The COVID-19 pandemic is having an immense effect on our economic ecosystem and is an unprecedented shock that will significantly impact future economic development.
As the first wave of the COVID-19 pandemic spread across the globe, lockdown and social distancing measures led to a plunge in demand and supply. Supply chains have been massively disrupted from the outset of the pandemic and continue to struggle even as regional clusters start to reopen. As the crisis has developed, four groups of companies in different sectors have emerged. There are companies that had a healthy and functioning business model before COVID-19 and companies with business models that were already under pressure going into the crisis. These groups can be divided further into those that are likely to be temporarily negatively affected and those for which the negative changes may be permanent.
Healthy business models
Depending on industry and company, shocks from COVID-19 may be temporary. We are already starting to see demand returning in some sectors. In many cases, however, companies are struggling with ongoing disruption. This is expected to continue for the remainder of this year, and any solution will depend largely on the availability of a cure or vaccine for COVID-19. Many sectors will see a return to a “new normal,” and will not need to change their existing business model. Such sectors may include hospitality (e.g., hotels and restaurants), advanced manufacturing, oil and gas, or technology, media and telecoms (TMT), which has seen some success in the COVID-19 crisis.
Other sectors are experiencing a different impact. Shocks due to COVID-19 have been disruptive and may lead to permanent change due to changes in customer behavior, due to fear, regulation or a shift in values. Their previously healthy business models will therefore need to adapt; for example, airlines are not only experiencing a drop in demand of more than 90% but also fear longer-lasting effects. Ongoing travel restrictions impacting personal travel, plus new ways of working, and the economic downturn causing businesses to defer travel, have the potential to reduce overall demand for air travel permanently.
Stressed business models
Other companies in various sectors, were already under pressure before COVID-19. These companies have been impacted by the current crisis in a different way. The pandemic has served as more of a catalyst for existing problems and in some cases revealed the true extent of their problems. The crisis has led to an immediate need for action, shortening the time available to react to underlying issues and to prepare a structured response. It may be a chance for many to address the need for structural change, but with a significantly more negative impact in the shorter term due to COVID-19.
For example, the automotive sector has been struggling with overcapacity and the need for structural change for some time. Non-essential stationary retail has also been heavily impacted by an immediate drop in demand due to lockdown. Changes in consumer behavior and the increasing shift to online channels presented challenges to this sector before the crisis. Companies need to more urgently take action to make the necessary changes in their business models to be able to compete during the crisis and to remain relevant in the future.
Some companies will experience a similar acceleration of challenges as a result of the COVID-19 disruption but will not be able to restructure or turn their business around. They will find that the sustained changes caused by COVID-19 have rendered their business model obsolete, and it will remain so once the crisis has passed.
The following graph illustrates these four groups of companies with a categorization of sectors as described above, indicating their potential need for restructuring: