managing through the dislocationcommunications.sgtech.org.sg/~sgtech/edm/2020/07... · economy, and...

EY-Parthenon |

Managing through the dislocation

Resilience Framework and Digital

EY-Parthenon |

Contents

I. Economic situation and outlook►What is most reasonable recovery scenario?

►What is emerging megatrend?

II. Impact by sector and company►Which sector is more impacted or benefited?

►What would be possible scenario for corporates?

III. COVID-19 response framework►What does corporate need to do for now and future?

► How does DIGITAL matter?

EY-Parthenon |

The second wave has been started with delayed hope for solutionas of 18th July 2020

Source: Google News

“Experts estimate that a fast-tracked vaccine development process could speed a successful candidate to market in approximately 12-18 months –

if the process goes smoothly from conception to market availability”

“The US government is choosing three vaccine candidates to fund for Phase 3 trials under Operation Warp Speed”

EY-Parthenon |

We all need to prepare global recession

WHO alerted (Dec 31)

Localized outbreak

Capacity problems in local public healthcare

Direct supply chain disruption

Medical supply shortages

Wait-and-see attitudes

International education and tourist decline

Downward pressure on commodity prices

Public Health Emergency of Intl. Concern (Jan 30)

Limited regional contagion

Direct and indirect supply chain disruption

Travel restrictions

Significant tourism and hospitality decline

Psychological risks

Pandemic (Mar 11)

Community spread in different countries

Labor supply shortages

Obstacles to business resumption

Market volatility

Public events cancelled

Fears of layoff and rise in uncertainty

Commodity prices weaken

Fragile public health infrastructure

Small & medium-size firm bankruptcies

Credit shortfalls

Non-performing loans

Financial disturbances

Loss of public confidence

Widespread risk-aversion

Vulnerability increases

Public health impact

Supply risks

Demandrisks

Phase IISector disruption

Phase IIIGlobal crisis

Phase IVGlobal recession

Phase IChina shock

January 2020 February 2020 Current 2-3 years

Source: EY-Parthenon Analysis

EY-Parthenon |

Governments’ large stimulus packages increase asset inflation for sure

Sources: IMF, EY-Parthenon Analysis

As of 17 April, more than 169 countries and territories have announced more than US$8

trillion in fiscal actions.

Total COVID-19 discretionary fiscal actions as a percentage of each country’s 2019 GDP

Direct aid

$260b Expanded Unemployment Insurance and

Pandemic Unemployment

Assistance

Loans to business

$150bAid to states and

territories

$32bGrants to air carrier workers, contractors

$350bSupplemental appropriations

$500bEconomic

Stabilization Fund(loans & relief for

industries and state and local gov’t.)

$25bPassenger airlines

$4bAir cargo carriers

$17bNational security

businesses

Embe

dded

wit

hin

$500

b

$377bSmall business

loan forgiveness grants, other grants

The CARES Act is the largest single stimulus packageto date at $2.2 trillion

< 2%

2– 4%

4– 9 %

9 - 15%

15-35%

No Data

EY-Parthenon |

-1000-900-800-700-600-500-400-300-200-100

0

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sept

Oct

Nov

Dec

Scenario 1 Scenario 2 Scenario 3 Scenario 4

-20.0%-18.0%-16.0%-14.0%-12.0%-10.0%

-8.0%-6.0%-4.0%-2.0%0.0%

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sept

Oct

Nov

Dec

Scenario analysis of the economic impact on SingaporeSummary of GDP and employment impacts

Employment impact from base case (FTEs)1

GDP impact from base case (%)

1This is computed based on the loss of productive hours to the economy. It is assumed that the one full-timeequivalent (FTE) works 40 hours a week. A negative employment impact refers to an individual who is laid off butstill actively looking for jobs or an individual who is suspended temporarily but still officially contracted or anindividual whose working hours have been reduced but is still officially contracted due to COVID-19 pandemic.

Low economic growth and challenging public finances

High unemployment and inequality

High level of societal vulnerability

Resilience more important than efficiency

Broad government economic footprint


EY-Parthenon |

The EY Future Consumer Index on global behavior and sentiment shows that people emerging from lockdown remain deeply cautious but shift to new normal


EY-Parthenon |

Contents



II. Impact by industry and company►Which sector is more impacted or benefited?



EY-Parthenon |

We have analyzed the impact of COVID-19 on different industries based on the following key criteria

Sources: EY-Parthenon analysis

Demand / revenue impact

► Potential drop in revenue from COVID-19► Degree to which consumer demand and prices are sensitive to COVID-19 effects► Degree to which there is consumer demand for existing channels (e.g. online vs.

offline, essential services, etc.)

Supplychain disruption

Liquidityrisk

Shareholderreturns

COVID-19 impact evaluation criteria

► Disruption in procurement of raw materials / use of fixed assets► Dependency on external sources of inputs and ability to shift supplies and

sourcing strategies if needed► Ability to meet existing demand by providing use of fixed assets

► Issues in securing liquidity and raising capital► General cash levels in the industry and access to short–term financing► Possibility for measures to stop uncontrolled cash-outflows► Ability to raise capital without incurring penalties for increasing gearing

► Degree to which shareholder returns have declined and are expected to decline► Degree to which sales and prices are sensitive to COVID-19 effects (e.g. as a

result of consumer patterns, government lockdowns, etc.)► Ability for companies in the sector to continue operating business

EY-Parthenon |

Summary of COVID-19 impact by sector – Weaker


Supply chain disruption

Liquidity risk

Shareholder returns (YTD)1 -54%

Hospitality

• Significant risk based on substantial fixed costs and impact of cancellations and lack of bookings

• Hospitality players have sustained through crisis via financial engineering, short-term cash flow from quarantine packages, while maintaining brand image with CSR efforts

-43%

Oil & Gas

• Falling oil prices and supply surplus threatening players with higher production costs and significant liabilities

• Oil and gas players have invested into alternate revenue streams, leveraged technology to reduce cost, and divested non-core assets

-41% 2

Retail malls

• Current disruption in operations worsened by accelerated adoption of online retail (sales increase of 3-4X by 2025)

• Retailers have been reacting to COVID-19 by leveraging online channel and sharing economy, and by engaging consumers across multiple channels

-37%

Automotive

• Deferred consumption due to the high cost during times of economic downturn

• Best-in-class automotive companies have reacted to GFC and COVID-19 by exploring new business models, tailoring marketing messages, and adapting production practices

Note: (1) Based on S&P Industry and Sector indexes, 2 Jan 2020 to 8 May 2020 , (2) based on FTSE Retail REITs Total Returns 2 Jan 2020 to 30 April Sources: EY-Parthenon analysis

-61%

Aviation

• Travel restrictions and flight cancellations due to COVID-19 have led to a US$ 48b revenue loss from Jan – Apr ’20 and a predicted 44% - 80% drop in international passengers for 2020

• Airlines have reduced capacity and repurposed some passenger airplanes to carry cargo

EY-Parthenon |

Summary of COVID-19 Impact by Sector - Stronger


Supply chain disruption

Liquidity risk

Shareholder returns (YTD)1 -5%-12% +14% 2-15%

Note: (1) Based on S&P Industry and Sector indexes, 2 Jan 2020 to 8 May 2020, (2) NYSE FANG+ Index, (3) February 2020, China Sources: EY-Parthenon analysis

-8%

Commercial Real Estate

• COVID-19 is disrupting real estate unevenly across sectors with commercial retail and REITS facing the most headwinds

• Real estate developers are exploring making tactical acquisitions in line with the strategic fit to their portfolios

FMCG Food Producers

• Increase in packaged food consumption driven by fears of scarcity, hygiene concerns, and changing behaviors (e.g. dine-in)

• FMCG packaged goods producers are responding to COVID-19 by engaging consumers directly via digital channels while maintaining operations

Last Mile Logistics

• Sudden demand spike from 30% to 80% growth for subsegments like online food delivery has resulted in logistical challenges

• LML providers have invested into their businesses to take advantage of growth opportunities, and leveraged their resources to combat the outbreak

Consumer Technology

• Largely positive impact, with super-apps, e-commerce and OTT companies emerging as the winners

• Significant M&A opportunities likely to arise with opportunities for winners to consolidate and old economy players to acquire distressed players

Pharmaceuticals

• Online platforms are witnessing a sudden spike in demand for their services; sale of prescription drugs fell by 27%3

• Pharma companies have responded by postponing acquisitions, accelerating digital transformation and exploring new funding models

EY-Parthenon |

The impact of COVID-19 varies considerably across industries: the degree of impact in turn shapes the strategies to respond to the crisis

Strong

Transformed

Industry Examples of Strategies

Reshaped

Unknown

Industry position

• Industry was strong/ gaining going into the COVID-19 outbreak and may emerge unchanged/ stronger

Consumer TechPharma

• Affected by demand drop and will come out with a greater need for a changed business/ operating model

AutomotiveReal EstateFMCG FoodLogistics

Oil & GasPhysical Retail

• Industry already facing structural decline hastened by the event

• Industry’s future is uncertain and the demand recovery is long-term

TravelHospitality

• Need for longer-term resilience, e.g. hospitality and travel players need to focus on shoring up and strengthening financials

• Need for further investment both to cope with increased demand during the crisis, and to strengthen position post-crisis

• Need for business transformation, e. g. automotive companies are exploring robotics and real estate developers are looking into transformative acquisitions and digitization initiatives

• Need for divestitures and repositioning, e.g. Oil & Gas players need to diversify their risk with new revenue streams; traditional retailers need to strongly leverage online channels

EY-Parthenon |

Re-positioning is possible: Sector and Company Rotation

Fallen Angels► Strong player but financially exposed► Might be short-term blip – so take advantage as a

competitor or acquirer

Inevitable Tragedy► Weak sector and weak balance sheets will hasten

decline► Cut your losses and exit these businesses

Once in a Lifetime► Strong balance sheet – allows for once-in-a-lifetime

opportunity to leap ahead of competitors – making investments/ acquisitions

► Must be BOLD / and bring in strong management

LUCKY – Sector + Balance Sheet► Must continue to invest through the crisis ► High chance of coming out stronger

Performance (Pre – Post Crisis) Examples

Strong Strong

Weak Weak

1

2

3

4

Rules of thumb(1) Companies that moved boldly to acquire/divest during crises had significantly higher total shareholder return(2) Companies that acquired/divested during crises took an initial hit to cashflow, but later generated much better cashflow

1

2

3

4

EY-Parthenon |

Key Megatrends that ‘STRONG’ company adapts

► Dark Factories / Supply Chain - costs increase overall – firms build in buffers

► Labor costs arbitration is less important due to AI driven support functions (e.g. chatbots)

Robotics/ AI for supply chain and functional

► Expect Company Rotation though not as much sector rotation

► Well run / aggressively managed firms will be exposed / giving lagging player a short-fuse opportunity

Company rotation (short-fuse opportunity)

Megatrends Implications

► Platform wins - Retail/ Distribution is less important and margins shift downstream

► Route-to-market constraints eased – Last mile wins

Profit pool shifts across value chain to customer touch points

► Scenario Planning and Macro Linkages become relevant again

► Supply Chain – costs will rise ► People – protection and increased automation

Build resilience

► Expect aggressive Traditional/ Digital Platform Alliances

► Strategic M&A/ investments in aspiring unicorns as values are up to 60-70% less

Rise & rise of digital

EY-Parthenon |

Post COVID – need for a comprehensive and single sourced point of view is growing

For internal EY use only, not for distribution

EY-Parthenon |

Contents



II. Impact by industry and company►Which sector is more impacted or benefited?



► How to push Digital Transformation?

EY-Parthenon |

EY Enterprise Resilience Framework


Short term finance management

Supply Chain Management

Workforce mgt. & employee health

NEXT & BEYOND Strategy update

Legal & contract DR

Customer & Brand

protection

Long Term Value

RE-POSITIONING STRATEGY

M&A options

Defer non-essential spend Sector

scenarios

Time

Deg

ree

of b

usin

ess

resp

onse

Low

Hig

h

NOW

Competitive responses

Update scenario

modelling

Supply Chaindiversification

Demand scenarios

Use headroom in facilities

Rollover LCs / guarantees

Build and maintain cash

buffer

A/C receivable financing

Review hedging arrangements

NEXT (2 to 3 months)

Offer part-time work and/or unpaid leave

Extend alternate sales

delivery

BEYOND (6-12 Months)

Create Crisis Management

task force

Supply risk assessment

Cash flow forecasting

CRISIS & LIQUIDITY MANAGEMENT

Contingency working

arrangements

Review S&OP Inventory

Communicate BCP

Stabilize customer demand

Customer risk assessment

Faster & agile market

response

Portfolio ShiftBusiness model transformation

A B CVALUE CREATION

Legal and regulatory

watch

ZBB and scenario planning

Commercial and operational

quick wins

Working capital

Capitalallocation

Portfolio review Debt optimization

Tax optimization

support

Workforce capability

rethink

EY-Parthenon | Impact of COVID-19 - Confidential

Workforce management & employee health

In the face of the disruptive forces changing the working world, organizations need to become much more adaptable to rapid change — and they need their people to be flexible and agile

Customer & brand protection

Develop a customer-centric response to mitigate revenue risk and build a competitive advantage at the point of sale

Short-term finance management

Strong liquidity and working capital management improves the perception of a business and creates cash flow. This in turn supports strategic capital allocation goals and improves commercial and operational performance

Supply chain management

Addressing an organization’s overarching end-to-end supply chain and operations strategy to grow, optimize and protect their operations

Legal & contract dispute resolution

Provide clients with the detailed guidance you need to navigate the increasingly complex legal environment of the global economy.

Establish crisis management teams/task force to calmly manage short term (liquidity) impacts and countermeasures

Assess potential risks and define coordinated response mechanisms

Communicate clear and positive messages via coordinated standardized communication tools

Focus on employee health and protection of productive assets – define supply chain and production risks

The EY crisis management framework provides businesses with a model and a task force to help mitigate control. The crisis management framework rests

on five pillars that reflect all areas of impact

NOW - Navigate immediate liquidity and crisis governance challenges to manage volatility for downside


A

EY-Parthenon |

QSR P&L cost structure and typical ZBB savings1 FOOD SERVICE EXAMPLE – INDICATIVE

XX Typical ZBB savings

15%

12%

7%

5%

5% Royalties

5-10%

Delivery

Cost structure

10-15%

35%

Marketing

Corporatesalaries

General andutility

Rental

Personnel

Rawmaterial

0%

~8-10%

~15%

~2-5%

~5-10%

~6-8%

~8-12%

~4-5%

Revenue(Indexed

vs. steady state)

% EBIT Margin

% ROIC

EBIT and ROIC impact of ZBB

Steady state Crisis state (Present)

Short-term (6-12 months)

Medium-term(12-18

months)

1.0x0.6-0.7x 0.6-0.7x

1.0x

7 to 11% -20 to -12% -6 to 2% ~13%

4 to 8% -35 to -25%

-10 to 0% 9 to 12%

NEXT - ZBB can help drive EBIT uplift of 5-6% & ROIC uplift of 4-5% in 12 to 18 months

Note: (1) Based on project experience Source: EY-Parthenon experience

B

EY-Parthenon |

Actions

Opportunistic acquisition /

strategic divestiture

Supply chain transformation

Accelerating digitalization

BEYOND – EY can support companies to take actions to reposition their businesses for the post-COVID future

Sources: Industry Reports, CapitalIQ, Various News Articles, EY-Parthenon analysis

Type Cases

Consolidation

Cheap valuation

Divestment

SC diversification

SC Localization

AI / Automation

Digital value creation

nnn

Had strong digital and analytics in place and rebooted its brand image post crisis –adopted online and mobile first approach; EV growth ~8x from 2010-20202

During the GFC, Boston properties took advantage of the downturn to acquire heavily discounted trophy office towers in markets that which will recover faster in upturns

During the current crisis, Nike adopted a “Consumer Direct Offense” strategy and reported a 38% digital sales growth in Q2 FY20

In recent years, Samsung shifted part of its supply chain from China to Vietnam and India. Because of its SC diversification, the company hasn’t experienced any meaningful production disruptions during the current crisis.

To reduce the risk of labor fallout due to COVID-19, BMW uses robots for small factory maneuvers such as picking and stacking

Belgian-Brazilian brewer InBev buys Anheuser-Busch in 2008 and creates the world’s largest beer company and one of the largest consumer goods group in the world

Virgin Australia sold 35% of its loyalty program ‘Velocity Frequent Flyer’ in 2014 for US$216m to Affinity Equity Partners in order to accelerate its growth

Aston Martin increased parts sourced locally in the UK above 55% ahead of Brexit in 2019 from just 29% parts sourced locally in 2017

C

Direct to consumer

New economyDisney rolled out Disney+ streaming service (OTT) to compete against Netflix and on the first day the there were 10 million sign ups

EY-Parthenon |

Companies need to think through the development of their digital strategy and roadmap to support their overall corporate strategy to win in the market…

CloudIoT Big Data Robotics 3D Printing Cybersecurity Blockchain

Corporate digital strategy

Disruptions Productivity

• Full potential• Build Vs. Buy• Digital governance

Digital business plan

New business models OperationsCustomer experience

Capability building

Organic building• Analytics• People/Process/IT

• Valuation• Integration

Inorganic building

• Origination• Diligence

New capabilities lay the groundwork for new strategic options

Acquisitions / Divestments Supply Chain Digitalization

EY-Parthenon |

The rise of the new digital economy in SEA is expected to unlock ~USD 101B by 2025F

Sources: Google report, EY-Parthenon analysis

For internal EY use only, not for distribution

101B32B~306B

2015 2020 2025F

Southeast Asia Internet economy GMV (USD B, 2015 – 2025F)


EY-Parthenon |

The digital enablers continue to evolve ushering in the new digital economy

Sources: Analyst reports , news articles, EY-Parthenon analysis

Digitalization

Digital transformation

Birth of the new digital economy

Wave-1-Data and Connectivity

Wave-3- Mature Digital ecosystems, New

business creation, data monetization models

Enabling Technologies and Trends

Wave-2-Convergence of new technologies as it is

frictionless and decentralized. Rise of platforms

2000

2010

2020-Digitalization

Digital transformationDigitalization

►Higher internet penetration rate►Ease of automation►Decrease cost of the following:

►Storage►Computation►Sensors

►Rise of Social ►Advent of Smartphone,

Ecommerce

►Emergence of new technologies

►Cloud►Platforms► IoT►Smart Robots►M-commerce and Super

Apps

►Start of a new economy:►Multi-platforms and

super-apps►AI►Blockchain►5g►Smart bots►Nanotech


EY-Parthenon |

Digital Ecosystems are emerging, disrupting or maturing across industries

Sources: Analyst reports , news articles, EY-Parthenon analysis

Traditional companies

Digital Ecosystem

No integrated and clear digital ecosystem view.

Isolated and pocketed transformational efforts

Digital ecosystem first strategy is clear and well-defined. Digitally mature models already exist

Companies are aware of and respond to signs of digital ecosystem playbook. The best in class models yet to mature and unbundling is happening

Level-1: DE are Evolving

Level 2: DE are disrupting

Level 3: Digital Ecosystem are Maturing


EY-Parthenon |

…and do not miss the biggest tectonic shift of the digital ageDo not miss the biggest tectonic shift of the digital age


Product centric

1:1 supply chain

Linear Growth

Capital Intensive

Conventional JV’s

IT, Ops focused

Over-reliance on few channels

Limited Diversification

Competitive models

Data-Dark

B2C or B2B

Dependent on Industry trends

Customer-Journey Centric Offer

Platform based value chain

Exponential Growth

Asset-Light, Aggregator Models

Multi-partner open ecosystems

Digital-First, 360* transformation

Omnichannel

Multi-Industry, Multi-Geography

Collaborative, Co-opetition

Personalized Data-Engines

B2ME

Future-proof, resilient, disruptors

Traditional Models Digital Ecosystem Models


EY-Parthenon |

42%42% of recently interviewed Real Estate executives rank ‘better user experience’ as the greatest opportunity for digital twins to deliver value (EY)

3.6B With over 34% overall smart building devices, over 3.6 billion devices forecasted to be installed by 2021. (Memoori.com)

3.5% Up to 3.5% higher occupancy by using BIM (Introduction of BIM by European Public Sector)

20%Digitizing engineering, construction, and operations processes capture up to 20% of capital project expenditure (Introduction of BIM by European Public Sector)

Convergence of the physical and virtual world where every process, product or service is represented digitally


REAL ESTATE EXAMPLE

Outcomes

• Digital replica of physical assets• Spatial awareness• Root cause analysis• Intelligent recommendations• Predictive maintenance• 3D database of asset info• Data storage and historical recall• Building portfolio data• People flow data• Wellness & productivity• Experience management

EY-Parthenon |

Are you ready to disrupt yourself? Truly digital transformation to new economy

Sources: EY Consumer Study


EY-Parthenon | Page 29

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