COVID-19: changing industry fortunes and how businesses can thrive

The strong

The outlook for the consumer technology, e-commerce and health care 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 customers as the COVID-19 pandemic shifts their lifestyle and consumption habits.

E-commerce companies have seen huge growth in transaction orders and gross merchandise value, despite challenges with supply chain disruption and last-mile delivery. Several large e-commerce platform players are likely to turn profitable in the next 12 to 24 months.

While resources in the health care 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 capitalize on the expansionary opportunities, organizations, 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 an uneven disruption with commercial retail and REITs facing the strongest headwinds as we envisage structural changes to how space is used. The increased emphasis on online retail channels and new F&B business models like cloud or dark kitchens also softens real estate demand. Take for example plans announced by Gojek and Rebel Foods to build 100 cloud kitchens in Indonesia in 18 months.

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. Malls also have to deal with social distancing and temperature checks, which will impact footfall. At the same time, companies now realize that they may not need that much office space or are looking at reimagining that space for collaboration, 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 during the pandemic, 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 twins in maintaining operations, robotics and artificial intelligence 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 a structural decline even before the pandemic, remains under pressure, given plummeting oil prices and the 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 by controlling capex and opex. As the new normal sets in, the sector will recover, as oil is still required, but that will take time and certainly not back to the path it was on before the crisis. The contours of the industry will be reshaped as the energy transition accelerates in some regions, while others focus on protecting existing energy producers. As oil companies restructure, they will also have the opportunity to review their business model, exit non-core businesses, and embark on digitalization 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 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 persists into the future remains to be seen.

Navigating 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?

EY considers it necessary for businesses to plan over three time horizons.

In the “now”, we advise businesses to develop contingency plans to facilitate quick, effective responses to possible scenarios, as well as manage short-term liquidity to preserve value.

Looking at the “next” phase, defined as the next six months, businesses will need to focus on areas such as finance and balance sheet, portfolio rationalization and tax optimization, rapid cost takeout, and operational efficiency improvements.

While resolving near-term concerns, businesses need to also consider the “beyond”, i.e., after the next six months, and prepare to seize opportunities after the pandemic. The key areas of focus should include business strategy and transformation, supply chain diversification, M&As and portfolio optimization.