The Business of Survival

Most bosses and worker shave been through economic cri-ses before. They know that each time the agony is differ-ent—and that each time entrepreneurs and firms adapt andbounce back. Even so, the shock ripping through the businessworld is daunting. With countries accounting for over 50% ofworld gdpin lockdown, the collapse in commercial activity is farmore severe than in previous recessions. The exit path fromlockdowns will be precarious, with uneasy consumers, a stop-start rhythm that inhibits efficiency, and tricky new health pro-tocols. 

And in the long run the firms that survive will have tomaster a new environment as the crisis and the response to it ac-celerate three trends: an energising adoption of new technol-ogies, an inevitable retreat from freewheeling global supplychains and a worrying rise in well-connected oligopolies.Many firms are putting a brave face on it. 

Pumped with adren-alin, bosses are broadcasting rousing messages to their staff.Normally ruthless corporate giants are signing up for public ser-vice. lvmh, the Parisian purveyor of Dior perfume, is distillinghand-sanitiser, General Motors wants to make ventilators aswell as pickups, and Alibaba’s founder is distributing masksworldwide. 

Cut-throat rivals in the retail trade are co-operatingto ensure supermarkets are stocked. Few listed firms have madepublic their calculations of the financial damage from the freezein business. As a result, Wall Street analysts ex-pect only a slight dip in profits in 2020.Don’t be fooled by all this. In the last reces-sion two-thirds of big American firms suffered afall in sales. 

In the worst quarter the mediandrop was 15% year-on-year. In this downturnfalls of over 50% will be common, as high streetsbecome ghost towns and factories are shut. Nu-merous indicators suggest extreme stress. Glo-bal oil demand has dropped by up to a third (see Briefing); thevolume of cars and parts shipped on America’s railways hasdropped by 70%. 

Many firms have only enough inventories andcash to survive for three to six months. As a result they have start-ed to fire or idle workers. In the fortnight to March 28th, 10mAmericans filed for unemployment benefits. In Europe perhaps1m firms have rushed to claim state subsidies for the wages of in-active staff. Dividends and investment are being slashed.The pain will deepen as defaults cascade through domesticpayment chains. h&m, a retailer, is asking for rent holidays,hurting commercial-property firms. 

Some supply chains linkingmany countries are stalling because of factory closures and bor-der controls. Italy’s lockdown has disrupted the global flow ofeverything from cheese to jet-turbine components. China’s fac-tories are cranking back into action. 

Apple’s suppliers bravely in-sist that new 5gphones will appear later this year, but they arepart of an intricate system that is only as strong as its weakestlink. Hong Kong’s government says its firms are reeling as multi-nationals cancel orders and ignore bills. The financial strain willreveal some astonishing frauds. Luckin Coffee, a huge Chinesechain, has just admitted brewing its books.In the past two recessions, about a tenth of firms with creditratings defaulted worldwide. 

Which survive now depends on  their industry, their balance-sheets and how easily they can tap government loans, guarantees and aid, which amount to $8trnin big Western economies alone. If your firm sells confectionery or detergent, the outlook is good. Many tech companies are see-ing surging demand. Small firms will suffer most: 54% in Ameri-ca are closed temporarily or expect to be in the next ten days.They lack access to capital markets. And without friends in highplaces, they will struggle to get government help. Only 1.5% ofAmerica’s $350bn aid package for small firms has been disbursedso far and Britain’s effort has been slow, too. 

Banks are strugglingto deal with contradictory rules and a flood of loan applications(see Finance section). Resentment could rage for years.Once exits from lockdowns start and antibody testing rampsup, a new, intermediate phase will begin (see Briefing). Firmswill still be walking, not running (China is still only functioningat 80-90% of capacity). Ingenuity, not just financial muscle, willbecome a source of advantage, allowing cleverer firms to operatecloser to full speed. That means reconfiguring factory lines forphysical distancing, remote monitoring and deep cleans. Con-sumer-facing firms will need to reassure customers: imagineconferences handing out n95masks with the programme, andrestaurants advertising their testing regimes.

Over a quarter ofthe world’s top 2,000 firms have more cash than debt. Some willbuy rivals in order to expand their market shareor secure their supply and distribution.The job of boards is not just to keep afloat,but also to assess long-run prospects. The crisisis set to amplify three trends. First, a quickeradoption of new technologies. The planet ishaving a crash course in e-commerce, digital payments and remote working. More medicalinnovations beckon, including gene-editing technologies. 

Second, global supply chains will be recast, speed-ing the shift since the trade war began. Apple has just ten days’worth of inventory, and its main supplier in Asia, Foxconn, 41days. Firms will seek bigger safety buffers and a critical mass ofproduction close to home using highly automated factories. 

Cross-border business investment could drop by 30-40% this year. Global firms will become less profitable but more resilient.Don’t go from crisis to stasis The last long-term shift is less certain and more unwelcome: afurther rise in corporate concentration and cronyism, as govern-ment cash floods the private sector and big firms grow even moredominant. 

Already, two-thirds of American industries have be-come more concentrated since the 1990s, sapping the economy’svitality. Now some powerful bosses are heralding a new era of co-operation between politicians and big businesses—especially those on the ever-expanding list of firms that are considered“strategic”. 

Voters, consumers and investors should fight thisidea since it will mean more graft, less competition and slower economic growth. Like all crises the covid-19 calamity will passand in time a fresh wave of business energy will be unleashed.Far better if this is not muffled by permanently supersized gov-ernment and a new oligarchy of well-connected firms.