Small Business Survival in the COVID-19 Era

by Zhang Peili

The novel coronavirus pneumonia （COVID-19） outbreak in early 2020 is making a huge impact on the economy and peoples lives. Small and medium-sized enterprises（SMEs） have been hit the hardest because of their poor position in distribution of industries and poor risk tolerance. For SMEs that used to be under enormous pressure even during normal times， the pandemic just made things worse. As many as 30 percent of enterprises in China are likely to see their revenues fall by more than 50 percent in the first half of this year， according to several reports. Devising strategies to survive the “long winter” has become a huge test for SMEs. Severe Challenges on the Demand Side

The high infectivity of COVID-19 forced people to change behavioral habits drastically， which in turn changed market demand—both directly and indirectly.

First， consumer demand has declined significantly. The epidemic forced people to reduce going out and getting together， decreased personnel exchange and flow， and caused people to live and work at home as much as possible， directly leading to a sharp decline in consumption demand in some sectors， especially service industries. Catering and tourism have seen the most direct and obvious impact. Companies in these industries are mainly SMEs. For example， 80 percent of the catering industry is composed of SMEs. According to a report on the impact of the epidemic on Chinas catering industry released by the Chinese Cuisine Association on February 12， 78 percent of catering businesses lost all revenues during the 2020 Spring Festival holiday， nine percent lost more than 90 percent， seven percent lost 70 to 90 percent， and only five percent lost less than 70 percent， compared to numbers from 2019.

Second， international demand has declined significantly. Around mid-to-late March， COVID-19 quickly spread worldwide. To date， more than two million people have been diagnosed with COVID-19 outside China， and the number of cases is still rising rapidly. Countries are taking similar measures to promote isolation and quarantine， which will inevitably affect the international market demand. According to data from the Ministry of Commerce， Chinas export volume reached 3.33 trillion yuan （US$471 billion） in the first quarter of this year， down 11.4 percent， of which private enterprises exports reached 1.71 trillion yuan （US$242 billion）， down 7.3 percent. In the first quarter， exports were basically fulfilling previous orders. With the continuous development of the pandemic overseas， Chinas foreign trade in the second quarter will likely further deteriorate， and small and mediumsized foreign trade enterprises will be hurt the most.

Third， consumption habits have changed. The pandemic is causing increased income uncertainty， which is leading to changes in consumption habits. The fierce consumer response to early price hikes by the major hotpot chain Haidilao and the noodle chain Xibei demonstrated that consumers have become more cautious about spending money. They are now less willing to pay higher prices to upgrade consumption. Enterprises are being forced to provide higher-quality and more affordable products and services. This trend will likely gain even more steam after the epidemic. SMEs have been struggling with a supplydemand mismatch as their product structure is not able to meet the demand of consumption upgrading. Now， enterprises must cut costs while upgrading their products at the same time. This will further squeeze the living space of SMEs.

Supply-side Problems

The COVID-19 pandemic has caused profound changes in the flow of people， logistics and capital， but the supply-side problems plaguing SMEs are even more prominent.

First， the shutdown made it difficult for SMEs to endure cost pressure. When an enterprise stops production， its income source is cut off while costs such as wages， rents， loan interests and taxes continue to pile up. Enterprises must survive only with their available cash on hand.

Second， the price of raw materials has increased significantly. In the global market， due to rising costs caused by the pandemic， the prices of many products have risen rapidly. In the first quarter of 2020， Chinas CPI rose by 4.9 percent year-on-year， far higher than the increase of 1.8 percent in 2019. As consumer prices increased， the price of raw materials needed by enterprises also increased significantly. Resumption of production faced huge pressure due to rising production and operation costs. A survey of the central region， the Pearl River Delta and the Yangtze River Delta conducted by Zhongnan University of Economics and Law from March 24 to 27 showed that 10.69 percent of enterprises faced a sharp rise in the price of raw materials， and 55.2 percent saw a slight rise. About 28 percent of enterprises raw material prices remained stable， and about six percent enjoyed a drop in raw material prices.

Third， the industrial chain cycle has become blocked and unstable. Due to a combination of the factors arising from the Spring Festival holiday and the epidemic， a vast number of SMEs stopped production. Changes in market demand， increases in production costs， difficulties in capital turnover and other reasons such as impeded flow of people and logistics are making it difficult for SMEs， especially labor-intensive enterprises， to resume production. According to data from the Ministry of Industry and Information Technology， by April 14， almost all industrial enterprises above designated size had resumed operations， with an average operating rate of 99 percent and a staff reinstatement rate of 94 percent. However， as of April 15， only 84 percent of Chinas SMEs had resumed production， a far lower percentage. According to a survey by Zhongnan University of Economics and Law， enterprises suffering insufficient inventory of raw materials face difficulties to find alternate suppliers. When supply is disrupted， 32.6 percent of enterprises find it difficult to secure alternate suppliers. Most enterprises lack a stable supply chain. About a quarter of enterprises cannot maintain stable production because of a lack of raw materials. Failure of supply and industrial chains is exerting a profound impact on SMEsrecovery and future operations.

Coping with Challenges

The challenges faced by SMEs during the coronavirus outbreak not only threaten their own survival， but also affect the overall economic situation and social stability. For this reason， governments at all levels in China responded quickly to launch a series of policies to support SMEs， including financial support， tax preferences， assistance in work resumption， social security support， cost reduction measures and service optimization.

Government support is crucial. China is not alone in its concern for SMEs. Countries around the world have also introduced economic assistance plans to support their SMEs. However， even after the central government and local governments in China introduced extensive policies， enterprises do not know much. The sense of support is not strong. According to a survey by China Enterprise Reform and Development Research Institute， only 8.6 percent of enterprise managers reported strong familiarity with supportive measures issued by central and local governments， and 34.3 percent responded that they were relatively familiar. About 20 percent of businesses admitted they did not know much. About 38 percent of private enterprises and 49 percent of the self-employed said they had a general understanding. These numbers show that most supportive policies for enterprises have not been sufficiently implemented.

Support needs to effectively address problems plaguing SMEs and alleviate their acute pains. According to the survey， staff renumeration， loan repayment and rent costs are the heaviest burdens for enterprise operation. Except for the policy of exempting and cutting some social insurance fees， which can directly reduce operating costs of enterprises， most policies involve advocacy and are indirect， so they have little or relatively slow impact on reducing the costs of enterprises， leading to a weak sense of gain. At present， Britain， Canada， Australia and Denmark are directly subsidizing the payroll of enterprises seriously affected by the pandemic to help them retain employees， covering 75 to 80 percent of wages. China can learn from those countries on how to directly subsidize wages of employees and directly and quickly reduce the burdens on enterprises to enhance confidence.

At the same time， China should accelerate the implementation of supportive policies. Both relevant departments and local governments have been paying more attention to introduction of policies than to implementation. Many policies are mostly about principle and direction， and lack specific measures for implementation. The government needs to change its working philosophies and strengthen and improve the implementation of those policies to make enterprises really benefit.

Considering the impact of the pandemic， SMEs need to strengthen and adjust as quickly as possible to adapt to the new market environment and new situation. First， SMEs should prepare to operate within tighter margins， focus on core business， tap new potential， simplify operations， control costs， end blind expansion， and ensure they retain enough capital flow to endure difficulties ahead. Second， SMEs need to accelerate the promotion of internet channels， adapt to market changes more quickly， implement the “enterprise + internet” action， smoothly shift procurement， sales and service links to online mode， and actively use the internet for business model innovation. Third， SMEs must adapt to changing consumer habits， actively adjust their product structure， improve product quality， enhance production creativity， and endeavor to provide high-quality and low-cost products. Fourth， SMEs should enhance the construction of corporate credit. When enterprises encounter difficulties， credit becomes particularly important because it directly determines the financing ability of enterprises， the stability of the supply chain and the trust of consumers. SMEs should transform the sudden impact of the pandemic into an opportunity， monitor credit development， and constantly accumulate and improve their corporate credit quality.