Last month, I wrote that the COVID-19 crisis has created prime opportunities for investing: depressed prices create opportunity to acquire assets that are likely to appreciate rapidly once the crisis passes. I also wrote that it is important to invest thoughtfully: fundamentals are changing, and without an appreciation for how those changes affect the economics of industries and value of assets, it is equally a prime opportunity to vaporize cash.
It is becoming increasingly likely that the COVID-19 crisis will result in lasting change in the ways companies operate. It will also encourage formation of new companies unencumbered by legacy assets and operating models. That will change the terms of what it takes to compete. Here are a few of the ways that might happen.
Corporate cost structures will change. According to the Wall Street Journal, employees and employers are finding it preferable to work from home and want to continue to be able to do so on a partial if not a primary basis. More employees working from home obviates the need for a lot of commercial office square footage. The Wall Street Journal also reported that some employers are looking at limiting the number of employees in the office on any given day as a permanent policy. Employees rotating through the office don't need (expensive) permanently assigned cubes and offices; (inexpensive) open space plans will do. Fewer in-person visits from recruits, vendors and customers means there will be little need for vanity offices in expensive cities. Not requiring consultant and contract labor to work on-site will reduce corporate travel costs. Of course, companies can't get free office space from their employees and expect the same level of productivity from them when they are working in a distributed manner. To support productivity of distributed workers, companies may offer a home-office improvement benefit to encourage increased comfort and productivity. Companies will also invest in increased task automation and activity surveillance to increase labor productivity and reduce labor intensity. As people become more proficient at working in a distributed manner, companies can employ people in any geographic market, giving them access to low-cost labor markets. They can also encourage existing employees to relocate to an area with a lower cost of living. A company that can source 25% of its work force from a location with a lower cost of living than where their employees are located today - for sake of example, suppose 20% lower - could shave 5% off its total labor costs. A shift to more people working from home represents a significant cost take-out opportunity for labor-intensive businesses.
Consumer transactions will change. Companies big and small have had to scramble to figure out how to create demand, take orders and fulfill orders just to stay in business. They've had to scramble because small merchants have largely relied on legacy consumer buying habits. A small merchant wanting to do more business digitally didn't have the balance sheet to finance development of digital capabilities, let alone drive consumer behavior change to use those capabilities. And, while there has been plenty of tech targeted at the small business, small merchants couldn't justify the fees as they could only realistically expect light trade activity through digital products. But with each and every small merchant facing the same adapt-or-die challenge, there is now a massive market of willing merchants and their customers. As a result, the race to improve digital capabilities for small merchants is now on, so there is reason to expect that considerably more innovation will be accessible to small merchants on a metered rather than a R&D basis. Still, the friction inherent in most transactions that has long been accepted as the norm for how business got done will increasingly become an exploitable weakness as consumers have become comfortable with new ways to transact. Today, you can't avoid going to the local hardware store to find the right replacement bolt, but when the big box DIY center allows you to snap a picture of the bolt from the comfort of your workshop, calculate the dimensions automatically, and have it delivered it to your doorstep in no more time than it would take to make a trip to the hardware store, that will reduce friction. That, in turn, means that the bad news for large merchants is that the tech arms race for frictionless commerce is only going to intensify. As Elaine Moore put it in the FT, having packages delivered to your doorstep is a hard habit to break.
Tax regimes will change. If employers perpetuate work-from-home practices long after the crisis passes, large cities such as New York will lose a great deal of their daytime population commuting in from suburbs. The Wall Street Journal reported a few weeks back that New York is losing mortgage- and rent-paying residents as people move out of the 5 boroughs to locations both near (New Jersey, the Catskills) and far (the North Carolina, Florida) from New York. Plus, reduced business travel means fewer people traveling to work in places like New York. A reduction in temporary and permanent population reduces taxable trade and taxable income. New York state and New York city tax receipts will drop as a result of depopulation and a reduction in trade and travel. That, in turn, will create pressure for increased taxes or entirely new forms of taxes on the people and companies that remain. Accountants and lawyers will be busy figuring out new ways to engage in legal tax avoidance, while companies will consider whether to relocate to where their former customers are, and to where the taxes aren't. It's also worth mentioning that federal tax policy might change, for example to allow more people to write-off dedicated home office space, giving people incentive to spend more on home improvement. It isn't difficult to imagine the DIY retailers lobbying congress to create legislation that allows employees to set aside up to x-thousand-dollars of annual income as tax exempt for use on home improvement. In the aggregate, there will be a free-for-all at the state level, as states grope for tax receipts in new and imaginative ways; at a federal level, never will have so many industry lobbyists ever have lobbied so hard.
Regulatory regimes will change. On the one hand, many regulations have been lightened to make it easier for companies to conduct business during the crisis. On the other hand, although big tech went from villain to hero in a short period of time because of the crisis, increased dependency on technology will bring renewed scrutiny to big tech. With more business being conducted digitally comes more opportunity for big tech to engage in surveillance activity, which will bring back calls for enforceable protection of digital privacy. This time around, it won't be for the benefit of individuals as much as it will be for large non-tech companies that find themselves increasingly dependent on big tech. Governments starved for tax receipts will also lean on big tech to collect, analyze and share data with government agencies looking for black market trade and illegal activities. Governments may also delay or restrict the deployment of technologies such as autonomous vehicles as a means of protecting service jobs - and the votes of people in service jobs. Because people don't have uniform access to technology, some segments of the population will face marginalization in an increasingly digital economy; that will motivate state legislatures to pass laws that compel technology providers to make technology more accessible.
Corporate IT costs will rise. People working remotely are for the most part working unsupervised (well, except for those on endless streams of conference calls). Some managers will believe they are not getting a full day's effort of their direct reports, trust relationships will be difficult to build with new hires who managers have interacted with primarily through video conference, and there will be incidents of remote-work abuse that erode manager-employee trust. New forms of employer surveillance tech will emerge, and if managers shift roles from salaried to hourly or piecework, that surveillance tech will need to be integrated to things like payroll. Information security costs will also rise: more employees are working from home creates more endpoints and more vulnerability to cybercrime. More people working from home will encourage (or require) employers to spend more on outfitting employees with better personal technology, and extend the scope of what technology is included in BYOD policies. Finally, an increase in digital trade will increase the need for more and faster technology to conduct that trade, amplifying the risk of frail legacy tech and accelerating the shift from solutions that are self-hosted to cloud.
Industries will change. A long-lasting reduction in demand for global travel makes it impossible for large airlines to service debt or top-up underfunded employee pension funds. A sustained reduction in demand for travel would be the knock-out punch for Boeing's commercial airplane business, already struggling as a result of a crisis of their own making. Airlines and large industrial firms are national champions and governments have a history of rescuing their champions. By way of example, nations have low tolerance to bank failures because the panic that results from them has knock-on effects in the financial and real economies alike (as exemplified by Lehman in September, 2008). From a certain point of view, a lot of banks were nationalized by governments in the wake of the 2008 financial crisis. In some cases, such as Lloyds and RBS in the UK, it was outright government ownership. In other cases, it was funding injected into banks through credit extensions or bond buying programs that removed assets from bank balance sheets to a central bank's balance sheet. In each case, it gave regulators license to give direct orders to the banks. Companies in industries that have little prospect of returning to pre-crisis norms may survive, but they will be unable to negotiate the terms of their survival. Detroit automakers - two of which were bailed out in 2009 - would have been content to retrench and resume selling light duty trucks at volume once demand recovered with the broader economy, but their lender of last resort set new policies for them to invest in electric vehicles. Airlines and commercial airplane manufacturers will similarly be given new marching orders.
Little or none of this may come to pass, of course. Testing, treatments and analytics may result in far less draconian methods of containment. Federal, state and municipal governments would all but mandate a resumption of pre-crisis business-as-usual, as that is the shortest and surest path to restoring economic health. But the longer the crisis lasts, the more employees develop new muscle memories for and discovering new productivity from working in a distributed fashion. The more comfortable employers get with that, the more likely these changes - and many more - will happen.
The effects won't be isolated. The interconnected nature of businesses and governments means an earthquake in one industry creates major tremors in quite a few more. Large-volume buyers of IT consulting services may no longer have to pay the 10% to 20% travel tax on that labor. That takes money out of the airline, hotel, rental car, and restaurant industries, which will translate into a drop in demand for direct and indirect suppliers to those businesses.
A company that is quick to adjust labor practices and PPE will be better prepared to navigate the labyrinth of new tax and bear the cost of new tech, and make it more resilient to shock waves of demand volatility and industry recalibration.
