EY-Parthenon | Page 1
Managing through the dislocation
Resilience Framework and Digital
EY-Parthenon | Page 2
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 | Page 3
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 | Page 4
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 | Page 5
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 | Page 6
-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
Source: EY-Parthenon Analysis
EY-Parthenon | Page 7
The EY Future Consumer Index on global behavior and sentiment shows that people emerging from lockdown remain deeply cautious but shift to new normal
Source: EY-Parthenon Analysis
EY-Parthenon | Page 8
Contents
I. Economic situation and outlook►What is most reasonable recovery scenario?
►What is emerging megatrend?
II. Impact by industry 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?
EY-Parthenon | Page 9
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 | Page 10
Summary of COVID-19 impact by sector – Weaker
Demand / revenue impact
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 | Page 11
Summary of COVID-19 Impact by Sector - Stronger
Demand / revenue impact
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 | Page 12
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 | Page 13
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 | Page 14
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 | Page 15
Post COVID – need for a comprehensive and single sourced point of view is growing
For internal EY use only, not for distribution
EY-Parthenon | Page 16
Contents
I. Economic situation and outlook►What is most reasonable recovery scenario?
►What is emerging megatrend?
II. Impact by industry 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 to push Digital Transformation?
EY-Parthenon | Page 17
EY Enterprise Resilience Framework
Source: EY-Parthenon Analysis
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 | Page 18Impact 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
Sources: EY-Parthenon analysis
A
EY-Parthenon | Page 19
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 | Page 20
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 | Page 21
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 | Page 22
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)
Acquisitions / Divestments Supply Chain Digitalization
EY-Parthenon | Page 23
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
Acquisitions / Divestments Supply Chain Digitalization
EY-Parthenon | Page 24
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
Acquisitions / Divestments Supply Chain Digitalization
EY-Parthenon | Page 25
…and do not miss the biggest tectonic shift of the digital ageDo not miss the biggest tectonic shift of the digital age
Sources: EY-Parthenon analysis
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
Acquisitions / Divestments Supply Chain Digitalization
EY-Parthenon | Page 26
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
Acquisitions / Divestments Supply Chain Digitalization
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 | Page 27
Are you ready to disrupt yourself? Truly digital transformation to new economy
Sources: EY Consumer Study
Acquisitions / Divestments Supply Chain Digitalization
EY-Parthenon | Page 29
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