A ‘Black Swan’ is broadly defined as an extremely rare event that has severe consequences to human life, the economy, or both. It cannot be predicted in advance, although once it has struck, it is common practice to retrospectively identify trends building up to it. Covid-19, an infection caused by SARS-CoV-2, a strain of the now infamous Corona virus, seems to fit this definition perfectly.
There have been plenty of infectious disease scares the world has had to face over the last three decades, both long-term (AIDS) as well as short-term (Ebola, Zika). Yet, not since the Spanish Flu at the culmination of the First World War has mankind fallen victim to a pandemic as devastating in size and scale as Covid-19. Globalization and rampant consumerism have accelerated business at an exponential rate in the last half-century, but it is ironically these factors that contributed to the spread of Covid-19, making it the “world’s disease”, the first truly global pandemic of this impact in contemporary history. The virus is extremely contagious and has an R0 of 1.5-3.5 (R0 represents the average number of people to which a single infected person will transmit the virus), making it more infectious than the common flu and even potentially more infectious than the deadly SARS virus that swept across South East Asia in 2003. With a fatality rate ranging from 1.4%-4.7% (the methodology used to calculate this rate is subject to international debate), it is prima facie not an existential threat to mankind. Yet, the truly insidious nature of this disease is experienced only when looking at its broader impact, and the lives it affects indirectly through its impact on the economy and daily life.
This paper attempts to do three things. First, it examines the macroeconomic implications of Covid-19, focusing on India. Next, it analyses supply chain disruption, especially in identified sectors such as manufacturing, e-commerce, retail and services, and the next steps that companies in these sectors can take to mitigate their liquidity risks. Finally, the paper examines the impact of this economic downturn on aspects of human life.
Measures to protect health, such as social distancing, have been instrumental in limiting the hazardous effects of the virus on human life. However, these have all but brought the global economy to a standstill. Growth targets have been slashed, jobs have been cut and stock markets have tanked. Crippling debt and no new equity infusion have forced several MSMEs that were living on the edge to shut shop. While India was one of the later countries to get affected by Covid-19, its devastating effects have rippled through the economy at a terrifying pace. Moody’s has forecast GDP growth at 2.5% for this calendar year, a steep decline from previous years (and, in fact, a sharp drop from the 5.3% it had estimated for the same period just before the government’s lock down was announced).
If missteps in policy development and/or its implementation may have represented the gasoline, Covid-19 is proving so far, to be the matchstick that triggers an economic downturn. Lower growth rates will increase poverty and unemployment, which the country already grapples with. Graphed movement of stock indices including the Dow Jones Industrial Average, the Shanghai Composite Index and the BSE Sensex, shows a picture more closely resembling the financial crash of 2008 rather than the SARS epidemic of 2003. Private fundraising has dried up, as it did in the wake of the 2001 dot-com bubble and 2009 financial crash. If the economy remains shut for too long, the country runs the risk of going bankrupt.
Financial institutions are likely to be badly hit – having just survived and still reeling from the defaults of major institutions such as IL&FS, Punjab National Bank and Yes Bank, several more Covid-19 linked defaults would bring the industry to its knees. And while relief to the tune of INR 1.7 lakh crore has been earmarked for a stimulus package by the government, a detailed look at the measures taken reveal that there is little trickle-down benefit to the common man. The measures are certainly not enough for complete economic recovery. Loose fiscal and monetary policy, a trademark of Indian policy recently, will put pressure on finances and lead to increased inflation. Delinquencies and NPAs are expected to rise. Combined with loss of tax revenue that the government is expected to witness, the economy is likely to witness dark days ahead.
An Inflection Point for Supply Chains
Although the virus originated in China, reports claim that the country is well on its way to containing its spread internally. Nevertheless, the corporate world has had a long, hard look at its global supply chains, and China’s role as the most vital cog in manufacturing supply chains. Analysts reckon that China’s economy shrank by as much as 10% this quarter, its first contraction in over four decades. Manufacturers in China until very recently were operating at 50% capacity, with just 56% of their usual workforce. Already contingency plans are in place to de-risk companies’ reliance on China, and once business is back to normal, we may well see companies diversifying operations to other sources of cheap labour, especially Vietnam, India, Bangladesh and a few other countries.
According to a survey carried out by the Institute of Supply Management on US-based companies, 75% of respondent companies are already reporting supply chain disruptions in some capacity due to corona virus related transportation restrictions, with 80% of them believing their organizations will experience some impact because of Covid-19 disruptions. One in six companies have reported adjusted revenue targets downward by an average of 5.6%.
India has been badly stung as well. Certain industries like pharmaceuticals, automobiles, chemicals and textiles, have become overly reliant on Chinese imports. The businesses most impacted though comprise the Micro, Small and Medium Enterprises (MSMEs), that are overwhelmingly dependent on Chinese imports.
In today’s cash crunched scenario, the adage “Cash is King” has never been more accurate. Companies starved of liquidity are conserving whatever reserves they have, delaying payment to vendors in their supply chain. This puts an immense strain on working capital availability for these vendors. On the other hand, companies race to claim their receivables, but face similar backlog there from cash-strapped distributors and dealers. In these tumultuous times, many relationships are damaged and once the crisis is over, we may well see a complete rejig of vendor and distributor bases. Companies will be forced to inject liquidity across their supply chains, for new and existing stakeholders alike.
All too often, overhauling of supply chains, in similar fashion to cost-cutting, is implemented only in the wake of an adverse event. Consistent and active supply chain management and innovation are rare. Investing in new-age technologies gives companies the opportunity to analyze vast amounts of data on manufacturers, suppliers, distributors, customers and all other stakeholders in the ecosystem – allowing them to implement more effective contingency plans as a result of having developed agile supply chains. In India, especially, most supply chain management revolves around human interaction and bilateral conversations, making supply chain management a cumbersome and cost-ineffective process.
Procurement has been historically centered around cost-savings and therefore most managers are hesitant to invest heavily in new technologies. However, technology providers have adapted their business models in order to customize their products to their customers’ liking. Today’s third-party FinTech providers work in partnership with major corporations to provide them with cost-savings while mobilizing capital across the entire value chain. The Covid-19 pandemic has made managers take a focused look at the need for their companies to provide working capital to cash-starved businesses in their organizations. We expect to see a lot of strategic tie-ups between companies and FinTechs who provide such marketplace or SaaS based solutions, once the pandemic dies down.
Sector Specific Impact
A virus is agnostic – it does not choose whom to infect. Almost everybody’s life and, especially, work has been affected in some form or the other. However, there are some sectors that are affected far more than others.
Manufacturing has taken a beating. Unlike several white-collar jobs that can be performed remotely, workers in this sector have been idle (in the best-case scenario; far more likely is widespread layoffs). The government’s 21-day lock down, while an essential step in containing the spread of the virus, has triggered a ‘sudden stop’ for the industry which is immensely value destructive in the short-run. Key manufacturing industries such as automobiles, smartphones, retail, and others have all halted production due to an inventory surplus, as there is virtually no demand for their products. Manufacturing is especially ill-equipped to handle the fallout for the virus, keeping in mind that this is an industry whose growth has declined in only two quarters in the last two decades, according to Sachchidanand Shukla, chief economist of the Mahindra Group. The entire supply chain, right from providers of raw material to distributors of the manufactured goods, has grinded to a standstill.
E-commerce is another industry that is severely hit, with both demand and supply affected. As consumers rush to save cash, a lot of discretionary spends are being cut. Fashion, retail and other verticals saw sales dip between 20% to 35%, even before the lock down, with reduced footfalls in both online and offline channels. Major E-commerce players in India are dealt a dual blow to their supply chains – most of their suppliers are either local MSMEs that do not have the cash floats to continue operations or are imports from China.
Services have born the major brunt of the fallout. The global aviation sector is on the verge of collapse, as movement of people and goods becomes restricted, and will remain on red alert even once lock down measures are lifted. Domestic airlines in India are estimated to lose up to $3.6 billion in the first quarter of the new financial year, according to CAPA, an aviation advisory.
Hospitality too, has seen its business model collapse, as most restaurants remain closed while hotels double up as quarantine centres. The Indian hospitality sector is staring at a loss of up to $4.7 billion in revenues, as per hotel consultancy Hotelivate.
However, it is not all doom and gloom for some industries. Pharmaceuticals have poured billions of dollars into R&D in the race to find a cure for Covid-19. FMCG companies have ramped up production to ensure no shortages, as people race to buy essentials required during these trying times. Some, like Hindustan Unilever, have slashed prices on hygiene products, to enable widespread adoption. Notices from several state governments to allow food delivery services to be classified as “essential services” has breathed fresh life into companies like Swiggy and Zomato (although local authorities have been restricting the ease with which they operate). Entertainment companies like Netflix and Supercell, a gaming company, have seen massive spikes in demand for their services. And, on a lighter note, it has never been a better time to be an influencer or content creator, as billions of people stay at home, glued to social media.
Human Cost of Economic Stagnation
Loss of livelihood is a bigger worry at the moment for most of India’s rural class than loss of life. Not everyone has the luxury of being able to work from home. 75% of India’s workforce is either self-employed or has casual workers without full-time employment. Airlines and the hospitality business have had to mercilessly lay off staff or send them on leave without pay. Demand is fast exceeding supply for qualified and trained medical professionals that can address and contain the situation. Contractors have had their retainers severed and are out of work. The logistics industry has been disrupted entirely, with reports of thousands of truckers left stranded in unfamiliar states that have their borders sealed. With families to feed and debts to pay, a majority of India’s workforce is struggling to see light at the end of the tunnel.
The organized corporate sector has not been spared either. Although ability to work from home is positively correlated to high skill labour, companies have been looking to mitigate risk and in cases of dire need, trimming their employee related expenses.
Broadly, three models are emerging:
- Salary cuts or deferment of salaries across the workforce. This has been adopted by industries most severely hit such as aviation, hospitality and retail, where companies are bleeding dry.
- Senior management salary cuts. Leading from the top, a lot of large MNCs and Indian conglomerates have announced that their top brass will take hefty salary cuts until the crisis is over. Most of these managers have stock option compensation that continues to drive them to pull their companies out of this ordeal in one piece.
- Equity for salary swaps. An option that is popular among young, agile startups with relatively smaller work forces, this method sacrifices short-term loss for a potential long-term gain.
No event has hit and hindered Indian businesses as much in this millennium as the virus has. Yet, it has given companies food for thought. Labour models, the way a company engages with its employees, and the future of how we work is under the microscope.
It is interesting to note that the writer Nassim Nicholas Taleb, who popularized the term “Black Swan” in his eponymous book in 2007, does not believe that Covid-19 can be categorized as such an event. According to him, a true black swan was something like the terror attacks of September 11, that nobody could foresee. He claims that there is no excuse for governments and corporations to have not been prepared for something like this. Whether or not we should have been prepared, the imminent need is to handle the crisis and fallout that is likely to ensue. Once it clears, there will be a lot of finger-pointing at China, and possibly even sanctions on certain industries. Yet, companies must do their best to look introspectively. Protocols need to be put in place for crisis management. Companies that currently rely on bulky and inefficient supply chains will need to adopt new technologies with a view towards leaner and more efficient operations. Even once business is resumed, the economy will take a while to recover. Optimum production levels will face a gestation period due to a lack of liquidity.
At CredAble, we have a bullish view on our own business, as an increasingly large number of major corporations reach out with a view to partner with us, in order to upgrade their existing supply chain finance systems. FinTech providers such as ourselves not only leverage technology to provide cost savings to our clients but also enable quick and debt-free finance to all stakeholders of theirs, right from their suppliers to distributors, essential in such times of need.
There have been some positives to take away from this pandemic, for those of us who can afford to. Pollution levels have significantly dropped, giving us an opportune time to re-evaluate our relationship with our planet. By virtue of being confined to our homes, we get to spend more time with our families and loved ones, effectively pausing our otherwise busy lives. And companies, too, get this moment to hit “reset” – to unlearn things they have learned and answer new questions as to how to create value to address a better tomorrow.
We are currently living through a time that will one day fill the pages of a history book. We must all do what we possibly can to ensure that history does not repeat itself.
- Eisenburg, 2020, How Scientists Quantify the Intensity of an Outbreak Like COVID-19, UofM Health
- Hodgson, 2020, The Mystery of the True Coronavirus Death Rate, Financial Times
- Unknown, 2020, China Goes Back to Work, The Economist
- Boyd, 2020, Covid-19 Survey: Impacts on Global Supply Chains, Institute for Supply Management
Founder’s Office, CredAble