View: Covid-19 crisis = Danger + Opportunity


By Gaurav Dalmia

How can business move to normal? A three-tiered framework of macro, industry and company can be useful. Macro analysis entails scenarios on evolution of the health crisis, GoI’s fiscal response, and how global trade and capital flows may alter. Industry analysis warrants an understanding of consumer behaviour and its implications.

Analysis of the company’s ecosystem requires a deep dive into operations to find weak spots and lags. Intuition can be a good starting point. But a nuanced view would serve better. Inherent uncertainties don’t make this a futile exercise. US President Dwight Eisenhower’s maxim, ‘Plans are nothing; planning is everything’, helps clear the clutter and internalise responses.


During normal times, people over-emphasise macro. Yet, at times like this, macro rules. The International Monetary Fund (IMF) expects the global economy to contract 3% and global trade to dip 11% in 2020. Investment banks are competing to publish dismal forecasts. This will be a lot worse than the financial crisis of 2008-09, but nowhere near the Great Depression of 1929.

Macroeconomic forces are crisscrossing. A debt burden of $253 trillion on a global GDP of $87 trillion will complicate matters. Economic nationalism may become par for the course. The cumulative stimulus of $8 trillion may be inadequate and end up creating an asset bubble.

A lot will depend on a second wave of infections as lockdowns open. A cure and a vaccine will become watershed events. The 2008-09 US subprime mortgage contagion spread rapidly. Within a year, 59 countries were simultaneously in recession. Although things started getting back to normal within two years, a follow-on recession hit many countries in 2010-13.

In the US, employment levels reached pre-recession levels only in 2016. China showed an early trailer going into the Covid-19 crisis in late January. It should also be an effective gauge coming out. China’s oil demand had fallen 25% in early March, but is now down only 5%. Google Maps shows peak-hour traffic in Chinese cities has normalised, while off-peak traffic is much lower.

Consumer discretionary spends, down 50% in February, are recovering slowly. Because of the nature of China’s fiscal stimulus, Goldman Sachs is bullish on ‘capex commodities’ as compared to ‘opex commodities’. Spain is showing similar trends. A Peterson Institute study shows retail sales in China down 19% last quarter, while online sales up 6%, exacerbating the already dominant online migration.

Copper, a leading indicator, was down 15%, but threemonth futures are up 7%, suggesting that demand from a recovering Asia would stabilise the global economy — good for India’s exporters accounting for 19% of GDP.

Moody’s categorises travel, global freight, non-food retail, automotive and consumer durables in the highexposure category; metals, oil, chemicals and agriculture in the moderate-exposure one; and fastmoving consumer goods, telecom, construction, defence and pharma in the low-exposure category.

Sectors like real estate may face Schumpeterian shocks — Germany’s possible legislation giving employees the long-term right to work from home (WFH), and Tata Consultancy Services’ announcement that 75% of its 450,000 employees may WFH by 2025. Demand downgrade may be significant across product categories.

Analysis by Bain & Company shows that 66% of India’s pre-Covid consumption was by low-income and lower-middle-income consumers, and 75% by casual labour or otherwise self-employed. This demand vulnerability will be amplified by the NBFC crisis and credit availability.

The biggest determinant between winners and losers will be how businesses respond to the downturn and prepare for upticks. One will see divergence within sectors, driven by case-specific labour, supply chain or distributor challenges.

In The Numbers Game, political scientist Chris Anderson and behavioural economist David Sally found that unlike in basketball, where the strongest player in the team determines the outcome, in football, the acumen of the weakest member determines victory. Life resembles football more than basketball.

Companies must identify and upgrade their weakest links. A sample study of 1,563 companies by Avalon Consulting found that only 250 companies have strong cash resilience and profitability. For mid-size manufacturing companies, one month’s wages equal a quarter’s profits. Businesses should avoid temptations for short-term fixes.

Companies that indiscriminately use force majeure to cancel contracts will weaken their long-term franchise. Small exporters are already finding factoring agents have disappeared. Working capital may be a challenge. Even with government intervention, banks and NBFCs are unlikely to fulfil the liquidity needs of small businesses.

International Finance Corporation (IFC) research shows that of the $625 billion capital needs of the Indian business sector, banks and NBFCs provide less than 30%. The rest comes from friends, family and informal channels. Larger companies will need to support their stakeholders. Iconic companies like GE, Disney and Microsoft were born in recessions. Remember, the Chinese word for crisis, ‘weiji’, is composed of two characters: one represents danger, the other, opportunity.

The writer is chairman, Dalmia Group Holdings

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