TMT Industry Outlook

After the storm, confidence remains

In the past year and a half, two black swan events—the US-China trade war and the COVID-19 outbreak—have affected the entire global TMT industry, with repercussions most likely to be felt over the next few months or even longer. To understand the industry's expectations of what the remainder of 2020 will hold, Deloitte conducted a survey of TMT industry executives in China. The survey also explores what countermeasures executives will take to contend with the trade war post-pandemic and the impact these events will have on the company’s business models and operation processes.

Mounting operational pressures

Research shows that the impacts from the two black swan events on TMT enterprises include the transformation of business channel modes, the retention and growth of customers, and financial pressure related to cash flow and operating costs. These impacts were only intensified under the double attack of weakening consumer demand and channel reduction.

In addition, most enterprises are facing operational and financial challenges in regard to supply chain management; capacity layout; and lost working days due to the pandemic. The electronics industry, in particular, faces the challenges of slower production line operations and a shortage of materials, resulting in insufficient productivity. In the communications industry, some 5G application demonstration projects have been postponed.  With the largest optical fiber supply chain in the world located in Wuhan, and the demand for 5G optical fiber more than twice that of 4G, the impact on the existing development process of 5G has been significant.

Figure: what is the most likely impact of this outbreak on your company?

The growth of technology

Technology-based enterprises took many measures to deal with the pandemic, including the implementation of flexible working systems, tracking the health of all employees and establishing an emergency management team. They also set up rapid response teams, which established a sustainable development plan for returning to work. At present, most TMT enterprises in China have reopened and workers have returned. Going forward, technology-based enterprises will focus on how to maintain business growth. This will require clear strategic planning, keen market insight, operation and technology support, and reasonable risk management and control. In addition, enterprises are speeding up the pace of digitization and the use of technology—such as artificial intelligence, cloud, and big data—to gain competitive advantage.

Figure: what is your most concerned topic in 2020?

Revitalizing the business

For the enterprises in this survey, the two most important ways to revitalize their business in 2020 will be cost control management and accelerating the launch of new products. In addition, strengthening the layout of resources as well as alliance and ecosystems are a priority. Nearly half of the enterprises said they would explore more online business models, while enterprises with a slower digital pace said they would speed up digital transformation and improve market competitiveness.

Figure: what measures will you take to revitalize your business after the outbreak?

Increasing R&D and managing risk

Research shows that some enterprises who were affected by the US-China trade war said that they had encountered obstacles in expanding to overseas markets, with their plans limited or even suspended. Some enterprises are working to minimize the role of US-China trade in the operations and are increasing their own independent R&D capabilities, reducing their foreign dependence. In recent years, other events have also prompted the industry to rethink its long-term strategy. This includes Japan's semiconductor material export restrictions on South Korea in 2019 or the restrictions on China's high-end manufacturing industry.

In light of the impact of the pandemic, domestic science and technology manufacturing enterprises are also reexamining procurement and supply pipeline enterprises, with the demand for localization more urgent than ever. In the past, up to 80% of a large factory’s materials could be supplied by foreign enterprises. Now many are hoping to source materials from home.

Figure: under the influence of Sino US trade war, what measures did your company take?

Upgrading the industry

At present, the National Development and Reform Commission and other relevant departments are drafting the basic ideas of the Chinese government’s 14th five-year plan. Officials are aiming at high-quality development and improving the quality and efficiency of China's economy, with a focus on making up for shortcomings as well as promoting upgrading and enhancing industrial innovation and competitiveness. Promoting economic transformation and upgrading will be key parts of the plan along with developing strategic emerging industries, breaking through technological bottlenecks, and mastering core technologies. 

Those interviewed as part of the survey predict that the plan will also focus on 5G, cloud platform big data, artificial intelligence, and network security. Although these technologies are being widely used at present, the plan will address how to apply them to various industries at a deeper level; how to accelerate R&D in new technologies; and how to use new technologies to accelerate the transformation of traditional industries towards digitization.

Figure: which of the following areas do you think the 14th five-year plan TMT will focus on?

Staying confident in 2020

In general, most of the executives are still confident about 2020. More than 60% of the respondents expressed an optimistic attitude towards and confidence in the TMT industry this year. Nearly half of the respondents think that the business can still meet the projections for the whole year, with about 30% of the executives more reserved. As for the performance of enterprise revenue, about 30% said that the annual revenue would decline slightly, below the 20% range, in 2020.

Figure: How does your operating revenue look like in 2020?

From this survey, we see that many TMT industry executives have great confidence in 2020. Though the two black swan events will indeed have some impact on technology companies in the short term, it will accelerate new business models, technologies, products and solutions in the long term as a result of the need to respond to these events, which could create new unicorns in TMT arena.

As such, if enterprises in the economic downturn can still make effective investments in strategic management, they may be able to exceed the market value despite the retrograde cycle. Whether an enterprise can see the opportunities in this crisis will depend on its own strategic choices and reserves.

In order to promote the steady growth of enterprises, optimize their structures, and increase efficiency in the short-term, enterprises need to have insight into a multitude of factors. Those factors include market demand, multi-scenario simulation of supply and demand, control costs, optimizing structures, adjusting production and marketing plans, and adjusting production arrangement flexibly.

In addition, enterprises will need to strengthen upstream and downstream visibility and coordination, resolve supply chain uncertainty, implement supply chain emergency plans, monitor supply risk, and give appropriate support to suppliers to overcome difficulties. In the medium- and long-term, enterprises will need to continue to promote digitization and artificial intelligence, deepen ecosystem collaboration, build resource networks, and open up new online services to create an integrated services system.

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