South Carolina businesses brace for a worsening pandemic
By Dustin Waters
When in the grips of a pandemic, looking back to lessons learned during past national and global crises can prove vital for finding your way forward.
The South Carolina Department of Health and Environmental Control (DHEC) announced the state’s first death as a result of a COVID-19 infection on March 16. By that time, the coronavirus outbreak, which began in Wuhan, China, had spread to more than 150 countries and regions.
To understand how markets will react to such a major world disaster, Allen Gillespie of FinTrust Capital Advisors looks for past comparisons.
In this case, the economic effects of the coronavirus outbreak are less like those faced during past epidemics and more similar to those experienced during the major industrial strikes of 1926 in the U.S. and U.K.
“There most definitely is a global industrial slowdown. China has been the manufacturing hub of the world, so when they go offline, markets feel it and react to it,” says Gillespie. “While it is unique that it’s a virus and it’s China, the effect is similar to the industrial strikes of the 1920s when production went offline.”
While many have compared the coronavirus pandemic to the SARS crisis, one major difference between these two outbreaks is China’s position in global manufacturing.
At the time of the SARS outbreak in 2003, China’s share of global manufacturing output was less than 10 percent, according to a report from the Congressional Research Services.
Since that time, China’s share has increased to account for more than 25 percent of all manufacturing.
Meanwhile, companies in South Carolina are reacting cautiously.
With North American headquarters in Greenville, tire manufacturer Michelin announced travel restrictions to China, South Korea, Iran and Italy — acknowledging that the company was prepared to coordinate responses with state and local governments, as well as suppliers and customers.
Howard Coker, president and CEO of Sonoco, released a statement to employees calling for staff to practice social distancing, avoid large public gatherings, and practice good personal hygiene.
“I’m confident we are taking all the necessary steps to ensure our teammates can work safely through these trying times,” Coker told employees. “However, it is important that we stay diligent to make sure we follow all our safety and workplace controls. We cannot allow events beyond our control to impact what we can control while on the job.”
Wells Fargo expects consumers to cut back on spending, especially on big-ticket durable items such as motor vehicles, furniture, and appliances. In addition to seeing a slowdown in air travel and transportation services, the restaurant industry will take a hit as customers cut back on social engagements.
Even in the event of a strong rebound, this sort of discretionary service spending is unlikely to be made up quickly. According to Gillespie, broader economic recovery will depend on how quickly production can rebound, but the effects on the bond market will linger.
“To put it in perspective, we’re seeing things in the bond market that we haven’t seen since Lehman Brothers went belly up in 2008,” says Gillespie. “The moves have been unbelievably large in the bond market for us to get to zero interest rates. We’re lower than we were during World War I, World War II, lower than we were in 2008. Across the globe, I think that’s pretty telling for where expectations are.”
With this slowdown in manufacturing and workers across the world ordered to limit direct social interactions, companies are facing dramatic disruptions in their workforce and supply chains.
Anticipating a rebound
While South Carolina Ports has seen strong volumes over the first two months of 2020 — with record volumes in February — impacts on March volumes resulting from the quarantine of many plant workers have become apparent.
“We anticipate that our container volumes will be down about 15-20 percent in March and April versus our business plan. It is promising however that many companies and ocean carriers are reporting a return to normalcy, including workers resuming operations in China,” says S.C. Ports Authority President and CEO Jim Newsome. “We anticipate a rebound in volumes in May and June to finish the year above plan, barring any unforeseen worsening of the situation.”
As a managing partner at Ernst & Young, Jessica Donan is finding most companies looking for new strategies for how to quickly pivot their suppliers, raw materials, and delivery options, as previous options have suddenly become unviable.
In efforts to optimize costs, many organizations have built concentrated supply chains with limited flexibility and a high reliance on a few tier-one vendors. Faced with the coronavirus outbreak, these companies are finding the need to invest in a more diverse sourcing strategy with an early warning system to detect new product risks and outliers in their supply chain.
“Think about all the potential unexpected disruptions. You’ve got natural events, trade barriers, civil unrest, terrorism, distressed suppliers, epidemics, cyber attacks,” says Donan. “COVID-19 is just one reason to go through the exercise of supply chain resilience. All those other things are there as well.”
Adding to the challenges faced by businesses is the incorporation of a decentralized workforce. Risk of further spread of the coronavirus has forced widespread adoption of telework practices, raising concerns over organization effectiveness and cyber security.
“This exposes any weaknesses in your IT infrastructure and technology,” says Donan. “Do you have a complete infrastructure built out so that it is large enough and secure enough to allow people to work remotely? Do you have a technology infrastructure such that companies where people work in teams can still effectively work in those teams?”
Aviation, retail, health care, travel, and other industries with frontline consumer interactions were the first to report higher than usual employee absenteeism due to fear of infection.
Trouble for travel
Meanwhile the outbreak comes at a time when most consumers would usually find themselves headed to their favorite travel destinations.
For South Carolina, a state where the tourism industry has an annual economic impact of more than $22 billion, the cruise ships, international travel, and event planning will be the industries most immediately affected.
“This is the perfect time to do a lot of training and development. You know you’re going to have a recovery strategy. You know you’re going to be working hard to get guests back,” says Wayne Smith, chair of the College of Charleston’s Department of Hospitality and Tourism Management. “One big thing that happened when SARS happened was a bunch of companies laid off employees. When the recovery strategy happened, the companies couldn’t find employees and the good employees got jobs with other companies.”
Smith recommends businesses catering to tourists spend the next few months investing in their staff to ensure that when travelers do return, the business is running at optimum performance.
The same day South Carolina recorded its first death from the coronavirus, a cruise ship arrived at port in Charleston. Following President Donald Trump’s request that cruise companies pause operations for 30 days, Charleston city officials worked with DHEC to coordinate a plan with medical staff aboard the ship, which will remain docked in Charleston until the nationwide stoppage expires.
Later that same day, Charleston City Council followed national and statewide measures to declare a state of emergency in the city.
After much debate during the emergency meeting, councilmembers passed an ordinance restricting large gatherings of 50 or more people in establishments including bars, restaurants, movie theatres, live performance venues, bowling alleys, arcades, gyms, and houses of worship.
Those who opposed the ordinance raised concerns over limiting access to religious services and restricting customers and employees from businesses, though efforts to amend the ordinance were unsuccessful.
“This is serious. We have to act to save people’s lives. This is what we’re talking about today,” councilman Ross Appel told fellow councilmembers. “I want to remind everybody that when it comes to disruptions and conveniences, this is happening. This is real.”
Entering the second week of March, deputy director and chief communications officer with Charleston International Airport Spencer Pryor stated that airport officials had not seen any noticeable difference in the rate of arrivals and departures up to that point. Unfortunately, some experts expect the coronavirus outbreak to cause a dramatic shift in travel behavior.
“Right now, you’re seeing some shifting behavior where people who would normally go to fly destinations are going to drive destinations,” says Smith. “As this becomes more severe, all of a sudden we’ll see that tap shut off.”
According to a March 11 consumer impact report from Wells Fargo, air-travel spending took a noticeable drop during the 2003 SARS outbreak. Canceled flights are often tied to hotel reservations, so spending in these two closely linked industries should follow similar patterns.
A new analysis released by the U.S. Travel Association projects that decreased travel due to coronavirus will inflict an $809 billion total hit on the U.S. economy and eliminate 4.6 million travel-related American jobs this year.
The numbers, prepared for the U.S. Travel Association by Tourism Economics, were presented by U.S. Travel Association President and CEO Roger Dow at a White House meeting with President Trump, Vice President Pence, Commerce Secretary Wilbur Ross and other travel leaders.
“The health crisis has rightly occupied the public’s and government’s attention, but a resulting catastrophe for employers and employees is already here and going to get worse,” Dow said. “Travel-related businesses employ 15.8 million Americans, and if they can’t afford to keep their lights on, they can’t afford to keep paying their employees. Without aggressive and immediate disaster relief steps, the recovery phase is going to be much longer and more difficult, and the lower rungs of the economic ladder are going to feel the worst of it.”
Dow noted that 83 percent of travel employers are small businesses.
Other findings in the travel impact analysis:
Total spending on travel in the U.S.— transportation, lodging, retail, attractions and restaurants—is projected to plunge by $355 billion for the year, or 31%. That is more than six times the impact of 9/11.
The estimated losses by the travel industry alone are severe enough to push the U.S. into a protracted recession—expected to last at least three quarters, with Q2 2020 being the low point.
The projected 4.6 million travel-related jobs lost would, by themselves, nearly double the U.S. unemployment rate (3.5 percent to 6.3 percent).
“This situation is completely without precedent,” Dow said. “For the sake of the economy’s long-term health, employers and employees need relief now from this disaster that was created by circumstances completely out of their control.”