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/ Winter 2021/Issue 105

Navigating an asymmetrical recovery

Shock waves from the pandemic show no sign of letting up—and businesses need to plan accordingly.

A version of this article appeared in the Winter 2021 issue of strategy+business.

If there’s one thing we’ve learned since early 2020, when COVID-19 began disrupting lives, livelihoods, and the global economy, it’s that the road ahead can take surprising twists and turns. In the US, where the vaccine rollouts helped spur hiring and the beginnings of a return to normal, a Delta variant–induced return of reversal on indoor mask-wearing requirements for vaccinated people was a stark reminder of how quickly conditions can change. Newer strains of COVID, such as aggressive Delta variants, continue to upend plans. And the situation is even more complex in many other regions, where the continuing impact of the virus is creating a business environment full of asymmetries and unanticipated disruptions.

Against a backdrop of infection hot spots and variants, travel bans, and imbalances in access to vaccines, global businesses must react with agility to a number of challenges. These include shortages of vital materials, the onshoring of manufacturing, and uncertainty around access to funding—whether that is government support or access to lenders and capital markets. Labor shortages and higher pay offers also point to a budding war for talent—for both blue- and white-collar jobs—as sectors reopen and companies need to hire.

The experience of companies on the front lines of these challenges shows just how complicated and unpredictable it can be to chart a path forward. Consider these hurdles:

• Uneven demand and mismatched supply and demand have become problematic for a Tier One automotive supplier. The early and fast recovery of the Chinese market and the unpredicted high demand for new cars in the US created the need for more capacity and investment. At the same time, European markets fell behind expectations and needed capacity adjustment and restructuring. This asynchronous demand also puts stress on supply chains in regions where demand is significantly above expectations, including a well-publicized shortage of semiconductors that caused delays and sharp production cuts for several major automakers.

• Inconsistent access to countries with low production costs—where the pandemic’s impact has been most acute—as well as disparate lockdowns in countries where global firms are operating have also caused a range of supply chain dilemmas. Many firms now require increased sourcing flexibility, including shorter lead times, and a better picture of their potential stockpiling needs. However, as one international retailer found, it has become increasingly difficult to assess what levels of stock are needed. Vaccination programs are slow in some supplier countries, and local lockdowns, such as one that caused weeks of delays and closures at China’s Yantian port, are occurring at unpredictable intervals that undermine the retailer’s ability to source cost-competitive products.

Asymmetrical vaccination rates and varied efficacy among different vaccine types have led to some unusual situations, particularly for companies opening or reopening global operations. A large-scale industrial operation in a developing country with no vaccine availability had been shut down for more than a year. Its owner decided to transfer in workers from a country with higher rates of vaccination. All went well initially—until a few breakthrough cases emerged among those workers, and the operation faced closure again.

In short, the world’s erratic, nonlinear recovery has introduced new sources of uncertainty into planning—and raises the distinct possibility that business leaders will have to contend with these sorts of disruptions for years to come. There are also indications that corporations are not prepared to deal with these unexpected developments. A recent PwC survey of 400 business leaders in the UK revealed that 67% believe top-line revenue will return to pre-pandemic levels within two years, and 61% have not produced 12-month forecasts that plan for a range of best- and worst-case scenarios. What is clear is that companies that survived the pandemic have not necessarily got to grips with a sustainable model for the future.

Planning for the unplannable

These trends create a strong case for doubling down now on better, more sophisticated, and more far-reaching scenario planning that considers a wider range of outcomes. For one company, a supplier to major retailers in the home improvement sector, uneven regional lockdowns and limitations on physical retail space led to dwindling orders and real concerns about being able to stay afloat. Robust cash-flow forecasting and scenario analysis based on multiple lockdown scenarios revealed what to expect and helped the company set internal triggers for when to start working with its lenders, if needed.

The key for many businesses will be to build scenarios that account for a wider diffusion of results than was needed in the past. Take the cinema business as an example. Instead of sales projections being drawn up in a band between down-10% and up-10%, we’ve seen that some businesses can find themselves in a band between down-70% and up-80%. An unexpected upside sounds like a nice problem to have, but it also can create real operating challenges. Few of the companies whose growth was supercharged during the pandemic had a plan for that level of growth, which led to shortages, stock-outs, and delays that undermined performance. Planning for extremes is almost certain to be critical for some time to come.

Finding finance

Although there is considerable liquidity overall in the debt markets, whether from traditional loans, bonds, or newer debt funds, companies’ ability to access these markets will vary widely. Regional and country differences in government support (and the pace at which support mechanisms are lifted), along with variations in capital availability between companies of different sectors and size, are all creating additional asymmetries and unpredictable balance sheet pressures. Small- and mid-market players may face particular difficulties, as many enter the new normal with significant deferred tax and rent obligations, government support to repay, higher financial debt, and working capital requirements.

The key for many businesses will be to build scenarios that account for a wider diffusion of results than was needed in the past.

The pandemic has also led to an uptick in interest in the deployment of liquidity across borders and regions into jurisdictions that have been harder hit. The opportunity to pick up a distressed asset at a discounted rate is attractive, but must be weighed against the uncertainty around the future viability of the asset in these jurisdictions. We can see that there is scope to mitigate uncertainty and risk by negotiating creatively. 

In a recent situation, a global retailer was facing insolvency until a white knight was found to inject much-needed equity. A key challenge for the investor was the uncertainty with respect to the ability of the business to meet its high fixed rental costs if stores stayed closed for an extended lockdown. By using a court-supervised process, the retailer and its investor were able to negotiate revised terms with landlords that pegged future rent to the level of revenue achieved by each store. Although this solution required the landlords to compromise their position, the alternative was a freefall insolvency that would likely have resulted in the termination of the tenancies.

The ESG factor

Amid an often bewildering and shifting array of asymmetries, the burgeoning environmental, social, and governance (ESG) movement is creating an additional set of pressures and opportunities that are relevant for the post-vaccine business environment.  In a recent strategy+business article, our colleagues Peter Gassmann, Casey Herman, and Colm Kelly described the far-reaching implications of ESG for all companies. They set out its impact on the ability of companies to attract capital; on the shape of corporate portfolios; and on the attitudes of customers, employees, suppliers, policymakers, and other critical stakeholders—an impact that is poised to continue growing. The ESG imperative further heightens the importance and difficulty of effective scenario planning, at a time when it is already a tough putt.

As the economic recovery plays out differently across jurisdictions, ESG can provide a useful framework to achieve the increasingly reciprocal aims of remaining in the market and meeting global challenges. Last year, the dual shocks of the pandemic and the oil price crash pushed one global industrial organization to fast-track its ambition to transform from a business centered on fossil fuels to a market leader for energy in a post-carbon era. The new environmental mandate to be an “energy technology” company enabled the business to rapidly scale its planned transformation program, delivering US$200 million of cost savings in 2020 while setting its trajectory toward net zero. What was once viewed as an obstacle for the industry was refashioned as an important driver of recovery and change.

It’s clear that the pandemic has continued to accelerate a shift in corporate value to a broader value ecosystem that prioritizes issues of society, the environment, and governance. This points to opportunities for companies to build their business as they stretch to serve harder-hit parts of the world, to reappraise the environmental impact of their supply chains at the same time as they are reacting to the challenges created by uneven global recovery, and to reevaluate what they report publicly as they adapt their purpose to the world that lies ahead. Although there’s no one-size-fits-all approach for managing a business in today’s unpredictable environment, the robust planning, option generation, and flexibility needed to cope also can be harnessed to clarify a company’s place in the world and the long-term value it aspires to create.

Author profiles:

  • Heather Swanston is PwC’s global business restructuring services leader, with experience leading complex, cross-border restructuring advisory mandates for corporations, financial investors, and lenders in troubled situations. Based in Tokyo, she is a UK partner on secondment to Japan and a member of the PwC Japan leadership team.
  • Peter Greaves is PwC’s Asia-Pacific business restructuring services leader. He is a licensed insolvency practitioner, with considerable experience assisting clients in restructuring in both distressed and non-stressed situations, and, where appropriate, planning and executing steps to optimize a stakeholder exit, whether via a transaction, formal proceedings, or a managed wind-down. He is a UK partner on secondment to PwC Hong Kong.
  • Steven Fleming leads PwC’s US business restructuring services practice and has worked in London, New York, and Dubai. He provides financial advisory services to many local and international clients, spanning the whole deal spectrum, from devising restructuring strategies to performing valuations and due diligence, business reviews, and negotiating with investors, creditors and other stakeholders in connection with in-court and out-of-court restructurings. Based in New York, he is a principal with PwC US.
  • This article includes contributions by PwC Canada partner Mica Arlette, PwC UK partner Jason Higgs, PwC Germany partner Thomas Steinberger, and PwC Netherlands partner Peter Wolterman.
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