COVID Induced Inertia

My immediate reaction to the late March lockdown was that urgent transformation was necessary to avoid an economic catastrophe. Already most business in the pre-2020 world were stumbling along complacently in a 30-year boom with loose or flawed business plans and models.

The health of their businesses, as well as the national economy, would rely on businesses emerging post-COVID stronger than when they went into the great hibernation, and with sharpened business models focussed on the transformed needs of their customers in the new environment.

There was undoubtedly a need for significant government financial support just to keep the economy ticking over in hibernation. I have no problem with that, although I am sure in hindsight many different things may have been done. I am concerned at the consequent lack of urgency in the business and finance sectors to transform themselves, and the economy.

While there has been some clever innovation in various sectors and businesses there mainly appears to be little in the way of transformation. News reports, ASX announcements and anecdotal evidence highlight that it is very much ‘business as if it was usual’:

1.      Some sectors and businesses are right in the path of the lockdown. Existing models, with little or no tweaking, have generated significant revenue growth due to changed behaviours of customers turbocharged by superannuation withdrawals and government stimulus.

2.      For others business as usual has been constrained by lockdown factors with a hit to the revenue matched by cost cutting and reduced working hours. Any strategic planning has been directed to risk minimisation rather than value creating activities.

3.      Some more entrepreneurial retail groups have taken advantage of Jobkeeper and rental concessions to screw their suppliers and employees while increasing profits.

4.      Legitimate use of Jobkeeper and rent concessions have enabled temporary relief for businesses that have suffered significant reductions in turnover

5.      Some sectors have been smashed and will take a long time to recover. Travel and tourism are obvious examples.

6.      Some businesses have closed their doors, probably for good

Regarding group 3 I hope and expect that treating your stakeholders poorly will come back and haunt you. Understanding and having regard for the needs of all stakeholders was once the hallmark of great and enduring businesses, now only recently rediscovered as ‘having a social licence to operate’.

Many businesses will slowly morph from hibernating to comatose, swelling the ranks of the horde of pre-2020 zombie businesses.

The government lacks direction as it relies mainly on employer bodies, professional and industry associations, and unions for advice. An army of administrators advising each other on how business can be stimulated efficiently and productively. The big end of town and the media have started the seasonal call for the government to start pumping billions into picking winners.

The outcomes are predictable when government intervenes to stimulate the economy or manage risk. There is a whole industry adept at pocketing this money and passing the risk onto other businesses or back to the taxpayer.

Zombie businesses have been a growing sector of the economy since the GFC. Three decades of continuing prosperity have propped up poorly managed and undercapitalised businesses. At the same time, the banks and the ATO have tried to avoid external criticism for forcing business closures by allowing insolvent businesses to continue trading.

Zombies are undoubtedly a significant drain on the productivity of the economy and the wealth of the nation. Despite widespread acceptance that they need to be put out of their misery I do not see many choices for the government in addressing its own September deadline. Possibly the current programs will be extended to March next year to get the country through Christmas. Will COVID-19 be under control at that stage and will it be enough to get through winter?

One thing that has returned to normal is China as our exports have quickly picked up. Sadly, as has their aggressive use of commerce to exert their other agendas. Milk, barley, beef and now wine. I cannot see why it should stop there.

China’s advocates have insisted that its level of ownership of Australia’s assets and businesses was relatively low. We are now seeing why regulators in all jurisdictions place much more emphasis on the “control” of assets and businesses, rather than ownership. For many industries opening the China market became an easy route to success. Those businesses whose plan was to sell into China are pretty much at its mercy.

Nobody will shed a tear if the zombies finally throw themselves off the ‘insolvency cliff’ but they will drag millions of employees, contractors, and other businesses with them. This will trigger the government’s financial liabilities for FEG (does anyone on earth know how big this is?), impact the banking system and probably flow on to the broader stock market.

Compounding the blow to superannuation balances will be the expiry of the SG Amnesty. Admittedly it has been a victim of the COVID downturn and lockdown, but workers can now expect zero possibility of recouping unpaid superannuation while their future employment prospects and conditions are now far less certain.

It would be nice to think that our governments have plans. Seven months into this pandemic and there is little evidence of too much thinking outside of the box. Border communities have been crucified by state premiers enforcing lines on maps which have no reference to identified COVID hotspots. We seem to be stuck in that place where we are protecting our hospital system and medical front line, but not much else.

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