Crossing the digital divide

Charles Phiri
Associate: Indalo Business Consulting

One of the biggest challenges associated with the Fourth Industrial Revolution (4IR) is the process of assessing whether your company/industry will be significantly impacted by technology.

Take the insurance industry as a case study. If you were in the industry in 2010 and made the statement that technology would significantly impact the industry, you would have been laughed at. Fast-forward to 2016 and we see many of the industry’s biggest names being disrupted by direct insurers who were using data analytics to price their products.  Still, there were players in the industry who felt that technology would not have a major influence on the industry, I wonder how they feel now after Covid-19 has basically changed the game for every industry?

Is digitisation the new globalisation? This question was asked in a recent article that was published by Forbes.

Supply chain driver
The article points out that, with supply chains in chaos and the key trade relationship between the US and China still in a delicate state, the future of globalization is something that bears heavily on corporations as they emerge into the post covid recovery.

While many of people felt that the image of a deflated globe was too pessimistic a representation of the state of the world economy, the current roadmap that the world facers is that we are on a path away from the globalization of the period 1990-2020 (fall of communism to the fall of Hong Kong), and are moving towards a new multi polar form of world order, that has largely yet to be constructed.

Deflated World
The article adds that, to give this phase or path a name, the author of the article proposes that we use the term Interregnum, an English term to denote a pause between periods of Government (notably used between the end of the reign of Charles I and the ascension of Charles II to the English throne between 1649/60).  

Today, the Interregnum is the mid stage of a paradigm shift and is characterized by noise, uncertainty, and multiple contests between the old and the new (finance is a good example with the emergence of ‘DeFi’ or decentralized finance).

In the Interregnum, new leaders have yet to emerge (think of the USA, Russia and China) and the firm ‘rules of the game’ of the new world order have not yet been fixed (there is no binding agreement on the rules of engagement of cyberwarfare for example).

Virtual doctor consultations are now the norm
Photo By: Canva

The article points out that the above is not an optimistic sounding diagnosis, though a realistic one, and one that should also challenge the view that everything is well in our world.

What is also confusing is that in the context of globalization (an intertwined, interconnected and interdependent world where nations are willing to sacrifice some sovereignty for better trade relations), there are several emerging trends that could be taken as representing a return to globalization, but in fact do not do so.

The article adds that one of these is the upturn in the business cycle, which has had a huge helping hand from government spending and developed world central banks. Indeed, one interesting snippet from the earnings calls of large US banks is that households are cash rich and this should fuel consumer spending into the second half of next year. In contrast, I suspect that China is now close to a recession.

Business Cycle
The article points out that, more broadly, the point is that a rise in economic activity is not the same thing as a resumption of globalization. Globalization is a very specific pattern of activity and while many of the drivers of globalization such as the flow of people and ideas are in abeyance, other, distinct patterns are emerging.

In general, globalization and the business cycle (see the NBER page on business cycles) have a very odd relationship. Prior to the beginning of this wave of globalization the world enjoyed a regular rhythm of short business cycles. In contrast, the period of globalization has been marked by the two longest periods of expansion in modern economic history (1991-2001, 2009-2020), punctuated by the bubble and the global financial crisis.

The article adds that a partial explanation for this is that the positive effects of globalization – China exporting deflation, emerging economies growing up, greater global consumption and the international disintermediation of financial risks have all helped to dampen and sustain business cycle expansion phases.

Another positive trend that bears watching is the acceleration of the digital economy, which from an investment point of view is exciting and disruptive. There is a temptation to say that the advent of the digital economy portends the revival of globalization but my sense is that the effects of digitization will be largely confined to industry verticals and nation states.

The article points out, consider the point of the hundreds of thousands of Indian tele-doctors; they will disrupt the Indian rather than say the UK health system. Consider also the vast amounts of data that will be created by the application of 5G and then 6G to our cars – the use and storage of much of this will be localised (at least in Europe) than globalised.

Increased profits will driving digitisation in the future
Photo By: Canva

However, the idea that technology is transforming the nature of economic activity is a very important one, and one that gives clues as to what will replace globalization. For corporations, globalization meant that they could optimize their activities through an interconnected network of activity; a factory in Mexico, fed by research and development in Zurich from a head office in Berlin, inspired by marketing specialists in Barcelona and sold to consumers in North America.

The effective end of cheap labour, the rise of protectionism as a political issue and advances in robotics most likely mean that the trend of going abroad is slowing. What is more interesting is what is happening to consumers and workers. To a large extent, they are coming home feeling freer that they can, even at the margin, work from the city of their choice and consume more services online (from legal advice to trying on clothes virtually).

There is no telling what the long term effects of this will be. However, one can assume that in Europe at least people flows will be better distributed around second and third cities (Bordeaux, Porto, Munich, Malmo) and that there will be greater attention to local political issues.

 That’s probably a hopeful way to end this chapter of the debate on the future of globalization, or what’s next?

The role of BRPs
Reading a recent report that was released by Deloitte, it is interesting to note that they predict that the business rescue/turnaround industry will be impacted by technology. The extent of this remains to be seen; how will technology impact business rescue and business turnaround?

When it comes to our own meetings, online meeting platforms will grow in popularity and we may find that it is the norm, and possibly the easiest way to get creditors in the same room for that all important creditors meeting. The one thing that will impact the development of technology in our sector is the Protection of Private Information Act.

Insofar as the advice that we provide distressed companies, there needs to be a shift towards the digitisation of their business. Online businesses found popularity during the Pandemic and will continue  to be popular going forward. Companies that invest in technology will have a better chance of returning to a profitable core than those who don’t. This is an issue that cannot be avoided. 

Charles Phiri is an Associate at Indalo Business Consulting and is an Experienced Business Rescue Practitioner