12 to 24 months.
While resources in the healthcare sector have been stretched, seen particularly in the shortage of medical masks and equipment, the pandemic has also driven technological innovations in the form of digital health and telemedicine — previously hampered by regulatory and behavioral obstacles.
The upsides of digital seen now should endure into the future for these sectors. To fully capitalise on the expansionary opportunities, companies, particularly those in a good balance sheet position, should look at acquiring companies with attractive valuations and sound businesses in similar or adjacent industries.
The transformed
The real estate, FMCG and food logistics, and manufacturing industries will likely emerge transformed as a result of major shifts in supply-demand dynamics.
For the real estate sector, there is uneven disruption with commercial retail and REITs facing the strongest headwind. The increased emphasis on online retail channels and new F&B business models like cloud or dark kitchens also soften real estate demand.
Not to say that malls will not come back to life but real estate players will have to pivot their strategies for a new normal. Social distancing and temperature checks will impact footfall. Companies are also rationalising their need for space and the use of it, therefore impacting office real estate demand.
The FMCG and food logistics industry tells a tale of mixed fortunes. While it enjoys a spike in demand in last-mile delivery, escalating cargo costs and productivity are of concern. Yet, the prospects are promising, particularly for cold chain logistics given the heightened demand for temperature-sensitive fresh food deliveries and pharmaceutical products.
For the manufacturing industry, deferred consumption of goods in an economic downturn will require manufacturers to rethink business models, adapt production practices and review supply chains. Smart factories, the use of digital twin in maintaining operations, robotics and AI will gain greater prominence. Reshoring or near sourcing of manufacturing, coupled with a renewed emphasis on domestic supply chain independence, will be on the minds of many.
The reshaped
The oil and gas sector, which has been facing structural decline even before the pandemic, continues to be under pressure given plummeting oil prices and supply surplus, exacerbated by restrictions in travel and mobility during the crisis.
Many oil and gas companies are focusing on cost reduction and cash flow management through controlling capex and opex. The sector will recover, as oil is still required but that will take time and certainly not back to the path it was on pre-crisis. As oil companies restructure, they also have the opportunity to relook at their business model, exit non-core businesses, and embark on digitalisation and automation initiatives.
The uncertain
Tightened travel restrictions and lingering fears of travel will create significant uncertainties for the future of tourism and aviation. Airlines in the Asia Pacific region are expected to see the largest revenue plunge of US$113 billion ($157 billion) in 2020 compared with 2019, and a whopping 50% fall in passenger demand.
Airlines are repurposing to tap opportunities in cargo and freight but this is not enough to offset the revenue losses. Faced with a liquidity crisis, direct financial support and tax relief from governments will be critical. Travel and tourism have been a big part of lifestyles, so despite the current dire situation, how long the negative impact of the pandemic holds into the future remains to be seen.
Transform and transact now, next and beyond
Notwithstanding the varying impact across industries, businesses are confronted with a common challenge: how can they balance addressing the immediate and short-term issues with longer-term strategic priorities? We see it necessary for businesses to plan over three time horizons: now, next (three to six months) and beyond (after the next six months). And how one harnesses transformation and transactions to reposition itself for the future is vital.
Businesses have had to leverage technology to enable new ways of working and delivering their services during the pandemic, underscoring the importance of digital in boosting agility and competitiveness. As companies look to reshape their business, improve productivity or reduce capacity, digital transformation is a key enabler.
Where digital capabilities are lacking to drive growth, M&As could be an accelerator. Valuations have dipped in recent uncertain times, making it opportune to consider M&As for consolidation, or for traditional incumbents to acquire distressed players or underfunded companies that have good technology products and capabilities.
Invariably, there will be execution challenges and companies must be mindful of them. For one, companies must be clear of their long-term strategic goals and ensure alignment across business units on the priorities, including where to play and how to win. Even when that is achieved, the lack of funding and internal capabilities will limit even the best plans on paper.
Clearly, the issues to be managed are complex, evolving and span the entire enterprise. To help provide business with structure amid the chaos, EY has developed the Enterprise Resilience Framework, identifying the nine key areas that businesses must address to build business resilience in the now, next and beyond. No doubt, securing future growth may come with a price. But let growth not be the price you pay for inertia or fear of the unknown.
Liew Nam Soon is EY’s Asean regional managing partner. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.
