The litmus test for the global economy

Contingency planning has become mission-critical. The longer the coronavirus pandemic continues, the more it will expose the underlying fragility of today’s debt-laden global economy.

Companies therefore have to move into crisis management mode, with a number of key areas requiring immediate attention:

• Employee health and safety is the top priority. Governments are slowly waking up to the risks and are starting to provide expert advice. In the meantime, of course, many companies have already taken steps to reduce all unnecessary travel and to encourage home-working wherever possible. It would be prudent to assume their measures will last for longer than initially expected, as nobody will want to take the risk of problems emerging as a result of precautions being relaxed – especially in litigious countries such as the USA
Value chain risks are clearly a key area of concern for the business itself. Upstream, the oil price collapse means that the new US shale gas expansions have lost their hoped-for feedstock advantage versus European and Asian producers. Downstream, China’s auto sales fell 80% in February, whilst smartphone sales were down 55%. We must assume that other affected countries will also see major declines, even if hopefully not on the same scale
Supply chain risks are another major area for review. Anyone who has tried to map a modern supply chain knows that the exercise quickly reveals a number of ‘black holes’ where nobody really understands all the inter-dependencies. For example, although it might seem obvious in hindsight, did anyone really expect freight volumes in Los Angeles to fall 25% last month – even given its role as the largest gateway for seaborne China imports? And even if China does now return to normal, it will still take weeks for new shipments to arrive given the disruption that has occurred to freight and logistic operations
Credit risks also have the potential to surprise the unwary. The lure of cheap money from the central banks, and investor pressure to maximise earnings, has unfortunately led many companies to over-leverage their balance sheets. Even a relatively small profit downturn will therefore put their financial viability at risk. And as we know, whilst banks are happy to lend when the outlook is sunny, they are very quick to withdraw when storms appear on the horizon
Paradigm shifts add to the complexity that we now face. Today’s population growth is largely due to a major post-War rise in life expectancy, rather than a new babyboom. But older people already own most of what they need, creating a ‘demographic deficit’ in terms of demand growth. As a result, sustainability is now replacing globalisation as a key driver for our business. Used car sales, for example, are already cannibalising new car sales in China and elsewhere. Similarly, analysts see the used smartphone market growing by 50% over the next 3 years from the current 207 million sales.

Every business will have its own priority list of key risks. And, of course, I understand the feeling that ‘one can’t plan until one knows what is happening’. But whilst this was entirely logical in a world of ‘business as usual’, we now face the necessity of learning how to plan for uncertainty.

Reasonable people can disagree about whether the risks I have identified are a 10%, 50% or a 90% probability. But even if you assume they are just a 10% probability, their potential downside impact is so large that they cannot be ignored.

Contingency planning has therefore become mission-critical. One key uncertainty is that nobody can know how long the virus pandemic will last. But we can be sure that the longer it continues, the more it will expose the underlying fragility of today’s debt-laden global economy.

This crisis means it has therefore become mission-critical for businesses to build scenarios covering different timescales.

The aim is to understand what can be done today to mitigate the consequences of the epidemic extending beyond the end of this quarter, or into the second half of the year, in key markets? It will also provide a framework for assessing how recession might impact prices and margins for your products, as well as accelerating the trend towards buying second-hand products?

As the saying goes – “to fail to plan, is to plan for failure.”

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