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Survival in an unusual environment

KUALA LUMPUR, 11 April 2020 – THE weeks have passed by in a flash since the outbreak of the Covid-19 pandemic.

Companies have had to endure much unpredictability and distress in a short span of a little over a month as they cope with supply chain disruptions, cost increases, a plunge in demand and revenues and uncertainty about their sustainability.

While this is not the first crisis that businesses are experiencing, it is perhaps the first one where they are collectively forced to halt operations for over a month due to the movement control order (MCO).

For sure, there is no returning to business as usual once the situation on Covid-19 stabilises and consumers and companies are allowed to pick up where they left off.

The business landscape will change. The curtain will come down on many companies and many people will find themselves without a job. Some business models will be obsolete and some plans will need to be tweaked.

In a way, the current circumstance draws a line between the resilient businesses and the ones that can no longer hold on.

Either way, small and medium enterprises (SMEs) are currently fighting for their survival. Cash flow issues continue to weigh them down and visibility remains murky despite the various assistance given by the government as demand is expected to remain low for months after the MCO.

But while the current situation is punishing, SMEs should also not lose focus on their recovery strategies so that they can restructure and consolidate to be in a position of strength as they adapt to the changing landscape.

They have the advantage of being nimble and flexible and true entrepreneurs are known for their grit and resilience.

“The worry now is about survival. Under stress, you won’t think about six months down the road. But we need to do that. Even the government wants to prepare for recovery.

“We need to reimagine the paths forward at the consumer, supply chain and organisational levels. This crisis opens up the opportunity to reassess all that.

“There will be some who won’t survive. It depends on the strength that you are in now which gives you a better chance to survive. But you need to look at recovery, ” says Socio-Economic Research Centre executive director Lee Heng Guie.

Some breathing space

Since late-February, the government has announced stimulus packages worth a total of RM260bil to help low-income earners and ease the financial burdens of the SMEs. The measures to aid businesses range from low-interest loans, grants and wage subsidies to loan moratorium and consent to renegotiate employment terms.

“The government aid is giving you room to rebuild, ” says Lee.

Naturally, some quarters will ask for more aid as business normalisation will take a while.

But Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) SMEs committee chairman Koong Lin Loong opines that the government has done its part to help businesses deal with their short-term challenges, particularly with cash flow, under the recent stimulus packages for SMEs.

“These measures are to help companies with immediate relief, that’s what the stimulus is for. It is targeted to make sure that companies can survive. Three to six months’ help is sufficient.

“Businesses cannot expect the government to help them in the mid- to long-term. After six months, the government shouldn’t be focused on helping business specifically anymore. In the mid-term, the government can help by focusing on building the economy. It needs to keep the economic wheels going so that companies can find their footing, ” he says.

Koong says the government will need to realign and resume all big projects in the mid-term and help for the construction and development industries will be crucial then.

He believes this will be addressed at a later stage, possibly in Budget 2021, as the government looks to rebuild the economy.

Survival of the fittest

Many have called this fight against Covid-19 a war. And in any war, casualties are unavoidable.

Going by the 80/20 rule, Koong estimates that about 30,000 SMEs may face some serious issues with survival.

Considering there are slightly over one million companies in Malaysia, at 98.5%, the number of SMEs would be around the upper end of 900,000 companies. About 70% of these companies will be able to survive as they are small and flexible enough to adjust and adapt accordingly.

Plus, most of them don’t have loans, notes Koong.

Of the remaining 30% of SMEs, some 60,000 companies could potentially bow out. Assuming these 60,000 companies employ about 20 people per company, that would put about a million people out of jobs.

However, Koong says not all of these 60,000 companies will go down the drain as some will have connections to secure funding facilities or new investors, some will be acquired, and some may undergo other forms of restructuring or buyout to survive.

And of the one million potential jobless people, not all of them will be left in a lurch as many of them have skills and expertise that will enable them to move to other companies or start their own enterprises.

“So give or take, about 30,000 companies may have some serious problems, ” says Koong.

Meanwhile, Institute for Democracy and Economic Affairs (IDEAS) research manager Lau Zheng Zhou says some SMEs will be more ready to adapt than others, putting the operators’ entrepreneurial skills to test.

“Fundamentally, the SME stimulus package is directed at defraying business cost, but the other half of the equation is for businesses to generate enough income to sustain themselves, which is quite impossible for many SMEs during the MCO.

“Estimating layoffs is challenging as the human movement restriction factor is unprecedented. In 2009, the unemployment rate was at 3.7% against an earlier forecast of 4.5%. Despite the challenging economic environment then, employers in the private sector had continued to grant salary increments.

“This time it’s different because many businesses are not even allowed to resume operations, so sustainability becomes an issue if operators cannot generate adequate income and have to rely on stimulus measures, ” says Lau.

SMEs that can adopt digital solutions will be more likely to survive.

Those in the food and beverage sector are obvious candidates to adopt online distribution channels. Education and medical clinics can also potentially adopt digital solutions in delivering their services.

Other businesses may have to consider product diversification or turn to value-added services to survive.

Paradigm shift

With uncertainty and new models the order of the day, Lee says SMEs must have a paradigm shift to build resilience and prepare for the future.

He advises them to rebuild from where they left off by identifying structural barriers within the company that they may have ignored prior to the MCO.

“The stabilisation to recovery stage may take a while, about six months to maybe the first half of next year. We are looking at a long-U recovery. But you need to build resilience for sustainability.

“Look into what you can do better, or why you were impacted more than others during the MCO. You will also need to consider things like digitalisation, automation, e-commerce and upgrading of skillsets.

“Consolidate your operations. You may also want to look at reorientation of supply chains because companies were also affected by the trade war earlier. So companies need to look at operating cost and supply chain post-Covid-19, ” he says.

Other things to keep an eye on are changes in consumer behaviour and, possibly, factory layouts as people continue to practise social distancing. Brick and mortar businesses will have to undergo transformation and the future of work will need reskilling.

“So the MCO allows you to consider a lot of changes. There will be an impact to your operations based on what you adopt, like disruption to workforce and making do with non-essentials. Take this opportunity to look into these things, ” he adds.

These efforts can be carried out over time to ensure that further strain is not placed on their shoulders as they will need to juggle recovery efforts with a deterioration in market demand and continued cash flow challenges.

SMEs will also need to rebuild their balance sheet before committing to new investments.

“Manufacturing SMEs will be most hard-pressed because they are usually labour-driven. Investment into automation and other capital-intensive solutions at this juncture will only add further risk on liquidity and insolvency while expected factory orders will likely to be moderate in the near term. So the managers do not have easy solutions on adaptability.

“But disruption in the environment will compel businesses, big or small, to speed up on adaptability and may even result in efficiency gains, ” notes Lau.

Koong urges companies to learn from the crisis and evolve. Otherwise, they will count among those who will be shuttered.

“If you can go through the Covid-19 crisis, then you are a real entrepreneur. If you cannot go through it, then maybe you are not a real entrepreneur. That means you didn’t do the things that you know best.

“There are a lot of people selling all kinds of products and services out there. Just because someone can earn money for it, it doesn’t mean that you can make the same because not everyone knows how to do it best. So you should do what you are good at and produce what people want.

“Profit is important in good times, but cashflow is important in bad times. Companies will need to be more aware of this moving forward, ” says Koong.

He hopes more companies will look into automation and IR4.0 and tap into every available incentive, loan and grant to implement this.

Apart from considering internal issues, they will also need to look at how they can merge or synergise with others as consumers are increasingly looking for one-stop solutions.

Policy support

As the SME landscape changes, there will also be a need for the government to retool policy to better support these changes.

For example, Lee says the government may want to look at better security for the gig economy and addressing the last-mile support for digital and e-commerce.

“Everyone will have to reorientate. The government will also need to take into account the new normal.

“No matter what, SME is still the biggest pillar for Malaysia’s economy. There are still a lot of institutions to support SMEs. It is not the end of the day for them, ” quips Lee.

Lau adds that the government should also look into enhancing SME capacity to adapt digitally or providing incentives for employee reskilling so that existing business models can better respond to the changing environment.

And given that there will be casualties in the shorter term, the government should create a reskilling programme to absorb them to ensure that the country’s aggregate productive capacity is enhanced to pave the way for an eventual recovery.

Opportunities in crisis

As many stories there are about companies going bust, there have also been just as many about businesses that were birthed in the midst of a crisis.

Such was the case for system integrator Acestar Sdn Bhd.

Group chief executive officer Natalie Sit founded her company in 2008 in the midst of the last financial crisis.

“Regardless of what business you run, uncertainties and challenges are part of the game. Not everything will follow your plans.

“What’s important for businesses now is to ensure that they can break even. Stay alive for three months and things will get better. You just need to hold on a little longer.

“A lot of young companies are still building their confidence so they think, if they close earlier, they can cut their losses. If they can hold on a little longer, I believe, they can make it.

“During the last crisis, we just worked hard to break even every month. Times were tough, so I just worked harder. It is easier for companies with smaller revenues to break even. I didn’t care about what was happening outside. The external will only distract you.

“At the end of the day, we chose to be entrepreneurs. We cannot be fearful. We need to continue to provide direction for our company.

“Try to find opportunities around you to increase sales or reduce expenses. We need to be naive enough to believe that it will be ok, ” she shares.

First published in The Star, 11 April 2020

2020-04-13T12:54:07+08:00 13th April 2020|News|Comments Off on Survival in an unusual environment