Board Member Insights: How COVID-19 is a turning point for digitization, and why digitization will help us endure

This blog post is a contribution of Portulans Institute Board Member, Jacques Bughin. It is a commentary on how COVID-19 urges digitalization, impacting five core industrial processes.

 

The COVID-19 pandemic has taken the lives of hundreds of thousands of people worldwide.  These combined fatalities only add to the disruption to our economies, as it may lead to a 10% fall in global economic welfare.

Besides its socio-economic toll, the COVID-19 crisis has made clear that digital transformation may be a formidable enabler of a new and safer kind of society. In fact, going structurally digital has the potential to regenerate a large portion of the socio-economic value that has recently been lost, particularly if we embrace the process fully and with a long-term perspective.

COVID-19’s ugly impact

If a vaccine is not discovered soon, and given the current epidemiologic parameters of the virus, more than 50% of the world’s population may ultimately be infected, with a particularly severe or even lethal consequence for between 20 and 40 million people globally. To avoid this risk, locking down economies has been a powerful strategy, especially when executed quickly. Various studies demonstrate that the optimal lockdown period is at least 50-60 days. However, this comes at the price of a two-thirds reduction in economic activity, generating an annual 9.5% of drop in GDP, and a difficult recovery in the short term.  This drop is likely larger than what was witnessed during the Great Depression.

More worryingly, the lockdowns around the world might not be followed by a V-like recovery. There are emerging signs of a major demand-driven recession according to a recent WEF survey, in which 90% of top economists and managers felt that a demand-driven recession was at our doorsteps. The forthcoming recession may be driven by multiple factors, such as an increase in unemployment due to bankruptcies, limited consumption rebound due to the slow return to economic normalcy, especially in the most impacted sectors, namely airlines, retail, hospitality, entertainment, and extra precautionary savings. Evidence from China, where lockdowns were lifted before the rest of the world, suggests that 65% of people might resist consuming as much as they did before the pandemic crisis. In addition, more than 40% of workers do not feel at ease to go back to work.

Crucially, while essential, a lockdown is not a long-term strategy. Testing and tracing individuals, following ethical and privacy norms, and some form of data governance, to determine how, where and when the virus may spread is a much more powerful proposal. In fact, finding, testing and quarantining the infected, rather than everyone in a certain area, would lead to a large reduction in welfare loss: half the total welfare cost induced by the lockdown could potentially be saved. 

And this is exactly where technology will help us weather this troubled period and relaunch the economy.

Technology in the time of COVID-19: Five Examples

Technology has a role to play on many fronts and will become a key part of establishing our “new normal”.

Tracing and Testing

COVID-19’s main challenge is that it is incredibly contagious, and many individuals are asymptomatic. Governments need to find and respond to infections quickly to control its spread. A key part of this is targeting chains of social contact. Digital technology tools are critical for facilitating this investigation. There is evidence that countries with tracing tools at hand, such as Singapore, have been able to better fight the disease.

These responses are not exclusive to COVID-19. Digital datacasting was successfully used during the Zika virus (2015), and for the seasonal flu. Blue Dot, a Canadian company, predicted the outbreak as early as late December 2019. AI-based video and thermal recognition tools have been used in China, Israel or the UK to scan crowds, identify those potentially infected and assess the extent of social distancing, all rather effectively.

Digital technologies can also be used for direct testing. For example, instead of using high-level expensive tests (whose production is in short supply), digital image scanning and deep learning algorithms may help diagnose infection through x-rays at hospitals and computed tomography scans. Not only are these good substitutes for tests, but also these measures may be more accurate than human interpretations of tests.

Supply Chain Protection

One of the pandemic’s major issues has been supply chain disruption. To give a sense of the disruption, it has been reported that more than 50,000 companies have a direct supply chain link in Wuhan, with 100 times more companies around the world having a second-tier supplier in the Hubei region.

With this degree of interconnection and dependency, supply chain disruption has a major ripple effect. Integrating technology may help better anticipate those effects, react accordingly, and build value chain resilience. Examples include digital twins, which offer more pervasive simulation tools and effects, and better-synchronized responses. For instance, SAP Software Solutions has recently mobilized a large set of its technology tools to ensure safer and smoother handling of supply chains.

Digitization has the power to fight critical disruptions in healthcare supply chains. A Dutch venture between the government and start-ups has been effectively using network modeling technology to map the medical supply chain and build an effective blockchain-enabled decentralized marketplace for these products. Furthermore, a Belgian company is publishing 3D prints of swabs that are currently in short supply for COVID-19 testing.

Effective R&D

Beyond tracing, testing, and securing supply chains, another critical objective should be to mobilize R&D to find a cure for COVID-19. As early as February of this year, machine learning tools have identified multiple rheumatoid arthritis treatments that can be repurposed for treating the virus. These types of treatment drugs have been recently confirmed as effective in random health trials in late April.

Working with, rather than against, the machine

Another consequence of the pandemic has been the leap into further enterprise digitization. Enterprise tools adoption was largely lagging on the consumer side but now many more companies are now adopting teleworking and digital interfacing. These companies have realized that progress in enterprise platforms has made the digital remote experience as good, if not better, than physical encounters. Without the appropriate technology, the alternative would be not to work.

Sustainability

Last but not least, technology is a strong catalyst for a green revolution. It has been slowly recognized that fatality rates are higher in locations with relatively high pollution. The lockdowns have significantly reduced pollution, in part, because of production shutdowns, but also because of the reduction in car and plane travel. Digital technology offers individuals and firms a way to work remotely and limit the need for travel. Given these new realities, energy consumption may become greener and more optimized.

Digitization and COVID-19: impact in need of diffusion

Digitization has the ability to help avoid a second wave in the short term, and in the long-term, it helps by rebuilding productivity lost due to the lockdown.

Regarding the short term, the first wave of a pandemic, called “herald waves”, might be followed some months later by a second wave, as was the case for most influenza pandemics in the past. One way to limit this risk is herd immunity – but we seem far from this level in the case of COVID-19. Thus, the alternative remains for citizens to remain highly cautious as they begin to exit their respective government-mandated lockdowns. Behaviors such as not wearing masks and short-sighted quick lockdown shutdowns may be enough to cause a new outbreak. In fact, it is estimated that behavioral changes may sustain, on average, half the effects of a complete lockdown, with a standard deviation of 20%.

Such a reduction in infectious transmission is just about what is needed to keep the reproduction rate of the COVID-19 virus below outbreak levels (the COVID-19 reproduction rate is approximately 1:2), but there is no scope for failure. Getting to track any rebound quickly is thus critical and while non-digital tracing methods (such as tracing and tracking using call centers) may prevail in some cases, they lack scale and timely reactions. This suggests the adoption of digital tracking is potentially more helpful. In effect, most testing and tracking methods have a 70-80% success rate in specifying infectious cases, and can be processed real-time, a key advantage against COVID-19, considering non-symptomatic cases,

The real danger of any crisis, whatever its causes, be it financial, or viral, is a large socio-economic disruption that derails the long-term growth of countries. After more than 10 years since the 2008 global recession, two-thirds of countries worldwide still have seen their growth cut by 15 basis points a year. The causes of this gap include depletion of skills due to unemployment and cuts in R&D that led to lower innovation in the long-term. COVID-19 may lead to the same issue, given education shutdowns, the risk of numerous bankruptcies amongst a large set of small innovative companies, and in general, the uncertainty it brings to the economy if the virus is not controlled.  Digital technologies may solve this, at least in part, as we estimate that remote work technology has the ability to newly impact close to 10% of the workforce, while automation as a  substitute for virus-prone interactions can support 3-5% of total work equivalents. Regarding digital supply-chain tools, the effects may be in the range of boosting productivity by 10-30%. Finally, digital technologies also hold promise to support finding a vaccine or identifying existing medical capacities to fight the disease.

In many cases, the challenge is not the technology, but its wide adoption. About 40% of companies worldwide have been digitizing their supply chain, and automation adoption tools are more in the range of 10-20%. Regarding digital tracking, the technology must have sufficient reach (i.e. more than 50% of the population) to be effective. In practice, this rate is not easy to achieve as as that rate would be in the same vein of technology giants such as Facebook in the US.. Even in countries promoting digital tracking, levels are below 50%; it is reported to be at 40% in Iceland, and about 20% in Singapore and Israel.

Monitoring the disease and solving the productivity shortfall must also be accompanied by a stimulus for people to accept the use of those tools, and for firms to fully adopt them in new workflows, and value chains. While we should not compromise on security and privacy, digital tools are not “evil” themselves, as some individuals and firms may believe. In fact, they may become fantastic tools to innovate and support our welfare. In our global battle against COVID-19, digital technologies and digitization are proving themselves as such a tool of the utmost importance.