What businesses need to do after lockdown

Wednesday 13th May 2020 Justin Cleveland

With the federal government laying out plans for reopening the Australian economy, researchers from PGIM Inc, the investment management business of Prudential Financial, Inc, says we need to start thinking about what the world will look like.

A diverse group of researchers and investment professionals participated in the creation of a white paper, After the Great Lockdown, which comes to the conclusion that, even once we're back to work, there will be major global structural changes.

"Economically, the pandemic-induced global recession could reach a magnitude not seen since World War II", they write.

"The structural changes unleashed by the Great Lockdown could transform the business landscape, creating new winners and losers around the world," says Taimur Hyat, chief operating officer of PGIM. "Investors who anticipate these long-term transformations will be strongly positioned when the dust finally settles."

Four structural changes

In particular, there are four structural changes that will reshape how global businesses interact.

Diversifying supply chains

"One group of companies will lean further into global supply chains but increase resiliency by diversifying geographically across multiple locations," they write in the report.

"Another group will pull back from offshore supply chains and employ automation to bring activities back to home markets."

Neither of these trends is novel; the authors simply believe that we'll see an acceleration of existing trends.

Presently, nearly all manufacturing passes through China. If not in whole, at least for components. While it's a cost-effective solution, this became a choke point for global manufacturing during the pandemic.

The solution is to geographically diversify. It will be particularly easy in industries where substitute suppliers already exist. Scaling up will be easier because they're not starting from scratch.

"In contrast, it would be relatively costly for industries that produce complex, specialized [sp] goods, like aerospace parts and systems. Such companies will likely only consider more diversified supply chains if investors really begin placing greater weight on supply chain resiliency rather than pure cost efficiency."

If it's effective in existing industries, the authors fully expect to see it take off in others – and quickly.

Reshoring supply chains

Offshoring was a simple, cost-effective way for global businesses to produce products for their supply chain, however there was already a move toward bringing the production of critical components back either in-house or, at very least, to a domestic supplier.

"Reshoring will likely require an increased reliance on automation and robotics. This will allow companies to offset higher costs in their home market by replacing labor costs with upfront capital costs."

Expect to see an increased uptake in things like 3D printing, already something that was forced into service to create masks for healthcare workers in areas where supplies were limited.

Ensuring financial stability

In the same way that we saw bottlenecks and choke points in the manufacturing chain due to physical distance, suppliers going belly-up could cause a cascading effect on global supply chains.

The authors believe that a company's balance sheets should be taken into account in the future. "The prospect of a large competitor going out of business is usually thought of as an opportunity to gain market share.

"However, if the demise of a large player induces bankruptcies up and down the common supply chain it would be highly disruptive to survivor firms as well."

More government intervention

Too big to fail was a rallying cry during the GFC, and it continues to be so today. "Almost every country has industries deemed simply too important to be left to free markets, such as nuclear plants or AI capabilities."

The authors believe that we'll see significantly more government regulation across a wider span of companies to ensure that nations and their people are not over-exposed during the next crisis. "We are dangerously overdependent on a global supply chain," noted one top US trade advisor. "Never again should we rely on the rest of the world for our essential medicines and countermeasures.

The future of the office may be from home (and a lot less dense)

The authors of After The Great Lockdown look at a lot of different factors that organisations need to think about for their future operations. Like the office.

"If the mass restlessness during the Great Lockdown has demonstrated one thing, it is that humans are social animals who need to interact with others."

They believe we'll see a continued expansion of remote working while the density of offices will relax. Indeed public health officials in some jurisdictions, "may seek to amend building codes to lower the occupant density of buildings," they write. While the office is likely not going away, it will certainly change.

Obviously, we need to first survive the next few months. That's step one.

Thereafter, we have a chance to re-evaluate how we interact with each other. "Only time will tell which ones [changes] will be etched into the corporate landscape long after the financial scars from the Great Lockdown have healed.

"It is imperative that long-term investors look past the immense disruption of today to consider how this episode will transform the investments in their portfolios tomorrow."

Read After the Great Lockdown here.

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