Thursday, May 28, 2020

Post-COVID predictions - Resiliency/Repatriation/Rethinking cash

I've written and published a post-COVID scenario, which you can find on my LinkedIn page.  (Small hint - if you click on the document in my "Featured" section, then click on the "expand" icon in the lower right, the document is easier to read and you can also download from there).

Following the scenario, I am writing a series of blog posts about some of the implications of the scenario and various predictions I've made coming out of the scenario.  In my first blog post of predictions, I wrote about the Rise of the Millennials and what that will mean for political and business governance.  I also wrote about the coming real estate bust - fueled by failing retail businesses and less demand for corporate buildings as employees work from home, as well as a possible crime wave.

In this blog post, I am examining a few more trends and likely outcomes, and their implications, including:
  • Creating more robust supply chains - becoming "anti-fragile" and resilient
  • Repatriation of critical businesses or industries
  • A potential decline in the use of cash / growth of digital currency
Supply chain Resiliency - becoming Anti-Fragile

In a timely article - well, timely for my predictions and blog post - the New York Times ran a story on May 22, entitled What happened to the great American logistics machine? The answer to that question is that the same thing happened to logistics and supply chains that happens to many activities and processes:  as more people became dependent on the processes and supply chains, more efficiency was demanded, and consumers demanded lower costs.  The result:  very efficient and low cost supply chains stretching around the world, delivering goods and services at high speed and low cost.  However, COVID and our reaction to the virus exposed the other side of all that efficiency.  Those supply chains were exceptionally brittle, fragile, with dozens of failure points that could cause the supply chain to collapse.  A virus brought all those years of optimization tumbling down.

The toilet paper fiasco is a good example.  There is plenty of toilet paper in the US, but at least half of the production is for corporate use.  The problem with the businesses that produce for corporate or office use is that their supply chains are different, their packaging is different, their pricing is different, than the supply chain for consumer toilet paper.  You can't just start shipping commercial grade toilet paper to Wal-Mart and have them stock it and sell it. The supply chains are so optimized and so aligned to business needs that it will take time to shift, if it makes sense to shift at all.

When you add in the amount of international exposure that many supply chains possess, in high technology, in food, in clothing, in pharmaceuticals, and then understand the impact that closing the borders or concerns over transmission of a virus from China to the US through the supply chain has, you can see that our supply chains, while optimized for cost and efficiency, are exceptionally vulnerable to any number of disruptions.  For too long, we've taken too much for granted - ignored or wished away issues that are now surfacing that snap elongated, brittle and fragile supply chains.

What this means

After experiencing this level of disruption in their supply chains, many companies are likely to rethink these highly optimized but inflexible supply chains, and seek more vendors who can provide more option if another major disruption occurs.  This may create more complexity and introduce more paths and more vendors in a supply chain than in the highly optimized models, and require more validation of vendors and pathways, but this investment will reduce the likelihood of catastrophic failure in the retail channel.  What it will do is drive up safety stock and inventory throughout the supply chain, and most likely add cost that either the retailer or supply chain bears (becoming less profitable) or that the consumer bears (driving up prices).


Oh, but you might think we should lump these two ideas together - supply chain resilience and repatriation, and while they are related they are very different concepts in execution.  Politicians in the US were horrified to discover how reliant the US is for personal protective gear and many pharmaceuticals on China and other countries.  The COVID pandemic merely illustrated what has been true for a while - in a global economy, we are reliant on the good will and business practices of countries that may not be transparent and may actually be competitors.

There are a couple of ideas at play here. What we can expect first is that politicians will demand that some companies or industries repatriate manufacturing for the national interest.  When Trump did this in the steel industry, he did it to score political points, because steel is a global commodity and is available from many sources.  However, when only a few countries that may be more adversarial to the US are the only sources for specific goods, it's likely that a national policy will emerge directing some manufacturing capacity in the US for critical goods.  The US Defense Department has funded programs like this in the past.

In case you think this is a political issue in the US alone, know that Japan is aggressively pushing its industries to repatriate manufacturing from China, and in many cases helping to fund the migration back to Japan.  The US will not be the only country to consider repatriating some manufacturing, for supply chain reasons as described above, but also to avoid having its economy held hostage by foreign governments over critical supplies.

Beyond the political reasons for repatriation, many businesses will want to diversify risk and demonstrate that where possible they are creating and sustaining jobs in the United States.  As automation and robotics improve, it will in many cases prove simpler to set up new, smaller production facilities in the US, reduce shipping costs and time afloat from China to the US, than to manufacture products in China.  This isn't true for every industry or every product, but we can expect some repatriation based on improvements in automation and robotics.

Finally, repatriation may simply mean bringing the work closer to home.  Mexico was the original "low cost" manufacturing location, and it is not separated from the US by an ocean, so logistics are simpler.  Some repatriation may become finding manufacturing capacity closer to home, in friendlier countries.

What this means

Politicians will want to be seen "doing something" after the COVID outbreak, and will want to seem to punish China for whatever role it played in covering up the COVID outbreak.  Plus, China will be a convenient whipping boy for people who want to focus on the lack of goods and the cost of goods, and more importantly the loss of jobs in the US during the prolonged economic doldrums post COVID.  While politicians may demand repatriation, there won't be a lot of money in the federal budget to assist, other than tax breaks for corporations, but there will be a combination of political pressure, risk diversification and improvements in automation to move jobs to the US or at a minimum away from China.

These moves will come with several costs - to our relationship with China, to our "go it alone" strategy globally and to the prices we pay for goods in the US.  An already difficult relationship with China will simply get worse if it appears the US is actively encouraging manufacturers to leave China, and if businesses do leave China that could dramatically impact the already weak Chinese economy.  Many other countries that might be willing to open their doors for our manufacturing may wonder if this is a temporary move, which might be reversed over time.  All of these activities increase uncertainty and increase consumer costs in the short run but may reduce political, reputational and logistics risk.

Filthy Lucre - the end of cash?

One other trend that could be accelerated out of the COVID pandemic is the radical reduction of currency as a form of payment.  Coins and paper currency are already of questionable value, given the state of digital payment platforms like ATM cards, debit and credit cards, gift cards and a host of other digital payment platforms.  Several smaller European countries are moving to a mostly cash-less operation, and it will pay to watch how those experiments unfold.

Paper currency and coins are potential COVID vectors, passing from hand to hand in transactions, and paper currency remains somewhat easy to counterfeit.  Since a dollar is not very valuable today, fractions of a dollar - in terms of coins - are even less valuable.  When it takes four or five quarters to buy a soft drink in a vending machine, increasingly we should ask - what is the value of coinage?  Why aren't all vending machines wired to accept credit cards or other electronic payment mechanisms?

I think we'll see a gradual shift in the US toward more digital currency and less paper currency in circulation.  This creates some really interesting challenges, but for very different reasons.  In the US it will require an acceleration of digital transformation, to ensure that in every situation, payments can be exchanged electronically without cash.  That may seem simple, but we are still far from a ubiquitous payment platform in the US.  The second consideration is in international markets, where the dollar is a trusted reserve currency.  Will other countries, governments and businesses have any concerns if the currency moves to a digital platform?  Finally, what about other countries where the US dollar - in paper form - serves as a secondary currency?  Does the US dollar lose some value, or do these countries and their economies shift to another paper currency, or do they rapidly shift to even more electronic or digital currency?

What this means

A shift toward a more digital currency, and digital forms of payment, will accelerate a lot of digital transformation in the many business sectors.  It will increase the power of banks and financial services companies that deal with payments, and could damage black market or illegal activities in the US if the amount or value of hard currency falls.

This shift could have real implications in other countries, where the US dollar is a secondary (and often more trusted) form of currency.  In places where US currency has been relatively ubiquitous, it could become a constraint on smaller economies where the US dollar is trusted, and could impact economies, especially in Central America where the US dollar is a trusted currency and digital currencies and payment mechanisms aren't well evolved.


These are just three of the predictions I am making about the future that will unfold after COVID, yet even in these three predictions you can see a significant amount of change that could impact the US economy and by implication the global economy.  When we add in other predictions, such as the three I identified in the first post (Rise of the Millennials, real estate bust and potential crime wave), we can begin to see real, potential change in the way we work, govern and live.

Keep an eye here for more predictions, and please feel free to let me know your thoughts or to ask questions.

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posted by Jeffrey Phillips at 7:03 AM


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