By now it is unlikely a conversational reference to Coronavirus (now known as COVID-19) will be met with a vacant expression. The recent outbreak originating from China remains on the front page of news, the dinner party topic of conversation, and a niggling worry in the back of many of our minds. However, beyond the very real health threat, the equally real economic threat remains uncertain.
What do we know?
The COVID-19 outbreak is not a novel event. As a global population, incidents of outbreak, epidemics and pandemics are not unheard of. The 2015 Avian Flu and 2013 Ebola outbreaks are testament to this. However, as we continue to become more and more embedded in the global economy, as with an outbreak itself, the economic effect of an outbreak will inevitably stretch beyond the locality of patient zero.
The economic effect of an outbreak, whilst not deadly, can have commercially deadly effects for business. Interestingly these effects tend to be attributable to efforts of containment and attempting to quell the spread of an outbreak. For example, at a rudimentary level restrictions on movement (as seen in China) limit the consumer and consequently affect business. Fear of infection furthermore leads to acts of avoidance, and in the context of the retail sector once busy shopping malls, restaurants and cinemas can become ghost towns. The effect is directly felt by the businesses and their owners who remain liable for operating costs despite the downturn in footfall. The manufacturing and import sectors do not escape unharmed with buyers demonstrating reluctance to source goods from the infected locality.
So far the economic impact of COVID-19 (whilst difficult at this stage to quantify), appears to follow the above course. China has seen international retailers close operations and airlines suspend flights. Its market fell 8% on the first day of trading post Lunar New Year, an otherwise very busy consumer period. Analysts have further tracked the impact of the recent outbreak to the trading prices of industrial commodities. For the SME sector within China, reports further warn there is a real risk some may go out of business if the outbreak continues to last beyond the three month mark.
So what does this all mean?
For many businesses like our clients, the recent outbreak is a timely reminder of the importance of market diversification. Ensuring your business is able to adapt to changing global conditions must be a paramount focus. Supply chain resilience (for example diversity in supply chains), diversity of geographical markets of operation, and the adoption of a developed business continuity plan are steps to achieve this.
From a private equity perspective, unsurprisingly, contingency plans may also prove to be material to investors, a point noted in the US Securities and Exchanges Commission guidance on COVID-19 published 30 January 2020 concerning investor disclosures.
Beyond operational actions, businesses should also give consideration to their corporate structuring, and whether this lends to a flexibility to adapt. Contractually, it is also prudent for businesses to review existing and potential new contracts in the context of force majeure (a topic discussed in detail in the Trowers Insight: Coronavirus – a force majeure event)
At Trowers & Hamlins, we pride ourselves on providing topical, practical and commercial advice to our clients. Any queries in relation to the above can be addressed to our key contacts on this page.
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