A debate is raging among mid-market business leaders as to what COVID-19 means for their exports and international supply chains. Shutdowns have caused major disruptions internationally, but also in local markets. So, should companies’ sales and supply focus be more domestic or more international? Are overseas markets an unnecessary risk or a smart hedge?
The conflicting opinions are revealed in our research into resilience in the mid-market, conducted in May and June. For the first time, we asked companies about their prioritisation of international markets and supply chains in the next 12 months.
We found that most companies are looking to change how they prioritise these two related areas, but there is a startling level of disagreement as to whether to increase or decrease their international focus. At a global level and by a slim majority the intention is to decrease prioritisation of international sales and supply chains, although there’s plenty of variation across geographies and sectors.
The results chime with what we’ve seen in our longer-running tracking of export expectations among mid-market companies, which showed export expectations for H1 2020 falling but not by as much as other growth measures, with a slim majority of 27% expecting to decrease exports in the coming year, compared with 25% expecting an increase.
The continued prioritisation of international markets – and the fact that around three-quarters of mid-market businesses sell goods or services abroad – is a timely reminder that “Globalisation is not dead. It may just look a little different. International trade is such an important part of the mid-market universe and may provide opportunities where domestic markets are struggling,” notes Francesca Lagerberg, Global leader – network capabilities at Grant Thornton International Ltd.
Factors such as business models, leadership and market opportunities will inevitably influence the importance that companies attach to international sales and supply chains. Usefully, our analysis finds the rule of thumb is that international supply chains are prioritised as much or as little as international sales: those prioritising international sales also prioritise international supply chains, and vice versa.
Geographically, the more developed regions of Asia Pacific, Western Europe and to some degree North America are currently shifting their sales and supply focus back towards domestic markets, while emerging regions remain more internationally focused. This could have significant economic impacts on the global economy depending on the scale and speed of these changes. The relatively early hit by COVID-19 to many developed countries during the IBR research months of May and June explains some of this pullback, while continued optimism and importance of trade may explain the resilient global focus of emerging markets.
At sector level, there are nuances aplenty. Sectors which are at the very heart of the national interest, like healthcare, education and transport are certainly seeing more domestic focus, as are consumer sectors like travel, tourism and leisure and consumer products. In many countries, restrictions and concerns about international travel have seen domestic tourism surge. And COVID-19 is also having some indirect impacts on demand.
Trefor Griffith, head of food and beverage (F&B) at Grant Thornton UK LLP, observes that “During lockdown, consumers have been recognising that there are things that they can do to help the environment – like buying locally and reducing the amount of travel – and this has boosted domestic demand.” He notes that sustainability isn’t a new trend in F&B, but its progress has been accelerated by COVID-19.
Internationalisation is still firmly on the agenda for many sectors. Nick Watson, global head of TMT at Grant Thornton, says “This sector has always been more international – particularly in terms of digital and software. Many don’t need a sophisticated supply chain to sell internationally.”
He does, however, note that the focus of many TMT businesses has been on existing – rather than new – clients over the last few months, which may have impacted international ambitions. Additionally, he identifies an increasing appetite in the US to bring more onshore, including outsourced tasks and services. Again, this trend existed pre-crisis, but has been accelerated.
Jonathan Eaton, national supply chain practice leader at Grant Thornton LLP in the US, confirms this trend, and notes that this shift in the US isn’t just a reaction to COVID-19 or negative trade and tariff developments, but also stems from positive government policies, notably the cut to the maximum corporate tax rate in the US – from 35% to 21% - and the one-time opportunity to repatriate intellectual property.
“The Tax Cuts and Jobs Act (which initiated these changes) really created an opportunity to bring production back to the US.” This underlines the importance of government policy in influencing company decision-making in this area.
Sectors focusing more on international markets
Sectors focusing more on domestic markets
In the face of global uncertainty, it’s easy to see why some businesses might rein in their growth plans and concentrate on the markets they know best, but many of our experts think this shift will be fairly short-lived.
Rodger Flynn, APAC regional head, network capabilities at Grant Thornton International, says: "A domestic focus is in progress however inherent limitations of local markets will lead mid-market business to look regionally and ultimately to the global market for growth opportunities.”
Robert Hannah, global head of strategic growth markets at Grant Thornton International Ltd, agrees and points to a number of immediate opportunities for mid-market companies. “If you have some excess capacity and are in a reasonably good position, then look to see whether you can develop effective online propositions or link up with a joint venture or distribution partners and explore the overseas market. Markets and partners are open to new things and if you move fast, I think you will do quite well.”
Clearly, if some companies are withdrawing from international markets, there is an immediate opportunity for others to steal market share and local partners. Our research suggests that some companies are already alive to this opportunity, with 25% planning to increase the number of countries they sell to in the coming year, and just 19% looking to decrease.
Robert also picks out a specific opportunity for service providers. “Coronavirus has re-written the rules on how you deliver services and where you deliver them. If you aren’t manufacturing something that has some physical presence, then so much can now be delivered online. Borders have dropped away and cultural norms of having to meet to make things happen are no longer there.” Francesca agrees that in every downturn, there are opportunities, but stresses the need to be growth-ready in order to take advantage of them – this is about being “better placed, better organised and more thoughtful”.
Trefor reminds business leaders that COVID-19 hasn’t fundamentally changed the considerations for businesses when deciding to internationalise products. “You still need to work out who would want to consume the product and whether you can get it there at a price they will pay. You still need to do the diligence to make sure it will be a success, then plan, plan and plan and make sure you have the right support to execute your strategy.”
When it comes to thinking about supply chains, it’s important to recognise that COVID-19 is just the latest in a long line of shocks to international supply chains. The escalation of the US-China trade war already had many businesses thinking about supply chain disruption and how best to deal with this. Last year, we noted that having multiple supply chains was as critical as ever and identified that some companies were adopting a ‘China plus two or three’ strategy for greater resilience, establishing secondary suppliers in multiple countries.
“This amplifies the supply chain issues that we have already seen and I think it is accelerating decision-making around supply chains. People are now thinking ‘we have got to bring it home – or closer to home’,” says Rodger. A closer to home shift could inevitably favour the lower costs countries in Europe, Asia Pacific and the Americas. But he cautions that a significant recalibration of supply chains will require real investment at a time where finance is much less accessible, and that the speed and scale of changes may depend on government incentives.
Business leaders have certainly shown a desire to improve the resiliency of their supply chains, with more than one-third globally saying that this is something they will need to address after the Covid-19 crisis.
Scott Wilson, advisory director at Grant Thornton International Ltd, advises against any knee-jerk decision-making and stresses the importance of considering multiple factors when thinking about international supply chains, such as the political and economic stability of the markets, taxation, availability of suitable labour supply, the cost base, intellectual property protection, the regulatory environment and the security of access to raw materials.
Jonathan says top-performing companies in the US go through a three-stage thinking process when it comes to their supply chains. “First, they ask what their supply chains have to look like to mitigate risk – thinking about resiliency and how to best serve customers.
Second, they think about where to best position their manufacturing facilities from a cost to serve perspective – taking a view that they’ll go wherever makes most financial sense. Third, they examine what makes the most sense from a tax perspective. Usually, you’ve got a half dozen scenarios to run through tax simulations to arrive at the best overall solution.”
Robert suggests that a more fruitful supply chain move might be away from single or multiple providers towards strategic partnerships. “These partnerships would be much more flexible, and rather than locking you into one country, one supplier or a set allocation, would allow you to turn things on or off at different levels in the supply chain according to shifting situations and needs.”
While fundamental changes to supply chains will be a consideration for some, the question for many is whether to abandon a just-in-time approach to production and instead focus on building up raw materials and finished stock to counter any future disruptions – a ‘just-in-case’ approach.
While some level of excess may be sensible for now, Francesca advises against a fundamental departure: “Just-in-time is not a thing of the past. The pandemic has made this more complicated, but the efficiency and margin advantage to a business of just-in-time have been so important for businesses. New business models may emerge from the pandemic but it will still be important to keep what works from the past.”
All our leaders stress the importance of scenario planning in helping businesses to work out the best way of dealing with the immediate challenges of COVID-19 on international sales and supply chains. “Those that have thought about the ‘what if’ questions will have worked out plan Bs to allow them to be agile and resilient. Businesses that want to manage their risk profile and be well positioned to take advantage of opportunities must engage in effective scenario planning,” says Scott.
For the medium to longer term, Scott notes that businesses will need to keep re-evaluating their international footprints. “As the impact of COVID-19 dissipates, factors like flexibility, reliability, cost and the market opportunity will continue to be important considerations for businesses seeking growth – with a purely domestically-focussed strategy being a limiting, and for some, unsustainable strategy.”
Contact a Grant Thornton adviser in your location to discuss COVID-19 and what it means for your international sales and supply chains.