The outbreak of COVID-19 caused a massive disruption on most aspects of our lives... and business was no exception. All sectors have directly or indirectly been affected, albeit in different ways.
Some are at risk of total collapse, while others have, in fact, seen growth. Arguably, the most hard-hit are aviation, travel, hospitality, tourism-dependent and event-related industries. On the other hand, IT solutions, telecom, detergents and medical supplies have benefited.
As a result of lockdowns, manufacturers too were affected to various degrees depending on factors such as their level of access to production inputs, financing and manpower to name a few. This is evidenced by the decline in the Global PMI Composite (a measure of economic trends in manufacturing) to a record low of 26.5 in April.
In the UAE, the headline seasonally-adjusted IHS Markit UAE PMI declined to 44.1 from 45.2 in March, signaling a deterioration in business conditions. Amongst manufacturers who are members in the Dubai Chamber of Commerce, 85 per cent posted a decrease in sales in the first three months of the year, 39 per cent expect a drop in sales by more than 75 per cent in the second quarter, and 14 per cent have shown a high risk of going out of business.
In a rapid and effective reaction to the impact brought on by COVID-19, the UAE Central Bank launched a Dh100 billion Economic Support Scheme, while the Dubai Government, Abu Dhabi Executive Council and the UAE Cabinet approved stimulus packages to support the economy and ensure business continuity. Government support has been primarily directed to those manufacturers who produce strategic products.
At Mashreq, we have actively engaged in discussions with clients and offered extending debt obligations where necessary. In selective cases resulting from supply chain delays, we extended advance payment tenors to accommodate the delay in shipments. We have also rolled out initiatives that support remote working; for instance, companies can pay salaries online and issue checks electronically for local payments.
Need to dig deep
Nevertheless, and despite global efforts to soften the blow of the outbreak, the market environment remains challenging, especially for manufacturers. This is primarily due to the very nature of the industry, where most jobs are on-site and cannot be performed remotely.
Furthermore, the slowdown of the global economy has exerted downward pressure on demand, production and revenues. This has been exacerbated by lockdowns preventing manufacturers from being able to actually sell their products, forcing some to change their sales strategy to online methods or tele-sales.
Another challenge which has crippled production is supply chain disruption. In some instances, goods were already paid for, but deliveries were delayed due to lockdowns and travel restrictions.
Manufacturers need to mitigate these issues by gaining a deeper understanding of their supply chains, identifying potentially weak links, sourcing alternative channels to cover their needs in case of emergencies and stockpiling raw materials whenever possible.
Getting payments becomes a stretch
Last but not least, a key challenge which has exposed manufacturers to significant risk is the stretch in receivables’ collection, which extends the working capital cycle and results in cashflow and liquidity pressure. While this could be alleviated by bank borrowing, taking on high levels of debt may lead to overwhelming obligations and have an impact on profitability due to the cost of financing.
To avoid this, manufacturers need to cut unnecessary costs and capital spending to support operations. In the long term, they must establish multiple financing channels by approaching new creditors and investors, while shareholders need to commit to supporting their businesses by injecting capital into them. Most importantly, manufacturers need to build-up a crisis-management reserve account to deal with emergencies and unforeseen events.
Looking ahead, the multi-billion dollar question is: What long term changes can manufacturers embrace to prepare for the New Normal? And what is the best approach to adopt going forward?
Ways to see through the crisis
With no clear end to the pandemic in sight, manufacturers must take concrete steps to navigate this challenging climate, through contingency planning, outsourcing, as well as investments in technology and innovation. Drawing up safety measures will be vital to determine which employee functions can be carried out from home.
Similarly, investments in IT systems, innovation and technology will be crucial in enabling a large chunk of manufacturer’s management teams to work remotely while reducing reliance on manpower. Lastly, outsourcing non-core functions can ensure that only workers that are needed for the manufacturing process are on-site.
What this insidious virus has taught us is that manufacturers need to embrace the change and adapt quickly as society changes in profound ways.
- Hind Eisa Salim is Executive Vice-President and Head of Services and Manufacturing at Mashreq Bank.