Strategy Note /

Business models after Covid-19: Accelerating the next industrial revolution

  • A wholesale relocation of supply chains is impractical and unlikely

  • The adoption of new technology in services will accelerate, hastening decline of “analogue” services

  • Tourism and travel: leisure may survive better than business travel, emerging markets better than developed

Business models after Covid-19: Accelerating the next industrial revolution
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
16 April 2020
Published byTellimer Research

In our latest look at the impact of the economic shock brought on by Covid-19, we focus on business models. We think the adoption of automation in manufacturing will accelerate, and stockpiling for corporate and national security purposes will be given greater priority, but a wholesale relocation of supply chains is impractical and unlikely.

There are several reasons why wholesale relocation of manufacturing away from China or full repatriation on an entire vertical chain of manufacturing back to home markets, even ones the size of the US, are unlikely.

  • While reliance on manufacturing located in China has exposed a vulnerability in all supply chains, the relocation of that manufacturing back to a home country large enough to potentially host it (eg the US) would not any better guarantee the availability of product during a truly global pandemic.
  • The diversification of production away from China was already underway (hence the growth in manufacturing across South Asian countries like Vietnam and Bangladesh, and, even, in East Africa in recent years) – it is just that this was being driven mainly by cheaper labour, efficient enough infrastructure, and, more recently, more favourable export tariffs.
  • Many richer countries may no longer have the environmental appetite, or economically viable supply of intermediary inputs in sufficient quantities to support the complete repatriation of manufacturing – this could apply to the UK as much as it does to Qatar.
  • Some countries, both developed and emerging, may be too small – in terms of population, space, and financial capital – to establish manufacturing on a scale to shift away from dependence on China.
  • The shift of a complete vertical manufacturing supply chain means that raw materials and intermediate inputs are required, as well as assembly, and this compounds all the factors listed above.
  • Unless the world shifts entirely to a state-driven model of production, then privately-owned companies will remain the owners of manufacturing production. Private companies will continue to maximise shareholder return and likely resist the relocation of manufacturing unless the state completely skews regulation (through business licencing, tax regimes, and subsidies) and forces more expensive product onto its population of consumers.
  • Self-sufficiency in manufacturing is an illusion. Just ask those who crafted the Saudi national strategy in the 1970s to establish food security, of which self-sufficiency, enabled by the deployment of technical exports and huge fiscal resources, was one component. This ended up delivering, by the 1990s, too much overpriced wheat, for example, and a massive depletion of water resources. Saudi ultimately shifted to a strategy of purchases of overseas land spanning, for example, Australia, the Philippines, South Africa, the US, and Argentina).
  • As a way of repatriating manufacturing (of potentially anything, apart from food), the adoption of 3D-printing may alleviate some of these challenges (eg supply of labour, some raw materials and intermediary inputs) but only where 3D-printed products are durable enough (and we are still very early in the evolution of 3D-printed products for the mass market) and only for countries with sufficient indigenous supply of electric power and petrochemicals.


Figure 1: Global manufacturing share – China is 28%


UN, Tellimer Research

The adoption of automation in manufacturing will accelerate but within limits.

While entire manufacturing chains are unlikely to relocate, within existing manufacturing facilities the embrace of automation technologies is likely to occur more rapidly.

Still, there are obvious limits to this: individual companies will only adopt automation when the probability-weighted costs of human indisposal (eg in the event of an epidemic) outweigh the present value of the fixed costs of new machinery, and there are some manufacturing processes involving human input that automation is still a long way from solving (eg manipulating and twisting fabric for stitching complex garments).


Figure 2: Industrial robot installations

Source: International Federation of Robotics, Tellimer Research

Figure 3: Robot density


Source: IFR, Tellimer Research

Figure 4: Installations of robots by industry (2018)


Source: IFR, Tellimer Research


Stockpiling for corporate and national security purposes will increase

While the complete repatriation of manufacturing is not feasible, greater stockpiling – for both corporate inventory risk management and, for essential items, government security risk management – is inevitable. The end result is higher cost for consumers.

The adoption of new technology in services will accelerate, as will the decline of “analogue” services (e.g. traditional retail, banking).

It is an almost universally consensus view, reflected in the outperformance of technology, and in some cases, telecom, equities throughout the crisis, that the delivery of services based on human capital and, traditionally, physical meetings, will shift even more rapidly than it already was to internet-based platforms: eg healthcare, retail, education, finance, and entertainment. In emerging markets, the most widespread instance of this is in the more rapid adoption of online payments and transfers.

While technology companies benefit, with perhaps a few years’ worth of technology adoption gains within the space of a few months, traditional retail, advertising, entertainment (sports, music), real estate companies and banks exposed to increasingly stranded retail and commercial assets suffer.

A few caveats that should be mentioned in this regard:

  • After such a prolonged period of social isolation there may be a backlash in favour of a return to the “bricks and mortar”, face-to-face, analogue, “real-life” version of all these services. At the extreme, for white collar workers, dressing up and working from the office might become every bit as much of a privilege as dressing down and working from home once was.
  • Technology’s gain should not always be mistaken for gains for the entire “sharing business model” and “gig worker” economy. The owner of the underlying asset might maximise utilisation in good economic times but in bad times they may be every bit as exposed to the fixed costs associated with that asset. Furthermore, this crisis has brought home one truth for asset owners in the sharing business model: the flexibility so cherished by home or car owners, or gig workers, in good times has been matched with the horror of near zero protection of income in a downturn.
  • The unexpected windfall of technology application users likely, in the short-term, does not drive higher revenues for technology companies, because most of them will be under, at least, soft pressure from governments not to charge fees for services (and may have been encouraged to cut fees to existing users) which have become mission-critical for most of an economy in lock-down. Whether these technology application companies will be able to start charging once the crisis passes (i.e. will governments interfere, or consumers resist), or will increasingly adopt revenue models based on mining user data for third-party advertisers, remains to be seen.
  • The unexpected windfall of users may also expose architectural flaws in a technology, particularly in terms of scalability, security and privacy. The highest profile example is, perhaps, Zoom Video Communications, which has seen a 20-fold increase in daily online meeting participants to c200m in the first quarter of 2020 but has also admitted to inadequate security defences against hackers and exploiters of private data. Precedents in the technology industry suggest that corporates and governments are more sensitive to data insecurity than consumers (who appear to place greater value on utility of the application than loss of privacy).

Figure 5: Price performance of tech-telco bellwethers (as at 5 April)
Source: Bloomberg, Tellimer Research

Tourism and travel: leisure may survive better than business travel, emerging markets better than developed

The shift of commercial meetings to online virtual meetings likely persists: the resulting cost savings will become embedded. However, for leisure travel the post-crisis outlook is not so clear cut. For potential international tourists at every income level, the liberation from many months of quasi-quarantine may act as a catalyst for a resumption of travel; a ticking off of items on the bucket list at a much earlier age than is usual.

Greater restrictions and higher costs (visas and health screening in advance, more expensive airfares and hotels after the closure of the financially weakest) may reduce value across the industry until sufficient supply exits. In markets with more informal and flexible labour, the tourism industry may survive in better shape than in those markets with highly restrictive labour. All other things equal, that might point to relatively brighter prospects in the emerging markets and the US, compared to, for example, the EU.

Figure 6: Travel and tourism direct contribution to GDP (2020f, %)

Source: WTTC, WB, Tellimer Research

You can read more on how Covid-19 is reshaping the world in our recently published report Waiting on the World to Change, in which we explore how the current crisis will result in new normals for politics, macroeconomics, business models, and finance. 

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