Covid-19 Will Mostly Impact the ER&D Onshore Industry
Since we published our last note on the impact of Covid-19 on ER&D spending, the situation has changed with Covid-19, having now spread to Europe and soon the US. Already, The European Central Bank is predicting a GDP decline of 5% in 2020, based on the impact of three months of confinement.
The Manufacturing Industry Most Impacted by Covid-19
In the R&D space, the manufacturing industry (~35% of global spending) is under intense pressure. Many airlines will go bankrupt or benefit from rescue packages: Airbus and Boeing will suffer, with Boeing also aching from the 737 MAX fiasco.
The automotive industry has suffered from two blows: the shutdown of the Chinese market and now the worldwide recession. The rest of the manufacturing industry is cyclical and will feel the pain from the economic downturn.
The Test for Enterprise ICT ER&D Spending Will Be in September
ICT and electronic goods (also 35% of spending) are in different situations. Confinement measures are impacting sales of electronic goods and have a deep impact on H1 2020 at least.
Enterprise ICT will suffer from delayed investments, initially trough the sharp reduction from discretionary spent. The real test to enterprise ICT will be in the September-October timeframe when clients draft their budgets. If the Covid-19 pandemic is under control, enterprise budgets should be fine. If not, they could be down by as much as 10%.
Pharma Is the Only Bright Spot
Finally, pharma is the only bright spot in a gloom environment. Governments are accelerating research funding and expenditures, for treating Covid-19 and also for other diseases, in a context where the population will ask for better medical expense coverage. However, few ER&D vendors are active in pharma R&D, with a few exceptions active in clinical trials IT and in pharma manufacturing IT.
The Covid-19 Crisis Will Impact ER&D Vendors Differently
Bottom line: of all ER&D vendors, we think Accenture, TCS, Infosys, HCL Tech, and Capgemini/Altran, along with EPAM, are better-equipped to go through the current crisis, thanks to their ICT ER&D client base.
Vendors with a substantial client base in automotive and aerospace will suffer significantly. In other terms, the onshore ER&D will be most impacted by the crisis.