CHALLENGES FACED BY THE COMPANIES IN PREPARING FOR THE NEW ECONOMY

Posted by: Rajat Kumar, Finance Head

The COVID-19 pandemic has shaken manufacturing industries profoundly. As has been the case after other major upheavals, such as the 2008-2009 financial crisis, a return to pre-crisis levels will likely take several years, if not more. Back in 2008, it took manufacturing industries three years to return to the pre-crisis level. This time the course of the crisis will be at least as severe as it was during the financial crisis, if not even worse.

The current crisis differs in character from the previous ones, both for the better and for the worse. For the better: Production levels before COVID-19 had already cooled down and companies have not geared themselves as much to strong growth as before the financial crisis. Additionally, companies have more cash and equity available, the crisis experience is higher. For the worse: The simultaneous supply and demand shock with shutdowns has led to extremely deep slumps and an “up and down” recovery is more likely than a steady curve.

The pandemic continues to pose obstacles, particularly for manufacturers that serve industries hurt by the decrease in travel and the resulting slump in energy production. Specialist companies that may have produced a single part used in just one manufacturing segment for struggling industries are looking to reduce their exposure to these areas while aggressively reconfiguring their products and processes for other, more profitable markets. As a part of that move toward diversification, manufacturers also need to look ahead, identifying categories that are likely to outperform in a new economy.

Impact of the first and second wave

First wave

India's manufacturing sector had gone through various phases of development in recent times. The sector contributes to approximately 16-17% of the GDP and provides employment to almost 20% of the country's workforce. During the first wave of the pandemic, lockdown-imposed restrictions on the movement of goods and people severely impacted workforce capacity and disrupted supply chains, bringing nearly all manufacturing activity to a stand-still.

The complete lockdown and partial lockdowns had both demand-side and supply-side impacts on the manufacturing sector. On the supply side, the limited movement of goods, services, and personnel affected the production network.

The downturn in economic activity and the overall slowdown in production caused employment loss. These supply impacts were further compounded due to the demand-side facing issues such as reduced disposable income, savings, and increased uncertainties.

Second wave

A second wave was witnessed towards the end of the 2020 financial year. The country's optimistic recovery was thrust into further uncertainty as cases increased far more rapidly than the first wave. The fatality rate amongst individuals increased as several States introduced restrictions and curfews to mitigate the loss of life in the second wave. Healthcare infrastructure in the country faced a total collapse as citizens ran helter-skelter in search of beds, oxygen cylinders, and resources to survive the second wave.

This widespread devastation further instilled fear amongst the citizens as new variants proved to be more potent leading to a mass breakout in the Tier I cities and a surge in the rural regions. This led to individuals being confined to their homes, more out of choice and fear. The number of people working during the second wave was much smaller as compared to those working during the first wave, which translated to slower economic recovery. With lockdowns slowly being reimposed, States allowed certain relaxations and permissions to keep the economic impact to a minimum.

In the nutshell, all the major sectors of the process manufacturing industry are suffering in the time of COVID-19. Reduced demand, and disrupted supply chain have been their major headaches. However, with challenge comes opportunity. Once the dust settles, the process manufacturers will find it imperative to innovate and change with time to remain relevant. The need of the hour though, for them, is to:

* Introduce worker safety measures, along with best hygiene & sanitization practices, at work
* Revisit their sourcing strategies, and line up alternate suppliers
* Rationalize their product ranges
* Evaluate supply chain agility, and make it more resilient
* Review their crisis or emergency response plans
* Optimize & streamline e-commerce & distribution networks
* Revisit their pricing, and promotion strategies