It is likely that the days and months to come will reshape the way we carry on our lives at a personal and social level. And as markets foresee, countries’ economies and companies’ income in the next months and years are at stake. (See the evolution of country risk spread or exchange markets).
I would like to share a small glimpse beyond the most important social and personal impact of the crisis, into the impact of the CoVid19 events from a business and operational perspective.
The effect of the actions undertaken by governments all over the globe imply certain consequences in the international business scene at least in the following terms:
Impact on the production
Most times, companies are finding it difficult to continue their operation due to lack of resources. Whether it is human resources because of the restrictions to movement imposed in several countries, financial resources because of the reduction of activity or the lack of raw material supply (many western companies depend on the supply of components and materials from China).
In the months to come, most countries will have to accumulate debt to pay for the actions undertaken and its consequences. This will be a new burden for countries like Spain, Italy or Greece, whose debt ratio was compromised during the 2008 financial crisis.
These constraints affect both the service and manufacturing sector, the latter being the most affected by the situation which can become even more critical depending on the length of the duration of the state of emergency, or the spread of COVID-19 impact across the worlds relevant countries (US, UK, Saudi Arabia)
It forces manufacturing companies to face fast changes in their production planning and processes to be compatible with either a decrease of the workforce, a change of the demand or even to adapt their manufacturing processes to more safe working conditions to reduce risks of spread.
The response of some countries (e.g. Spanish prime minister speech on 21st March), seems to point towards the re-orientation of the production lines of national manufacturing capacity towards certain products required for the fight against the spread of the virus. Still, it is to see how this translates into practice, but the strategy seems unintended for short-term and somehow resembles the economy planning strategies during wartime (Wilson, 2016).
Impact on the supply chains
This is an impact with a longer-term scope. In the last forty years, the global economy has experienced a significant and steady expansion, increasing the complexity and width of supply chains in cheap areas, but most especially in manufacturing. The expansion seems to have reduced in speed in the last months with the new policies promoted by US Trump’s administration, but the events triggered by the COVID-19 outbreak will most likely have an impact. One of the most important uncertainties of the COVID-19 aftermath will be the re-shaping of supply chains worldwide.
Impact on the demand
Several world institutions (from OCDE to most central banks) foresee a strong impact on the global economy because of the sudden drop of demand since Chinese New Year (when the first strong restrictions were undertaken by Chinese authorities). It is yet to see the evolution of the crisis and how the recovery of the economies will evolve. Some authors hope for a sudden recovery of demand, but most expect a lengthier and slower recovery of the global economy, leading to harsher consequences.
The weeks and months to come will be crucial in answering the open-ended questions that the COVID-19 outbreak has raised to the global economy and international business operations. Facts like the availability of a vaccine or the response of key global economies will definitely shape the aftermath of the crisis. At the moment, while staying patiently in our homes, we can only analyze changes day by day and trust that policymakers and economical authorities have as much audacity and competence as our medical, pharmaceutical and sanitary services to cope with COVID-19.
Wilson, M.R. Destructive Creation: American Business and the Winning of World War II University of Pennsylvania Press, 2016, 392 pp