(first two parts)
The risks associated with global trade and technological nationalism have had a significant impact on the technology sector. Tariff hikes, export limitations, stricter privacy rules involving data offshore, changes to employment requirements, and scrutiny of mergers and acquisitions (M&A) and ownership rules are just a few of these.
The boundaries between technology and other sectors are rapidly eroding due to digital disruption, and tech companies need to address this now more than ever. The common interest in information and technologies, as well as cross-sector trends, are driving industry connectivity. These include forming alliances focused on data and technology, developing industrial ecosystems, exploring new business models, increasing investments in new hybrid technologies, and digitizing everything.
EY teams conducted a global research study with 750 technology executives to gain a better understanding of the risks and challenges facing global technology companies. Added insights and commentary from the EY Global Technology Sector team to help people understand what technology companies need to do to succeed in this ever-changing environment.
In the first part of this article, we will discuss how technology companies should deal with uncertainty, how to solve critical regulatory issues, how to optimize their supply chains and how to choose the right operating model.
Dealing with uncertainty
The results of the EY survey show that technology leaders are facing changing political costs, political volatility and new constraints on supply chains and operating models, creating both opportunities and challenges. Many tech companies have adopted a “China-plus-1” strategy due to rising tariffs and labor costs. Asia-Pacific countries, including Vietnam, Malaysia, Thailand and India, will benefit from new investments that de-risk their supply chains. Businesses around the world are at risk of frequent cyber-attacks affecting their operations.
Tech businesses view government intervention through two different lenses, depending on their position in the value chain. On the one hand, governments concerned about maintaining access to critical technologies are developing new, multibillion-dollar incentive programs to create incentives for new research and development (R&D) expansion and innovation capacity, such as the one proposed in the US. Semiconductors (CHIPS) Chips legislation proposed for US law and EU.
On the other hand, governments are increasing the complexity of the situation with new laws and regulations. Federal contractors are subject to U.S. government procurement restrictions motivated by national security concerns and affecting their supply chain. The Digital Markets Act was adopted by the EU to place restrictions on digital platforms, including their ability to grow and the requirement to provide competitive services to consumers.
Dealing with critical regulatory issues
Due to the current geopolitical issues, the complexity of ensuring compliance has increased, which has led to new export control measures. These new export restrictions are sensitive technologies, telecommunications, crypto security, semiconductors, sensors and software.
For example, the Export Administration Regulations, administered by the US Commerce Department’s Bureau of Industry and Security, are “extraterritorial,” meaning they impose restrictions on products manufactured outside the US that use US-owned software or technology. Origins. To ensure compliance with these and any upcoming laws, technology businesses need a comprehensive understanding of their future value chains.
The study highlights the following critical regulatory issues that impact technology enterprise operating practices.
• Transaction taxes, sales/use taxes, value added tax and taxes on digital services
• European Union approach to competition
• OECD Base Erosion and Profit Sharing (BEPS) 2.0 projects with Pillars One and Two
• Executive order prohibiting anti-competitive behavior
• Assess critical supply networks for manufacturing semiconductors and other critical technologies on executive orders
• Intellectual Property Taxes (IP)
Technology companies around the world are increasingly impacted by changes in the regulatory and tax environment. Countries aim to broadly sanction their digital economies and transactions, which may be driven by recent political changes. Lawmakers are focusing on the evolution of digital services and new tax and regulatory regimes on operating models such as over-the-top and software-as-a-service (SaaS). The results of the EY survey show that efforts to modernize antitrust and competition laws in the technology sector, data sharing and trade and tax regulations are the main influences driving changes in operating models.
A closer look at the survey results reveals some significant differences between sectors of the technology industry. Executives of Internet, e-commerce, IT services, and cloud companies consistently express concerns about almost all of the aforementioned regulatory issues. As a legacy, tech executives are vulnerable to the EU’s General Data Protection Regulation (GDPR), digital services taxes and the global minimum tax. On the other hand, new technology company executives focused on sourcing raw materials and the sector’s competition/antitrust policy.
Optimizing supply chains
Tech companies have had to rethink their supply chains due to the impact of Covid-19 and a host of new “black swan” events. The outbreak has put more pressure on global supply chains, with the impact of the outbreak on US and Chinese trade. Importers have had trouble procuring manufacturing supplies on time, and exporters have struggled to secure registrations on ships due to global factory shutdowns and shortages of shipping materials. Not surprisingly, 95% of executive respondents said their organizations are changing their operating models and supply chains.
The research shows how the pandemic’s impact on supply chains has increased the focus on resilience and sustainability, as technology executives and their companies’ desire to move their supply chains closer to shore and back to the ocean. Up to 71% of executives said that their companies expect to localize their products in the next three years, compared to 19%, whose companies have already done so. The fact that 68% of CEOs agree that technology companies need to do better to reduce global emissions in the next three years reinforces the case for convergence and convergence.
Choosing the right operating model
Executives understand the importance of constantly and proactively updating their business models. They point to benefits such as higher revenue growth and increased employee satisfaction – the biggest benefits from operating model changes. However, many of them are solving tactical and practical issues, which makes them feel that there is more to do. Industry leaders were more positive about the benefits of implementing the right operating model. In terms of both financial performance and customer or employee satisfaction, these benefits should show a direct correlation between the correct operating model and significant improvements in business performance.
An EY study found that 65% of respondents had changed their working model at least once in the past 12 months. Emphasizing the importance that high-tech businesses play in the quest to become agile digital enterprises, these tech executives recognize that they still face challenges. Thus, the pace of planning and evaluation is accelerating. He reports that technology leaders are reexamining their operating models in whole or in part in light of the rapidly changing operating environment. Almost half of the respondents said they now do this assessment a few times a year.
More than half of executives (55%) say they still think their operating models need to change, and 50% say they frequently review improvements and make frequent revisions based on those reviews.
As companies grow in size and revenue, they become more confident that they have the right operating models. Most small and medium-sized businesses or low- and middle-income businesses believe that they do not have the right operating model and need further improvements, but they believe that high-income technology enterprises already do. While most executives in the autotech and technology infrastructure sectors believe their companies have the right operating model, executives in other sectors are equally divided or need to plan for future improvements, he said.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances are verified. The views and opinions expressed above are those of the author and not necessarily those of SGV & Co.
Rossana A. Fajardo is the head of EY’s ASEAN business consultancy and the head of SGV & Co’s consulting service line.
