Written by Rami Cassis
Given the catastrophic loss of human life unfolding before our eyes, it is difficult to consider what business might look like after Covid-19. But even at this early stage, it’s clear that globalisation could be changed forever.
Problems caused by national lockdowns and travel restrictions will almost certainly prompt many companies to relocate supply chains in their own country or region. In the pharmaceutical industry, which has been sourcing most ingredients from China, many production sites could relocate closer to home in due course, with other industries likely to follow. Proximity, freedom of speech and social and cultural affinity (do you eat bats?) may become far more important considerations in choosing a business partner.
Further, there are already noises about “buy America” and the United States reducing its reliance on China. The more considered Americans in favour of this policy may choose to wait until the after the crisis peaks, but the mood music on both sides suggests change is coming. Threats from China to sink the US “into the hell of a coronavirus pandemic” is a sure way for China to descend to world pariah status.
As companies turn away from China, the most likely beneficiaries will be producers in the Americas, Europe and India. American corporates may look to outsource production and services to cheaper suppliers closer to home, benefitting countries like Argentina, which is culturally more aligned and has a highly skilled and multi-lingual workforce. Similarly, companies in Europe that have been working with suppliers in China may instead look to new partners across Eastern Europe or North Africa.
From an investment perspective – and our focus is on mid-sized companies supplying large corporate clients – this could be a good time to invest. As multinationals look to re-configure their global supply chains in the wake of COVID-19, there will be good opportunities for many mid-sized companies to grow in the medium term, although the short term looks extremely challenging.
The large tech companies are among the beneficiaries of the present crisis, as business life pivots to home working and virtual solutions to keep going (but also because, simply, they have the balance sheet to see through any immediate financial setback). For the first time in living memory, entire organisations have shifted to remote working, enabled by technology – and this is unlikely to go into full reverse. COVID-19 has demonstrated that everyone, from the CEO down, can work effectively out of the office, which may drive a wholesale shift in business models and working lifestyles.
Moreover, this change looks set to tip the balance even further in favour of large technology corporates, which bigger companies feel they can now rely on to deliver an expanding range of solutions and services. There will of course also be scope for many specialist and new technology providers to grow in this new environment, if they can navigate what promises to be a very choppy period ahead.
Our goal, as specialist investors in the mid-market, is to find new partners to work with and position them for growth when the upturn comes.