A.T. Kearney’s great shakeout report anticipates national self-sufficiency, accelerated M&A in the wake of Covid-19

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On top of the health effects already seen across the globe from Covid-19, the pandemic has affected governments, businesses and citizens in ways that will have lasting effects on the world order and economy, according to A.T. Kearney, which explores these seismic changes and examines possible trends from 2020-2025 in its “The Great Shakeout” report.

The report finds that global government and business leaders will be under more pressure than ever to perform for their stakeholders, while many economic participants who were already struggling, including low-skilled workers and minorities, could face an even steeper uphill battle toward prosperity post-Covid.

The impact of economic shutdowns and changing consumer behaviors also will create pitfalls and opportunities further up the value chain, as nation-states seek to enhance their independence in manufacturing and food security. The same goes for M&A activity heating up, even as government authorities increase their scrutiny of potentially anti-competitive business practices. New challenges and opportunities for collaboration will shape the world into one that's markedly different, but perhaps more equitable and resilient, than what came before it.

“A crisis of health is converging with economic hardship and social unrest to change the world as we know it,” Paul A. Laudicina, founder of Kearney’s Global Business Policy Council and co-author of the report, said in a press release announcing the report. “Governments are facing mounting pressure as they are forced to provide more economic support with fewer resources. These challenges will only grow unless the public and private sectors work together to support vulnerable groups such as small businesses, minorities and laborers whose jobs are threatened by automation.”

Bringing industry home

From the 1980s through the 2008 global financial crisis, the world moved increasingly toward globalization, according to Kearney’s report. Since then, practices like outsourcing and free-trade agreements have been under attack, especially over the last four years during the era of Trump and Brexit.

But it was the outbreak of Covid-19 and the subsequent scramble for personal protective equipment (PPE) that pushed the trend into overdrive. Many countries around the world including China, India and the United States explicitly designated key sectors of their economies for support and investment over the coming decade, in an effort to reduce or eliminate reliance on foreign sources and strengthen national economies.

In Japan, more than half a billion dollars will go toward helping a single manufacturer, Sharp, move production out of China to mitigate supply shocks and promote economic growth. And in pursuit of greater energy independence, the EU and South Korea have allocated millions toward offshore wind projects and increased incentives for purchasing electric vehicles in similar attempts to boost domestic economies while reducing the need to import foreign energy and products.

Kearney forecasts potential difficulty in the coming years for manufacturers attempting to source foreign high-tech commodities like computer chips, especially in places like the US and Europe that have lagged behind. World’s Top Exports found that only about 10% of exported electronic circuit components came from those regions in the 2019, even while silicon design is still largely conducted in those areas.

Kearney also expects localized supply chains to be a greater focus in the coming years, as reshoring or "near-shoring" offer supply chain resilience benefits and greater opportunities to monitor environmental and labor standards compliance.

Emerging M&A opportunities

In 2019, before the pandemic roiled the global economy, private equity capital had grown to record levels, with more than $1.4 trillion ready to deploy. With Covid bringing major and potentially long-lasting changes to consumer behavior around the world and plunging many services industries into the fight of their life, Kearney sees potential for a wave of post-Covid M&A activities as businesses that continued to thrive during lockdowns or with significant cash reserves eye long-term growth opportunities.

By the third quarter of 2020, FAANG companies and other tech giants had already spent more than $200 billion, with investments like those from Facebook in India-based telecom company Jio and Microsoft’s acquisition of IoT and cybersecurity focused CyberX. Tech adjacent sectors like app-based food delivery have also already seen major consolidation in 2020, including European Just Eat delivery giant acquiring Grubhub for $7.3 billion.

Consolidation is also increasingly likely in the hardest-hit sectors, with American Airlines and JetBlue growing closer to one another through a partnership designed to more efficiently manage flights during the historically low period for travel and tourism.

Kearney sees calculating and managing risk as a high priority for businesses seeking acquisition targets in the years following the pandemic, as historically strong balance sheets for well-known companies may have been severely hurt during unprecedented business downturns. Industries like healthcare, retail, airlines and auto components are on Kearney’s list of those most likely to see significant M&A activity based on anticipated consumer trends and the strategic ability of some businesses to perform better than others.

Mergers, acquisitions and consolidation may face some stumbling blocks, however, as national governments seek to protect key industries and defend against encroaching foreign influence. Governments will also be under intense pressure to revive national economies and trust in institutions after a year that badly damaged both, adding extra scrutiny to any deals that could jeopardize those overarching goals.

Struggling governments

Fiscal stimulus related to the Covid-19 pandemic reached staggering levels in some countries, totaling more than 21% of annual GDP in Japan and 13% in the United States. These vital measures helped stave off complete economic collapse but have put already highly leveraged government accounts under even greater strain. And in many cases, they have been seen as not sufficient to support the millions of struggling citizens forced out of the economy by government driven lockdown measures.

As a result of these deficits, Kearney sees an opportunity for businesses to step up and support their communities, like in May 2020 when Google and Apple announced they would use their dominant position in mobile technology to support contact tracing efforts to slow the spread of the coronavirus.

The National Institutes of Health also noted how healthcare and pharmaceutical companies have worked closely with governments during the pandemic to coordinate care responses and rapidly develop effective vaccine treatments, set to dramatically shorten the duration and economic strain of the ongoing crisis.

And while more stimulus funding is likely to be allocated during the waning months of the pandemic, Kearney sees continued challenges for small and medium-size businesses, which may be forced to turn to funding measures like peer-to-peer micro-loans or small-scale “equity” deals with venture capital funds to keep the lights on until the storm has passed.

Read more of Spend Matters' coverage of issues that help procurement practitioners, like an interview with Bayer's CPO and other procurement leaders.

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