How COVID-19 Will Change the Geography of Competition

For any business leader, decisions about their company’s geographic footprint are crucial. Entering a foreign market requires major resources and a strong commitment to succeed. Similarly, deciding to locate a manufacturing plant overseas entails the careful selection of an offshore destination. A multinational footprint also has fundamental implications for the overall structure of a company.

Leaders are exposed to two significant errors of judgment when they misunderstand the geography of competition. First, they escalate commitment to geographic markets they should be retreating from; and second, they miss out on novel opportunities to create value across borders in different areas of the world. By getting their geographic footprint wrong, they make the company less resilient and unfit for future global challenges.
 

Throughout 2020, leaders were exposed to radically divergent views on the future of globalization and the shifting geography of competition post-pandemic. At one extreme, some observers predicted the demise of globalization and a sharp decline in international activities post-COVID-19. At the opposite extreme, others predicted a swift return to pre-pandemic globalization patterns following the rollout of large-scale vaccination programs.

My analysis, however, reveals that both perspectives are misleading and, in fact, the reality is more complex and subtle. COVID-19 is set to have a lasting impact on the geography of competition, regardless of vaccine availability. My ongoing analysis of the world’s 500 largest corporations suggests leaders should avoid two common misconceptions and carefully consider three trends that are set to reshape their companies’ geographic footprint in the aftermath of the pandemic.

Beware Two Common Fallacies

Fallacy 1: The COVID-19 pandemic has caused companies to localize. The business press tends to associate the past two decades with rampant globalization. However, when we look closer, we find that a large number of economic activities have continued to take place within a company’s home country. COVID-19 has not caused companies to localize; the majority already had a local focus before the pandemic hit.

Consider what the hard data tells us about the geographic footprints of the world’s largest corporations — derived from Fortune’s Global 500 list. In a previous study, Pankaj Ghemawat and I found that companies in the 2012 Fortune Global 500 list were not all that global with respect to the geographic distribution of their equity affiliates. We reached the same conclusion when assessing global companies in the list the following year. Even the world’s largest companies continued to locate nearly one-half of their affiliates at home.

To better capture the shifts over the past decade, I analyzed the footprint of the nearly 400 companies that were included in all five Fortune Global 500 lists from 2012 to 2016. My results show that their share of international affiliates has remained quite stable over time, with domestic affiliates on average representing slightly more than half of the total affiliates year after year. When restricting the focus to 100 of the largest companies included in this sample and evaluating their footprints in 2019, my analysis finds that, on average, nearly 40% of each company’s affiliates continued to be located within its home country right before the pandemic hit. That is not exactly the global footprint one would associate with a borderless world narrative, especially for the largest corporations.

This is also confirmed when adopting a sales-based classification scheme of Fortune Global 500 companies, according to which, truly global companies — generating at least 20% of sales in North America, 20% in Europe, and 20% in Asia — only accounted for 3% in 2002, 12% in 2013, and 9% in 2017.1

What COVID-19 has done is cause a mindset shift about globalization. To continue to overestimate the global nature of companies’ footprints would contribute to a misunderstanding of the geography of competition. The home country already played a crucial role before the pandemic, and this is set to continue. Take the example of U.K.-based grocery retailer Tesco. In 2015, the company sold its South Korean business, and in early 2020, it finalized its complete exit from Asia to reinforce its focus on markets in the U.K. and Ireland. The localization process in Tesco started well before the onset of the pandemic. This pattern also emerges from macro indicators. For instance, trade intensity — the ratio of gross exports to gross outputs — was already falling in nearly all goods-producing value chains before COVID-19 hit.

Fallacy 2: The COVID-19 vaccines will restore companies’ pre-pandemic globalization patterns. The development and ongoing distribution of COVID-19 vaccines was warmly welcomed by the business world. However, it would be a mistake to expect companies’ geographic footprints to return to pre-pandemic patterns.

The pandemic has exposed the fragility of supply chains built purely on efficiencies and cross-country arbitrages. A focus on resilience is set to drive the reconfiguration of companies’ supply chains, regardless of vaccines. In the aftermath of the pandemic, we can expect companies to increasingly embrace a multilocal sourcing strategy based on a regional footprint.

Maersk CEO Søren Skou noted in a conversation with IMD that companies “had designed their supply chains too much for more efficiency,” leading them “to have single-source situations of often quite small parts.” This will change post-COVID-19. With a multilocal sourcing strategy, companies rely on a larger number of smaller, flexible production facilities and sourcing partners closer to where end customers are located. This type of strategy emphasizes the home region, which lowers companies’ risk to operate across borders while still offering them the opportunity to benefit from cross-border differences.

The real action will be in digital cross-border flows of data as a result of the growing ability to store and transfer data points around the world at negligible cost. We may become more globally connected sooner than we think, just in different ways than we expected pre-pandemic. Germany-based online retailer Zalando is a case in point. The company was founded in 2008 and expanded into 16 other European countries, entering most of them during 2010-12. In the years preceding the pandemic, Zalando went through a radical transformation to expand its digital infrastructure while keeping a European footprint. This entailed developing in-house technologies to improve warehousing, delivery, and customer service processes and to fundamentally reshape its digital marketing efforts. The digital enhancement has become even more critical since the beginning of the pandemic: It is set to drive Zalando’s digital platform-based business model and its relationship with consumers and partners (especially fashion and lifestyle brands) across all markets to an even larger degree post-COVID-19.

Three Trends Reshaping Your Company’s Geographic Footprint

Trend 1: The home region will become even more crucial. Intraregional trade was already on the rise before the onset of COVID-19. A data-driven assessment of the changing footprints of the world’s largest corporations suggests that this trend will accelerate.

My multiyear analysis of Fortune Global 500 companies finds that they have maintained a marked regional focus on the location of their affiliates that started in the years preceding the COVID-19 pandemic — with, on average, roughly 70% of their affiliates located either domestically or within their home regions. The pronounced home-region orientation emerges just as strongly when considering where Fortune Global 500 companies generated their sales. Comparing the sales distribution of Fortune Global 500 companies in 2002, 2013, and 2017, it is clear that most companies remain home-region oriented. In 2002, 88% of companies generated at least 50% of sales in their home region — compared with 69% of companies in 2013 and 74% in 2017.2

With rising geopolitical tensions, stronger pressures from local governments, and the necessity to pay more attention to local stakeholders’ needs and expectations, we can expect companies to prioritize their home regions to an even larger extent. Consider the pharmaceutical industry and how Europe’s heavy dependence on supplies sourced from countries like China has recently come under public scrutiny. In January 2021, France-based multinational Sanofi completed the spinoff of six European factories into a newly listed entity named EuroAPI — with over 1 billion euros ($1.2 billion) in annual revenues — that will precisely focus on attracting companies that want to increase their pharmaceutical production within the European Union. This is a trend that we can expect to see materialize in other sectors as well.

Trend 2: Global expansion will remain an option for very few companies. Hardly any companies, even those among the world’s largest corporations, were global before the pandemic hit.

A truly global reach will continue to be an option for very few companies in the post-pandemic era. We can expect the winners from COVID-19 — many of which are asset-light companies that effectively leverage digital platforms — to be among the rare companies that seize opportunities for global growth. They have the financial resources to invest on their global footprints — like Sweden-based Spotify, a clear beneficiary of the pandemic. Spotify has taken advantage of the growth momentum of paid-for streaming music services triggered by COVID-19 and managed to add a record 30 million subscribers, reaching 155 million paying customers by the end of 2020. This was also achieved via changes to its geographic footprint. In June 2020, the company entered Russia — the world’s fastest-growing recorded-music market in 2019 — and 13 other countries simultaneously. That represents a strong push to meet the company’s global ambitions, right in the middle of the pandemic.

Trend 3: Digital technologies will drive globalization’s next phase. Pre-COVID-19, digital technologies were already important drivers of globalization, enabling innovation, providing access to information, and connecting consumers and suppliers. The pandemic has further accelerated this trend.

Focusing on e-commerce will not be enough to succeed post-COVID-19. Digital technologies will drive globalization’s next phase and therefore determine how companies organize their cross-border activities. For example, Germany-based Adidas saw its e-commerce business boom, with a 50% year-on-year uplift in online sales in 2020 because of COVID-19. Yet its digital acceleration plan goes way beyond ramping up its online sales channel and includes developing new digital capabilities to interact with consumers worldwide and digitalizing its entire supply chain, from the design to the distribution of its products. Adidas recently unveiled an ambitious digitalization plan driven by investments of more than 1 billion euros until 2025, focusing on 3D design and printing capabilities, computerized knitting, and robotic cutting directly driven by data on specific user profiles. On the customer side, the company will make further investments to equip its own retail stores with omnichannel digital capabilities to create a seamless consumer experience across all touch points. It is focusing on stores in a few key cities identified as strategic, including Mexico City and Seoul, to drive superior customer engagement.

Data on the world’s largest companies confirms the dominant role the home region played for companies pre-pandemic as well as the scarcity of true global reach. Before deciding on their companies’ geographic footprint for the post-pandemic future, leaders must consider the data — and not be misled by false causalities.