The COVID-19 crisis has tested many paradigms, especially globalization. Trade and supply chains, and corporate and government responses and strategy have been impacted. Even before the onset of this crisis, the globalization model was under pressure. The global financial crisis of 2008/2009 and the more recent Sino-American trade wars played their part. A global shift towards the prioritization of national interests has led to more domestically-focused populist and policy responses in recent years.
The onset of COVID-19 has accelerated some of this sentiment. The core tenets of globalization—movement of people, capital and foreign direct investment (FDI)—have been significantly affected. Most research has shown declines in all three.
The present crisis comes after a historic rise in markets and economies, record levels of international travel, strong growth patterns in Gross Domestic Product (GDP) and robust countercyclical buffers after a decade of stress testing. FDI does tend to be volatile; current and capital accounts do fluctuate. Against this backdrop, a jolt to the world economies will have important implications. However, do these implications signal a fundamental shift in patterns of trade and commerce? As ever, the future is hard to predict.
The scale of subsequent wave(s) of the virus, whether (and how quickly) a vaccine can be found and deployed, and how long this crisis lasts, will all affect the extent of change and future outcomes. The International Monetary Fund (IMF) predicts that at least some countries will have a V-shaped recovery, but also reports unprecedented requests for macro-prudential support, and bases its predictions on a successful vaccine.
In supply chains, the disruption has caused havoc for producers and consumers alike. Consider the potato farmer in Idaho. With restaurants closed, distribution channels upended and orders canceled, the crop is stranded upstream, creating excess supply where even destroying the crop costs money. With borders closed, disruption in transport links and businesses under pressure, the movement of goods internationally has been a formidable challenge, creating excess supplies on one end and shortages on the other.
In moving supply chains closer to home, swapping profitability for proximity is a complex proposition. Will businesses be comfortable with the higher cost of moving supply closer? Does this eliminate the risks, as we have seen in the potato farmer example? Is there a case for total flexibility in supply chains, and would that safeguard against the risk of disruption?
Should manufacturers have the ability to move suppliers from one country to another? Will that protect supply chains in times of previously-unforeseen disruption? One conclusion is certain; some of the byzantine supply chains need to change, and though this was true before COVID-19, this call for efficiency carries new weight.
Asset management firms are trying to answer some of these questions. Private markets with globally-integrated portfolio companies need to look closely at the implications on supply chains, as they have a direct bearing on the financial performance of their investments. Many private equity investors have focused on supply chain efficiency as a key to unlocking maximum potential from their portfolio companies. Even public market investors want to explore the underlying businesses of their equity positions, as share price is directly impacted by financial performance.
Finally, there is also the question of global finance and corporate strategy. Are companies that are vertically integrated and have interdependent business lines more susceptible to the present challenges, or are companies with independent business lines more at risk? What strategy should businesses be formulating and executing for the challenges ahead? How will COVID-19 impact global finance and the private markets?
In a recent webinar, SS&C and a panel of three scholars – who have also advised major corporations and are published authors – considered all the questions posed here. We explored the impact and recovery hypotheses, and considered various strategy responses that are likely to be most effective. Click here to watch the "SS&C Dialogues - Globalisation, Supply Chains and Corporate Strategy in the Face of COVID-19" webinar.