Amidst the coronavirus pandemic, a New Deal may be coming
Some companies are thriving. Who will be the eventual winners, and what is in store for the losers?
This is the age of the Great Disruption, in the midst of which the IMF has already warned that the global economy may experience its worst recession since the Great Depression of the 1930s. As the Covid-19 coronavirus pandemic continues to unfold, casualties in the business world are mounting but yet, some companies are thriving. Will these early winners be able to sustain their momentum, and how will those on the losing side recover once the viral outbreak subsides? More importantly, what lies ahead for all companies?
These are the early casualties
The travel industry was among the first to be hit by the pandemic, with airlines, hotels and the cruise companies suddenly brought to their knees. At time of writing, several airlines have already collapsed — Flybe (UK), Trans States Airlines (US), Compass Airlines (US) and Virgin Australia. Hilton has suspended operations at some 1000 hotels, with Marriot temporarily closing 25% of its 7,300 properties, and French group Accor closing two-thirds of its hotels around the world. The famous Softbank-backed Oyo Hotels & Homes startup has freezed operations worldwide, furloughing thousands of employees. With virtually all cruises being suspended, Carnival, the world’s largest cruise company, has offered its idle ships to national governments to act as temporary hospitals.
For years, the prognosis has never been good for the traditional retail sector but it is now wounded even more by lockdowns everywhere. In the UK, for example, fashion and furniture chain Laura Ashley has already collapsed. In the US, famous retail stores like Sears, JC Penney and J Crew will face serious challenges to their continuing survival, as they were already in distressed mode even prior to the pandemic.
Buffeted by the coronavirus pandemic as well as the Saudi Arabia — Russia price war, the oil industry is grievously suffering from demand destruction and untimely over-supply. On April 20, even though a deal has been reached between Russia and Saudi Arabia the previous week, US crude oil ended the day about $30 below zero, which is the first time that the main US oil benchmark has turned negative. This means that sellers have to pay $30 to buyers to take the oil off their hands, amidst the devastating glut. Oil majors like Exxon Mobil, Shell, BP, Equinor and Total are all hunkering down to manage the fallout, while hundreds of small US shale oil producers are particularly at risk.
Initially hit by supply chain disruptions, the manufacturing industry is now facing a collapse in demand, even in countries far away from the epicentres of the viral outbreak. In Cambodia, for example, at least 91 garment factories representing almost one in six in the country’s $7 billion industry have suspended work due to falling demand, with 61,500 workers affected. These closures are likely to ripple though the Cambodian economy to hit the microfinance banks. This is because many Cambodian villagers will face difficulty paying back their micro loans, as most of them typically rely on monthly remittances from their adult children working in the garment factories.
As the economic crisis spreads, it is likely that the banking sector not only in Cambodia but also worldwide will get impacted, as banks start to face credit write-offs and non-performing loans across many industries.
These are early Winners
It is not all doom and gloom in the corporate world, however. Amidst the tumult, a few early winners are emerging.
The ecommerce industry is poised to benefit the most, as home-bound customers flock to online stores for their day-to-day and other shopping needs — power-charging a trend that was already underway for years. The fortunes of the logistics / delivery industry have correspondingly risen, as goods need to be delivered from the online stores to customers. For Amazon, the pandemic has proven to be a short-term boon, which is likely to reinforce its leading position as an online vendor.
The video conferencing and online entertainment sectors have also experienced a tremendous boom, as people work / study from home and stay at home. As companies adapt to telecommuting, it is likely that in the post-pandemic economy, video conferencing will continue to increase in usage. Zoom Video Communications has thus far been the biggest beneficiary of this boom, with average user numbers in March 2020 almost 3 times that of Microsoft’s Teams (its closest rival). Sweeping aside the traditional media entertainment companies which are still scrambling to adjust to the new Covid-19 dynamics, Netflix is similarly seeing record traffic and a surge in new subscriptions.
Finally, the pharmaceutical sector is witnessing a hotbed of activity, as companies intensify their focus on developing a vaccine or at least a drug that can treat the coronavirus. Particularly promising at this time is the antiviral medicine remdesivir developed by Gilead Sciences that has been found in early trials to be potentially helpful in treating Covid-19. If proven, such a drug will be useful until such time that a vaccine is developed or when the virus finally runs its course.
A New Deal may be coming — everywhere
Across the world, even when lockdowns are lifted, the situation will not return to full normalcy, as long as there are legitimate fears of being infected in the absence of a vaccine. This means that the global recovery of all affected industries and companies is likely to be a protracted affair, considering that different parts of the world are currently in varying stages of the outbreak (and will thus recover at different times).
For example, we should not expect the travel industry to be able to jump-start a recovery in the near to medium term. Chastened by the experience with their own domestic viral outbreak, cautious tourists will particularly avoid visiting countries perceived as still being “risky”, with resulting implications for the businesses (airlines, hotels, cruise ships, retail shops, etc) that are dependent on those legs of the global tourist flow. It is noteworthy that Singapore Changi Airport has suspended operations of one of its four terminals - for 18 months - from May 1, not only to save on running costs but also to opportunistically allow the speeding up of previously planned major upgrading works at that terminal. Considering that Changi Airport is one of the busiest aviation hubs in the world, it seems to imply that Singapore does not expect international air traffic to recover fully within the next 18 months.
But what about the early winners — are they likely to sustain their current momentum? It should be noted that Amazon, Netflix and Zoom are dependent on international markets for their continuing expansion. However, the post-coronavirus landscape is expected to be fundamentally re-shaped, with major changes in government, corporate and consumer behaviour. Just as the Great Recession of 2008–2009 highlighted the contagion risks of a globally inter-connected financial system, the Covid-19 coronavirus pandemic of 2020 has now exposed systemic risks in the way that we have stretched globalization as if the world has no political boundaries. Issues related to national security, such as food, energy and cyber security, will increasingly come to the fore. In the post-coronavirus world, companies are thus likely to face more hurdles in international expansion.
The Great Depression of the 1930s triggered the implementation of the New Deal (a series of programs, public works projects, financial reforms and regulations to rebuild the country) by President Roosevelt in the United States. I believe that the Great Disruption of 2020 will similarly trigger “New Deals” in many countries, which will in turn precipitate much political realignment while creating new opportunities for agile companies.
As an early case in point, as part of its recent economic stimulus measures, Japan has set aside $2.2 billion to help its manufacturers shift production out of China. This consists of $2 billion for companies shifting back to Japan and $0.2 billion for those seeking to move to other countries.
Over the next few years, it will be interesting to follow the political and economic realignments in countries around the world. Currently, uncertainty is the order of the day, but new opportunities (and challenges) will abound once the pandemic passes.
I have a personal website where I continue this line of thought. Click here to visit and stay in touch.
