Digital Transformation and Industry 4.0 in the Context of High Interest Rates
igital transformation and Industry 4.0 are crucial for the modernization and competitiveness of companies, but the current scenario of high interest rates in Brazil and around the world presents significant challenges. Below is a summary of the correlation between digital transformation, the main risks involved, and the impact of high interest rates.
Digital Transformation vs. High Interest Rates
Implementing emerging technologies such as IoT, 5G, and big data requires substantial investment in technology, infrastructure, and staff training. However, the high interest rates we are currently seeing not only in Brazil but also in other markets increase the cost of capital, making loans and financing more expensive. Although there is still a direct correlation between investments in technology and interest rates, the current scenario could discourage companies from investing in new technological projects or expanding their digital capabilities.
With the cost of capital high, the financial risk of new investments increases. Companies may face difficulties in generating sufficient returns to justify investments, especially in an uncertain economic scenario.
According to a study by Deloitte[1], in 2024, several factors such as high inflation, rising interest rates, declining demand, geopolitical conflicts, supply shortages, currency volatility, new regulations and changes in tax policies, as well as the ongoing effects of the global pandemic, continue to impact some countries. These macroeconomic and technological challenges, combined with persistent difficulties such as talent shortages and technological disruption, make it difficult for companies to achieve their growth and profit targets.
Despite this disruptive and uncertain business environment, Deloitte predicts growth for companies. The survey of nearly 300 senior executives from leading global companies in different sectors found that, in addition to inflation, talent shortages and supply chain constraints are the triggers for 90% of cost transformation programs. External macro trends have increased the pressure to establish more competitive and sustainable costs. More than half of the companies aimed to reduce costs by at least 10%.
However, 72% of the companies surveyed have not yet achieved their planned cost reduction targets, mainly due to a combination of external barriers and internal constraints, infrastructure/system-related challenges and disjointed transformation efforts without the necessary governance and coordination.
Main Risks Involved
There are some risks to watch out for, such as those that affect ROI, others that affect liquidity or implementation costs, and finally the risk of obsolescence, especially when it comes to technologies.
Higher financing costs can be one of the challenges to ROI. The long term required to recover investments in technology can be daunting, especially in an environment of high economic volatility.
In an environment of high interest rates, the availability of capital can be restricted. Companies with limited access to financial resources may find it difficult to sustain ongoing investments in digital transformation.
When it comes to new technologies, the complexity of their implementation can represent a significant risk, including integration failures, organizational resistance and change management challenges. These risks can also be exacerbated by additional financial pressure.
Last but not least is the obsolescence of digital technologies, which are evolving rapidly and in some sectors exponentially. Investments made today can become obsolete in a short period of time, requiring continuous reinvestment. With the high cost of capital, the ability to make these reinvestments can be compromised.
Possible actions to mitigate the impact of interest rates
Direct your efforts towards improving operational efficiency with existing resources, prioritizing lower-cost investments that offer a more immediate return.
Although it may seem harmful to postpone or reduce investments in digital transformation due to the high cost of financing, actions of this type related to projects that are not considered critical can be postponed, at least in the short term, or canceled.
Seek out strategic partnerships, sharing the risks and investments required for digital transformation. Collaborations with startups and technology suppliers can be a way of accessing innovations without significantly compromising equity.
Explore alternative sources of funding, such as venture capital, private equity, or even government funding and tax incentives aimed at innovation and digitalization.
Our viewpoint
Depending on the size of the company and the contexts in which it operates, it is possible to verify some specific actions:
In the short term:
- Small Companies: Focus on accessible digital tools that improve operational efficiency, such as process management software and digital marketing. Train staff to maximize the use of current technologies.
- Medium-sized companies: Seek partnerships with startups and technology suppliers to share costs and risks. Explore specific lines of credit for innovation, such as those offered by the BNDES or venture capital funds.
- Large companies: Implement pilot digital transformation projects to test new technologies with controlled investments. Review and optimize existing processes to free up resources for future investments.
In the medium and long term:
- Small Businesses: Expand digital presence and adopt e-commerce and advanced digital marketing; invest in low-cost automation solutions that increase productivity; integrate technologies that promote sustainability and energy efficiency; develop a scalable technological infrastructure to support future growth with a view to scalability.
- Medium Enterprises: Implement emerging technologies that offer a quick ROI, such as CRM systems and ERPs; form consortia with other companies for joint investments in technology; explore digitalization to expand operations to international markets, as well as Artificial Intelligence (AI) solutions for data analysis and decision-making.
- Large Companies: Develop an integrated digital transformation strategy, covering all areas of the company. Create innovation hubs and invest in R&D to remain at the forefront of technology, complete the transition to an Industry 4.0 model, with fully integrated and automated systems, in order to maintain a leading position in the market.
Despite the challenges posed by high interest rates, digital transformation and Industry 4.0 remain key to long-term competitiveness.
However, considering the current economic outlook and economists’ perspectives on a scenario of market maintenance or deterioration, the challenges are likely to increase as this scenario persists.
Companies need to carefully balance the risks and benefits os technological investments, considering alternative financing strategies and partnerships to mitigate the impacts of the high cost of capital.
Strategic adaptation and the prioritization of projects with a high potential return an immediate impact will be crucial to navigating this challenges economic scenario.
These actions, adapted to the size of the company, the market niche and the dynamics of demand, will help organizations navigate the challenges posed by high interested rates while continuing to progress on their digital transformation journey.
The aim of this report is to provide a succinct and comprehensive analysis, helping readers to better understand the economic and financial environment and make informed decisions, without exhausting the subject.
[1] Strategic Cost Transformation (deloitte.com)
Posted at first time at June, 13 on liked-in Publicação | Feed | LinkedIn
