After the dust settles from COVID-19 the financial world may never look the sameResearch from PGIM shows how business models, strategies and actions of companies will need to adapt to thrive in a post-COVID-19 world
May 12, 2020 — NEWARK, N.J.–(BUSINESS WIRE)–What will the world look like after the coronavirus? When global lockdowns end, as families and communities recover, new opportunities and challenges will emerge for companies—and investors—around the world as they navigate the economic, social and political shifts brought on by the pandemic, according to research from PGIM Inc., the $1.3 trillion global investment management business of Prudential Financial, Inc. (NYSE: PRU).
In After the Great Lockdown more than a dozen PGIM investment professionals across fixed income, equity, real estate, alternatives, and asset allocation explore how the business models, strategies and actions of companies will need to adapt to thrive in a post-COVID-19 world.
“The structural changes unleashed by the Great Lockdown could transform the business landscape, creating new winners and losers around the world,” said Taimur Hyat, chief operating officer of PGIM. “Investors who anticipate these long-term transformations will be strongly positioned when the dust finally settles.”
PGIM believes four structural changes will reshape businesses for the long term:
- A barbelling of global supply chains: Resilient, multi-regional supply chains in some sectors paired with a reshoring back to home markets in other sectors.
- “Just in time” to “just in case”: A transition back from lean inventories to fat inventories, especially in capital goods, as companies balance higher costs with greater certainty around supply.
- The continued rise of “weightless” firms: A dramatic acceleration of the trend towards firms built on capital-light, technology-heavy models and centered on investments in software, research and development, data and intellectual property.
- A shift in real estate usage and footprints: A rethinking of the “live, work, play” urban real estate model and the co-working spaces that had powered the gig economy, with added momentum for logistics, cold storage and warehousing required to support the next wave of e-commerce and online retail.
While there are clear opportunities for companies that embrace these transformations, challenges abound—at least in the near term. Economically, the pandemic-induced global recession could reach a magnitude not seen since World War II, impacting employment, inflation, savings and investments for many quarters ahead.
Socially, with minorities and lower-income households disproportionately affected, the coronavirus crisis will fuel the growing tensions from widening income and wealth inequality. And politically, the Great Lockdown will escalate the ongoing tussle between globalization and sovereignty as the need for a multilateral response is countered by the compulsion to shut borders down. PGIM’s investment professionals have explored many of these critical topics this year and throughout PGIM’s Megatrends research series.
Excerpts From ‘After The Great Lockdown
Hidden Fragilities In Global Supply Chain
One of the most immediate and damaging impacts from the coronavirus pandemic has been the dramatic breakdown of global supply chains. This process began in China, which now accounts for roughly 20% of all intermediate and capital goods imports globally. As the government implemented restrictions in almost 90 cities, China’s manufacturing sector all but ceased operations.
Cross-border and domestic trade activity declined over 50% in a single week during the initial peak of the outbreak. The concentration of global corporate supply chains in a small number of low-cost locations led to increased vulnerabilities. The disruption didn’t end there. Having endured the shutdown of Chinese factories in February, Apple, for example, was suddenly met with new shutdowns in Italy, Germany, Malaysia and South Korea – where many of its component makers are located. Meanwhile, nationwide lockdowns in Peru, Chile, Canada and Mongolia halted the mining operations which produce the raw materials for most essential smartphone components.
Greater Geographic Diversification of Global Supply Chains
Nearly all manufacturing supply chains pass through China, as companies sought linear, cost-effective supply chains over the past two decades. Rising labor costs and pressures from the US-China trade war were already beginning to reverse this trend, and the coronavirus episode will likely accelerate this reversal. Many firms will likely pursue more geographically-dispersed, flexible, and sometimes purposefully redundant sources of supply in order to better withstand regionally concentrated or global supply and demand shocks. Countries like Vietnam and Mexico have already benefited from supply chains diversifying away from China.
This geographic diversification will be most cost-effective and prevalent in industries where substitute suppliers already exist. For example, global sneaker manufacturers like Nike and Adidas may find places in emerging Asia,
like Bangladesh, relatively easy to scale up because some manufacturing capability and know-how already exists.
Reshoring and Automation of Once-Global Supply Chains
On the other end of the spectrum, firms that have offshored steps in the supply chain that are now automatable may accelerate their “reshoring.” In particular, companies that rely on specialized components that are critical to the production process may be especially tempted to bring them back home. During the pandemic, distance has complicated life for companies chasing overseas suppliers, coping with other countries’ restrictions on the transportation of goods, or trying to understand different national regulations and standards around work. While reshoring may shift the concentration risk to their domestic market, many firms will find it easier to monitor and rely on supply chains closer to home. Globally, there was already an uptick in reshoring activity across chemicals, metal products and electronics. The coronavirus episode may very well broaden this trend.
A Stronger Focus On Vendor Financial Vulnerabilities
The sharp contraction in global economic activity in 2008 from the GFC left many tier 2 and 3 auto suppliers in the US straining for solvency.18 Ultimately, dozens of auto parts suppliers filed for bankruptcy the following year.19 With the COVID-19 shock to the global economy in the early stages, suppliers with weak balance sheets or limited access to liquidity are already straining, and bankruptcies may ensue later this year.
A New Era Of Government Intervention
Almost every country has industries deemed simply too important to be left to free markets, such as nuclear plants or AI capabilities. Government intervention in the supply chains of “essential” or “strategic” products – especially food, medical equipment, and pharmaceutical components – will almost certainly increase after the Great Lockdown.
Alongside a slew of other proposed government interventions, the rhetoric for supply chain restrictions is building already. A top US trade advisor noted, “We are dangerously overdependent on a global supply chain. Never again should we rely on the rest of the world for our essential medicines and countermeasures.” Even NATO is considering whether to produce more essential medical equipment in countries within the alliance.
Access “After the Great Lockdown” at here.
About PGIM and Prudential Financial, Inc.
PGIM, the global asset management business of Prudential Financial, Inc. (NYSE: PRU), ranks among the top 10 largest asset managers in the world* with more than $1.3 trillion in assets under management as of March 31, 2020. With offices in 16 countries, PGIM’s businesses offer a range of investment solutions for retail and institutional investors around the world across a broad range of asset classes, including public fixed income, private fixed income, fundamental equity, quantitative equity, real estate and alternatives. For more information about PGIM, visit pgim.com.
Prudential Financial, Inc. of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. For more information, please visit news.prudential.com.
*Pensions & Investments’ Top Money Managers list, May 27, 2019; based on Prudential Financial total worldwide institutional assets under management as of Dec. 31, 2018. Assets under management (AUM) are based on company estimates and are subject to change.