Life Post-COVID

    Posted by Drew Bernstein on Mar 31, 2020 2:32:01 PM

    In China Economy

    Does China Foreshadow What U.S. Businesses Can Expect?

    Even as the U.S. government extended social distancing guidelines through the end of April, China is announcing the success of its “back to work” campaign now that aggressive measures have contained the spread of the COVID-19 virus. Nearly 99% of major industrial companies are back in operations, with 90% of workers again on the job, according to government statements. More than 75% of small and medium businesses have also restarted operations.

    That China was able to achieve this after a stringent lockdown lasting less than two months seems miraculous, given how fast the infection is spreading in other parts of the world. In major Chinese cities, restaurants and malls have reopened and are starting to come back to life. Traffic jams have once again become a source of urban annoyance.

    But the "new normal" is likely to be very different for an extended period.

    Workplace safety. While offices have reopened, businesses are taking heightened precautions to prevent re-infection. In some cases, workers alternate days or work in shifts to maintain social distancing within the office. Before entering an office building, employees have temperatures scanned, and anyone with a fever is placed in quarantine. Staff members wear masks in all public places and often at their desks. China’s largest factories have taken these precautions to an even higher level. Foxconn has reportedly administered 50,000 COVID-19 tests and 40,000 chest x-rays as it ramps back up production in the facilities that assemble products for Apple and others. Before bringing employees back to work, each business will need to evaluate what constitutes a safe workplace and implement appropriate policies.

    Travel restrictions. The ability to travel for business is limited by measures intended to halt the spread of the virus. This weekend China banned all foreign nationals from entering the country over concerns about re-importing the virus from parts of the world where the pandemic is now raging. Overseas Chinese are encouraged to remain where they are and immediately placed in quarantine if they return. Even within China, local governments have imposed mandatory quarantines on those traveling from regions deemed to be higher risk. For the audit profession, this had created obstacles to completing elements of the fieldwork required for an annual audit. Many areas of commerce still rely on face-to-face meetings to finalize deal terms and build confidence in a new business relationship. How much of this can be replaced by video conferencing is hard to say. Expect a long-term impact on international capital flows and outsourcing arrangements, given these uncertainties.

    Measuring the fallout. It will be some time before we have an accurate sense of the impact of the COVID-19 outbreak on companies' financial results. According to government figures, industrial profits fell by over 38% in February, and the China Beige book estimates that the economy may have contracted 10% or more in the first quarter. Retailers and electronics and home appliance manufacturers have begun significant discounts and coupon programs to entice consumers to get back out and start shopping. In China, many companies did not have the option of laying off workers even when they shuttered offices and factories, given China's strict labor laws and pressure from local governments. But as export demand from the U.S. and Europe falters in the coming months, Chinese businesses and consumer confidence could be hit by a second wave of virus shock. Small and medium enterprises that do not have a financial backstop from the government are most at risk in the near term. But given high levels of existing corporate and local government debt, an extended recession could cause widespread defaults. Businesses with strong accounting and financial systems were able to make informed decisions quickly. Others are still operating in a haze.

    Ultimate corporate stress test. The abruptness of the onset of the pandemic has tested companies' ability to respond to a crisis and will reveal underlying strengths and weaknesses in the months to come. Those that made investments in technology were able to transition relatively smoothly to a remote work environment and play an essential role in sustaining vital logistics networks and health tracking systems. Some of these technologies and business models are likely to become even more deeply embedded in daily life post-crisis. Industries that went into the crisis with weak balance sheets are likely to emerge as shadows of themselves if they emerge at all.

    Given its unbridled social controls and far-reaching government powers, China was able to contain the spread of the COVID-19 virus quickly and get its industrial machine humming again in a matter of weeks. But the country remains vulnerable to the repercussions as the pandemic spreads across the world and susceptible to a resurgence of infections until a vaccine can be developed and widely administered. The billion-plus Chinese never exposed to COVID-19 are dry tinder for a future wildfire.

    The American economy, where consumer spending makes up 70% of GDP, is arguably at higher risk for a sharp contraction during an extended lockdown than China. U.S. businesses must make decisions to ensure their survival today while planning a "back to business" strategy to keep their employees safe and sustain their customers' goodwill on the other side of this journey.