Entering into the final quarter of 2020, it has not been an easy year for business owners, business leaders and employees. With government lockdowns being imposed globally and enforcement of social distancing rules, the challenges of doing business locally and internationally have begun a transformation of the business landscape. With these rapid changes occurring, businesses have had to adapt through the implementation of technology, a culture of working from home and reconfiguration of traditional business models. While many organizations have been able to retain core functions for interim stability, a great deal of strain has been placed on business managers and leaders responsible for navigating this challenging period. Let us explore the current international business climate, analyze the challenges and possible solutions, and look at effective steps business managers can take.
The Current Business Climate
Prior to the pandemic, global economies were generally experiencing steady year on year growth. Even with uncertainties such as the China-US trade war and the Hong Kong protests, finance and business was able to weather political disturbances. As reported by the Organization for Economic Cooperation and Development, China began steering its fiscal policy to stimulate greater domestic consumer spending by stimulating start-ups with lucrative grants, and it was emerging as a serious competitor in the new age of artificial intelligence and the digital economy. Neighboring Asian countries such as Vietnam, Thailand and Cambodia were experiencing increased trade with Europe as a result of streamlining lengthy supply chains.
While we all know that the virus originated in China, it fast became a global issue. By January 2020, China had publicly announced the outbreak of a new virus which had similar traits to SARS. In the direct path of the storm, Chinese businesses were hit first as rising infections threatened to bring provinces to their knees. The virus then struck the wider Asia-Pacific region and, all too quickly, became a worldwide concern.
China was quick to implement a strict nationwide lockdown, and businesses were immediately shuttered. Considering the enormous proportion of Small to Medium sized Enterprises (SMEs) which heavily rely on their physical presence, the impact was significant. By the end of March 2020, over 100 countries had imposed some form of lockdown. In terms of business closures, as reported by The Drum and Statista, between January to May 2020, 18% of East Asian and Pacific SMEs were forced to close. South Asia was particularly vulnerable with 46% of SMEs closing. On average, around the globe, 26% of SMEs closed during this period and 63% of the remaining SMEs reported a decline in sales.
Ongoing Impacts in China
China may have been tripped up by the challenges of Covid-19, but it has not fallen. The recovery has been rapid. China’s current social freedoms are a direct result of swift and decisive action taken to prevent the spread of the virus. People are now able to meet and socialize, unlike many other countries worldwide which are still experiencing some form of lockdown. Businesses have embraced the ‘new normal’. China has demonstrated its tenacity, its focus on supporting business and its determination to overcome any obstacle in its path. Having a business partner in China opens the door to a growing and resilient economy in which to do business.
Let us look back at the immediate impact of the virus, and its effect on some major global economies.
Challenges Faced by Businesses
In the first stages of the outbreak, there was one clear crisis: Covid-19. However, disaster does not walk alone. As reported by Bright Bridge Solutions, in many countries government lockdown policies have created economic crises which have rippled across the globe. Businesses have lost revenue and opportunities, and have had to evolve to survive.
Some key operational challenges to businesses that have emerged as a result of the pandemic are as follows, as covered by Development Asia:
1. Government lockdown policies
Business closures and restrictions on movement of people have been effective measures in reducing risk of disease transmission. However, this approach inevitably results in loss of revenue. The fluctuating numbers of Covid-19 cases have directly impacted the measures imposed by the government. In some countries, such as the UK, changes are enforced at very short notice. This adds an additional layer of complexity in that businesses must adapt quickly to new policies, whether relating to opening, closing or policing of customer numbers.
Industries which have been completely unable to operate remotely, such as the travel and hospitality sectors, are feeling the greatest strain. As reported by the United Nations World Tourism Organization, Chinese tourists comprise of at least 20% of total inbound visitors in 8 Asian economies. The total number of inbound visitors to Thailand plummeted by 42% in February 2020, and 76.4% in March, when compared to 2019. In April and May, there were no recorded visits by Chinese tourists to Thailand. Similarly, hotels fell silent as there was a 40% year on year decline in rooms being booked across Asia at the end of February.
The travel industry is perhaps the most severely hit sector, with entire fleets being grounded at airports for the end of Q1 and beginning of Q2. At Changi Airport in Singapore, passenger numbers fell by 99.5% between April to May 2020. The International Air Transport Association predicts passenger circulation for Asia-Pacific will fall to 53.8% in 2020, representing a 27.5% drop in revenue.
2. Deflated demand for goods and services
With governments around the globe implementing policies that have led to business closure and operations at a reduced capacity, there has been an inevitable drop in demand for goods and services. Global supply chains have suffered a domino effect, for example supermarkets reducing their inventory to only the most popular items. Reviving demand will be a slow and gradual process.
3. Reduced operational cash flow
Cash flow is the primary lifeline of every business. The disruptions caused by lockdown policies can have almost immediate effects on cash flow. This means access to alternative funding is critical. A large number of SMEs have noted they had only one month of cash reserves. And whilst governments and private lending institutions have opened their doors to struggling businesses, it is important to bear in mind that a large proportion of financial aid is fashioned in the form of a traditional loan, i.e. the financial aid will need to be repaid at a certain date, including interest. Businesses will need to be mindful of repayment terms in the wider context of cash flow uncertainty.
4. Reduction of opportunity for organic growth and meetings
Disruptive lockdown policies, social distancing measures and regular working from home has meant a loss of opportunities to organically grow a business. Traditional forms of business development such as networking events, roadshows and meetings are often impossible. Rather, businesses will have had to adapt to a new form of business development that consists of virtual introductions and meetings via Zoom/Teams/Google, and work on developing virtual relationships.
5. Difficulty in adapting to the new landscape ability to offer alternative products/services
It is clear businesses have had to adapt and find their comfort zone in living with Covid-19 as part of regular operations. For the longer term, this means serious consideration about investing in research and development and creative business modelling, in order to effectively adapt to changing market practices. SMEs are amongst the most vulnerable as their cash flows and profit margins can be very tight. The danger is that the largest businesses (utilizing their reserves) will dictate new market practices. SMEs will be left with little choice but to keep pace or consider offering alternative products and services to compete with other market players.
6. Mental health and employee welfare
The most abstract of challenges for businesses going forwards will be management of the workforce and employee welfare. Whilst revenue control and service delivery levels are the fundamental, employees are very much at the heart of the success of a business. It is essential to emphasize this more nuanced challenge that has often been neglected in the past, as it strikes the very core of a business’s culture.
Working from home has impacted individuals very differently. Some prefer the new lifestyle as it enables greater flexibility and autonomy in managing their own time. Others, particularly those living alone, have found it extremely challenging to maintain the same level of productivity compared to before. It will be critical for business owners to provide sufficient support to ensure morale is high. The business’s response to virtual working will feed into employee well being and how employees perceive their employer. This ultimately determines loyalty of employees to the brand, which correlates with employee productivity. For those employees with additional stressful responsibilities such as home schooling, or care for the elderly, businesses must accept flexible working patterns to demonstrate compassion and support.
The true difficulty with such an abstract challenge is that there is no easy solution. It is a continuous process which requires constant care and attention from business managers and leaders.
Sectors have closed their doors as lockdowns have hit. While we hope that most will open for business again in the future, it is a sad but unavoidable truth that some will never reopen. The industries most severely affected by Covid-19 this year have been:
– Tourism agents – 54% closed
– Hospitality and events – 47% closed
– Education and childcare – 45% closed
– Arts and entertainment – 36% closed
– Hotels, cafes and restaurants – 32% closed
For economies worldwide, this has been a catastrophic blow.
What are Governments Doing Worldwide?
Many governments have been quick to publicize innovative schemes to offer financial aid to businesses of all sizes, employees, and those suffering due to the lockdowns. In the Asia-Pacific, 29% of businesses reported receiving state financial aid. Globally, around 60% of financial support was in the form of government grants (approximately 49%) or government loans (approximately 10%). However, many businesses have found that the financial aid was not received quickly enough to allow them to adapt to the rapidly changing circumstances.
In April 2020, the UK Government reported that its GDP was 25% lower than it was in February 2020. The health risks posed by Covid-19 have significantly impacted traditional consumer spending culture. In Q2 2020, consumer spending fell by 23.6% compared to Q1 2020.
The labor market in 2020 began with the highest employment rate (76.6%) since 1971, with 33.1 million people employed. However, business management teams have had no choice but to streamline their work forces, with employment levels dropping by 415,000 between June to August 2020. Since March 2020, 2.7 million people have claimed for unemployment related benefits.
Whilst the UK government has introduced various schemes such as furlough, Eat Out to Help Out and reduced interest rates to 0.1%, its budget deficit continues to climb in an attempt to prevent businesses entering bankruptcy and loss of employment. From April to September 2020, UK government borrowing hit a record high of £208 billion. The national debt rose to £2.06 trillion (103.5% of GDP).
A major powerhouse in domestic manufacturing, the US also experienced seismic shocks to the economy. SMEs have been particularly affected, with aggregate SME revenue across all industries plummeting by 19.1% since January 2020 as reported by The Brookings Institute.
Like for like, the labor market has also suffered tremendously. Non-farm employment (i.e. goods, construction and manufacturing) fell by 20.5 million in April 2020. Businesses reducing their operations led to a reduction in working hours nationally. The total number of hours worked in March 2020 fell by 60%.
The consequences have been substantial. Between February to March 2020, retail sales dropped by 8.7%, the largest month-on-month decline since tracking of such statistics began. At consumer level, although increased savings have been noted, there is a clear imbalance as it was reported that one in five households was behind their rent in July 2020. Most frightening is the growth of food insecurity levels (i.e. where a household has insufficient food for its residents to maintain a healthy lifestyle). Since before Covid-19, such levels have doubled from approximately 14% in 2018 to 32% of households in July 2020.
Historic declines in output have been the major headlines in Germany. The German Statistics Bureau reported a 10.1% fall in GDP at the end of July 2020. All sectors of the economy were affected, save for construction. According to Business Standard, the greatest affected sectors have been automotive, plant engineering and machinery. Plants that have not closed have been running at reduced capacity, impacting supply chains, as they seek financial aid from the government’s €130 billion rescue package. However, further Covid-19 waves will dampen the government’s generosity as national debt increases. Experts estimate a 6.2% drop in GDP for 2020.
According to the National Law Review, consumer spending dropped by 10.9% in Q2 2020 and exports declined by 20.3%. Employment rates have also dropped, but not as severe as other states. There was a decline of 1.3% in Q2 2020 compared to Q2 2019, with about 44.7 million employed.
Compared to other leading economies, Germany has rolled with the punches and is in a relatively stable position to weather Covid-19.
The French government’s strict response to Covid-19 involved the shutdown of non-essential activities, and had a major impact on the economy. Radio France Internationale reported that France’s Q2 GDP shrank by a record 13.8%, one of the poorer performances in the Eurozone. The economy has been shrinking for three consecutive quarters, and is in a continuous state of recession.
Certain sectors fared worse than others. The Economic Times noted that transportation suffered a 46% drop, whilst the restaurant and hotel sector saw a 57% decline. Domestic household consumption fell by 11%. Meanwhile, exports plunged by 25% and imports by 17.3%. One of the worst hit sectors was construction, which reduced by 24.1%. It’s clear that government policy had a direct impact, as France elected to shut down construction sites during lockdown, whilst Germany chose to keep sites open.
Employment levels were relatively stable but this was largely due to an intense regime of short-term, contract hire. At the end of Q1 2020, private sector employment fell by 2.3%. Compared with the level at the end of Q1 2019, employment had dropped by 1.4%. In response, a €100 billion stimulus package has been agreed by the French government to rescue jobs and businesses, as covered by the IZA Institute of Labor Economics.
The Road to Recovery
As briefly touched on earlier, the most immediate solution to the challenges businesses face is financial aid provided by governments. Whilst this is an easy short term solution, it cannot be a long term solution. The damage already caused to global supply chains runs deeper than a mere reduction in supply and demand. Long established relationships and bonds between businesses of different origins have suffered. In this respect, businesses should seek long term stability and growth through alliances and diversity. Collaboration in terms of allying with new partners, whether locally or internationally, to share resources and knowledge. And diversity, not just in terms of the workforce ethnicities, but also a diverse range of customers and services, and adapting to newly emerging markets.
Recovery of Asian markets
Being the first region to be devastated by Covid-19, it was the first to react. Compared to Europe and the Americas, Asia has fared well against the chaos Covid-19 has brought. Below are some snapshots of how Asia has recovered.
Known for the resilience of its financial markets, Hong Kong has been subject to much disruption even before Covid-19. So, when lockdown measures were enforced, business slowed, but soon revived after restrictions were relaxed. Economists in the Hong Kong Government expect 5% GDP growth in 2021. September 2020 saw promising growth of year-on-year merchandise exports, induced by a demand from Mainland China. Reuters reported a 9.1% increase ($379.3 billion HKD), which was striking when compared to the year-on-year decrease of 2.3% in August 2020. Imports also showed growth, at 3.4% in September 2020. Hong Kong is keen to keep its doors open to the world as it gears up for potentially the largest IPO ever with Ant Group’s imminent dual IPO on the Hong Kong and Shanghai Composite stock exchanges.
With one of the world’s lowest fatality rates from Covid-19, Singapore is now committing heavily to national recovery. The Financial Times reported that the Singapore Government has been quick to increase financial aid, extending wage subsidies up to March 2021, injecting 187 Singapore dollars into the aviation sector and cash payouts for unemployed Singaporeans or those who suffered loss of income. There are also plans to reinvigorate domestic tourism as the government pledged 320 million Singapore dollars in “tourism credits”.
With arguably the world’s fastest internet, and China based Tencent’s recent announcement that it is opening of a new office, there is plenty of scope to rebuild by taking advantage of south-east Asia’s $100 billion internet economy.
With an aggressive and effective contact-tracing strategy, depoliticising Covid-19 meant that Vietnam has remained resilient to Covid-19. Whilst most countries have been faced with a contracting GDP, The Guardian and VOA News reported that Vietnam was one of the few whose GDP levels were steady, due to continuous demands in cheap manufacturing. Whilst the lower end of manufacturing such as clothing has seen numerous permanent factory closures (due to reduced consumer spending globally), high-end electronics manufacturing continues to flourish.
Domestic consumption has been a major contributor to Vietnam’s buoyancy amidst the crisis. Accounting for around 68% GDP, income disruption was ousted with a heavy 27 trillion Vietnamese Dollar stimulus package in March 2020. A closer look carried out by Mckinsey & Company revealed that spending on essential goods and services accounted for 42% GDP, giving the government capacity to implement innovative strategies to revitalize the country’s industries, reaching out to broken supply chains and partnerships.
The Way Forward
Businesses have to adapt to survive. Markets in Asia have had prior experience of responding to pandemics, from SARS to MERS, and have shown remarkable resilience when adapting to the challenges of Covid-19. Many businesses are waking up to the reality that they can overcome recent hurdles, and flourish in a post Covid-19 world.
Covid-19 has caused us all to grapple with different types of grief, both individual and collective. The five stages of grief will be familiar to all business leaders that have steered their companies through the global pandemic. First, denial. In Q1 of 2020, many countries were slow to respond to the unfolding crisis, denying that there was truly cause for concern. Next came anger and depression, as lockdowns hit profits and crippled previously flourishing businesses. Slowly, as weeks turned into months, business leaders began to accept the new reality, and took action to save their businesses and adapt to a new reality marked by loss and uncertainty.
There are a myriad of ways businesses have adjusted to the new normal. In many countries, government support has made the difference between sink or swim.
As the landscape has changed, many previous practices such as international travel have become impossible. However, new possibilities have opened up. In a world of Zoom, Skype and Microsoft Teams, there is no time wasted commuting. Hiring employees based overseas and searching for new international customers has become more streamlined. Business should look at how to tackle the problems they have now, as well as plan for the future. Some companies have entered into partnerships with other enterprises, sharing the burden of losses caused by the pandemic and finding strength in numbers.
In a recent demonstration of resilience, the South China Morning Post recently covered the Regional Comprehensive Economic Partnership (RCEP), which has been finalised after negotiations first started in 2012. Made up of 10 Southeast Asian countries, as well as South Korea, China, Japan, Australia and New Zealand, it is China’s first regional multilateral trade pact, and the first free trade deal between China, Japan and South Korea. According to the Financial Times, members of the RCEP account for nearly a third of the world’s population, and represent around 29% of global GDP. It is hoped that the pact will reinforce, amongst other things, a swift recovery from the coronavirus pandemic.
We should remember that the night is darkest before the dawn. With resilience, and a readiness to adapt and work in new ways, businesses can learn how to navigate the post Covid-19 world.
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