- SEA respondents expect a more severe impact and are less optimistic about macro conditions (SEA 88%, global 73%)
- SEA respondents expect a slower recovery extending into 2021 (SEA 64%, global 54%), yet are less concerned about the impact on profits and margins (SEA 32%, global 39%)
- Despite recognizing the need to accelerate the adoption of digital, robotics and automation, SEA firms are slow to leverage opportunities for M&A, industry consolidation and technology acquisition
The COVID-19 pandemic has seen business and global leaders trying to manage a crisis that very few were prepared for. According to the 22nd edition of the EY Global Capital Confidence Barometer (CCB22), Southeast Asia (SEA) respondents anticipate a prolonged and deeper impact on the economy, and are now focusing on developing resilience in their supply chains, protect their revenues and manage their margins and profitability, while reconfiguring capital allocation and M&A plans for the post-crisis world,
A majority (SEA 88%, global 73%) of respondents of the survey of more than 2,900 C-suite executives globally, including 260 from SEA (covering Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam), expect the COVID-19 pandemic to have a severe impact on the global economy in the form of depressed consumer sentiment, deep decline in consumption and disrupted supply chain. Interestingly, while respondents are concerned over the global economy, they are relatively more confident about the local economy, despite the high level of inter-dependence with the rest of the world. Only a-third (32%) of SEA respondents (global 38%) believe that COVID-19 will severely impact the local economy.
Vikram Chakravarty, EY Asean Strategy and Transactions Leader says:
“Hopes of a quick snap-back or a ‘V’ shaped recovery appear to have dissipated, except for a few sectors such as technology and pharmaceuticals, which may emerge from the crisis unchanged or even stronger. For other sectors, this is a moment of reckoning. We anticipate this pandemic will lead to the transformation (e.g., diversified industrials) or reshaping (e.g., oil and gas) of industries that may see a return of demand, but their operating and business models will change and we expect to see more digitization and robotics. For some sectors such as physical retail, this crisis may hasten their decline.”
Severe impact on global economy expected
Executives’ expectations toward economic growth have also changed significantly from a year ago. Then, 97% of SEA respondents (global 99%) believed that global economic growth was stable or positive. The sentiment dropped to 73% (global 82%) in early February, and further dipped to 48% (global 54%) when the survey closed in March. There was a clear shift in business sentiment in the middle of February in both global and local economy.
“From the survey results, we anticipate a more aggressive posture towards capital allocation globally. It is disappointing that we do not see the same level of aggression to drive industry consolidation in Southeast Asia. However, we suspect that stronger players will be using this period as an opportunity to roll up competitors.”
Indeed, executives are reviewing their operating models in response to the crisis. At the same time, governments around the world, including SEA, are proactively offering stimulus packages to help enterprise and people weather the impact of COVID-19.
Some boardrooms are rightly planning their future beyond the crisis. While 64% of SEA respondents (global 54%) expect a “U” shaped recovery period of slower economic activity extending into 2021, 30% (global 38%) see a “V” shaped recovery and a return to normal economic activity in Q3 this year. Very few (6% vs global 8%) foresee an “L” shape recovery, and recessionary conditions until 2022.
Nevertheless, every sector is experiencing direct or indirect impact of COVID-19, with almost all (SEA and global 95%) respondents expecting that the pandemic will cause a decline in profitability.
“We are all in the same storm but not on the same boat. In the meantime, we are working with clients to help ensure that their people are safe, and their businesses are resilient. However, the most important discussion we are having with them is about looking beyond the current crisis, using scenario planning to better understand their demand projections and the implications for strategy and capital reallocation.”
Preparing for what comes next
Executives are also planning their future beyond the crisis. Companies are already taking steps to effect change in their global supply chains (SEA 50%, global 52%), digital transformation (SEA 27%, global 31%), speed of automation (SEA 33%, global 36%), and management of workforce (SEA 48%, global 39%).
Many companies (SEA 69%, global 72%) already had major transformation initiatives underway. Pre-COVID-19 crisis, the key reasons driving transformation initiatives were pressure on revenue targets (SEA 24%, global 20%), attracting or retaining customers (SEA 14%, global 15%) and keeping up with competitors’ technology (SEA 14%, global 13%).
“Given the open nature of the SEA economies and the fragmented structure of the industries in this region, this crisis will have long-lasting effect. That said, players can come through the crisis better by seizing opportunities to transform digitally and through active corporate action to shed non-core assets and double down through acquisitions.”
Post-crisis recovery points to M&A
With the majority of companies assuming a recovery in the medium-term, 47% of SEA respondents (global 56%) will actively pursue M&A in the next 12 months. Three-quarters (SEA 75%, global 74%) of respondents are expecting to see an increasing competition for assets in the next 12 months, with a majority (SEA and global 55%) believing the competition to come from private capital.
“Despite the deep impact on profitability in the near term, the survey showed that the deep-rooted intentions to digitize and automate remain strong in the long term. This may well be an opportune time for firms to consider M&A to acquire digital firms where valuations have tumbled.
“Firms have learnt from past recessions where M&A activity remained muted for several years where the winners were those that took bold actions to avoid the ‘zone of regret’. Firms should aim for an internal transformation as well as active capital allocation to best prepare themselves for the future when the economy recovers. Crises can massively reshuffle the deck of winners and losers and it is important to look beyond the fog to make critical choices now,” he concludes.
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About the survey
The Global Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom practices in the way companies manage their Capital Agendas — EY framework for strategically managing capital. It is a regular survey of senior executives from large companies around the world, conducted by Thought Leadership Consulting, a Euromoney Institutional Investor company. The panel comprises select EY clients and contacts across the globe and regular Thought Leadership Consulting contributors.
• In February and March, Thought Leadership Consulting surveyed on behalf of EY a panel of more than 2,900 executives in 45 countries; 70% were CEOs, CFOs and other C-suit-level executives.
• Respondents represented 14 sectors, including Financial Services, Consumer Products and Retail, Technology, Life Sciences, Automotive and Transportation, Oil & Gas, Power & Utilities, Mining and Metals, Advanced Manufacturing and Real Estate, Hospitality and Construction.
• Surveyed companies’ annual global revenues were as follows: less than US$500m (25%), US$500m–US$999.9m (25%), US$1b–US$2.9b (18%), US$3b–US$4.9b (10%) and greater than US$5b (22%).
• Global company ownership was as follows: publicly listed (57%), privately owned (31%), family owned (9%) and private equity portfolio company (3%).