May 4, 2020

The extent of COVID-19 impacts are unclear. However, megatrends are emerging that affect global supply chains, our virtual existence, and certain industries.

The severity of COVID-19 extends past the humanitarian crisis and challenge to global health systems. As German Chancellor Angela Merkel said in impactful terms in a broadcast address: “The situation is serious. Take it seriously.” It has shaken markets, supply chains, and how we live and work. The short- and long-term impacts are unknown, but we will see its reach extend well past the initial economic shock.

Initial implications
Our general rule of thumb in thinking about COVID-19 economics is the financial impact of a sudden, sharp recession. Effects on individual industry sectors are roughly in line with those most impacted in a recession. These industries include tourism, hospitality, and others associated with disposable income, along with industrials, commodities, and additional areas tied to capital spending. We are in a global state of unsettled employment rates, consumer sentiment, and financial security. More resilient sectors in this type of environment include food and beverage, healthcare, media and telecommunications, and technology.

Emerging megatrends
Beyond initial impacts and regardless of the length and intensity of the virus itself, there will clearly be lasting effects. What those long-term, lasting impacts may be are very unclear. However, there are megatrends emerging.
 

1. A new view on the global supply chain
   The disruption of global supply chains for critical components—including raw materials and parts—is driving industry leaders to assess global dependencies. For example, consider that up to an estimated 80% of the world’s basic pharmaceutical ingredients are believed to come from China.1 Just-in-time manufacturing and inventory processes have concentrated supply chains that were previously solely focused on the lowest cost environment. Prior to the virus shutdown, these processes (along with a focus on economies of scope and scale) were dependent on rapid and free movement of supplies and components globally.
   
   COVID-19 is likely to focus companies and governments on these dependencies and weaknesses, perhaps reversing trends toward further globalization. This may cause supply chains to become more complicated and expensive. The assessment of manufacturing logistics and process silos may result in a realignment toward greater diversification, inventory levels, and redundancy—potentially at the cost of higher expenses and lower profit margins for many sectors.
    
2. The accelerated adoption of the virtual and the internet
   With millions required to work from home, companies and their employees are seeing what is possible. We are likely to see a continuation of some of the increased work-from-home percentages in any of a number of industries. Connectivity (both reliability and speed) will have even greater importance as more employees (and students) are dispersed outside of centralized locations. In healthcare, as an example, the growth of telemedicine for patients and remote monitoring for clinical trials will impact both the care of patients and the pharmaceutical to-market timelines.
   
   Streaming of entertainment and education, ecommerce, and delivery services are all likely to see accelerated and sustained demand increases. Expect a further accelerated decline in retail brick-and-mortar stores after this push toward digital channels. At the same time, is there any doubt that fear of contagion and extended periods of isolation and quarantine will have a significant impact in slowing the growth of the sharing economy?
    
3. A profound effect on travel and hospitality
   Almost overnight, many airlines, hotels, and other travel-related goods and services have reduced capacity and services. Expect the impact on these sectors to be deep and linger long after many other economic sectors begin to see recovery.
   
   How will consumer behaviors change? The lasting impacts are decidedly unclear, but, as in other deeply challenging times, downturns can drive new opportunities and efficiencies. As Kristalina Georgieva, International Monetary Fund managing director, explained, “We don’t know yet how our economies and way of life will change, but we do know we will come out of this crisis more resilient.”2 We see this resilience every day during the outbreak—from physicians and nurses in our hospitals to truckers and front-line service workers.
   
   Supply chains are stretching, but are not snapping. We have seen institutions like supermarkets change almost overnight by instituting social distancing measures and one-way aisles, while increasing contactless payments systems. These changes reflect the evolving social behaviors of their customers. People adapt and companies adapt to people. We can count on companies conforming to the new needs, desires, and behaviors of people after COVID-19 makes its mark on society.

¹ Huang, Yanzhong. The Coronavirus Outbreak Could Disrupt the U.S. Drug Supply. Council on Foreign Relations. March 5, 2020. https://www.cfr.org/in-brief/coronavirus-disrupt-us-drug-supply-shortage....
² Georgieva, Kristalina. Confronting the Crisis: Priorities for the Global Economy. International Monetary Fund. April 9, 2020. https://www.imf.org/en/News/Articles/2020/04/07/sp040920-SMs2020-Curtain....