Digital disruption: risks and opportunities in the shift to online

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Digital disruption: risks and opportunities in the shift to online

The pandemic has accelerated the pace of digitalisation. The Economist Intelligence Unit looks at how companies and countries can thrive amid the resulting market disruption. From the start of the coronavirus (Covid-19) pandemic, it was clear that digital businesses would be among the few winners. And so it has proved. Lockdowns have encouraged a remarkable acceleration in digitalisation across many sectors, from online retail and digital finance to online entertainment and telehealth. The effect is already causing market disruption that will only be amplified as the global economy recovers. Areas of opportunity will open up for companies that move quickly to develop new digital products and services, but there are also some serious risks that could undermine companies’ ability to grasp those opportunities. As well as spotlighting the key opportunities and risks, this paper outlines 16 factors - from the regulatory environment to infrastructure - that will determine the pace of digitalisation in different economies over the next five years. Emerging areas of opportunity The acceleration in digitalisation over the past year has been caused by lockdowns, which have forced both consumers and business online. Over the next two to three years, the rollout of vaccines protecting from Covid-19 will (if all goes well) make stay-at-home policies less necessary as the threat from the coronavirus fades. However, the digital economy will carry on expanding. Some consumer habits are likely to have changed permanently, Online retail to double its size while companies have spotted opportunities amid (share of online sales in total global retail sales; %) the disruption. 20 Online retail. The Economist Intelligence Unit, using data from Edge by , estimates that 18 online retail sales in the 60 biggest economies surged by over 30% in 2020. In 2021 we expect 16 further growth of 18% in online sales, and by 2025 they are likely to account for nearly 20% of total 14 retail sales, up from 10% in 2019. Even sectors that have traditionally been less reliant on digital sales, 12 such as automotive, will change. We expect online sales to account for nearly one-quarter of new- 10 car sales by 2025, from less than 5% before the 2019 20 21 22 23 24 pandemic. Sources: The Economist Intelligence Unit; Edge by Ascential. Digital finance. Digital payments will soar in tandem with the rise in online retailing, but will also penetrate further into real-world retailing as customers and sellers seek to avoid contact with cash and cards. Regions with low levels of banking or card penetration, but high smartphone penetration, will make a particularly rapid switch to digital payments systems, as companies such as WhatsApp Pay (US) and Ant Group () roll out new services.

1 © The Economist Intelligence Unit Limited 2020 DIGITAL DISRUPTION: RISKS AND OPPORTUNITIES IN THE SHIFT TO ONLINE

These consumer trends will bring China pays by phone corresponding switches behind the scenes. (number of electronic transactions) Financial firms will shift more customers to online Mobile Online 400 and mobile platforms, adopt remote claims management, promote passive investment strategies and use roboadvisors. To speed up 300 monetary transactions, we are likely to see new interbank payment services, along the lines of 200 ’s Unified Payments Interface and Brazil’s PIX. China and other countries will accelerate their

100 experiments with central bank digital currencies, encouraged by the introduction of Facebook’s scaled-back digital currency, called Diem. 0 Remote working. Lockdowns have seen 2013 14 15 16 17 18 19 20 companies such as Zoom, Okta and Slack (US) Sources: People’s Bank of China/Haver Analytics; The Economist Intelligence Unit. and TikTok (China; also known as Douyin) become household names, and in the process change the way that teams operate. If remote-working remains commonplace, the implications could be far- reaching, affecting everything from customer management to recruitment. In manufacturing, companies are automating production, or stepping up digitalisation of supply- chain management and product design. Pininfarina, an Italian car design company, now deploys many of its new car designs virtually, allowing it to expand its customer base. Logistics will become increasingly digitalised: very sophisticated tracking systems will be needed for the huge effort of rolling out Covid vaccines. Telehealth. In the US, Medicare, a government health fund, went from reimbursing 11,000 virtual visits a week pre-pandemic to 1.3m visits a week during the March-May lockdowns. Several countries have adopted new regulation and reimbursement rules that will support future growth in telehealth. Healthcare providers and patients are also becoming more adept at using remote technology, and identifying gaps in its ability to meet clinical goals. Online entertainment and gaming. Microsoft’s online and Xbox gaming revenue rose by 64% year on year between April and June 2020, while Sony saw 50% growth in game and network services over the same period. However, gaming and entertainment are shifting away from devices towards the cloud, opening up opportunities. Education. Schools and universities have been forced to adopt remote-learning policies that could ultimately disrupt their business model, giving them an opportunity to reach a broader customer base but probably at lower fees. Fixed costs will remain high, unless the campus model also changes. This shift will open up the sector to digital-only providers, with only the most prestigious institutions likely to retain market share. Data analytics. Underpinning the new digital economy will be the crucial role of data, as companies use it to yield new customer insights, enhance productivity, or deliver efficiency gains. This prospect has driven consolidation in the data market this year, including S&P Global’s acquisition of IHS Markit,

2 © The Economist Intelligence Unit Limited 2020 DIGITAL DISRUPTION: RISKS AND OPPORTUNITIES IN THE SHIFT TO ONLINE

the Stock Exchange’s purchase of Refinitiv, and Intercontinental Exchange’s deal to buy Ellie Mae. The data market will also be disrupted by new regulations on data localisation being introduced by countries such as China, India, Indonesia, Vietnam, Russia and Brazil. This trend will drive growth in edge computing, which allows data to be stored and analysed locally. Key risks As companies move to grasp these opportunities, they will also need to navigate new risks. Telecoms infrastructure. The sudden surge in demand has, on occasion, overwhelmed servers during 2020, including (most recently) those used by Google and Amazon Web Services. If demand remains high, telecom companies will need to invest heavily to shore up existing telecoms infrastructure, at a time when revenue has been dented by the pandemic. However, only a comprehensive fifth generation (5G) network can offer the bandwidth and data transmission speed to support a more digitised world. Big data, in particular, needs both extensive storage and smart analytics to maximise its potential. Although the pandemic has delayed many 5G auctions, about 47% of the 60 markets we cover expect to launch a 5G network by end-2020. Some of the remaining countries will try to make up for lost time by carrying out auctions in 2021. US-China tech wars. The rollout of 5G is being hampered by the sanctions imposed by the US against Huawei, a Chinese telecoms equipment manufacturer. This has forced many countries to abandon Huawei hardware to buy 5G equipment from (often more expensive) competitors such as Samsung (South Korea), Ericsson (Sweden) and Nokia (Finland). However, poorer countries will need to explore cheaper ways of maintaining network speeds.

Business hub technology and innovation elements which perform very well during disruption (% of respondents saying the city is doing very well)

Availability of digital government services Availability of e-commerce Telecommunications infrastructure, such as broadband, mobile networks 50

46 40 40 38 34 34 34 30 32 30 30 28 26 26 26 20 22 22

10

0 Auckland Sydney Sources: OECD; The Economist Intelligence Unit.

Digital taxes. International e-commerce giants (such as Amazon of the US and Flipkart of India) face a renewed crackdown, as governments try to support domestic players or rescue bricks-and- mortar companies. India, Indonesia, Singapore and Malaysia have already launched digital service taxes. The EU is likely to roll out its own digital tax regulations by the end of 2020 if the OECD fails to 3 © The Economist Intelligence Unit Limited 2020 DIGITAL DISRUPTION: RISKS AND OPPORTUNITIES IN THE SHIFT TO ONLINE

arrive at a consensus under its Base Erosion and Profit Shifting (BEPS) project. Some governments, such as the UK, will consider a levy on all online retailers to level the playing field. Regulatory risks. One dilemma governments will face is how to regulate technology companies that are expanding in areas such as fintech or healthcare, but refuse to be regulated like organisations from these industries. Competition regulations, data privacy, consumer trading standards and (perhaps) solvency regulations are all under review, as well as data localisation laws. Digital security. The acceleration in digitalisation has brought an inevitable acceleration in cyberattacks, forcing companies to invest more in cybersecurity. Phishing, scams and malware attacks are getting more sophisticated and more targeted, as recent efforts to derail AstraZeneca’s vaccine programme show. Factors driving the pace of digitalisation Despite these risks, digitalisation is likely to be one of the prime drivers of the economic recovery. A recent EU report claims that, by 2030, digital technologies will contribute a cumulative €2.2trn (US$2.5trn) to the EU economy, a projection that will underpin the EU’s pro-digital policies. The information and communication industries alone now account for 8% of the EU’s GDP (see chart), while Accenture estimates the whole digital economy at around 22% of global GDP. Given the current economic crisis, this is a contribution that cannot be ignored. However, to develop a digital economy countries need to have a conducive business environment (see table). They also need to ensure that the impact on employment of the shift online is managed carefully. Digitalisation will drive job losses in sectors including manufacturing and retail over the next four years, but is also likely to generate new roles in areas such as programming and app development, as well as online deliveries. Displaced workers will need reskilling programmes if they, as well as businesses, are to thrive.

Information is driving the economy (information and communication businesses; share of gross value added)

Q2-19 Q2-20 10

8

6

4

2

0 EU UK US Canada Korea Brazil Turkey Russia Australia Sources: OECD; The Economist Intelligence Unit.

4 © The Economist Intelligence Unit Limited 2020 DIGITAL DISRUPTION: RISKS AND OPPORTUNITIES IN THE SHIFT TO ONLINE

Factors that will drive digital growth Market environment Government Regulation and policy Workforce Stable, rapid and widespread Clear and stable roadmap Conducive tax regimes. Provision of digital teaching in internet provision. towards a digital economy. schools. High penetration of mobile Clear understanding of how Streamlined regulation for Digital degrees and adult phones and other connected to mitigate adverse economic business start-ups. education programmes. devices. and social impacts to minimise backlash. Engaged customer based, Government support for Clarity over digital regulations, Employers willing to invest in both household and company. cybersecurity, particularly including data privacy and upskilling. for vulnerable and important competition. sectors. Market gaps. Government support over Investment incentives for Support for public-private international standards, digital R&D. incubators and tech R&D. investment and trade. Source: The Economist Intelligence Unit.

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