THE MEANING OF A "K" RECESSION (click on slides for better resolution)

2021 will be a time to look at the world differently. Previous recessions' underlying question was their duration: from V, the shortest, to L, which never ends. From this perspective, all firms were in the same boat. There was what economists call an aggregate of economic data.

Today it is different. It is a "K" recession. One part of the economy is on the brink of bankruptcy, such as air transport, tourism, events, and culture, while another, e-commerce, food and of course pharmaceuticals, is booming. Economic forecasting is thus complicated since you must deconstruct the figures sector by sector to get a clearer picture.

The first consequence of a K-shaped recession is to concentrate power, especially financial power, in a small number of companies. Apple has the same stock market value as the 2000 companies with the smallest capitalization of the S&P (the Russell Index). The overcapitalization of some groups, particularly in the digital sector, raises the issue of a weakening of competition, mainly through abuses of dominant position.

The other is that state aid is blurring the real impact of the recession for some artificially supported companies. These are the so-called "zombie" companies that would probably have disappeared even without the crisis.


The lesson from past crises is that money must continue to flow into the economy. Since 2008, central banks have pursued a loose monetary policy (quantitative easing) and low-interest rates. However, this time, governments have joined the effort by making credit and cash available to companies endangered by the successive lockdowns. The traditional fiscal rules, such as a maximum public debt of 60% of the GDP, have disappeared – and for a long time. The OECD estimates that its members' total public debt reached some 137% of their combined GDP in 2020.


Governments have thus stepped in and made a considerable amount of money available to save companies. However, it comes at a cost, and the "empire" strikes back. Governments will be more interventionist. They will add stringent conditions to their support, such as interfering with strategic options or preventing such practices as the distribution of dividends and companies' acquisition. Working with governments and understanding how they function will be a priority for companies' leaders. The world is becoming more political.


While experiencing the Covid crisis, the economy is opening a new chapter in globalization. The last one was characterized by one global market with cost-efficiency and high profits. It could be summarized as "Just in Time". The new chapter is characterized by a decoupling of economies and a duplication of technologies. The aim is to reduce the overdependence on supplies from other nations. The objective is to develop a "Just in Case" model , more secure, more resilient, and more expensive.

Besides, since crises may continue to occur in the future, a new concept is emerging: disaster management. It implies the management of events with low probability (a pandemic) but very high impact. It will imply the allocation of resources blocked for a long time (such as stocks of masks, vaccines, etc.), and thus more cost.


In this context, protectionism is a significant disruption to business confidence. The rhetoric has moved from job protection to national security. The debate is increasingly political and emotional. The risk is to move from a tariff war where price increases are transferred to consumers, to one of denying market access, which cannot be circumvented.

In this context, governments will most likely promote the return of national champions, prevent the acquisition of local companies by foreign state companies, and introduce Buy National legislation to favour local business.

Despite these uncertainties, the world economy remains global, and products will continue to be manufactured and assembled in many geographies. However, a stronger regionalization of business (nearshoring) and a reappraisal of partnership and business locations is likely.


Global technology companies now can extend their business reach far beyond their initial industry sector. Amazon is a world leader in cloud technology; Google and Facebook in digital advertising, Tesla in batteries and solar panels, and Amazon now produces more watches than the entire Swiss industry. Size matters. Ant financial, the electronic payment company of Alibaba, is 16 times larger than Paypal.  The entry barriers in many businesses are thus falling and can also affect public institutions, for example, in the case of the creation of digital money (Libra). The challenge: who will be my competitors tomorrow, where will they come from?


Besides, the development of new infrastructures, buoyed by the pandemic, remains essentially in private sector hands. It is the case of e-commerce, e-banking, e-payment, or advertising on the Internet and social media. The debate will heat up about who should monitor, and ultimately rule the information that these infrastructures detain. The ownership of private and business data will be one more source of tension between companies and nations worldwide.


A few large companies concentrate technology and financial power. The combined market capitalization of the ten largest global technology companies is over 9 trillion dollars, which is more than the combined value of their equivalent in the banking and pharma sectors. Technological giants do not only innovate, but they have also engaged in a strategy of buying promising start-ups, often above market value. They use about 25% of their financial resources to buy successful innovative young companies all over the world. They are engulfed in a sort of economic black hole managed by a few companies. As a consequence, many nations now run the risk of losing promising young companies which would have had the potential of becoming large national champions.


The power of technology giants has triggered a political debate in the US and Europe. It is not only about how they should be taxed, but also about how they can be better controlled. In the US, the question of whether they should be dismantled, like the oil and banking industry in the 1930s, is being considered. It could split the technological platform from the services provided. The theory is that systemic risk today stems less from overregulated banks than from overvalued and underregulated technology companies. Some scholars argue that it would not be necessarily detrimental to competitiveness. According to Morgan Stanley, a spin-off of Amazon Web Services, the cloud operations of Amazon, could fetch more than $400bn and would constitute the largest IT companies in the world.


New business models flourish and surf on new technological platforms. The "free" model offers services as a counterpart to accessing personal data (Facebook), the "subscription" model locks consumers into a long-term relationship (Spotify). The "licensing" model only offers the use of a product, but not its ownership (Microsoft, Netflix). These business models change the relationship between companies and consumers. One objective is to lock consumers in a proprietary relationship, providing an ecosystem of products and services. In short, "you have the choice, provided that it is mine."


Consumers are not passive and force new business models upon companies. The circular economy is one example of how consumers force companies to introduce sustainability and environmental protection in their value chain and business proposition. It is part of a more significant movement advocating ESG (Environmental, Social, Governance) policies. Companies should consider society's priorities for broader issues such as climate change, transparency or ethics.

PMore precisely, the security of products (through certification processes, including health and sanitary standards) and transparency will gain in importance because of the COVID crisis. Consumers will be adamant about better knowing and monitoring how a product is manufactured and distributed until it reaches them.


The global tax reform is an example of better international cooperation to solve a global issue. Three basic principles guide the tax reform worldwide: a territorial system, transparency, and equality of treatment. However, divergence will continue regarding tax rates, which will not be harmonized. Governments are also attacking the issue of technological companies taxation with the idea of tax revenues (2-3%) rather than profits, which are hard to assess for a single territory. However, individual initiatives are likely to create political confrontation and retaliation, as it is the case today between the US and France on such an issue.


The arrival of the millennials as consumers and employees force companies to reassess their approach to products and markets. This new generation is driven by "Meism"; a self-centered approach to life, an eagerness for transparency, which means that nothing should be confidential ; a willingness to improve the state of the world, especially through sustainable development, and a conviction that "free is cool", which implies a reassessment of profitability models for companies. This new paradigm reinforces Peter Drucker's statement: " Changes in society now have more impact than changes in management." Companies that ignore this new fact will face strong headwinds from consumers, society, and governments.


This world competitiveness landscape implies new attitudes and new approaches to managing people. It is not only being good at "what you do" that counts, but also being good at "what you are." Winners will need to deal with more uncertainty and a higher degree of discomfort. They should nurture a healthy sense of ambition for their organization and themselves. Resilience and the ability to quickly re-invent oneself are crucial to success.

Companies need to stimulate a mindset of imagination (why not?), of energy (why not now), and of commitment (why not me). Companies are increasingly questioned, especially by the millennials, about their contribution to society, beyond their financial results. The “legality” of the actions of companies - conforming to the law - is no longer enough in a world where public opinion also demands "legitimacy" - adapting to a higher standard. In such a world, companies will need to answer the broader question: why us?


Therefore, economic crises are a period of reinvention for products, business models and work structures. The winners of tomorrow are those who will identify the numerous opportunities in a fast-changing environment quickly. They will also implement their ideas faster than others.

Even if the pandemic will not stop at a precise point in time (and it is the difference with a war), it will accelerate change and innovation in companies. It will also imply spending more time on mindset and values, especially if employees will increasingly work remote. In short, it is time to be bold!