Portfolio Manager Denny Fish and Research Analyst Adam Wolfman discuss how large-scale technology platforms and novel digital business models are helping societies cope with the fast-spreading COVID-19 coronavirus.
- As the COVID-19 coronavirus spreads, businesses and societies are relying upon new digitally enabled services to purchase items, work and stay informed as person-to-person contact has become limited.
- Given China’s head start in digital engagement, that country’s businesses and citizens quickly leveraged digital platforms to navigate the constraints placed upon them when combating this virus.
- We believe these events will accelerate the adoption of digital engagement everywhere and that while some behaviors will revert to normal once this crisis abates, other digital-first practices will become normalized.
The global outbreak of the COVID-19 coronavirus is sure to test economies and business models. Among these are the large technology platforms and ecosystems that have in recent years become integral to how companies and individuals communicate and conduct commerce. We have long stated that the tech sector is writing the operating system for a digital global economy. As COVID-19 spreads, we are witnessing, in real time, how these platforms react to the stresses placed upon them and what role they are playing in helping citizens, corporations and policy makers navigate this complex and rapidly evolving environment.
We expect – and are already seeing – consumer and business behavior to change as countries attempt to arrest the spread of the virus and companies attempt to execute contingency plans to ensure business continuity. In China – where COVID-19 first emerged – the high level of digital engagement gave the country’s population a head start in adapting to the new reality of dramatically limited person-to-person contact. In countries that have lagged China in digital engagement, we expect this crisis to accelerate digital adoption. While an elevated level of digital engagement may subside once COVID-19 shows signs of containment, we expect some consumer and corporate behavior to be permanently altered. Given that we are only weeks into this global event, it’s difficult to draw firm conclusions on which behavioral changes become ingrained and which subside. It is not too early, however, for investors to consider various scenarios as they seek to understand how an integrated global economy and individual societies will function as the outbreak abates.
Where It All Began
As has been the case in many emerging economies, when new technologies emerge, these countries don’t have to account for legacy systems that are threatened by novel business models. Thus, the pace of growth of new industries or processes can be rapid. The widespread adoption of e-commerce, digital payments and wireless communication within China are powerful examples of this phenomenon. When also factoring in online gaming and social networks, it is hard for foreigners to imagine the degree to which Chinese citizens “live” online.
This massive head start has helped the country’s population navigate life under strict quarantine. In the weeks since the virus broke out of its likely source in the province of Hubei, we have seen strong indications that digital infrastructure created in recent years have been leveraged to meet the needs of isolated households and employees. The temporary closure of stores has led to an uptick in online services such as food and grocery delivery. Furthermore, cohorts that have been slow to adopt these services – e.g., the elderly and citizens of smaller cities – are trying these digital tools perhaps for the first time. There is reason to believe that many will continue to utilize these services even when the most acute period of this crisis passes.
Online collaboration has also seen a marked uptick. Entire businesses are now working remotely and – as with e-commerce – we expect this function, to a degree, will become a normal part of the workplace. Similarly, educational collaboration has risen considerably given the closure of entire school systems. This includes not only education-specific platforms but also popular social media platforms that have been repurposed for education. With entire swaths of the population now isolated from each other, social interaction has become even more dependent upon the large social media platforms like Tencent’s WeChat, and sequestered citizens are spending an increased amount of time playing online games and watching short videos. And hungry for information, these platforms – along with official digital outlets – have become important sources of news.
No one, not even optimistic Chinese corporate managers, could have anticipated the uptick in demand placed upon these digital platforms. In order to alleviate capacity constraints, cloud services providers have rushed to procure additional servers. Within e-commerce, delivery companies are struggling to meet customer orders due to lack of drivers. While these impediments may limit the growth of certain businesses during the height of this crisis, we believe their services – and the companies that provide them – will become an even more integral part of China’s economy and society.
Many other countries lag China in digital adoption. Yet, we believe recent events will serve as a catalyst for greater reliance upon digital platforms and services. An immediate case study is playing out in Italy, where roughly a quarter of the country’s population has been effectively quarantined.
The digital economy has, in fact, made inroads in other regions. We expect the impending rollout of 5G services will aid wider scale digital adoption in the U.S., Europe and other major regions. Software as a Service (SaaS) – up until now a largely developed market phenomenon – is likely to become more widely depended upon by businesses globally.
A more digital global economy – even in its current, relatively nascent form – has likely helped societies absorb the massive shock caused by COVID-19. Our greatest hope is that the virus will soon be contained and future suffering greatly curtailed. With the world now on alert, corporations and governments are likely to create digital contingency plans to deal with future large-scale sequestrations. It’s completely within reason to expect artificial intelligence to be deployed to identify emerging risks and help formulate public health solutions.
While economies always evolve and new business models come to the fore, we believe the era of COVID-19 may mark a turning point in how society leverages new technologies to combat emerging threats. It remains to be seen which consumer and business behaviors become permanently altered, but our expectation is that some will indeed.