Question

As 90% of the US population is under some form of shut- or lock-down, the economic consequences have been devastating: 10 million unemployment claims in two weeks, expectation of a Q2 GDP decrease of over 25%, etc. The same is true in other countries with very few exceptions. While big business will probably recover, the impact on small businesses is both uncertain and possibly permanent – a study in the UK estimates that a six month shutdown would result in one third of small businesses closing permanently...

Using a real life example of a business you know well, how is it affected by the crisis and how it plans to survive in the future. You should try to incorporate any pertinent financial topics (such as: fundraising, the Fed, monetary and/or fiscal policy, bank lending, etc.) and include graphs, tables, charts to aid in your explanation.

Answer 1

I have been involved with the textile business for some time and I am seeing how it is getting affected by the current crisis. The major part of the business involves manufacturing different types of textiles (not in the final form of clothes you wear), and exporting it to countries in Europe and US, where a final design is given to the clothes. Since the lockdown has started, the first major impact has been on the manufacturing capacity in the cloth factory. Since a lot of the workers are not turning up due to the shutdown and the fear of contracting the virus, the supply chains have broken. What further breaks the supply chain is the fact that many of the raw material (like several chemicals for cloth) are imported from other areas and due to several restrictions on the transport of goods and personnel, they are just not available. Although the monetary policy has responded by cutting rates, which would be helpful in normal times as it cuts the cost of borrowing for expansion, it is not doing any good right now as the problem is not the lack of funds. Lower rates can not make the workers turn up for work. The second major impact has been on the demand for cloth. Since during times of uncertainty, people reduce their consumption and save more, the demand falls. The demand has also fallen due to a lot of workers becoming unemployed who now do not have the income to consume. This has more long term impacts as the factory will not restore to full production, even after the crisis, if there is no demand in the economy. Fiscal policy like increased unemployment insurance and income transfers will certainly help improve demand, but that will be restricted to necessary goods and not goods like textiles. The only way to survive in the future is to minimize the current losses by shutting operations temporarily and seeking some sort of government subsidy to recover at a later stage. Re-developing international networks is key for businesses depending on foreign markets.