MD2MD Economic Optimism February 2020

Member optimism – A story of two halves

As you’ll see above the optimism of MD2MD members at the end of January and early February 2020 on average hasn’t changed much since late 2019.  The graph doesn’t tell the whole story though. I point out to guests that whilst the MD2MD discussions aren’t massively statistically significant, they are very current as members have just voted on how they feel TODAY.

In January 2020 that comment proved very relevant. The graph above includes just one datum for January 2020. That datum combines 63 scores from four meetings held in the last week of January and the first week of February 2020.

Informal discussions suggested two DIFFERENT although consistent messages from different members at meetings just a few days apart. Discussions best illustrated by sharing some (paraphrased and simplified) conversations between MD2MD members.

The first message was very encouraging. “Sentiment is improving – rightly or wrongly people feel Brexit is getting sorted and we can move on. It’s early days but enquiries are increasing, orders are being released and sales forecast is looking good”. “Yes joins in a lawyer. And the banks are finally confident enough to pull the plug on zombie companies. Those making no money and simply surviving because interest rates are so low. They tend to do that when they feel the market is positive”

The second message a week later was not so good. “The Corona virus thing is going to hit us badly. We’ve already been told the restart from Chinese New Year has been delayed a week, and then two weeks. And we suspect it will be at least the end of February before production restarts. That means a month of lost production after the usual two week stop. A six week gap. We’re going to be short of stock. And to make it worse we’ve now got panic buying so our stock is going more quickly than normal.”

So the discussion begins and an opportunity is spotted. “They won’t be able to catch up quickly as there are only so many ships available, operating to a 14 week global cycle with six weeks on the sea to get here. So we, and China, are going to miss at least a month’s production. It’s a good job we’ve got stock to keep going. Sales would stop otherwise. Likewise we’re financially strong and can weather a month of missed sales – but I’m not sure that many of our competitors can … I guess that’s good news for us as they’ll go under. And we can gain their market share.”

The discussion continues and two more opportunities emerge: “I’ve decided to put up prices. That way my stock will last longer and I’ll make more margin even if sales are down.” “I sell to trade and have to give 3 months notice so can’t change prices that quickly. But we are lean and can just afford to fly product in. It’ll cost me though. It’s about 10x the distribution cost so we’ll only just break even. But at least I’ll be able to service my customers.”

And then continues with another positive angle: “Hold on, thinking about it, my competitors are a bit fat so they haven’t got the margins to airfreight their products … And that means if I approach thir customers while I have stock and they haven’t I can get my foot in the door and I can gain share too”

Two great examples of turning a problem into an opportunity through careful entrepreneurial thought.

Background: Chinese manufacturing is shut down

Chinese manufacturing typically stops and production workers leave the factories in the cities to return to their homes in rural China for two weeks to celebrate the Chinese New Year.  This year they were expected to return on Monday 3rd February.  This has not happened, not least because the Chinese government, initially slow to react, has tackled the emergency by banning travel in large parts of the country so as to minimise the spread of the disease.  Despite this cases are building very quickly. And whilst there are numerous teams worldwide working overtime and breaking records for how quickly they are isolating and identifying the virus and developing treatments and vaccinations, there is unlikely to be any effective treatment available for many months.

(Last updated 8th February 2020) A few MD2MD members have been told their production is stopped until 17th or 24th February.  And those members are sceptical as to whether production will resume before the end of February and it could be many weeks or even months to get back to normal.  And of course shipping, the only economic transport for most products, takes a further six weeks.

Background: The global economy is relatively slow

It’s simply the economic impact of the second largest economy in the world stopping. It’s not our purpose here to deal with the awful human and societal impact so, before exploring this situation further, here is a simplified summary of the economic situation as reported by the Bank of England on 30th January. For more details on the Bank of England view of the economy as at the 30th January click here.

Partly as a consequence of the US led trade war and resulting increased tariffs, world growth is slowing. The problems with the Italian banks and the changes in the automotive sector mean that is especially true in the EU. However after a volatile few years and very slow growth last year, the UK economy is expected to pick up a bit in Q1 2020, but is unlikely to return to normal levels of growth unless productivity improves. And productivity improvements take a long time (at least three-five years) to take effect so that is unlikely in the short term.

So the global economy is (was) OK but not strong.

Opinion: If China sneezes the world will catch a cold

The 2003 SARS epidemic is thought to have slowed China’s growth by 2%.  At that time China was, according the FT, about 4% of the global economy.  It’s now thought to be about 17%. If this time China loses about a month of production simple maths translates that to about 8% of their GDP.  That compares to a growth rate for 2019 of 6.3%.  In other words China could go into recession.  And that would very likely put the global economy into recession.

The above paragraph is focused solely on the manufacturing impact. It doesn’t take into account the myriad of other impacts such as the close down of Chinese tourism across the world. Chinese visitors are 10th largest spenders on UK tourism.

It also assumes the virus is successfully limited to China and a small number of other cases. Whilst the Novel Coronavirus (nCoV) is less infectious than diseases like Measles and Chickenpox, it’s roughly equivalent to SARS which killed 774 people in 2002/3 and Spanish flu which infected about half a billion people back in 1918 and killed as many as 100 million. Clearly the comparison with Spanish flu is very imprecise as we are undoubtedly better placed to manage it but then we also travel much more, but the fact that nCoV has already killed more than SARS  indicates how serious this epidemic / pandemic could be.

Recommendation: Review the likely impact on your business

The news is currently and rightly focused on the human impact of the Novel Coronavirus. We haven’t yet seen any mention of the economic impact, not even by the Bank of England at an economic briefing. The impact may however be significant and our purpose here is to highlight that to you so you can form your own view, and if you choose, take appropriate prompt action.

If you, your competitors, customers or suppliers trade with China to any significant degree you probably need to work out how you turn this challenge to your advantage NOW!

If you don’t, you still need to monitor events carefully, think about the potential business impact and be prepared just in case it causes a global recession / slow down.

Opinion: Disruption can be good for smart businesses

Sorry to be the conveyor of bad news.  But it’s not necessarily so – if you think and act quickly and smartly!  As MD2MD members have discussed many times, disruption, even recessions, can be an opportunity for smart SMEs.  If they work to turn a problem into an opportunity. The conversation above illustrates how smart thinking can turn a business problem like this into an opportunity.  Basically such global events affect your competitors too, so if you think quickly and move quickly you may be able to differentiate yourself more than you can when all is well and going smoothly. Disruption can help the smart and quick reacting small business.  I certainly know of a number of MD2MD members who took effective action quickly in 2007 and by doing so emerged from that recession with a greater market share and higher profits.

“In the midst of chaos there is opportunity”

(Sun Tzu)

Go for it – and good luck.  Keep us posted on developments!

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