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A catalyst for digitalization

In this month's Thematic Insight, we look at how some businesses have seen an increase in demand for their products as a result of the current situation.

June 8, 2020

Angus Muirhead

CFA, Portfolio Manager, Credit Suisse Asset Management

However, these are the rare exception, and even these businesses are unlikely to be immune to supply problems in the long term. While it may be too late to help some businesses this time, we explore the idea that the crisis may act as a catalyst for businesses and governments to adopt more automation systems, more intelligent supply chain management and digitisation solutions in general to be better prepared and adaptable the next time crisis strikes.

Stay at home demand

Over the last few weeks, while most businesses have struggled to cope with the crisis, a handful have been in the fortunate position to break the trend and see increased demand for some of their products. Banned from leaving home and unable to go to work, demand for PC monitors, laptops and tablets has risen, together with home entertainment, such as online games and streaming-video services. Remote-working and collaboration tools, such as Zoom, WeChat at Work, Ding Talk and Slack, as well as other enterprise IT enablers, such as Citrix, Adobe, DropBox and Office-365, have all seen a spike in demand.

Where still permitted, food-delivery services such as Meituan, Ocado, JD.com, UberEats, Foodora and Deliveroo, have seen orders rise with restaurants closed for normal business. Online education providers have also seen an increase in uptake, as schools switch to online teaching and stay-at-home workers opt to do some extra curricula studying. Udacity, Udemy, Neutopia, Coursera, SkillShare, Khan Academy, and the US Ivy League schools, which now offer more than 450 free online courses, are amongst those reporting an increase in adoption.

Emergency response

Healthcare companies and organisations are at the forefront of efforts to contain the virus and find a treatment. Many have quickly repurposed R&D and production to develop critical tests, treatments and vaccines, and to manufacture ventilators, face-masks and surgical gloves in scale.

A handful of robotics companies have also been engaged in trying to contain the virus and manage the crisis. UVD Robots of Denmark, TMiRob (Shanghai) and PuDu (Shenzhen) have all deployed "AGVs" (autonomous ground vehicles) to deliver medicine and food to patients, remotely monitor restricted areas and to disinfect hospital wards and bedside monitors. "UAVs" (unmanned aerial vehicles) or drones, from companies such as AntWork from Hangzhou, China, are being used to ensure people stay at home and to deliver medical supplies, and reinforce security efforts while so many shops, factories, museums and banks are empty.

FLIR Systems, a leader in high definition thermal imaging cameras for industrial automation, defence and security has seen a rise in demand for infrared cameras to screen body temperature. In response to the crisis, FLIR launched the A400/A700 sensors optimised for this task. In the product announcement, CEO James Cannon wrote:1

"As the world works together to face the global COVID-19 pandemic, given the need for this technology, FLIR will prioritize initial deliveries of this new A-series camera to professionals using it in elevated skin temperature screening as an adjunct to other elevated body temperature screening tools to help to fight the spread of the virus."

Likewise, Dexcom and Abbott, leaders in continuous glucose monitoring systems (CGM) for diabetes, saw a rise in demand after the FDA indicated they "would not object" if CGMs were provided to hospitals. CGMs are not officially approved for hospital inpatient use, but since approximately 28%2 of coronavirus patients in the US have diabetes, the use of CGMs to allow remote monitoring of the diabetes and limit unnecessary exposure to the virus, is compelling.

The digital economy is not immune

Beyond the companies providing an emergency medical response, a number of companies are experiencing a boost from "stay at home" demand and they are generally all part of the digital economy. These businesses have been able to continue operations relatively unaffected. You can subscribe to Netflix, Spotify or Adobe and "consume" their product without ever leaving your home and without meeting anyone, and since the product is not tangible, there is no need to pick it up or try it on for size.

However, in the long term even these companies may not be immune. While their heads may be in the "cloud", most have their feet firmly on the ground. Content for Netflix typically is produced by large groups of people on production sets. In the middle of March, they stopped all production "due to government restrictions and health and safety precautions".3 Adobe's products are used to promote business, commerce and events, most of which take place in the real world, and all of these internet businesses rely absolutely on IT infrastructure: data centers, switches, routers and fiber networks.

Degrees of automation

E-commerce champion, Amazon, despite its digital shopfront and an army of more than 200,000 robots in its fulfilment centers,4 is still heavily reliant on the real world. Approximately 80% of Amazon’s revenues come from the sale of physical products, and these products in turn rely on a long and often complex supply chain of raw materials, component parts, assemblers, and test and inspection centers.

The most highly automated industries: semiconductor fabrication, the production of flat panels for TV and monitors, and autos, as well as some process industries have been able to operate mostly uninterrupted, due to the limited number of people required in their production processes. However, many have now stopped because of the lack of end demand, or because of shortages somewhere along the supply chain.

A lack of demand is an obvious problem for any business, but the current crisis and the trade war have shown just how exposed most businesses are to the resilience of their supply chains. Even digital businesses and companies operating highly automated production lines are not immune, and it is possible that years of squeezing out costs by operating “just in time” lean inventory models has exacerbated the fragility of these global networks.

Supply chain diversification

The US Administration already put the global supply chain in the spotlight through its trade negotiations and the coronavirus is now giving politicians and other stakeholders further reason to question their dependence on the global supply chain. Instead of depending on supply from other countries, why not simply bring production back home and give the jobs back to the local workforce?

While the idea of "on-shoring" holds obvious appeal to many politicians, most large companies have spent the last 20 years "off-shoring", to ensure production is close to suppliers or close to customers, and it seems unlikely that this lengthy process will be unwound completely. We do however, see a number of companies diversifying their supplier chain and production sites to minimize the risk of tariffs or other country-specific issues.

In a survey conducted at the end of 2019 through DHL's supply chain risk management platform, “Resilience360”, 73% of respondents indicated that they were moving or planning to move some production out of China.5 As this shift occurs and production lines are set up in other countries, investment into production plants and tools rises, and robotics and automation systems often see a large share of the spending.

iRobot, for example, the market leader in home-use robotic vacuum cleaners, started moving production of its entry level Roomba 600 model, to Malaysia in 2019 to mitigate exposure to tariffs on US imports from China. Likewise, Nintendo shifted production of part of the Switch Lite game console from China to Vietnam at the end of the summer 2019, in order to "diversify the risk".

Next generation automation

Beyond diversifying production facilities and supply chains, we expect companies will invest more into "intelligent supply chain solutions". These solutions typically use a combination of sensors, communications networks and big data analytics to give visibility into the detailed structure of their supply chain, and businesses instead of scrambling at the last minute when a problem arises, have a lot of information at their fingertips to act immediately.

Although these smart solutions have been around since the era of desktop computer in the 1980s, adoption is still not widespread. Resilinc, a leading provider of comprehensive end to end supply chain resiliency solutions based in Silicon Valley California, found that 70% of the 300 companies surveyed in late January through early February, were only starting the process of gathering data about how their supply chain might be affected by the corona virus, and only 30% were already taking remedial action.6 

Adding a layer of intelligence to supply chain management not only makes it more adaptable to changes in demand and bottlenecks in supply, but may allow businesses to optimize their procurement processes and automate a lot of tedious, repetitive work. These systems can be used to estimate, forecast and track market demand and to adjust the cadence of supply and production. As supply chains become more and more complex and customers become more and more demanding in terms of the speediness and format of delivery, the need for automation and smart tools to manage the system, becomes greater.


Figure 1: Accenture's proposed schematic to build an intelligent supply chain
Sources: Credit Suisse, Accenture (2018), "Supply chain transformation for the intelligent enterprise", p.4; 
https://www.accenture.com/_acnmedia/pdf-94/accenture-supply-chain-transformation-sap-myconcerto.pdf, April 22, 2020

Conclusion

Fund Risks

  • No capital protection: investors may lose part or all of their investment in this product.
  • The emphasis on Robotics companies can create significant exposure to certain sectors or regions.
  • Exposure to small and mid caps can result in higher short-term volatility and may carry liquidity risk.
  • Due to the possibility of increased exposure to the emerging markets the fund may be affected by political and economic risks in these countries.
  • Equity markets can be volatile, especially in the short term.

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Sources

1 FLIR Systems, homepage, "News", "FLIR launches smart thermal sensor solution", 1 April 2020.
2 Centers for Disease Control and Prevention, US, "Hospitalization rates and characteristics of patients hospitalized with lab-confirmed coronavirus disease 2019, early release”, 8 April 2020.
3 Entertainment Week, "Netflix stops production of all shows and movies", 13 March 2020.
4 Amazon SEC filings 2019.
5 British International Freight Association (BIFA.org), “Most companies are looking to shift production out of China”, December 2019.
6 Harvard Business Review, "Coronavirus is a wake-up call for supply chain management", 27 March 2020.

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