‘The New Normal – Changes to Expect’
It is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself. - Leon C. Megginson (inspired from Charles Darwin’s Origin of Species)
The unprecedented coronavirus pandemic has disrupted the humankind completely and will change the way we live forever. Those changes will be irreversible to a large extent and will give rise to a host of other challenges and therefore changes can either be good or bad depending upon each person’s individual perception. For example, increased automation in factories will make manufacturing more productive and may be even more profitable for industrialists but on the other hand will hammer down jobs of semi-skilled and unskilled labour on a large scale. Many companies will need to completely reappraise their business models to assess whether there is still demand for their products and services and how they can meet them. Countries are preparing themselves in order to brace themselves for another wave of the virus, if it is on the cards. The ‘New Normal’ is expected to result in some irreversible changes, as a consequence of which there will be challenges. And if there are challenges, people and governments will have to assess and analyse how to face those challenges in the most efficient manner possible. This is the first part of the post focusing on changes to be expected in post pandemic era.
Changes to expect:
Work from Home (WFH)
Jes Staley of Barclays says that “The notion of putting 7000 people in a building may be a thing of the past.” Natarajan Chandrasekaran CEO of Tata Group, India has forecasted that most of the 450,000 employees of TCS may continue to WFH. TCS whose one-fifth workforce was working from home before covid19, is expecting that almost three-fourths of the workforce will continue to WFH. Executives who are speaking in favour of work from home believe that WFH will increase productivity, result in less waste of time on travel, lesser capital expenditure on offices, etc. Those are some alarming statements and pose a threat to a host of industries. However, as easier is seems any sort of outside breach in the work from home model may pose a great security threat and risk and may also lead to espionage of corporate data. Companies will have to address this pivotal issue before they depend largely on this model. As there are signs of re-emergence of this virus and any further lockdown will force these companies to either adapt or hang up the boots.
People avoiding crowded areas
China’s Wuhan, the epicentre of coronavirus pandemic is almost open. Shopping malls and supermarkets are open again but are largely empty. Even in Germany which is considered to have tackled the pandemic most expeditiously among other European nations, people are not moving out easily and are afraid of the virus contraction. The Alexa mall in Berlin was open on Thursday but was almost empty. Restaurants will have to adhere to social distancing norms encouraging sitting at safe distance, termed as ‘Empty Chair Economy.’ Restaurateurs from around the world have expressed concerns that they do not expect their businesses to survive with strict social distancing norms in place. Some even have agreed that with social distancing norms imposed, they will not be able to achieve even the break-even footfall and will be succumbed to financial strains. Different countries adopted different approaches, some excelled and some failed. Countries like Japan, Taiwan, South Korea, flattened the curve without imposing tough lockdown restrictions, whereas countries like US, UK, Italy, Spain, etc. failed to gauge the magnitude of the pandemic resulting in uncontrolled deaths as a result people their imposed lockdown on themselves. There is no specific data or projections as of now to understand how people’s state of mind will affect the economy globally and for how long, but the economists have warned that it will take minimum 2-3 years to restore pre-covid19 demand levels!
Employers will be required to encourage workers to be remain aware and responsible of their work environments. Some experts say that technologies such as providing wearables to workers which will alert them to maintain safe distance, practises such as non-sharing of factory tools, and workplace restructuring such as installation of sanitizing tunnels will be prevalent. Service providers will incorporate change in their office layouts and manufacturers will redesign factory layouts. In India, where IT firms are focusing more on WFH routine, companies like Maruti, M&M, Toyota, Tata Steel have already started changing their factory layouts such as demarcated work areas on factory floor and dividing operations into two to three shifts ensuring workers do not mingle with each other. There’s much more attention to workers’ safety than there was before when our work was based on speed.
Testing will be the new norm
As per a research report by Harvard’s Safra Centre for Ethics United States needs 5 million tests per day by early June and 20 million by late July in order to reopen the states fully and safely. These figures are way too high. Advanced countries of America and Europe will be at some stage might be able to cope up with that scale of testing but developing countries of Africa and Asia are struggling badly. For example, India has conducted a total of 1 million tests in the last 74 days, as compared to US who has approximately tested 7 million (see chart below). This clearly shows how a country like India having 5th largest economy in the world is not taking testing enough. As quoted in The Economist’s latest issue, “abandoning testing is like throwing away an umbrella in a rainstorm because it has stopped its bearer from getting soaked.” Scientists, economists and public health officials around the world have equivocally said that creating a system that can test millions of people a day for the virus will be needed to get out of lockdown safely. Testing of such a scale has never been in existence and will cost government billions of dollars. One argument is the expenditure on testing infrastructure is in a way investment as if another wave of the coronavirus returns or any other similar virus, countries shall be prepared. Germany has been ahead of other countries in the race because the country had infrastructure ready to deal with huge scale of testing.
Countries will bounce in and out of lockdowns
The lockdown which is still continuing in many parts of the world has crippled many livelihoods. A lockdown comes with severe challenges such as
Contraction in demand & overall GDP: Ex Chief Economic Advisor of India, Arvind Subramaniam has expressed his concerns over the current state of economy and said that the country should plan for “substantially negative economic growth.” In the first quarter, US’s GDP has contracted fastest since 2008 and experts believe that the complete effect of lockdown isn’t yet reflected. Even China’s economy shrank for the first time in 40 years since 1970s. Euro Zone has projected the worst decline of approximately 12% due to lockdown in times to come. Overall world GDP has plummeted by around 4.8% in April (see charts below)
Source: Centre for Monitoring Indian Economy (CMIE)
Enormous stimulus packages burdening governments with debt: Governments all over the world have introduced stimulus packages to make sure factories are furloughing instead of laying off their workers (see chart below). US senate has announced economic stimulus package worth $3trn. Similar stimulus packages have been announced by countries all over the world. A detailed note on how these debts will affect the governments in future will be posted separately under the upcoming Challenges post.
Source: Statista, IMF
Plunge in commodity prices: On 20th April, for the first time in the history crude oil prices have fallen below zero. In other words, sellers were paying buyers to take deliveries to avoid storage cost! As per Bloomberg, the oil price crash can be summed up in one word: inelasticity. Low prices aren’t making people want to use more oil, while producers are reluctant to scale back. Other commodities have faced a similar fate; however, their prices are not expected to drop sub-zero like crude which have strict storage restrictions. Oil and commodity prices are where they were 160 years ago (see chart below)
Prolonged unemployment: There are some heart wrenching figures from all over the world till the last week. India has recorded unemployment rate of nearly 26% in the last month. In US, more than 30 million people have filed new claims for jobless benefits in last six weeks total since the start of the lockdowns. In Europe as per the data of the five largest economies show that more than 35 million workers have been furloughed and are paid under government’s furlough schemes. Germany’s furlough scheme ‘Kurzarbeit’ was covering more than 10 million workers, double a previous estimate approximately 20% of the country’s workforce. Similarly, France’s furlough scheme ‘Chomage Partiel’ was covering more than 11 million workers, approximately 25% of the country’s total workforce.
Source: Centre for Monitoring Indian Economy (CMIE)
The above-mentioned challenges will be discussed in detail under the ‘Challenges’ post and is an indicative list. Unless a vaccine is developed for the coronavirus, countries will bounce in and out of lockdowns. If this virus or another similar type of virus surfaces and outbreaks again, the first instinct of the governments will most probably be to impose a lockdown. When Ebola outbroke in African countries in 2014, many countries remained under lockdown for 6 to 7 months. This is another virus outbreak for Africa within 6 years, and the wounds of Ebola are still fresh in their minds.
Shift from Just in Time to just in case:
Before covid19, companies which focused on maintaining a lean inventory and enjoyed better margins due to Just-in-time model have suffered greatest losses in the lockdown period. As a result, many industrialists are no more favouring the Just-in-time model and are willing to switch to Just-in-case model where they will stock cash and reserves aside for the rainy days. “There will be a trade-off between price and safety in favour of safety,” says Natarajan Chandrasekaran, CEO of Tata Group.
No travel unless very necessary:
As per draft guidelines issued by Aviation Ministry of India along with the coordination of Health Ministry, fliers may be advised to carry only one baggage item, reach airports earlier than usual, be thermal scanned while departing and arriving, and stand at designated areas at every place from check-in counters to food and beverage outlets. The ministry officials have emphasised on discourage of any cabin baggage carrying of just one luggage item because more the luggage, the higher are chances of contamination. No such guidelines are issued by any other country till now, but trend may be the same. Similar restrictions may be imposed on travel by other modes of transport. Such heavy restrictions will have two impacts on the travellers. First, if they will be able to reach any destination own their own say owned car, they would avoid other mass modes of travel because of fear of virus contraction. Second, if they can’t reach a place on their own, then the travel would be limited strictly to unavoidable instances. Most of the meetings will be held via teleconferences and video conferences. Since, many companies who used to spend millions on meetings for even trivial briefings have realised that meetings can also be held economically and efficiently via teleconferencing. As a result, work travel is going to be limited to only very important meetings. Evergrande, a big Chinese property firm with the help of social media and virtual-reality technology promoted homes during the covid19 shutdown and its sales more than doubled in February to $6.4bn. It is estimated that 3D cameras, webcams, and other similar communication devices will be in huge demand. In case of travel for leisure, it is estimated that the tourism industry is going to be the slowest in terms of recovery (see chart below). Also, ensuing global economic crisis and increased travel tariff due to new social distancing norms may wipe out plans of budget travellers in entirety.
Source: Oxford Economics
Impact on Public Transport:
Post covid19 if WFH becomes the new normal, than the demand for cab rental services and other modes of public transport is going to plummet. Also, consumer behaviour post-Covid-19 will change in the medium and long term as large chunk of people will move away from public transport towards safer alternatives in similar price range. As a result, cab rental service providers like Ola and Uber are planning to provide self-drive car rental subscription services like the ZAP Subscribe by Zoomcar. Such a shift may help remain them in the game but largely depends on the future demand levels as they are expecting a minimum increase in operating expenditure by 4-5% and fear if customers will agree to pay such premium. Deep pocket companies may adopt the penetration strategy by maintaining lower costs and knocking out other players of the market.
Increased dependency on automation:
Executives over the world want to make sure that their operations are pandemic proof, i.e. practises to make sure their worker don’t catch infection, because one mistake will lead to shut down of their plants for not less than 90 to 100 days. As per recent harsh guidelines announced by Ministry of Home Affairs, India executives will face punitive actions under Disaster Management Act if any of their workers catch the infection. Greater the number of human employees greater the risk of contagion. It is also believed that industries which have very thin margin will eventually replace the lower pay jobs. In India, Tata Steel, Ceat Tyres, Maruti, Mahindra, Toyota, Tata Motors, VE Commercial Vehicles and Shriram Pistons, among others, have big plans to automate their production lines. Similar views are shared from the industrialists in the west. Cairn Oil India Barmer plant has been working on cost optimisation and has focused more on automation in last 2 years. Since, investment in the new technology is going to be huge big companies with cash reserves and stable financials will be able to afford but small and medium scale businesses will either be engulfed by such big companies or simply knocked out off the market.
The above-mentioned changes are just some of the changes predicted and observed in the post pandemic world and hence based on limited data available. As the world gradually prepares itself to move out of this pandemic assuming a vaccine is developed and made available in next 3-4 years and no similar or a novel virus surfaces, more set of habits and behaviours will shape the future of this world’s lifestyle. In the next post, I will be discussing challenges arising as a result of above-mentioned changes and its short and long-term impacts.
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