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How tech companies can stay agile in an uncertain world

(First of two parts)

The recent surge in risks associated with international commerce and technology nationalism has had a significant impact on the technology sector. Tariff increases, export limitations, stricter privacy regulations that include data onshoring, changes to employment requirements, and a closer examination of mergers and acquisitions (M&A) and ownership regulations are just a few of these.

The borders between technology and other sectors are dissolving rapidly due to digital disruption, and technology companies must address this now more than ever. A shared demand for data and technologies, as well as cross-sector trends, are fostering industry convergence. These include the establishment of alliances centered on data and technology, the development of industry ecosystems, the exploration of new business models, the increase in investments in new hybrid technologies, and the digitalization of everything.

EY teams conducted a global research study with 750 technology executives to have a better understanding of the increased risks and difficulties that global technology companies must face. Additional insights and suggestions from the EY Global Technology Sector team were added to the findings to help people understand what technology companies must do to succeed in a constantly changing environment.

In the first part of this article, we discuss how technology companies need to withstand uncertainty, address critical regulatory issues, optimize their supply chains, and choose the right operating model.

WITHSTANDING UNCERTAINTYThe results of the EY survey show that technology leaders are coping with shifting political costs, political volatility, and new limits that are posing both possibilities and problems for their supply chains and operating models. Many technology companies have adopted a “China-plus-1” strategy as a result of tariffs and increased labor expenses. Asia-Pacific nations including Vietnam, Malaysia, Thailand, and India gain advantages from new investments that diversify risks in their supply chains. There is also a greater sense of threat since businesses around the world may experience more frequent cyberattacks that have an impact on their operations.

Technology businesses increasingly view government intervention through two distinct lenses, depending on their position in the value chain. On one hand, governments that are worried about protecting their access to crucial technologies are developing new, multibillion-dollar incentive programs to encourage the expansion of new research and development (R&D) and fabrication capacity, such as the proposed US Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act and the European Union’s proposed Chips Act.

On the other hand, governments are increasing the complexity of the situation with new laws and regulations. Federal contractors are subject to US government procurement limitations that are motivated by national security concerns and have an impact on their supply chains. The Digital Markets Act was passed by the European Union to place restrictions on digital platforms, including guidelines on their ability to grow and the requirement to give users access to competing services.

ADDRESSING CRITICAL REGULATORY ISSUESThe complexity of ensuring compliance has increased as a result of current geopolitical issues, which have also led to new export control measures. These include new export bans on sensitive technologies, telecommunications, encryption security, semiconductors, sensors and software.

For instance, the Export Administration Regulations, which are overseen by the Bureau of Industry and Security of the US Department of Commerce, are “extraterritorial,” meaning that they place restrictions on products that are manufactured outside the US using software or technology that has US origins. To make sure they are compliant with these and any upcoming rules, technology businesses will need a comprehensive understanding of their upstream value chains.

The study highlights the following critical regulatory issues affecting technology enterprise operational practices:

• Trade taxes, sales/use taxes, value-added taxes, and taxes on digital services

• European Union’s approach to competition

• The OECD Base Erosion and Profit Sharing (BEPS) 2.0 projects with Pillars One and Two

• An executive directive prohibiting anticompetitive behavior

• Review of crucial supply networks for producing semiconductors and other cutting-edge technology via executive order

• Intellectual property taxes (IP)

Technology companies worldwide are being increasingly impacted by a wave of regulatory and tax environment changes. Countries aim to broadly tax their digital economies and transactions, potentially driven by recent political shifts. Legislators are concentrating on new tax and regulatory regimes as a result of the evolution of digital services and operating models such as over-the-top and Software-as-a-Service (SaaS). Findings from the EY survey revealed that efforts to update antitrust and competition laws in the technology sector, data transfers, and trade and taxation regulations were the main influences to changes in operating models.

A closer examination of the survey results reveals some notable differences between various facets of the technology industry. Executives at internet, e-commerce, IT services, and cloud companies consistently expressed more concern about the effects of nearly all the previously mentioned regulatory issues. According to legacy technology executives, they are affected by the General Data Protection Regulation (GDPR) of the European Union, digital services taxes, and global minimum taxation. On the other hand, emerging technology company executives focused more on sourcing of raw materials and the impact of sector competition/antitrust policy.

OPTIMIZING SUPPLY CHAINSTechnology companies had to rethink their supply chains after the impact of COVID-19 and a host of new “black swan” events. The pandemic put further strain on the global supply chain, which was already coping with the effects of the US and China trade issues. Importers had trouble buying manufacturing supplies on time, and exporters had trouble getting bookings on ships due to worldwide factory closures and a lack of shipping containers. It may not come as a surprise that 95% of the executive respondents said their organizations are changing their operational model and supply chain.

The desire of technology executives and their organizations to nearshore and reshore their supply networks was significant in the survey results, reflecting how the effects of the pandemic on supply chains have increased the focus on resiliency and sustainability. As much as 71% of executives said their companies expect to move their manufacturing to be more localized over the next three years, compared to 19% who said their companies have already done so. The fact that 68% of the CEOs agreed that tech firms will need to take better efforts to reduce global emissions over the next three years is likely a linked aspect that also strengthens the case for near/reshoring.

CHOOSING THE RIGHT OPERATING MODELExecutives recognize the need to continually and proactively update their operating models. They noted that they look for benefits such as higher revenue growth and employee satisfaction — the top benefits realized from operating model changes. However, many are also addressing tactical and functional issues, giving the impression that there is much more to do. Industry leaders were more positive about the advantages of implementing the right operational model. In terms of both financial performance and customer or employee satisfaction, these benefits should show a direct correlation between having the right operating model and significant improvements in business performance.

The EY survey found that 65% of respondents have changed their operational model at least once in the previous 12 months. While highlighting the importance that the top technology businesses play in the effort to become adaptive digital enterprises, these technology executives nevertheless note that they still face difficulties. As a result, planning and evaluation paces are accelerating. Technology leaders reported that in light of the operational environment’s rapid change, they routinely examine their operating model either completely or in part. Nearly half of respondents claimed they now perform this assessment a few times a year.

More than half of executives (55%) stated that they still think their operating models need to change while 50% are actively planning improvements despite more frequent evaluations of their operating models and more frequent revisions based on these reviews.

Companies also became more certain that they had the right operating models, as their size and revenue increased. The majority of small- and medium-sized businesses or businesses with low to medium revenue believe they do not have the correct operating model and seek further enhancements, whereas high-revenue technology enterprises believe they already do. Executives in other sectors were evenly split or said they need to plan for future improvements, in contrast to the majority of executives in the autotech and technology infrastructure sectors who believe their companies have the correct operating model.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Rossana A. Fajardo is the EY ASEAN business consulting leader and the consulting service line leader of SGV & Co.

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