Small business owner after Covid-19 quarantine
As lockdowns come to an end in the U.S. and Europe, the owners and executives of millions of small and medium-sized enterprises (SMEs) face the daunting task of re-opening. Of course, they are not the first to navigate the recovery. For example, China flattened its curve in February and many of the country’s SMEs were re-opening as early as March – with little government support. Thus it would prove wise for those running SMEs and about to rejoin the economy, to consider the experience of China and learn from those who have already begun the struggle to survive in a highly competitive market.
Markets may differ but the needs of SME owners are universal. Most have small teams, occupy market niches or run on thinner margins, and have less bargaining power with suppliers and customers than large companies. The small size is a big asset in the current environment: most can move nimbly and adapt rapidly.
At first glance, China presents a hopeful picture: Covid-19 cases are largely under control, helped by a mandatory albeit controversial QR healthcode system to track and trace contacts. Chinese industry rebounded in April. Optimism among Chinese consumers about recovery is twice as high as their counterparts in the U.S. and Western Europe, and business confidence, which remains down in the U.S, has bounced back in China from a low in February.
But SMEs in China are hurting, providing a cautionary tale for business owners everywhere. Here are four lessons western SMEs should heed, and actions they can take:
1) Be Ready to Make More Cuts than You Expect
Consumer optimism in China has not brought spending back to pre-pandemic levels. Most company revenues were down 40-70% in the first quarter and many Chinese SMEs downsized, according to Jean Liu, director at XNode, a business accelerator in Shanghai.
The service sector has been particularly devastated. People in China aren’t going out in droves to eat, to travel, or for entertainment. Retail and gyms are slowly re-opening, but with strict rules. Corporate travel and events are on hold. Large scale gatherings look to be over for the long-haul.
“Many of our restaurant and bar clients have closed down for good. The existing contracts that we still have are mainly international hotel clients, but many remain closed,” said one provider of kitchen cleaning services in Shanghai. His business has been closed since January, with no re-opening date scheduled.
Companies serving corporate clients are also feeling the hit. Miguel Garat, CEO of the HWS Group, a leading furniture management company focused on corporate and education clients, and President of CleanAir Spaces, reported no sales in February, although he saw a slow recovery in March when lockdowns ended. And Natasha Fang, founder of Tolmao Group, a marketing agency, said several of her clients have gone under, and many more are delaying projects.
“Shall we continue paying full salaries to employees or cut wages, temporarily layoff or even dismiss staff?” she said. “We are not sure when the pandemic will be over and we do not know its long-term impact.”
Action: Take a realistic look at your sector’s prospects and prepare the worst-case scenario, and then some. SMEs in China have had to tighten their belts more than they anticipated.
2) Identify Pockets of Opportunity
In China, most business owners remind themselves that the word for crisis, 危机 (wei1 ji1), includes within it the characters signifying danger and opportunity.
Growth online, already potent in China, has taken off dramatically. Many SME proprietors have begun generating business using live online broadcasts. Fang, of Tolmao agency, advises her clients – many of whom relied on offline marketing pre-lockdown – to harness China’s social media tools to attract new customers and clients. Kenny Wong, partner at WE Marketing Group, has helped retailers create short-form video, live streaming, and branded content to increase Online to Offline sales, which have increased five-fold during the pandemic.
But the opportunities are not solely online. With summer approaching, consumers may shift vacation budgets to home or self-improvement. Big businesses are preparing for the fact that teleworking, and less face to face contact with clients, may be here for the long term.
“100% of our customers had people working from home and needed a solution to make sure they could stay productive at all times,” said Garat, whose team looked at the pain points their customers were experiencing. “We created a ‘Home office kit’ with everything needed to work remotely: ergonomic chairs, height adjustable desks, anti-virus purifiers to stay safe.”
That swift action lead to a huge success. It brought HWS and ClearAir Spaces back on budget in April, and the kit has become a standard offering. Likewise, many corporate trainers have shifted offerings to meet an increased demand in resilience coaching and stress management. And Megi, a provider of accounting software, has seen strong demand for its cloud services.
Even in sectors experiencing deep downturns, some customers are re-thinking their business. Life Solutions, a provider of water filtration systems, has seen hotel owners seek in-room water purification, as they move away from bottled water delivery to reduce staff contact with guests.
“This change won’t happen overnight, especially right now,” said co-founder Jon Newton. “But it’s an indication of how much health and safety concerns are entering investment decisions.”
Action: SMEs are nimble, so play to that strength: pivot the business online, partner more deeply with clients to discover unmet needs, or move into emerging niches with a strong safety, health, work and life improvement, or teleworking benefit.
3) Manage Only What’s Critical
“Since re-opening after the lockdown, almost all my large corporate clients have extended their payment terms to 150-days [from 90],” said Newton of Life Solutions. “Luckily, everyone needs their water filtration systems serviced, so we do have a steady business to ride this out – but managing the cash strain puts us in a more delicate position.”
Others companies have been less fortunate. Many Chinese SMEs lack solid funding or credit channels, causing working capital challenges, according to Carlos Martin, a partner at advisory firm Financeren. More than half of Chinese SMEs cannot ride their cash for more than three months, according to research led by Peking University. Indeed, in the first quarter, close to half a million Chinese SMEs shut down, although Michael Chiao, co-founder of Megi, said that figure represents only 3% of China’s SMEs, does not represent bankruptcies – and that many of those companies were probably not well run to begin with.
The Chinese government gave companies a two-month holiday on payroll deductions and encouraged landlords to delay rental collection. But these measures merely delayed the hit, as many SMEs now have three months of payments due in May. Otherwise, the government has done relatively little in stimulus. They reduced the VAT rate for small scale tax payers, according to Yang, but only announced modest proposals at last week’s Party Congress, including cutting broadband costs and providing medical insurance subsides.
Garat also advises SMEs to review their supply chain. Just as CleanAir Spaces was emerging from lockdown, their large supplier of UV lights in Thailand had to close its factory due to an outbreak, delaying all orders. His team moved swiftly to purchase the essential component from a supplier they had qualified but never done business with. Having a mix of suppliers was crucial to continuing the business, and the backup supplier, a small business itself, proved to be agile and easy to work with.
Chiao says the crisis brings out problems many companies already had pre-pandemic: “If you have healthy operation – sound cash flow, good relations with employee and healthy internal control – you are in a much better position to remain viable.”
Action: Find out what government support might help you, but focus on fundamentals: review your cash position, supply chain and areas of your business that were weak links in good times.
4) Navigate a Safe Return to Work for Your Employees
Unlike large corporations, most SME employees wear many hats. So, if one person goes down, his or her absence dramatically affect business operations.
Despite an end to lockdowns in February and March, most Chinese SMEs experienced an additional two week delay for employees to return. That’s because much of China’s workforce are migrant workers who were on annual leave during the Chinese New Year, and thus many were required to take a 2-week quarantine before returning to the factory or office.
A similar delay may be less likely in Western countries, which have more relaxed guidelines and enforcement. But the question then becomes: how to ensure employees who return feel safe?
“The fear of returning to work is real,” said Garat. He put strict measures in place to create a safe workplace, which he communicated early on to staff. Most of his employees valued the transparency and honesty from the top. Chiao said employers that have good relationships with employees are doing better, and seeing more loyalty, shared sacrifice and increased productivity.
Ultimately, Chiao said, decisive government action in China has controlled the pandemic. In contrast to widely varying rules in the U.S. and many parts of Europe, China has laid down strict guidelines on the use of masks, social distancing, and a mobile quick response health code system.
Few business owners in China love the rules, but it has given them a certain peace of mind that many western SMEs won’t enjoy.
“The system makes us surrender some of our privacy, but it works,” said Newton. “Since it has been in place post-lockdown, we have had no employees get sick at Life Solutions. And that gives me a certain relief as a colleague, business owner – and member of society. [With the system in place] things will normalize more quickly, I can focus on the business and not try to be a doctor.”
Action: Particularly in the absence of clear government guidelines, SME owners should develop strong policies of their own in order to assure worker safety. Doing so will manage morale, productivity, and, most importantly, the health and safety of workers.
In hindsight, closing down was the easy part. Re-opening will prove more difficult for SMEs in the U.S. and Europe. Companies that re-open without a clear plan, or open in areas where case counts are still rising, will face an even more uncertain future.
Western governments took relatively little action after warnings from Asia at the start of the outbreak. In these exceptional times, studying the path of SMEs in China may not only keep American and European business owners out of bankruptcy, but even lead to competitive advantage. Will they heed the warnings this time?