Authored by: Sarwant Singh, Managing Partner & Regional Leader, Frost & Sullivan, Middle East, Africa and South Asia (MEASA) and Global Head – Mobility and Aerospace, Defense & Security Practice
In the oil & energy sector, plunging jet fuel demand, paralleled by higher oil production by Saudi Arabia from April, threaten to push crude oil prices to a 17-year low in Q2 2020.
However, it’s not that everyone and everything is capsizing. Some sectors in the GCC have made gains and exciting opportunities are emerging while careful risk mitigation strategies are helping others chart a new course for the future.
A Changed Global Environment
What could the depth, length and shape of recovery look like?
Gradual Containment entails a sharp V-curve recovery process, whereas the Severe Pandemic scenario entails a more stretched U-curve recovery.
Based on dynamic, real-time updates, Frost & Sullivan research indicates that COVID-19 could play out in three ways. In the first, and most hoped for, the scenario of Gradual Containment, the outbreak will be largely contained by April, with most economies showing signs of industry and economic rebound by May, with full recovery by Q4 2020.
If the pandemic is not contained to a large extent by April, a Severe Pandemic scenario would ensue, marked by downturns in consumer demand, industrial production and world GDP growth. The possibility of a year-long recession is real with full recovery only by Q3 2021.
And, finally, the third and least-hoped for scenario, Global Emergency, will be marked by the uncontrolled spread of the pandemic with economies limping back to recovery from Q1 2021, with a full recovery only by Q1 2022.
Impact & Implications for Six Key Sectors in the GCC
Notwithstanding pockets of growth in network implementation and management services, the IT services sector is likely to decline as a whole. The pandemic will, however, catalyze unprecedented growth in digital services and technologies that enable digitalization. While most hardware segments will shrink, rising demand for workforce management, collaborative, security, remote access, and productivity tools will energize the enterprise software segment. Big Data, the digitalization of government services and healthcare services, and wider 5G use cases across industries will characterize the IT services sector in a post-COVID period.Travel restrictions have pummeled the food & beverages (F&B) sector. The Hotels, Restaurants & Cafes (HORECA) segment, which comprises 30% of the GCC’s economy, has been particularly hard hit because roughly 20% of its revenues is related to tourism. Meanwhile, quick-service restaurants (QSRs) and fast-food eateries have realigned operations to serve only delivery and takeaway orders. F&B retail is in flux with disrupted supply chains, consumers bulk-buying long-shelf-life F&B products, and hoarding/panic buying throwing traditional demand projections into disarray. The nascent e-commerce industry has received a fillip with new growth opportunities for primary packaging materials manufacture.
The healthcare sector is expected to experience a short-term decline of about 15%-20% in revenues across all major sectors in 2020. This will be a result of reduced consumption caused by delays in elective surgery and lower purchases of medicines due to fewer prescriptions. Shortages in medical devices like ventilators and test kits and operational issues, including the disruption of clinical trials and inadequate virtual care, will further exacerbate challenges. On the positive side, COVID-19 is poised to trigger double-digit growth in telemedicine and virtual care solutions, highlight the need for higher local production of essential drugs and underpin the growing importance of online pharmacies.
Ongoing uncertainties will have a short, sharp impact on the mobility sector. Consumer traffic in physical showrooms is expected to dip by 70%-80% with an up to 24% drop in new car sales in 2020. Demand for vehicle servicing and parts, short-term car rentals and shared mobility services will wane steeply. Promisingly, moderate pick-up in GCC new vehicle sales is expected in 2021. This will be reinforced by the fact that the 3.5 million vehicles purchased during the peak years of 2014-2015 will need to be replaced within the next 2-3 years. Aftersales will prove resilient as customers move to extend the useful life of their vehicles.
Sustained infrastructure development and growing segments like e-commerce will moderate the impact of COVID-19 on GCC’s transport & logistics sector. More immediately, the sector will face challenges in the form of supply chain disruption, capacity constraints and cost pressures. However, the crisis will motivate the building of shock-resilient supply chains in food and healthcare logistics while creating greater impetus for supply chain digitization. Warehousing space will expand with the establishment of more free zones, even as warehouses gain greater operational efficiencies through the use of robotics, artificial intelligence, and augmented reality tools.
The industrial & energy sector will embrace new paradigms—digitalized, decentralized, decarbonized, circular and curative—in the aftermath of COVID-19. Currently, disruptions in material supply and logistics and labor mobility are having a significant impact on the construction segment. Projects at the bid evaluation stage and those under execution will be particularly impacted. As the sector regroups, there will be newer and wider applications for automation and digitalization technologies. In addition, autonomous operations in manufacturing, oil exploration, supply-demand assessment, site inspection, and predictive maintenance will pick up pace.
Look Ahead, Anticipate and Adjust
The duration and severity of COVID-19’s impact on economies and sectors will undoubtedly vary. However, companies would do well to set in motion a “look ahead, anticipate and adjust” roadmap.
Over the near term, companies should explore supply chain diversification and leverage new opportunities arising from changing customer demands. Over the long term, product and service portfolio diversification will be critical to ensuring greater resilience.
Externally, strengthening brand equity and shifting sales channels online will be strategically important. Internally, adopting technologies that support workplace and operational continuity will enable companies to hit the ground running following the COVID-19 crisis.