How to Recover Losses From the Epidemic | iAsk Observe

Resistance means everything.
iAskMar 03,2020,08:22

 To live on, even in the hardest time.


Return to work or continue to wait?


The novel coronavirus epidemic has spread from Wuhan to other parts of China, and further to the rest of the world. It threatens the public health, and forces many companies to suspend production.


Official data shows that SMEs accounts for more than 99% of enterprises in China. They contribute higher than 50% of tax revenue and over 60% of GDP, creating more than 80% of jobs.



       (Data source: Northeast Securities)


       SMEs’contribution to economic growth cannot be understated. But when the epidemic struck, SMEs also became the most frustrated market players.


According to a joint survey from Tsinghua University and Peking University, 34% of small and medium-sized enterprises have balances lasting for only one month, 33.1% of enterprises for 2 months, and only 17.91% of enterprises can maintain for 3 months.


"A few more days, I am afraid the company will go bankrupt."

"Working in office might cause infection. But if not working, what should I do with my loans?"


There are dilemmas and intricate economic issues jeopardizing the majority of SME owners and employees.


"Zero risk and infection is an ideal that everyone hopes to achieve, yet a more realistic goal is to control the epidemic to the lowest infection level while maintaining a normal social and economic order. Extreme“shock”measures that sacrifice all behind is not the all-around victory we need. It can’t even be regarded as a victory.


Liang Jianzhang, Ctrip founder advocates orderly resumption of work.


The economy and society is a dynamic circular system that a slight change affects the whole body. At present, while Chinese people are making efforts to prevent and control the epidemic, they resume production in an orderly manner, and many companies have already restarted.


On February 24, a press conference of the Six Departments held by the Information Office of the State Council of the People's Republic of China revealed that the resumption rate of industrial enterprises above designated size has increased in a steady approach, of which the rate has exceeded 90% in Zhejiang, above 70% in Jiangsu, Shandong, Fujian, Liaoning, Guangdong and Jiangxi. The opening rate of SMEs is near 30%.


Whether it's working from home online or returning to the company in batches, people are eager to have the normal life back on track, but the severe test from reality continues.


However, even after the resumption of work, enterprises still face many challenges. In the epidemic, the resumption of production does not rely only on the company's own factory, but also it depends on the resumption of the upstream and downstream.


According to Bloomberg, Nissan Motor announced that one of its plants in Japan has suspended production due to the shortage of spare parts, but gets prepared to restart production at any time. Before that, the South Korea's Hyundai stopped their production lines because of the shortage of spare-parts.


Reuters reported that China Apple’s iPhone factory has delayed the opening time. Although Foxconn's Zhengzhou factory obtained a permit to resume work, only 10% of its employees returned to the factory. Due to the risk of catching the infection, the resumption of work in the Shenzhen factory is expected to be postponed further.


Playing a critical role in the global industrial chain, the shutdown of Chinese manufacturing caused by the epidemic, has affected supply chains and economies outside of China.


Huang Qifan, Chairman of the Tsinghua Industrial Transformation Advisory Committee remarked: “The disruption of the industrial chain and supply chain which are resulted from logistics disruptions and measurements of disease control, has a greater impact than trade frictions. Once the disruption occurs, and substitutions are found, some industries will lost the 30 year manufacturing foundation, which is difficult to recover. Therefore, we must attach similar importance to protecting the industrial ecology, the industrial chain and supply chain, and protecting SMEs just as we are doing on the epidemic. Only in this way can we truly survive the difficult times.


How does this epidemic influence all walks of life?


"The Trillions of Yuan Loses"


Industries that rely heavily on catering, tourism, aviation, film and television are the most suffered victims.


Catering industry: In the evening of February 12, the China Cuisine Association announced that, during the novel coronavirus epidemic, 78% of catering companies lost over 100% of their operating income compared to that during last year's Spring Festival; 9% of the companies lost more than 90% of their revenue.


In an epidemic report recently released by the Evergrande Research Institute, it is estimated that the impact of the epidemic has caused a loss of 500 billion yuan in the catering retail industry, within the 7 days of the Spring Festival.


More than 400 restaurants of Xibei Oat Noodle Village in 60 cities across China have basically stopped service, with only 100 takeaways outlets still opening. Jia Guolong, Chairman of Xibei Catering, estimated that the company has lost 700-800 million yuan in the month near the Spring Festival.


Home Original Chicken has more than 100 outlets in Wuhan. When Wuhan city was locked down, in order to minimize the risk of infection, all stores in Wuhan were voluntarily closed as soon as possible, and more than 1,000 employees took the initiative to stay in Wuhan. In addition, more than 100 stores were also closed in Anhui and Nanjing. Shu Congxuan, Chairman of Home Original Chicken, conservatively estimated that the income from the two months around the Spring Festival should have reached 800 million yuan, and the actual performance is a lose of at least 500 million yuan.


Catering is undoubtedly one of the worst slashed industries. When eat-in restaurants such as Xibei are closed, the cash flow together with the loan can only pay up to 3 months of salary. After that, many companies face the risk of breakage of cash flow, which brings enormous pressures for survival.


Tourism: The losses exceeded 500 billion yuan. The total revenue of the Spring Festival tourism in 2019 was expected to be 513.9 billion yuan. However, the revenue this year is only a fraction, with a loss exceeding 500 billion yuan, as the second most impacted industry after catering. 500 billion yuan is difficult to regain after the epidemic, because Golden Weeks are short, and summer holiday may be lessened this year.


Ctrip, the biggest tourism company in China, achieved a 40 billion yuan revenue in 2019, with 8.2 billion yuan in the first quarter of last year. If the epidemic continues for a full quarter, Ctrip's revenue loss will exceed 8 billion yuan.


Industry insiders predict that asset-light operations and small debt travel agencies will gradually enter a recession period. The epidemic accelerates the elimination and transformation of travel agencies. 1.3 million tour guides from around 40 thousand travel agencies across the country are facing survival challenges.


Aviation: In 2019, the revenue of China's civil aviation industry was 1.06 trillion yuan. The Spring Festival is the peak season, which expected a revenue around 200 billion yuan. Now the demand is decreased by 40% and losses are around 100 billion yuan.


China Southern Airlines had revenues of more than 140 billion yuan in 2018 and 116.6 billion yuan in the first three quarters of 2019, which is the highest airline revenue in China. However, it losses over 10 billion yuan during the Spring Festival. If it continues for a quarter, the revenue loss will exceed 30 billion yuan.



(Data source: CRIC)


According to a survey conducted by the China Real Estate Chamber of Commerce, among the 72 companies in the top 200 real estate list, 46 companies (mainly small and medium-sized enterprises) have an impact value of more than 440 billion yuan, with a monthly operating cost about 23.5 billion yuan. In the first half of 2020, the debts due are nearly 530 billion yuan.


For most of the real estate companies, the pressure of debt payment is very heavy in the first half of 2020. The unpaid debt will lead to more problems and may even bring the company to the verge of bankruptcy.


Film and Television: The revenue of Wanda Cinemas was 14 billion yuan in 2018, and the epidemic impact on revenue will also be in billions.


Even by the most conservative estimate, losses on China box office during the epidemic will surpass 10 billion yuan.


The 2020 Spring Festival films were expected to be huge successes. The seven films including Detective China Town 3, Lost in Russia, Legend of Deification, Champion and Boonie Bears: the Wild Life have already been tested by the market in terms of IP, theme, director, actors. With a wild range of audience, most brokerages expected a revenue about 7 billion yuan in 2020.


A film studio manager in Chongqing said: "Before the epidemic, we did several rounds of evaluation on how to arrange the seven Chinese New Year films. Just as Wandering Earth, a dark horse last year, we planned to bet on Champion to be this year’s winner." Yang Feng said, but now all the hesitation and arrangements are in vain.


Some insiders have analyzed and concluded that some small theaters might be reshuffled, while large cinemas such as Wanda and Tahoe need to pay close attention to the debt situation of their parent companies in real estate.


Mobile phone industry:


According to the latest forecast of Canalys, China's smartphone production in the first quarter 2020 will fall by 50% compared to last year, and IDC has witnessed a 30% decline.


Facing the downturn in the first quarter due to the epidemic, many research institutions have adjusted their mobile phone market expectations for 2020.


"Affected by the epidemic, I think that the sales volume of the entire industry will definitely decline drastically in the first quarter, but will rebound in the second and third quarters. I think mobile phones are still the most commonly used smart devices. The slide may not be as much as imagined." Lei Jun, Chairman of Xiaomi told the media in an earlier interview.


Even after the debut, there might be a short-term shortage. Lei Jun also acknowledged that the production capacity of Xiaomi 10 "is undoubtedly affected by this epidemic", and it may still be out of stock in a week or two.


Retail stores at the end of the market chain felt the earliest chills. No goods to order online, the physical stores are closed. Many store owners can narrowly support themselves because they had stockpiled goods before the Spring Festival but their cash flow was tight.


The profit season of mobile phone industry lasts for 8 months a year. The business is slim from January to April. To date the stores are out of stock and the sales volume has dropped by 30-50%. The mobile phone industry is waiting for daybreak in the darkness. A regional manager of a mobile phone manufacturer sighed.


The raw materials stockpiled before the Spring Festival are used up, and upstream production and transportation have not been fully resumed. The market is either out of stock or the price has skyrocketed.


The supply chain has not resumed work. On the entire production chain, they have problems at each node with workers and suppliers. Apple said that its smartphone supply could be affected by the novel coronavirus epidemic.


Resistance is the best way

How do companies respond to challenges?


Raising the example of catering industry which are the most impacted, their solutions are nothing more than the listed below:


The first is to reduce costs through cross-industry cooperation. In the stagnation, staff and ingredients are temporarily sent to the community e-commerce to promote the reasonable distribution of resources. The cost of ingredients in the catering industry accounts for 40%-50% , labor costs more than 20%. Such emergency measures can effectively alleviate budget pressure.


The second is to negotiate rent-free and post-rental clauses with the landowner, to set the fixed cost on venue.


The third is to actively adopt takeaway solutions and effectively increase revenue. The takeaway agency invested by CPT Technology has helped many food and beverage brands to develop businesses vigorously, helping them to increase their income during the epidemic.


Of course, there are also some companies have different problems and ways out. Compared to the little-traffic catering industry, there is a labor shortage in the retail industry due to insufficient supply and personnel.


More than 30 catering companies, including Xibei and Naixue, are seeking help from Hema to allocate employees. Xibei alone has sent more than 1,000 employees to work for Hema. This cross-border cooperation has eased the financial tension on catering companies in the short term.


Take the Chinese fast food leader Home Original Chicken as an example, the specific situation is:


Shu Xiangxuan, Chairman of Home Original Chicken, said in an interview with iAsk that the company spends more than 80 million yuan on salaries, 30 million yuan on rents. Besides, budgets of electricity and water bills, transportation, protective supplies are fixed costs.


To cope with the crisis, Home Original Chicken helped themselves, such as identifying emergency measures for "addition, subtraction, multiplication, and division." "Addition" is to strengthen services, "subtraction" to reduce unnecessary expenses, "multiplication" to enhance competitiveness and "division" is to overcome the fear of the epidemic.


In terms of funding, many banks are taking initiative to contact and provide assistance. CITIC Bank and SPDB are among those who are actively supporting Home Original Chicken.


Meanwhile, Home Original Chicken has made immediate adjustment of the organizational structure, in three parts: a strategic center, a research and development center, and a support center. The strategic center is mainly responsible for the brand's strategic direction and funding policy. The research and development center mainly deals with takeaways business, work meals and new retails etc. The support center focuses on work from home online, work in online groups, online training, and corporate culture building.


"There is no other better way than holding up." Shu Congxuan said that layoffs are not sensible ways that a company responds to the crisis.


Some century-old or millennium-old stores in the world have survived the crises of World War I and World War II and are still living. In comparison, the present situation is not desperate. We have a strong government and we are a established independent brand. I believe that where there is life, there is hope.


Home Original Chicken has a complete industrial chain. After the resumption of work, slight pressure exists on the supply chain, impacted by the external environment, the sales volume has declined.


Home Original Chicken has more than 800 directly-operated stores nationwide, with more than 100 outlets in Wuhan. Now except Wuhan, 60% of the restaurants have resumed business. They are mainly packaged for take-out, with a sales volume less than 20% of last year.


For other industries, the response to the epidemic is essentially the same: to broaden sources of income and deduct expenditure.


There are many deadly modes of corporate in a crisis, two of which are the most common. One is the dispirited and divided team and the other is the "sudden death" caused by a broken capital chain.


Regardless of the industry, if companies want to survive the epidemic, they must reassure the personnel and keep the cash flow.


Which industries will be an instant hit?


Encountering the crisis, all companies have tightened their budgets. The investment direction has also been adjusted in the context changing environment. It is necessary to find entrepreneurial companies that are more adaptable to changes.


An interview about hundreds of projects focusing on several key investments including consumption, entertainment and corporate services, revealed the following information.


10% of the companies responded that the impact was serious, 50% of the companies admitted a moderate impact, and 40% of the companies said little or no impact. About 65% of the affected enterprises were in the early stage of operation. The impact of the epidemic was specifically reflected in tight cash flow and offline work suspensions, supply chain adjustments, declined marketing effects, staggering of financing, and more difficult customer acquisition.



(Data source: Meridian Capital)


Zhu Xiaohu, a principal partner of GSR Ventures, believes that investors and enterprises are facing similar crisis and opportunities in 2020. "My favorite projects include those that have developed rapidly in the epidemic, such as online education, e-commerce, and enterprise services, etc. But the core of investment depends on whether the company's current plight is from an emergency or internal challenges. "


Like the cold winter, many people still believe that the epidemic is a reasonable turning point. Lin Wenhai, CEO of Yingyuan Capital thought: "the cold winter is a good season." It is easier to judge who are good investors and entrepreneurs at the turning point.


The epidemic raging across the country has put most offline businesses in a halt, but at the same time, it has also brought opportunities to online businesses.


Online games, online office, online education, Internet medical services, fresh produce e-commerce and others ushered in more opportunities.


Online games, film and television: during the epidemic, online games became extremely popular. The mobile game Honor of Kings had a cash flow of about 2 billion yuan on the Chinese New Year Eve. Its previous single-day record of was at 1.3 billion yuan on the 2019 Chinese New Year's Day. The epidemic has temporarily affected this industry but will not change its normal trend. There might be game classification in the future.


During the epidemic, the film Lost in Russia directed by Xu Zheng was available on the Internet for free, arousing protests from the film industry. However, this will not change the industry rules. Under the current censorship mechanism, there is limited space for development of online dramas and movies.


Online fresh produce is a novel industry that has appeared in recent years and the development is tepid. The epidemic has inspired many people to buy fresh vegetables, seafood and livestock on their phones, such as Ding Dong and Hema Fresh. The challenge of this industry lies in the supply chain and the cultivation of the user’s habits.


However, after the epidemic, most people will return to the physical food market and supermarkets, considering the factor of prices, and their lifestyle. Shopping is a way for house wives to exercise and communicate with friends. The industry will still be favored by capital, but its growth requires a process, from first and second tier cities to third and fourth tiers.


Although the current situation is positive for fresh food e-commerce, the ultimate test is to see if the company can establish a unit economic model, to generate abundant orders, and whether the gross profit margin has changed to develop in a forward direction, which is a critical test.


About the online office, Zhu Xiaohu believed that companies focusing on IM collaborative office and video conferencing have been well received. Even in the middle of the epidemic, everyone was given free time to get customers, and had a chance to test the products of various enterprises. Those products creating good user experience will stand out.


Corporate services are not the strong point for Chinese companies. With 20 years of Internet development, the total market value of China's consumer Internet is about one-third, the market value of financial services and fintech companies almost one-tenth of the U.S capacity. The market value of service companies only takes near one hundredth of that in the U.S., where opportunities for development are at least 20 times to 50 times more .


The recent biggest challenge for enterprise service companies is to provide services for small and medium enterprises who have been affected by the epidemic. The service companies recommend some companies such as Hey Tea, Zhenxing Chicken, to change mindset and help them run online businesses. If we can think and act in a different way, I believe that we can turn this opportunity into a challenge.


The core is to maintain a win-win situation for customers. If we think their shoes, create more value for them, help those companies to survive and develop, the service providers can have a brighter outlook.


In addition, start-ups should not fail from the late setbacks after the epidemic. Even after the epidemic is over, it may take two or three months for the operating data to recover, and takes another two to three months to raise funds, and receive money in the next four to six months.


In the fight against the epidemic, start-up companies must manage their budgets strictly. With the current balance on the account, the company probably can support for a few months. Without receiving concrete income, the company should avoid cash expenditures.


For the vigorous business of online office, retaining users is the primary concern.


After the outbreak, in addition to software such as Zoom, which has been in the video conferences for many years, a large number of Internet giants such as Ding Talk, Enterprise WeChat, and Lark have also launched free services and used their huge resources to solicit users.


January 31st marks the first day of telework in the epidemic months. The capacity of Ding Talk and Enterprise WeChat didn’t get proper expansion, which caused the system crash, and were unable to hold the huge traffic. Due to the lack of 5G network penetration and the slow start of novice users, many users gave a one-point negative rating. Those large companies responded quickly, added extra servers, and made technical adjustments to transform a downward crisis to an opportunity to expose the product. Up to date, more than 10 million companies have organized 200 million employees on the Ding Talk and nearly 50 million students are taught on Ding Talk online classroom.


However, most online office companies without IP traffic, may have a hard time of survival.


As to online office products, stability is particularly important.


Perceived by Wu Bing, CEO of Shimo Documents, the company should have a thorough understanding of the user's needs and actual conditions, in this window period of enterprise service. It should not blindly follow the trend, to conduct promotion, placement, marketing, etc. The key is to meet users’ needs. Only by increasing exposure and identifying new users, the company can’t match the actual demand right, moreover, it will be difficult to retain those users.


Without doubt, the epidemic has promoted the cloud video market to some extent, but can this short-term blessing become a medium-to-long-term advantage?


Zhao Yuanjun, CTO of Quanshi Cloud said that although the conference market seems to be very exciting, the sudden increase in users is not necessarily a good sign. How to retain users is the key. It depends on whether the product brings better free experience to users. On the whole, he believes that the development of the cloud conference faces a slow growing process.


After the inflection point of the epidemic, when people return to the office, it is still to be verified whether the video conference is an ephemera or an actual phenomenon.


The online education is less anxious than the online office business.


According to the official report of Ding Talk, as of January 31, more than 20 provinces including Guangdong, Jiangsu, and Henan have joined the "learning at home" programme, and over 10,000 colleges, high schools, and 5 million students have classes on DingTalk Classroom. In addition, live streaming platforms such as ClassIn, EduSoho, and Mu Kun Technology offered their technical capabilities free of charge. Hundreds of thousands of students from New Oriental accessed the New Oriental online live streaming system "Cloud Class", and tens of thousands of teachers have also switched from traditional classroom to online tutoring.


Many companies have also launched free courses. With the threshold of online experience is getting lower, more users are attracted to online education products, which brings huge opportunities for retention and conversion.




Favorable policies


China attaches great importance to the development of SMEs, and has introduced favorable policies in the past months.


On the one hand, the epidemic prevention and control is getting better, as China introduced countermeasures to resume the work of enterprises. On the other hand, the financial sector is experimenting policies to support SMEs.


In the morning of February 24, the State Council Office held a press conference on coordinating the prevention and control of the novel coronavirus epidemic, the economic and social development. Chen Yulu, Deputy Governor of the Central Bank of China, explained in detail how monetary policy can be more flexible and proper, and how the financial sector can fully support SMEs to overcome difficulties, as well as other hot issues.


In the afternoon press conference organized by the State Council joint prevention and control mechanism, officials responded to a number of questions including credit support, insurance compensation, and online services.


In the following day, the State Council held an executive meeting to promulgate various favorable policies.


The meeting pointed out the importance to support more than 80 million individual industrial and commercial households that have employed over 200 million personnel. It will help stabilize the livelihoods of hundreds of millions of families:


Firstly, from March 1 to the end of May, small-scale taxpayers in Hubei Province will be exempted from VAT, and the percentage charges in other regions are reduced from 3% to 1%.


The second is that individual industrial and commercial households who have old-age, unemployment and work injury insurances, shall refer to small and medium-sized enterprises, to enjoy the reduction and exemption policy.


The third is to guide financial institutions to increase low-interest loans and provide targeted support to individual industrial and commercial households.


The fourth is to effectively implement the policy aiming companies in addition to high-energy-consuming industries, to further reduce the price of industrial and commercial electricity by 5%.


Fifthly, to encourage local governments to reduce or exempt property rents for individual industrial and commercial households by reducing or exempting urban land use taxes.


With different anti-risk capabilities, each industry or company has different debt ratios and cash flow conditions. The position of each company in the industry is also affected by the epidemic in various levels. Some industries suffered, while others ushered in development and opportunities. With the support of national policies, more SMEs will survive the gloom days.


The current overall prevention and control of the epidemic is advancing in a positive trend, and the number of new patients except in Hubei has dropped to less than 10. However, the epidemic has caused trillions of net losses to the society in general. After the epidemic has subsided, most loses are still difficult to recover.


The Lebanese-American economist Nassim Nicholas Taleb, wrote in The Black Swan: the Impact of the Highly Improbable: “Unrepeatable events are ignored before they take place, and they are overrated afterwards. The probability of the Black Swan has decreased. The knowledge we have obtained from the past is actually irrelevant or false, or even dangerously misleading."


The whole country, its business and individual facing this epidemic should draw lessons, pay attention to unknown risks, and improve the ability to deal with risks. Then it can be worthy of the suffering.


In the era of uncertainty, we need to find a better way to survive.








Topics:How to recover losses on trillions of yuan from the epidemic? | iAsk Observe