A non-economist entrepreneur’s view of Corona Virus Impact
By: Dejo George
Tags: Corona Virus Outbreak, Business Impact Analysis, Startup, Business Decisions, Entrepreneurship

A non-economist entrepreneur’s view of Corona Virus Impact

As a entrepreneur, the last 4 weeks have been challenging to understand and grapple with. While personal and family health is the priority but equally important is to think through what lies ahead.

The challenges we are going through with regard to managing businesses, responsibility to stake holders including team members, shareholders, vendor partners etc have been daunting. Every news flow currently makes the picture darker. The western economies went from the narrative being “a passing one with some causalities and temporary suffering” to the current narrative being -”unprecedented” , “several times worse than 2008 financial crisis”, “worse than world war” , “may be the biggest depression in the last 150 years”.

The biggest challenge for an entrepreneur is “What decisions should one take ?” given No understanding of the scale of impact. While I write this from the perspective of a startup businessman, I don’t think that the questions in the mind of any CEO of a large enterprise or even an Industrialist will be any different. The difference being that I have to take decisions that will impact X people and capital, the others would have to the take the decisions that would impact 1000 X or a million X. The quantum of uncertainty, fear and pain in everyone’s mind would be the same.

In any decision taken, one should able to identify or aim visualize the rough boundaries of consequential events. However in this scenario, the visualized boundaries are shifting every day. There are few key matters one can attempt to decipher under the current scenario.

A) The Virus itself

Since the identification of outbreak in December 2019 in Wuhan, the virus has destabilized every country irrespective of the scale of development much beyond the estimate of the so called the best governments, data intelligence and educated minds. The article published in bloomberg in early April 2020, being an Oxymoron — The secret report concludes that China’s numbers are fake, two of the officials said, Bloomberg reported. The White House received the report last week, according to the news outlet. (Ref https://www.cnbc.com/2020/04/01/coronavirus-china-hid-extent-of-outbreak-us-intelligence-reportedly-says.html ) puts a question on intelligence capabilities of the most developed country and its ability to control the situation. The healthcare systems of Europe and US has been tested and the governments have conceded their inability and regret that the situation is beyond manageable. With time ticking, even the most brave and positive leadership agreeing to the fact that currently our only hope is to pass through this phase by slowing the pace of damage through social distancing and flattening the curve.

While the mortality rates of the infections is not very significant from a statistical perspective, but the mere fact that emotional impact and the fear of life created in the mind of people has been unprecedented in our lifetime making us live in a scenario akin to nuclear winter.

However, what has transpired over the last few weeks raises further question as to how much we know about the end for the primary cause, the virus infection in itself. Some of the unanswered question which will come back to our minds once the panic of uncontrollable infection rates are brought down being:

a) How much time will we need to see that a flattened curve would help to build herd immunity i.e 60% of population getting infected there by reducing future infections ?

b) Would we have a second wave of infection from a mutated version ?

c) How long would the immunity from the first infection last ?

While one timeframe we definitely have is that we hope to have a vaccine in 12–18 months. But many question still unanswered and leaves much to be desired. Everything else in between is under diligence.

B) Social Distancing leading to Lock-down and life beyond ?

Some countries including China to control the spread of the virus, has announced national/region level lock-downs while others have taken a more moderate approach involving social distancing and self imposed restrictions.

However one thing is common, people are less willing to come out as hospitalization and deaths increase with each passing day and businesses shutting down or forced to shutdown at unprecedented levels. The estimates of the impact on worldwide GDP is being revised downwards every passing week with the projection of depression already being predicted. Some countries who promulgated social distancing instead of forced lockdowns are now looking at a scenario of lockdown with contain the rapidly increasing infection rates. India has been one of the first countries to announce a lock-downs early on in the cycle. A brief overview of GDP analysis shown below would give clarity to the impact of lock down. The below table shows the Gross Value Add (GVA) of the Indian economy.

The lockdown along with limitations on International trade, the impact on the economic activity is catastrophic. With the announcement of lock down and logistics available for only essential items,

· Agriculture activity has been impacted especially forestry and fishing which contributes ~ 40% of agricultural sector.

· Industry sector including primarily manufacturing and construction has announced shut downs.

· Services sector also see a drastic impact except Public administration, defence etc. Except IT services and services which permits work from home Trade activities including hotels transportation etc are working at limited levels. May be less than 20% would be functioning

A rough sensitivity on the lock down shows the following on the GVA of Indian economy

Likely estimate of impact on Gross Value Add under lockdown

Every month of lock down will take away ~3.0% of the GDP, i.e India will enter into a recession for the first time if the lock down persist for more than 1.5–2 months. A scenario which the country has never faced before but seems like a definite possibility. The biggest challenge to the lockdown / forced social distancing measures undertaken by government is to understand how to come out of this. While the curve may flatten, the deaths will continue and fear will keep increasing as people see larger absolute numbers in television screens. A situation of being caught between the devil and the deep sea (include a large whirlpool).

The impact of a lockdown based economic depression is far more catastrophic and unchartered territory for any government. We have not seen a similar situation since the days of spanish flu where economic activities or recession have happened due to sudden stoppage of money flow. Velocity of money flow is a critical measure of economic activity and its strength. However in days of lockdown / strong social distancing, we have created a situation where the money flow have been severely restricted and the limited flow is now channelized in selective essential services and commodities sectors. Given that all discretionary spend is put to stop and only essential economic activity is functioning, as time passes, the possibility to open up the shut channels and the ability to increase the velocity of money flow gets constrained. The questions remain

· How soon can one open up the economic activity before its too late ?

· How to you restart channels of business which have shutdown ?

While some of the initial stimulus revolve around deferment of statutory dues and moratorium on loan repayments, they remain just baby steps in the climb uphill. Some developed economies have announced packages to ensure that the salaries loss due to unemployment is compensated through direct transfer of benefits. US government have taken steps to enable capital into private business to ensure the business have funds available to sustain salaries and also support capital requirement when the economic activity is to be revived. I guess some of these are the very least one can do at this situation. Many developing countries would be under sever constraints to implement such packages.

Time is of essence here and any delay will make consumer and business confidence slip downhill. One principal should prevail — unprecedented times call for unprecedented actions. Cash is only a medium of exchange for goods and services. Hence as long as the exchange of goods and services is kept going, government printing cash or taking the liability of the economy in its books shouldn’t be a second thought.

Despite the best intend of the governments, challenges would still remain as to why businesses who do not see a immediate revival in demand would like to access such packages and force itself into deeper future liabilities. Hence the gap between the intent and action will always take its time to fill. If challenges remain despite having access to capital, survival of business with limited access would be a tall ask.

C) A catch 22 situation — When God determines, everyone needs to take a giant leap of faith.

As lockdown and social distancing norms are eased to restart the business cycle, business owners, financial institutions are left to take a tremendous amount of faith, one that may require older norms to be redrawn.

Business

The business would require large working capital for sourcing raw materials and supporting operating cost including fixed costs such as rentals, salaries etc. Revenue would come in however, there would be a significant lag on the following account

a) Slow restart to the economic activity by partial withdrawals of lock downs or social distancing norms

b) Consumer sentiments to taking time to improve as people would see larger cummulated death numbers on TV screens despite lower infection rates.

Even the big business houses would face challenges as the entire value chain of the business starting from retailer to distribution to logistics need to crank up together under the above limiting factors

Financial Institutions

Banks & Financial Institutions will face NPAs from large portion of business segments which were otherwise good business. They would require loan restructuring leading to further curtailment of the risk taking abilities for the banks. Even the best companies in various sectors will face increased scrutiny and slower approval processes at the banks end. Hence the question is when ?

Key issues that would remain are

· How does the banks open up further lending of working capital to business which haven’t shown revenues in the last few months ?

· The economic activity will only start slowly and hence the predictability on serviceability of the loans ?

· If current credit risk metric of the current banking system does not approve it, who will take the risk of taking the decision for such lending ?

· How soon can one look at a new credit evaluation metrics ?

· How long would it take banks need to capitalize the entire value chain of a business ?

D) Business decisions — difficult or inevitable ?

In such dire situations, when there is no timelines to be seen coupled with uncertainty in capital availability in future, it become more challenging as an entrepreneur to take decisions. Only 3 factors remain determinable

1. Capital in hand currently which is limited

2. Confidence in the business model

3. One’s passion to survive and build further

In these situations, any decision taken is the right decision as there is no one who can predict. Best would be to prepare for the worst timelines by

1) Letting some of the staff leave and reducing the salaries of balance — however the responsibility for your team need to extend further by helping the staff to reduce their cost of living such as:

a) Helping the staff to communicate with their landlords to reduce rents

b) Helping the staff to avail moratorium / restructuring of their loans etc.

c) Most importantly, communicating the worst case picture so that the staff can prepare for longer timeframe for survival.

2) Invoking clauses such as Force Majeur earlier rather than waiting.

3) Informing upfront to vendors about the likely hood of significant delays in payments

4) Discussion with vendors and entire supply chain to see how business can be restarted by increasing credit limits and time frames across the value chain thus reducing immediate working capital requirements at the time of restart.

While decisions are difficult, they are inevitable and all decision taken are right under the circumstances.

Our generation have not been part of world wars or periods of Great Depression but few things about this make us part of this unique event, “We did not create this”, “Every human being is fighting a common enemy” and in the history books, “this time will also pass”.