Along Came a Black Swan

April 16, 2020


In economics, a black swan is an unpredictably rare event with potentially severe consequences. Since it first appeared in December 2019, the Coronavirus has caused companies around the world to look for new ways to continue to do business as governments locked down their nations to curb the virus spread. Can Egyptian companies benefit from their experiences?

For companies around the world, 2020 was supposed to be a promising year, tapping into new technologies to develop tools and services. First was the deployment of 5G networks and with it the internet of things. This year also might have been a definitive chapter in trade tensions between the United States and China, while experts debated the future of Great Britain after leaving the EU.

By January 23, however, the world was watching China as it put Hubei province under lockdown and declared its capital, Wuhan, the epicenter of the coronavirus (COVID-19) outbreak. To date, the virus has infected people in 177 of 195 countries, according to the United Nations. And by the time this issue reaches readers, there likely will be nearly 1 million registered cases. In the first 22 days in March, the number of global infections tripled, according to Johns Hopkins University, which has been mapping the pandemic since January.

The solution, so far, has been to close down as much of the economy as possible to reduce the spread of the virus. “Planet Earth is shutting down,” stated The Economist in its March 21 issue, along with a picture of the Earth with a “closed” sign. “Growing economic disruptions and market panic [are] the first stirrings of an economic collapse more serious than the global financial crisis of 2007-09,” said the article.

However, a close look shows that companies staying open are changing how they do business to protect employees, operations, and supply chains. Some are finding ways to minimize physical contact with customers, while others are developing new products and services.

For Egyptian companies, those experiences and ideas could prove vital to remaining open, serving local or international markets, while other businesses shut down around the world.

Impact on Egypt

According to a report from the Centre for Economic Policy Research (CEPR), the immediate impact of COVID-19 on the world economy was falling oil prices. They have gone from $70 per barrel at the start of the year to just over $33 at press time. Prices of liquified natural gas, meanwhile, dropped by 25 percent since the beginning of 2020 until press time. “Although other factors might have contributed to the drop, COVID-19 was probably the most important, largely because of the significant drop in demand from China as authorities shuttered production facilities as part of efforts to contain the spread of the virus,” said the CEPR report.

That is bad news for the MENA region, as GCC countries export oil and natural gas. Egypt has been a net exporter of liquified natural gas since the end of 2019 thanks to a 150 percent increase in production compared to 2018, according to CAPMAS.

On the other hand, drops in energy prices should translate to lower oil and LNG prices for manufacturers and consumers. Egypt cut prices of oil and natural gas for manufacturers in March as a preemptive move to counter the economic fallout from COVID-19. The implementation of the automatic fuel pricing index mechanism last August should ensure that domestic prices move with international rates. The next price adjustment is scheduled for the end of March.

Supply chain disruptions have hurt local companies since the COVID-19 outbreak, said the CEPR report. China’s production output dropped 13.5 percent in January and February, according to Trading Economics, as the country placed 700 million of its 1.4 billion inhabitants under lockdown. China is, by far, Egypt’s largest source of goods, according to CBE data. “When China’s production is disrupted, countries with strong value chain connections with China will likely also be affected,” said the CEPR report.

Exporters could also lose business as the EU, which accounts for 35.7 percent of Egypt’s exports, will likely see an economic contraction of 0.1 percent in 2020 compared to a 1.2 percent growth last year, according to Rabobank, a Dutch cooperative bank. In 2021, the bank predicts the Eurozone economy will grow 1.2 percent, versus a global forecast of 3.2 percent growth. Meanwhile, the United States economy is expected to grow 0.7 percent this year and 0.9 percent in 2021, said Rabobank.

The CEPR report also predicts tourism will be a casualty of social distancing. Egypt’s tourism had recovered to a record of $12.57 billion in revenue in 2019, up from $3.8 billion in 2016. In response to the pandemic, however, Egypt closed its airports until at least mid-April. “International travel is becoming very limited as air routes close, land borders close and new restrictions are put in place that prevent flights from leaving,” wrote Britan’s Foreign & Commonwealth Office in March, urging U.K. citizens to return home before airlines completely shut down.

Managing a crisis

In the face of such events, Egyptian businesses will likely be hurt throughout 2020 if executives don’t quickly adapt. “The coronavirus pandemic has placed extraordinary demands on leaders in business and beyond,” wrote Gemma D’Auria, a Senior Partner at McKinsey in Dubai in an article published in March. “The massive scale of the outbreak and its sheer unpredictability make it challenging for executives to respond.”

Business decision-makers may find themselves forced to improvise without sufficient information. Yet they must be decisive to instill confidence among the employees, said D’Auria, of Mckinesy. The key is to adjust decisions as the situation evolves continuously.
Additionally, business leaders need to acknowledge that for their organizations to face COVID-19 successfully, they need to “relinquish the belief that a top-down response will engender stability,” said the report. “A small group of executives at an organization’s highest level cannot collect information or make decisions quickly enough to respond effectively.”

The solution is to create multidisciplinary teams, or nerve centers, “designed to act,” said D’Auria. “Merely soliciting experts’ ideas is not enough; experts must gather information, devise solutions, put them into practice and refine them as they go,” she noted.

Martin Reeves, a senior partner and managing director in the San Francisco office of Boston Consulting Group (BCG), writing for Harvard Business Review (HBR) in February, warned that companies must minimize bureaucracy to ensure those teams yield results.
Their scope of focus would include assessing the impact on routine business activities, helping employees adjust to new work norms, and reaching out to support supply and distribution chains.

Team leaders should be able to “detach [themselves] from a fraught situation to think clearly how to navigate it” and combine optimism with realism. “In a novel, landscape-scale” crisis like the COVID-19 situation […] it is of utmost importance,” wrote senior McKinsey partner Aaron De Smet in an article on the company’s website in March.

Those teams also need to devote time to communicate with the rest of the organization about the status quo. “Transparency is ‘job one’ for leaders in a crisis,” wrote Amy Edmondson, a professor at Harvard Business School, in an HBR blog in March. “Be clear what you know, what you don’t know, and what you are doing to learn more. Don’t hide the bad news.”

Those updates must be at least as fast as the change in an organization’s status quo. “Events are unfolding at astounding speed,” wrote Reeves of BCG initially planned communication updates every 72 hours. “We moved to a daily cycle, not only for updating data, but also reframing our overall perspective,” noted Reeves.

The other aspect Reeves sees as vital is how business leaders react to the news. “News organizations often focus on what’s new rather than the big picture,” he wrote. “They sometimes don’t distinguish between hard facts, soft facts and speculation.” Meanwhile, with the pace at which COVID-19 news is updated, “we have a systematic tendency initially to overlook weak signals, then to overreact to emerging issues,” said Reeves. He also points out the importance of curating news to separate facts from speculation and fake news.

Operational Hurt

China’s shutdown has been a nightmare for companies around the world. Sinoproud Cambodia Garment Co., whose customers include Zara’s parent company, had to scale back production because it had no fabric. “If we don’t get the product in March, we might just have to cut back and put workers on half-pay,” said Sinoproud Cambodia Garments CEO Tu Ailan to Reuters in February.

The problem is twofold: There aren’t enough employees to meet demand, and transportation is limited due to curfews. “The resumption of motor transport is very slow and curbs production,” a steel mill executive in China’s eastern province of Shandong, told Reuters. He blamed a lack of drivers and a slew of checkpoints.

Lufthansa and FedEx in China have seen lower demand for goods from companies outside China, reported Reuters, noting that FedEx is working with governments to reduce the impact of movement restrictions on its operations. “China is so much more connected. The fact that China represents so much of the world’s economy, I think that’s why it seems so much more impactful,” Karen Reddington, president of FedEx Express Asia Pacific, told Reuters.

That invariably impacts Egyptian producers and traders who import from China. According to the CBE, Egypt accounted for 9.2 percent of China’s imports in FY 2018/2019.

Fixing the Supply Chain

Liu noted that companies have to go to extra lengths to secure supply chains in the era of COVID-19. In the short term, businesses need to develop a geographically diverse pool of suppliers and estimate the inventory across the company’s value chain to determine when parts will be required to maintain production.

Companies also need to realistically estimate demand and adjust their business models. That invariably requires production and distribution adjustments as COVID-19 changes the world’s demand and supply landscape.

Another step is to find suppliers with enough excess capacity to meet production needs and as many transportation options as possible. Finally, businesses need to ensure enough capital is on hand to deal with emergencies, such as changes in suppliers or transportation.

Logistics departments need to abandon the idea of running an efficient supply chain. “The just-in-time mindset of lean manufacturers is seriously challenged by the fact that Asian factories are at 40 to 70 percent of capacity and oceangoing vessels and ports have been closed,” Rick Burnett, vice president of Transportation Insight, a logistics firm, told Global Wire News in March.

The silver lining for companies relying on Chinese firms is that some are looking to expand to countries with fewer infections. Renaud Anjoran, who runs a factory in Dongguan in China, told Reuters in February he wants to open a second facility in Mexico (367 cases as of March 24) to minimize reliance on China. “People are seeing China as a major source of risk,” he said.

Dan Harris, the founder of Harris Bricken, a U.S.-based international law firm with offices in China and Spain, advises clients not to open branches in China. Instead, he suggests Vietnam, India, Turkey, Poland, and several South American countries. “But [out] of all these countries, we predict Mexico will be the biggest beneficiary,” he wrote to China Law Blog, a portal. It has direct access to the North American market and is roughly equidistant from Asia, Australia, Africa, and Europe.

Manufacturers also could benefit from Egypt’s access to Asia, Africa, and Europe by land, sea, and air. Additionally, it is one of the most industrialized countries in the Middle East and Africa, and is also part of the African Continental Free Trade Agreement, whose members had 3,929 cases of COVID-19 as of March 28.

Booming Innovation

According to Nikolaus Lang, the managing director in BCG Germany, wrote in a February HBR article, companies need to work on the premise of a different-looking world after COVID-19. “It is likely to fuel areas like online shopping, online education and public health investments, for example. It is also likely to change how companies configure their supply chains and reinforce the trend away from dependence on a few mega-factories,” noted Lang. “When the urgent part of the crisis has been navigated, companies should consider what this crisis changes and what they’ve learned.”

Some companies are ahead of the curve, developing novel ways to raise customer confidence. “Without a single law or regulation in the offing, the CEOs of supermarkets have created special opening hours for elderly people most vulnerable to the virus so they can safely shop for their groceries,” wrote Erica Ariel Fox, author of “Winning From Within: A Breakthrough Method for Leading, Living and Lasting Change,” in a blog on Forbes in March.

Some have repurposed production lines to meet changing demand. LVMH Group, the parent company of Louis Vuitton and Dior, started producing hand sanitizer for French hospitals and public health facilities. In the United States, as reported by Business Insider, the U.S. Food and Drug Administration significantly relaxed regulations overnight for private companies to produce and sell hand sanitizer. A pharmacy in New York City, after running out of hand sanitizers, printed instructions for making it at home. Meanwhile, more than 90 test developers and 40 labs in the U.S. are working on tests for COVID-19, Forbes reported in March.

As more people stay home, online businesses are booming. Owl Labs, which produces and sells tabletop video conferencing systems, has seen sales jump 60 percent this year, and website traffic increase 67 percent, company spokesman Mike Puffmann told The Boston Globe in March.

LogMeIn, which creates software for remote connectivity services, has seen “demand and use spike,” Craig VerColen, company vice president for corporate communications, told The Boston Globe. LogMeIn rushed to develop an Emergency Remote Work Kit for schools, municipalities, and healthcare providers and offered it free for three months.

Amwell, a telemedicine services company, saw “urgent on-demand patient visit” requests increase by about 35 percent. It primarily uses a mobile app that offers video conferencing with physicians.

Some traditional businesses also benefit. Evergrande Real Estate Group started using virtual reality and social media to minimize physical interaction with clients. They also started accepting fully refundable down payments for online reservations. Within three days in February, customers reserved 47,540 houses online, a 118 percent increase from February 2019, as reported by Pymnts, a digital payments online portal.

New World Order

Coming out of what McKinsey experts call a “landscape crisis” will be a very different business environment, especially for companies that rely on imports and exports.

Several experts talking to Foreign Policy in March stressed the world would become economically less open. “The coronavirus pandemic could be the straw that breaks the back of economic globalization,” wrote Robin Niblett, director and chief executive of Chatham House. “It seems highly unlikely in this context that the world will return to the idea of mutually beneficial globalization that defined the early 21st century.”

It also could mean China will no longer be the leading global manufacturer. “More companies will demand to know more about where their supplies come from and trade-off efficiency for redundancy,” said Shannon O’Neil, author of “Two Nations Indivisible: Mexico, the United States and the Road Ahead.”

What comes next?

Business leaders in Egypt need to act fast to capitalize on opportunities that will soon arise. McKinsey’s experts have set two scenarios for the rest of this year and 2021.

The first is a “delayed recovery” that has China and East Asia controlling the viral outbreak by mid-2020 and restarting their economies during the second half of the year. However, pre-coronavirus traffic wouldn’t resume before the end of the year, when Western economies come out of their lockdowns. That would be a window of opportunity for companies in developing economies that overcome the virus. Accordingly, the fall of 2020 should see a “resurgence in trade,” noted Linda Liu, a Mckinesy Partner at their New York office, in March.

The second scenario predicts a longer recovery time due to a second, less severe wave of infections coupled with more attempts to develop a vaccine. China and East Asia wouldn’t restart their economies before fall, according to Liu, delaying the resurgence in advanced economies until at least the first quarter of 2021.

For companies to sustain whatever competitive advantage they attain, they must prepare for the “next crisis,” wrote Lang. “COVID-19 is not a one-off challenge.”

He added that research on effective organizational responses to dynamic crises indicates preparation and preemption are a must. “Preparing for the next crisis (or the next phase of the current crisis) now is likely to be much more effective than an ad hoc, reactive response when the crisis actually hits,” wrote Reeves, of BCG San Francisco.