Fly Malaysia

Tag: COVID 19

  • Simplifying Supply Chains

    Simplifying Supply Chains

    Reading time: 9 minutes

    Introduction

    By now, you may have heard that the world has run short of everything from coffee to coal. You personally may have been caught off guard by the shortage of toilet paper in the supermarket. Perhaps, you’ve also felt the pinch of rising computer prices due to the price increase of semiconductors. Second hand cars have gone up in value, as businesses dismantle the tires of used cars. The immensely intricate and interconnected global supply chain is in disarray, with little end in sight (although, recently the Biden Administration has released 50 million barrels of oil to reduce the price of oil).

    This article will first uncover the complexities of global supply chains, and explore the factors that contributed to the “supply chain crisis” of 2021.

    Supply Chain: A Look at How iPhone Is Made

    The global supply chain crisis has shone the light on the usually unseen processes of manufacturing, shipping, warehousing and distribution. While we have grown accustomed to clicking and waiting for the orders to appear on our doorstep, or simply dropping by the shop to pick up items, the supply chains operating behind the scenes are always taken for granted. Apple, the most valuable company (by market capitalisation) has also felt the brunt of the global semiconductor shortage despite being well-known for its excellent supply chain. Tim Cook, Apple’s CEO, revealed in an interview that the supply chain crisis cost $6 Billion in lost sales (Serrano, 2021). 

    Every new iPhone is designed at Apple’s headquarters in Cupertino, California, but the resources required to make the design a reality are largely dependent on manufacturers from around the globe. According to Apple’s 2021 Supplier List report, it has 200 suppliers in 30 countries to procure ready-made components, which are sent to factories to be assembled. The iPhone you hold has its chip made in Taiwan, camera and glass screen built in Japan, accelerometer manufactured in Germany, final test of chipset done in Philippines before being assembled into the iPhone in China.

    Unfolding Factors behind the Supply Chain Crisis

    The supply chain disruptions which have wreaked havoc around the world can be traced back to the early phases of the pandemic. With the outbreak of Covid-19, people and businesses were compelled to limit their activities, driving the world economy into a deep freeze. While January 2020 seems ages ago, disruptions to the global supply processes were inevitable considering the fact that China, the ground zero of the novel coronavirus, is the world’s second largest economy, the largest manufacturing country, and a massive purchaser of goods and services ranging from raw materials to the latest gadgets. Factories were shut down, production was suspended, and a large number of employees were laid off. Shipping companies anticipated a steep decline in demand and trimmed their schedules as fewer goods were manufactured and fewer people had paychecks to spend.

    Despite fears that spending in many nations would be devastated, the pandemic merely led to a shift in consumer demand patterns. Purchasing surgical masks, kitchen appliances, furniture, electronics, home gadgets replaced demand expenditures for eating out, travelling to vacation destinations and attending social events. As a result of the pandemic, online shopping, a trend that has been fast rising for years, saw a boom. From April to June 2020, Amazon reported 57 percent more items sold than the previous year.

    At the same time, a string of competing shortages exacerbated the situation. In early 2020, China delivered huge volumes of protective gear all around the world, even to regions with minimal trade with China such as West Africa and South Asia. Accordingly, empty cargo vessels piled up in many parts of the world – having delivered their imports, there was nothing for them to bring back to China. A shortage of shipping containers has ensued as Chinese exports rebounded with unexpected strength, leaving many containers stranded in Europe and North America. Factories that depend on Chinese-made components faced difficulty producing more to meet the pandemic-induced spike in demand. Meanwhile, as surging orders outstripped the availability of containers, the freight rates skyrocketed, with the cost of transporting a container of cargo from Shanghai to Rotterdam increasing by 547% compared to the average over the last five years, according to Drewry Shipping. 

    Even when items were shipped and unloaded at their destinations, another crisis arose:  there were insufficient truck drivers to transport goods to warehouses, leaving them unclaimed. Truck drivers have long been in short supply, with wages continuously declining over the years amid arduous working conditions. Due to changing demographics like ageing and retiring workers, border controls and immigration quotas, as well as demands for higher pay and better protection for workers, the manufacturing and supply chain industries experienced a labour shortage, placing additional strain on the system. Major ports faced a staggering backlog of cargo, leading to lengthy queues of ships marooned at sea and delayed shipments. Shortages breed further shortages, and a breakdown anywhere along the supply chain has the potential of bringing output to a halt.

    Effects of the Supply Chain Crisis

    The interconnection of the global supply chain has long been an asset for increasing productivity, allowing specialisation, innovation, and cost-effectiveness. However, recent events have shown that disruptions in these intricate chains can be equally disastrous, as they are so intertwined, resulting in a domino effect.

    On the front end, there have been two significant categorical effects. Firstly, the widespread shortages. 

    The most notorious example is the shortage of toilet paper, which has become particularly sensational and newsworthy due to the absurdity of the lack of necessity. However, the extent of the issue stretches far beyond just toilet paper. According to Sager (2021), it is becoming increasingly challenging to restock shelves with basic food necessities such as wheat, not because of an actual food shortage but because of disruptions in the supply chain. Hospitals around the globe have also been struggling to provide relief to the public. The lack of qualified medical workers, disturbances in the production and distribution of medicine, and limited access to personal protective gear and ICU beds have hampered the medical system’s ability, putting the lives of millions at risk. The global supply shortages have likewise led to power blackouts in leading economies like China. The severe shortage of electricity has halted the busy lives of millions of homes and businesses. (Hoskins, 2021).

    As a result of these supply side shortages, consumers are paying significantly more for the same goods than in 2020. The Consumer Price Index (CPI), which measures the price changes in commonly purchased goods and services, has risen by 5.4% year on year, the most significant increase since 1991 (Adamczyk, 2021). The breakdown revealed gas prices increased by 42.1%, rental cars by 42.9%, meat and dairy by 10.5%, appliances by 7.1%, electricity by 5.2%, and rent by 3%. 

    The lower-income class is particularly hard struck by these price increases since they do not have consistent sources of income or large savings to tap into. Accordingly, the Raw Material Index has risen by 18% over the last year (Baffes, 2021). This index accounts for the increase in prices of materials such as metals, rubber, cotton, fuel, electricity, and more. Consequently, the cost of production and transportation have suddenly skyrocketed while supply reliability has plummeted. 

    On the back end, the supply chain crisis has detrimental effects on trade and foreign direct investment. There has been a significant decline in global trade, with imports and exports contracting by 32%, and as a result, foreign direct investment has fallen by 40% in 2021 (ILO, 2021). However, the issue does not end there. Businesses are under a lot of pressure because many are struggling to generate revenue and meet costs, especially small and medium-sized enterprises (SMEs), which usually have low capital reserves to buffer unforeseen expenses and businesses that operate in industries with high fixed costs. 

    Conclusion

    Manufacturing, shipping, warehousing and distributing have long been regarded as seamless and invisible in the eyes of the consumer. But it is not! The supply chain is highly intricate and reliant on all components working well. The Covid-19 pandemic has shed some light on the vulnerabilities of the globalised supply chain system. With the infectious virus prompting authorities to impose domestic and international mobility restrictions, business operations of essential sectors have slowed, factories have shut down, transportation agencies are struggling to mobilise goods, workers can’t go to work, and so on. All of this is happening while consumer demand patterns are changing. Consumers are demanding more household and technology related products, in addition to personal protective equipment. As a result of this supply chain crisis, there is a severe shortage in almost every sector. Food is not being distributed timely, hospitals are understaffed, and an energy crisis has emerged leading to widespread blackouts. In accordance with basic economic principles, the shortage has skyrocketed prices. The CPI and Raw Material Index have had the largest jumps in the last 30 years.  

    The ILO (2021) has forecasted the crisis will have long lasting structural effects that will reshape the design of the global supply chains. Countries like the United States have repeatedly expressed their over-reliance on China and desire to become more self-sufficient. Therefore, we can expect many economies to start partially reshoring business operations and diversifying their suppliers in order to lessen their vulnerabilities. Some analysts have also indicated that there is a possibility businesses may accelerate the development of automation to conduct business operations even in dire situations. 

    References:

    Adamczyk, A. (2021, October 13). Prices continue to rise—here’s what’s getting the most expensive. CNBC. https://www.cnbc.com/2021/10/13/prices-continue-to-riseheres-whats-getting-the-most-expensive.html 

    Apple Inc., 2021. 2021 Apple Supplier List. [Online] Available at: https://www.apple.com/my/supplier-responsibility/ [Accessed 8 December 2021].

    Baffes, J. (2021, June 17). Raw material commodity prices continue rising amid stronger demand. World Bank Blogs. https://blogs.worldbank.org/opendata/raw-material-commodity-prices-continue-rising-amid-stronger-demand 

    Beaman, J. (2021, December 26). Here’s how much energy prices rose in 2021. Restoring America. Retrieved December 30, 2021, from https://www.washingtonexaminer.com/restoring-america/faith-freedom-self-reliance/how-much-energy-prices-changed-in-2021 

    Bloomberg, 2021. Apple Set to Cut iPhone Production Goals Due to Chip Crunch. [Online] Available at: https://www.bloomberg.com/news/articles/2021-10-12/apple-poised-to-slash-iphone-production-goals-due-to-chip-crunch [Accessed 8 December 2021].

    Bloomberg, 2021. Surge in Shipping Costs Globally Could Cause Price Hikes From Coffee to Toys. [Online] Available at: https://time.com/6073233/shipping-costs-surge-price-hike-goods/ [Accessed 2 January 2022].

    Ellyatt, H., 2021. There are millions of jobs, but a shortage of workers: Economists explain why that’s worrying. [Online] Available at: https://www.cnbc.com/2021/10/20/global-shortage-of-workers-whats-going-on-experts-explain.html [Accessed 14 December 2021].

    Hoskins, B. P. (2021, September 30). China power cuts: What is causing the country’s blackouts? BBC News. https://www.bbc.com/news/business-58733193 

    ILO. (2022, June). Research Brief – The effects of COVID‑19 on trade and global supply chains. International Labour Organization. Retrieved December 30, 2021, from https://www.ilo.org/wcmsp5/groups/public/—dgreports/—inst/documents/publication/wcms_746917.pdf 

    Petrova, M., 2018. We traced what it takes to make an iPhone, from its initial design to the components and raw materials needed to make it a reality. [Online] Available at: https://www.cnbc.com/2018/12/13/inside-apple-iphone-where-parts-and-materials-come-from.html [Accessed 16 December 2021].

    Serrano, J., 2021. Supply Chain Crisis Cost Apple $6 Billion in Lost Sales. [online] Gizmodo. Available at: <https://gizmodo.com/supply-chain-crisis-keeps-apple-from-selling-all-the-pr-1847961450#:~:text=Supply%20Chain%20Crisis%20Cost%20Apple%20%246%20Billion%20in%20Lost%20Sales>

    Researcher(s): Muhammad Usama Zahid and Tee Jia Rou

    Reviewer(s): Muhammad Bahari

    Editor(s): Jessie Gan

    Download Article: [download id=”6300″]

    [yikes-mailchimp form=”1″ title=”1″ description=”1″]

     

     

  • How COVID-19 Affects Consumer Behavior

    How COVID-19 Affects Consumer Behavior

    Introduction

    Since the beginning of COVID-19, lockdown has been implemented globally and individuals are forced to stay at home which leads to a change in consumer behavior. One of the most common changes is that consumers have chosen to do their shopping online as it is obvious that stores are not open in response to the current situation. However apart from online shopping and e-commerce, there are industries like healthcare, education  and many more that are highly impacted and do illustrate a change of consumer behavior, bringing in the importance of technology in this era.  So the question here is, what are the changes of consumer behavior on different perspectives under this new normal situation?

     

    Aspects on the Change of Consumer Behaviour due to COVID-19

    Health and Well-being

    With the ongoing pandemic, consumers have been really aware of their health and well-being. According to a PWC United States survey, 31% of the survey correspondents have planned to or have made adjustments on their spending towards healthcare visits and 22% have reported on increasing their spending on medication due to the impact of COVID-19.

    Chart 1: As a result on the impact of COVID-19, have you already or do you plan to adjust your spending on healthcare visits or medications? (Source: PWC Health Research Institute COVID-19 Consumer Survey, April 2-8, 2020)

    Another research published by Deloitte has shown that around 90% of the respondents fear to visit the hospital  due to the high risk of getting infected by the virus while more than half of them are really concerned about healthcare after lockdown. Also, more than 70% of  them are willing to go to hospitals that do not treat COVID-19 patients and 45% are fine with going to hospitals that separate those patients in a different building.

    Chart 3: Consumer concerns around health management  respondents (Source: Deloitte)

    In addition, the majority of the consumers are willing to proceed with their elective procedures in the hospital once lockdown ends. However, only 28% of them are only willing to do it after the vaccine is created.

    Chart 4: Willingness to undergo elective procedure % respondents (Source: Deloitte)

    On top of that, almost 75% of the respondents have agreed on lesser hospital visits because of the infection risk, while showing an increase of at-home remedies, telehealth and telemedicine to avoid hospital visits.

    Chart 5: Frequency of hospital visits once lockdown ends vs. pre-lockdown % respondents (Source: Deloitte)

    Ever since the pandemic, consumers have started to explore new alternative platforms of home health care. E-pharmacy and E-health have been introduced to the society especially for chronic disease, cancer and mental health patients. The term E-pharmacy (or telemedicine) means the existence of online pharmacies that are able to prescribe medications for patients online and also deliver it to them without patients having to leave their homes. As for E-health, or also known as telehealth is a system that helps to monitor the patients with long term conditions to self manage themselves remotely. Part of the service consists of patients entering vital signs data like blood pressure readers, pulse oximeters or blood glucose monitors. After submitting the data, the information will then be passed on to a clinical or non-clinical monitoring service where the patient’s health is being observed. Also, this service does provide automatic coaching and mentoring for patients through questions and answers by the process of the system’s software algorithm.

    Chart 6: Shift in preference towards home-based health care has resulted in an increase in usage of and preference for telemedicine across specialties. (Source: Deloitte)

    Based on the chart above, the use of telemedicine has been slightly more than doubled during the lockdown from 21% to 44% of users. Among the respondents who designate an increase in telemedicine usage after lockdown, 77% of the respondents state that it is their preference with the reason of time saving. In addition, around 73% of them who had never tried telemedicine before, are inclined  to use telemedicine now. However, more than half of the respondents who are unwilling to use telemedicine due to their belief of face-to-face consultations are much more effective.

    Chart 7: Willingness to use telemedicine for consultations across different specialties (Source: Deloitte)

    By studying the result, the majority of consumers used telemedicine for general medicine while physiotherapy has the least usage of telemedicine due to the fact that it requires more in person sessions with physical examinations and rehabilitation.

     

    Education

    While countries are experiencing different points of infection rate of the COVID-19 virus, schools are forced to shut down. As a result, 1.2 billion students globally are not able to receive education due to school closures.  With the restriction of school lockdown, physical class has been shifted to remote learning. Upon such great demand on e-learning, many online learning platforms have provided free access to their services like BYJU’S which is a Bangalore-based edtech company founded in 2011.  According to Dingtalk (Alibaba’s remote learning app) CEO, Chen Han stated that they had expanded the capacity to support the large scale remote work by deploying more than 100,000 new cloud servers in just two hours last month from Alibaba Cloud. Besides, some school districts are forming unique partnerships, like the one between The Los Angeles Unified School District and PBS SoCal/KCET to offer local educational broadcasts, with separate channels focused on different ages, and a range of digital options. Furthermore, the UK media organizations like the BBC also offer curriculum-based virtual learning such as Bitesize Daily for children across the nation. With the right technology , e-learning is quite effective for students who have access to it as they require less time to learn compared to having classes in a traditional classroom setting. For example, Zoom is quite commonly used for meetings and educational purposes. As it has the function to record the whole lecture, students are able learn at their own pace by re-watching, skipping, or accelerating through concepts and chapters that they choose. However, there are some disadvantages on remote learning like students who live in areas that have bad internet access and are deprived of technology. For instance, 95% of students from countries like Switzerland, Norway and Australia are able to complete their lessons through online learning but only 34% of students are able to do that from countries like Indonesia. To resolve issues such as having poor internet access and technology, the government can provide digital equipment for students in need. For example, the Welsh government has a support programme with the collaboration of schools and local authorities to distribute devices to learners that are struggling without these equipment.

     

    Entertainment

    As lockdown restrictions are being implemented, public entertainment areas like cinemas, clubs, Internet cafes and more are forced to shut down leaving individuals to find their own entertainment at home. A lot of consumers choose to spend their time and distract themselves from the issues going on in reality by playing video games, e-sports and watching TV during the COVID-19 pandemic. According to new research by Nielsen, 82% of global consumers were involved in playing and watching video game content during the lockdown period.  As consumers are compelled to stay indoors, some leagues  have introduced e-sports (sport competition in the form video games) like eNASCAR iRacing Pro Invitational Series and NBA 2K tournament to keep gamers and fans engaged. With the commitment of these events, it is possible that e-sports and video games involvement could still remain high even when more live sports come back online. Besides, video games are well-known to be very engaging. Based on Nielsen Games Video Game Tracking (VGT), the number of gamers that stated they are playing video games more now due to the COVID-19 pandemic has increased since March 23, 2020. The U.S. has the highest rate (46%), followed by France (41%), the U.K. (28%) then Germany (23%). If TV is an indicator for overall media engagement during the pandemic, Twitch is the indicator for video game content engagement. As noticed below, the difference between Twitch engagement in the U.S. on January 1 and March 28 is more than doubled, as hours watched grew from 13 million to 31 million. The viewership was peaked on March 28, with League of Legends, Fortnite, and Counter-Strike: Global Offensive accounting for 33% of total hours watched across the top 50 titles.

    Chart 8: Daily Twitch Viewership In The U.S. More Than Doubled In QI 2020 (Source: 2020 The Nielsen Company (US), LLC)

    As we can see, the creativity of the video game industry has played a big part in helping consumers pass time which led to some collaborations. A great example is the collaboration of Epic Games with Houston rapper Travis Scott that organized a unique musical journey in Fortnite. This partnership that was worked out by Epic Games set a multi-date tour that consisted of different time slots to make it flexible for players to join from all over the world while Travis became the face of the event, attracting millions of people to tune in to the game from April 23-25, in addition to other video streaming platforms such as YouTube and Twitch. The Nielsen record for the average minute audience (AMA) for the first Travis concert had reached a total of 4.7 million, which almost half of the audience (2.3 million) were live viewers. While millions of people are self isolating at home, many looked to e-sports as a way to curb boredom.

    Consumers have always turned to TV to stay updated on information or simply just for entertainment. Hence, it is normal even during the COVID-19 pandemic  as consumers are unable to attend social gatherings or any other physical events. In 2020, we see this trend reflected in a deluge of social media activity about TV programs as consumers lean into the power of technology not just to view or listen, but to also fill a need to stay connected to friends, family and the world at large. A recent Nielsen study on consumer behavior related to the TV has been shown in Chart 9. Apart from keeping close to home and their TV sets, they are also using social media to stay connected more which resulted a total volume of TV and COVID-19-related conversations on Twitter alone to  reach nearly 9 million since the start of 2020 in the U.S. with a dramatic increase of 40 times between January and March due to the pandemic. As more consumers are forced to stay at home, they have been using social media to fill their time and discuss about the new TV, streaming, and movie choices. Despite there being a number of programs on air over the years, it is still noticeable that there is a big difference in social media activity across most TV genres. As expected, we see the biggest upticks in social buzz about talk and news programs, family movies and all streaming services.

    Chart 9: Number Of TV Tweets Mentioning COVID-19 Or Coronavirus (Source: Nielsen Social Concern Ratings)

     

    Travel and Mobility

    The travel behaviour of consumers has also been affected after the outburst of the pandemic. As lockdown rules are being enforced, consumers’ mobility habits do have some changes such as avoiding public transport but instead riding a bicycle or walking for local trips. For example, Germany had implied a travel ban on March 23rd 2020 and the distance traveled per person per day had dropped from the usual average of around 40km to almost 15km only in the first week of April. Thus, it leads to a decline in the number of kilometers traveled on public transport, as consumers prefer to walk or ride a bike.

    Chart 10: German Mobility : Average Kilometers Travelled By User And Day (Source: MotionTag)

    As consumers had preferred to walk and cycle, the time spent has increased 25 minutes per day  compared to the usual less than 20 minutes per day.

    Chart 11: German Mobility: Modal Split For Time Spent Travelling By User and Day (Source: MotionTag)

    As can be observed, the increase of consumers making short journeys for activities like food shopping locally by walking or cycling has not only reduced physical contact with other people but is also a good way to combine it with regular exercise. Though cars are still in use, usually essential workers that do not work from home only use it for work.

    Another important travel behavior aspect is airplane travel. As the spread of COVID-19 virus gets worse, many countries have banned international flights and consumers are afraid to take flights due to the high risk of getting infected by the virus. This has caused a dramatic drop in demand for passengers in this industry due to the current situation which threatens the businesses of many firms under the aviation industry. As we are aware that the aviation industry is also a target for government policies, the recent crisis has resulted in new loan guarantees, subsidies in wages and equity injections. To deal with these issues, government policies should prioritise firm specific measures like preserving competition and strike balance between the support of the aviation industry. Due to the pandemic, the failure of a number of companies will lower the competition and the injection of equity might affect the access of foreign companies to the local market. To avoid negative effects on competition and promote efficiency on controlled firms, lowering the costs of entry like reserving airport slots for new entrants can help to foster the competition.

    Chart 12: Expected change in airplane travels once the COVID-19 is no longer a threat as compared to the before-pandemic situations. (Source:  Science Direct)

    As we can observe from Chart 12, around 43% of the consumers choose to travel less frequently with airplanes in the future even if the COVID-19 condition is in control.

    Chart 13: Factors underlying the expected change in airplane travels once the COVID-19 is no longer a threat as compared to the before-pandemic situations. (Source: Science Direct)

    According to Chart 13, the majority of correspondents of the survey (48% of them) felt unsafe travelling with airplanes due to the closed space even after the pandemic, followed by 27% of them choosing to travel by their personal vehicles.

     

    Conclusion

    It is not surprising that the outbreak of COVID-19 has given such high levels of impact and changes on consumer behavior. The majority of it consists of the use of technology and without the help of it, society will be struggling in getting things done and inconveniences in different aspects will occur. Despite the negativity of the pandemic, we have to be grateful and embrace the modern high tech life that we are living in as technology has helped us get  through these hard times.

     

    Researcher: Yeoh Yi Ying (Janice)

    Reviewer: Millen Lau

    Editor: Adam Jantan

    Download the article here: [download id=”5449″]

    [yikes-mailchimp form=”1″ title=”1″ description=”1″]

  • Budget 2021 Roundtable Proposal

    Budget 2021 Roundtable Proposal

    Executive summary

    Covid-19 has significantly disrupted Malaysian businesses’ day-to-day operations stemming from a reduction of the overall consumption rate due to lockdowns and declining consumer confidence. What followed was an unavoidable chain of events — as businesses collapsed under financial pressure from outstanding debts and the absence of financial buffers, job supply in the market decreased. This then again led to further reduction of consumer’s spending power. The vicious cycle continues.

    Youths who are about to graduate today are most impacted by this pandemic as they face a more competitive job market in the next 2-3 years, competing not only with those from their cohort but also against those who are presently unemployed. What directly follows is a spike in youth unemployment right when experiences in this turbulent time will be most valuable in the future. As a result, those who are graduating today face hampered salary potential throughout their entire career. 

    We recommend 4 policies aimed towards reducing frictional unemployment and upskilling youths who are unemployed today: 

    (1) Establish federally-run employment centers.

    (2) Increase funding for private TVET centers.

    (3) Develop and launch a branded, long-term nationwide upskilling program.

    (4) More “PRIHATIN” for both youths and employers.

    Where are we today?

    Malaysian youths are struggling to find jobs but employers are reluctant to hire them.

    Youths are facing difficulties in securing a job amidst the Covid-19 pandemic as employers seek to cut staff and limit recruitment, resulting in a more competitive job market. Even before the pandemic, youths entering the labour force were deemed unskilled and unprepared by Malaysian employers. A survey conducted by the World Bank and Talent Corp in 2014 showed that 90% of Malaysian companies believe job applicants needed more industrial training and 81% highlighted that job seekers particularly lack communication skills. Furthermore, a further 80% of employers think that Malaysian university curricula did not effectively reflect their actual abilities (i.e. GPA does not reflect actual work ability). 

    However, employers are not all to blame. With fragile balance sheets, survival remains a top priority for most Malaysian firms.

    Following the Movement Control Order (MCO) in March 2020, businesses have been closing down throughout the country (c. 4,820 as at end-July). Average household consumption is down c. 55% (from RM6,317 to RM2,813) according to the Department of Statistics Malaysia (DOSM) and several categories saw large decline, such as spending on clothing (90% from RM135 to RM7 per month), entertainment and recreational activities (71% from RM200 to RM58 per month). This led to declining revenue for many companies with high future revenue risk, even at present. As a result, firms resorted to reducing the size of their employees to ease operating costs. Particularly for SMEs (c. 98.5% of Malaysian business establishments) wage payment could be a bigger problem as they generally have lower financial cushion to overcome the recession. 

    Chart 1: Average household expenditure before MCO vs during MCO

    (Source: Department of Statistics Malaysia)

    Debt servicing is particularly a critical issue for SMEs. Many of them face bankruptcy and permanent loss of business especially once the moratorium is over. According to the National President of the SME Association of Malaysia, Datuk Michael Kang Hua Keong, as many as 40% of businesses were expected to close down if not for the government stimulus package, however, it is expected that 20% of SMEs will still go bankrupt even with the financial support received. The net effect is an increase in the unemployment rate particularly for the lower-income earners employed in SMEs.

    Recessions disproportionately target youth when it comes to unemployment.

    While Malaysia recently reported an unemployment rate of 5.3% on average, the unemployment rate for youths aged 15 to 24 years old reached 14.2% in May 2020 up 1.3% vs pre-Covid levels according to the Statistics Department’s Labour Force Survey Report for May 2020. Comparatively, the unemployment rate for adults aged above 25 years rose by a mere 0.1% to 3.5% in May. This further underlines how youths are the most vulnerable age group in terms of unemployment during these difficult times. Indeed, we saw similar patterns back during the previous recessions where Malaysian youths’ unemployment rate rose faster than the overall rate. 

    Chart 2: Youth unemployment rate spiked during crisis, Youth unemployment ‘gaps’ increased

    (Source: Calvin Cheng and Bridget Welsh 2020, Department of Statistics Malaysia)

    With job supply on the downtrend and yet to bottom, youths face an increasingly intense competition in the labor market

    The number of graduates entering the labour market is on an uptrend as total graduates in 2019 has increased by 7% (Chart 3). However, according to Bank Negara, job vacancies have been declining since 2017, leading to a disparity between job supply and demand. According to Malaysian Institute for Economic Research (MIER), the pandemic will continuously apply downward pressure on the job market in Malaysia until mid-2021.

    Chart 3: Graduates in Malaysia, 2018 and 2019 

    (Source: Department of Statistics Malaysia)

    Chart 4: Labour Demand in Malaysia Q1 2017 to Q1 2020 

    (Source: Department of Statistics Malaysia)

    Those who can find employment today, wages are not enough to cover living expenses (true even pre-pandemic)

    The Malaysian Employers’ Federation (MEF) stated that unemployed graduates expect unreasonable starting pay. According to Jobstreet Malaysia’s survey in 2019, the average fresh graduate could expect a salary within the range of RM1,949 to RM 2,836. According to another study,  the School-to-work Transition Survey (SWTS) suggests that graduates with a degree earn less than RM 3,000 while graduates with diploma earn less than RM 2,000. SWTS concludes that most of the unemployed degree holders in Malaysia can only expect a salary of RM2,500 and more than 60% of the diploma holders can only expect less than RM2,000.

    According to Bank Negara, however, a working adult has to earn at least RM 2,700 to survive the cost of living in Malaysia. Let’s look at our neighbour. In Singapore, a working adult has to earn at least $1,286 (excluding rental) to sustain an affordable living. But, most degree holders there earn at least $3,600 as their starting pay (3x the cost of living). Hence, most Malaysian unemployed youths either start their careers with a deficit income flow or tend to perform additional informal jobs to make ends meet. Chart 7 outlines the job market in Malaysia even before the pandemic.

    Chart 5: Fresh graduate salary statistics 

    (Source: BNM, MEF, Jobstore Malaysia)

    Additionally, today’s graduates will earn lower wages than their non-recession peers throughout their entire career.

    The lifetime salary potential of those who are unemployed will deviate from those who are employed during a recession. According to Lisa B. Kahn, an economic professor from Yale, those who graduate into a recession face an initial salary potential loss of 6% to 7% for every 1% increase in the unemployment rate (vs non-recession graduates),  and up to 2.5% of wage loss 15 years later on. Putting it into perspective, students that graduated during the previous recessions are earning less than 10% of what they could be earning absent the recession. A study by the Royal Bank of Canada on the consequences of Canadians graduating during the 2008 financial crisis also revealed similar results. Furthermore, the study showed that recession graduates have lower odds of achieving a management position today (10% vs 12% of non-recession graduates) and are more likely to take unskilled jobs.     

    Chart 6: The wage growth rate of recession cohort and pre-recession cohort  

    (Source: Statistics Canada, RBC Economics)

    Chart 7: The career development of the recession cohort and pre-recession cohort  

    (Source: Statistics Canada, RBC Economics)

    Malaysian graduates are already desperate as they were willing to take a lower starting salary of RM1,500 back in 2019 due to difficulties in securing a job (youths unemployment trending upwards since 2014). With the pandemic today, the expected starting salary of the fresh graduates coming into the workforce could even decline further. While we lack data for Malaysia, comparisons exist overseas in Hong Kong and the United States where salary cuts post-pandemic coincided with increased unemployment rates. According to a recent study in Hong Kong, most employers in Hong Kong have cut down job vacancies by at least 50% and offered salaries 20% lesser than pre-pandemic levels.

    Our Budget 2021 wishlist

    We recommend 4 policies aimed towards reducing frictional unemployment and upskilling youths who are unemployed today: 

    Policy 1: Establish federally-run employment centers 

    To bridge the gap between job seekers and employers, we recommend establishing federally-run employment centers across the country. These centers will be responsible for guiding and linking job seekers with potential headhunters and/or the corporate HR team of potential employers. By registering with the employment centers, the firms are able to cut down the interview process hence saving overhead costs.In addition, tax rebates could be provided to firms that register with the employment centers instead of job search portals like Jobstreet.com.  Besides that, these centers should be responsible for compiling labour-related data (demand and supply) into a centralised database, and leveraging this database to improve job matching efficiency. 

    New Zealand has successfully established such centers in the early 2000s and consistently depended on them during times of crisis (including today). In their centers, advisors are appointed to manage and cater each individual youth’s needs and skills. These employment centers link job seekers to potential employers via phone calls or other online communication tools. Additionally, under the recently launched “Keep New Zealand Working” initiative, their Ministry of Social Development created an online recruitment portal which provided a database of unemployed local youths in each vicinity to the nearest employment centers. These centers also acted as their headquarters for employment-related emergency task forces established during times of crisis to coordinate nation-wide efforts.

    Policy 2: Increase funding for private TVET centers 

    Malaysian Technical and Vocational Education and Training (TVET) centers, especially private providers, are severely underfunded, limiting their ability to cater the demand for their services. According to the Malaysian TVET Forum in 2019, TVET enrolment for secondary school leavers in Malaysia is 10%, lower than many other developed countries such Germany and Switzerland at 60%. In Budget 2020, RM5.9 billion was allocated to fund these programs in the country. However, 95% of this was received by public TVET centers, while funding for private sectors TVET continued on their multi-year downward decline. Due to lack of funding, the number of private TVET centers in Malaysia fell from 876 to 517 centers from 2015 to 2020. 

    Furthermore, private TVET centers students will have to self-finance their studies often by PTPTN loans. However, high demand for TVET PTPTN assistance resulted in quota restrictions on the number of students private TVET centers absorb. This currently stands at 20,000 students despite then having the facilities to accommodate 60,000 according to the Federation of Accredited Centers of Malaysia.

    Germany has implemented a range of successful TVET programs which Malaysia can emulate. High school students there are able to apply to firms for temporary paid positions and enrol in a curriculum specifically designed to meet industry demands. The program also encompasses over 350 different career paths that require specialized skills, from automotive engineering and finance to retail management. It has been widely credited with keeping the county’s unemployment rate low after the global financial crisis and today at 5.6%, unchanged. 

    Policy 3: Develop and launch a branded, long-term nationwide upskilling program

    We see a lot of value from a nationwide upskilling program leveraging on existing TVET syllabus but with a shortened apprenticeship duration of 6-12 months (vs existing 18-36 months) for those who are unemployed today. This allows students to improve their marketability when they reenter the job market, and improve their long-term salary potential. Employers’ inputs in this program will be crucial specifically to ensure that the syllabus meets their demands and expectations. A well-funded training program alongside consistent firm participation will help prepare youths to acquire the required skill set. 

    Across the causeway, Singapore has recently announced a major reskilling program in their Budget 2021 speech. Through the Workforce Singapore (WSG) agency, those working in the most negatively impacted sectors during the pandemic are eligible to be trained and redeployed to new or higher-value roles through five reskilling programmes. Furthermore, employers who participate in these programmes will receive wage subsidies and training support by the government.

    Policy 4: More “PRIHATIN” for both youths and employers

    Under the current PRIHATIN stimulus package, a special grant worth c.RM2bn is made available for eligible SMEs and their employees. We hypothesise that an increase of these incentives (particularly on wage subsidies) and widening of its reach will reduce further job cuts. But we believe further incentives should be conditional on employers’ not reducing staff headcount for a period of one year. The total sum of incentives provided to each firm should also be structured based on the nature of work and the size of the company.

    The Malaysia@Work initiative, announced during Budget 2020, must also be reprioritised to complement these incentives and encourage further job growth in the market. Recap that Malaysia@Work was allocated a budget of RM6.5 billion and was divided into four categories namely (1) Graduates@Work, (2) Women@work, (3) Locals@Work and (4) Apprentice@Work. The Graduates@Work initiative, in particular, was designed to provide a wage incentive of RM500 per month for two years for graduates who secured a job after a year of being unemployed, and a hiring incentive of RM 300 per month for two years to employers for each new hire.

    On the cash assistance front, we propose a qualification period of 6 months of full-time unemployment with a track record of active job searching to be eligible for further incentives. This allows graduates who take up part-time jobs to not be exempt from the program while eliminating gap-year applicants from the program.

     

    Contributors: Nur Izzat Aiman, Tan Yong Ze, Elizabeth Lee, Tan Zi Yi, Millen Lau, Evon Chew, Durga Panirselvam, Dexter Neo

    Download Article: [download id=”5042″]

    [yikes-mailchimp form=”1″]

  • Budget 2021 Roundtable Proposal

    Budget 2021 Roundtable Proposal

    Executive summary

    Covid-19 has significantly disrupted Malaysian businesses’ day-to-day operations stemming from a reduction of the overall consumption rate due to lockdowns and declining consumer confidence. What followed was an unavoidable chain of events — as businesses collapsed under financial pressure from outstanding debts and the absence of financial buffers, job supply in the market decreased. This then again led to further reduction of consumer’s spending power. The vicious cycle continues.

    Youths who are about to graduate today are most impacted by this pandemic as they face a more competitive job market in the next 2-3 years, competing not only with those from their cohort but also against those who are presently unemployed. What directly follows is a spike in youth unemployment right when experiences in this turbulent time will be most valuable in the future. As a result, those who are graduating today face hampered salary potential throughout their entire career. 

    We recommend 4 policies aimed towards reducing frictional unemployment and upskilling youths who are unemployed today: 

    (1) Establish federally-run employment centers.

    (2) Increase funding for private TVET centers.

    (3) Develop and launch a branded, long-term nationwide upskilling program.

    (4) More “PRIHATIN” for both youths and employers.

    Where are we today?

    Malaysian youths are struggling to find jobs but employers are reluctant to hire them.

    Youths are facing difficulties in securing a job amidst the Covid-19 pandemic as employers seek to cut staff and limit recruitment, resulting in a more competitive job market. Even before the pandemic, youths entering the labour force were deemed unskilled and unprepared by Malaysian employers. A survey conducted by the World Bank and Talent Corp in 2014 showed that 90% of Malaysian companies believe job applicants needed more industrial training and 81% highlighted that job seekers particularly lack communication skills. Furthermore, a further 80% of employers think that Malaysian university curricula did not effectively reflect their actual abilities (i.e. GPA does not reflect actual work ability). 

    However, employers are not all to blame. With fragile balance sheets, survival remains a top priority for most Malaysian firms.

    Following the Movement Control Order (MCO) in March 2020, businesses have been closing down throughout the country (c. 4,820 as at end-July). Average household consumption is down c. 55% (from RM6,317 to RM2,813) according to the Department of Statistics Malaysia (DOSM) and several categories saw large decline, such as spending on clothing (90% from RM135 to RM7 per month), entertainment and recreational activities (71% from RM200 to RM58 per month). This led to declining revenue for many companies with high future revenue risk, even at present. As a result, firms resorted to reducing the size of their employees to ease operating costs. Particularly for SMEs (c. 98.5% of Malaysian business establishments) wage payment could be a bigger problem as they generally have lower financial cushion to overcome the recession. 

    Chart 1: Average household expenditure before MCO vs during MCO

    (Source: Department of Statistics Malaysia)

    Debt servicing is particularly a critical issue for SMEs. Many of them face bankruptcy and permanent loss of business especially once the moratorium is over. According to the National President of the SME Association of Malaysia, Datuk Michael Kang Hua Keong, as many as 40% of businesses were expected to close down if not for the government stimulus package, however, it is expected that 20% of SMEs will still go bankrupt even with the financial support received. The net effect is an increase in the unemployment rate particularly for the lower-income earners employed in SMEs.

    Recessions disproportionately target youth when it comes to unemployment.

    While Malaysia recently reported an unemployment rate of 5.3% on average, the unemployment rate for youths aged 15 to 24 years old reached 14.2% in May 2020 up 1.3% vs pre-Covid levels according to the Statistics Department’s Labour Force Survey Report for May 2020. Comparatively, the unemployment rate for adults aged above 25 years rose by a mere 0.1% to 3.5% in May. This further underlines how youths are the most vulnerable age group in terms of unemployment during these difficult times. Indeed, we saw similar patterns back during the previous recessions where Malaysian youths’ unemployment rate rose faster than the overall rate. 

    Chart 2: Youth unemployment rate spiked during crisis, Youth unemployment ‘gaps’ increased

    (Source: Calvin Cheng and Bridget Welsh 2020, Department of Statistics Malaysia)

    With job supply on the downtrend and yet to bottom, youths face an increasingly intense competition in the labor market

    The number of graduates entering the labour market is on an uptrend as total graduates in 2019 has increased by 7% (Chart 3). However, according to Bank Negara, job vacancies have been declining since 2017, leading to a disparity between job supply and demand. According to Malaysian Institute for Economic Research (MIER), the pandemic will continuously apply downward pressure on the job market in Malaysia until mid-2021.

    Chart 3: Graduates in Malaysia, 2018 and 2019 

    (Source: Department of Statistics Malaysia)

    Chart 4: Labour Demand in Malaysia Q1 2017 to Q1 2020 

    (Source: Department of Statistics Malaysia)

    Those who can find employment today, wages are not enough to cover living expenses (true even pre-pandemic)

    The Malaysian Employers’ Federation (MEF) stated that unemployed graduates expect unreasonable starting pay. According to Jobstreet Malaysia’s survey in 2019, the average fresh graduate could expect a salary within the range of RM1,949 to RM 2,836. According to another study,  the School-to-work Transition Survey (SWTS) suggests that graduates with a degree earn less than RM 3,000 while graduates with diploma earn less than RM 2,000. SWTS concludes that most of the unemployed degree holders in Malaysia can only expect a salary of RM2,500 and more than 60% of the diploma holders can only expect less than RM2,000.

    According to Bank Negara, however, a working adult has to earn at least RM 2,700 to survive the cost of living in Malaysia. Let’s look at our neighbour. In Singapore, a working adult has to earn at least $1,286 (excluding rental) to sustain an affordable living. But, most degree holders there earn at least $3,600 as their starting pay (3x the cost of living). Hence, most Malaysian unemployed youths either start their careers with a deficit income flow or tend to perform additional informal jobs to make ends meet. Chart 7 outlines the job market in Malaysia even before the pandemic.

    Chart 5: Fresh graduate salary statistics 

    (Source: BNM, MEF, Jobstore Malaysia)

    Additionally, today’s graduates will earn lower wages than their non-recession peers throughout their entire career.

    The lifetime salary potential of those who are unemployed will deviate from those who are employed during a recession. According to Lisa B. Kahn, an economic professor from Yale, those who graduate into a recession face an initial salary potential loss of 6% to 7% for every 1% increase in the unemployment rate (vs non-recession graduates),  and up to 2.5% of wage loss 15 years later on. Putting it into perspective, students that graduated during the previous recessions are earning less than 10% of what they could be earning absent the recession. A study by the Royal Bank of Canada on the consequences of Canadians graduating during the 2008 financial crisis also revealed similar results. Furthermore, the study showed that recession graduates have lower odds of achieving a management position today (10% vs 12% of non-recession graduates) and are more likely to take unskilled jobs.     

    Chart 6: The wage growth rate of recession cohort and pre-recession cohort  

    (Source: Statistics Canada, RBC Economics)

    Chart 7: The career development of the recession cohort and pre-recession cohort  

    (Source: Statistics Canada, RBC Economics)

    Malaysian graduates are already desperate as they were willing to take a lower starting salary of RM1,500 back in 2019 due to difficulties in securing a job (youths unemployment trending upwards since 2014). With the pandemic today, the expected starting salary of the fresh graduates coming into the workforce could even decline further. While we lack data for Malaysia, comparisons exist overseas in Hong Kong and the United States where salary cuts post-pandemic coincided with increased unemployment rates. According to a recent study in Hong Kong, most employers in Hong Kong have cut down job vacancies by at least 50% and offered salaries 20% lesser than pre-pandemic levels.

    Our Budget 2021 wishlist

    We recommend 4 policies aimed towards reducing frictional unemployment and upskilling youths who are unemployed today: 

    Policy 1: Establish federally-run employment centers 

    To bridge the gap between job seekers and employers, we recommend establishing federally-run employment centers across the country. These centers will be responsible for guiding and linking job seekers with potential headhunters and/or the corporate HR team of potential employers. By registering with the employment centers, the firms are able to cut down the interview process hence saving overhead costs.In addition, tax rebates could be provided to firms that register with the employment centers instead of job search portals like Jobstreet.com.  Besides that, these centers should be responsible for compiling labour-related data (demand and supply) into a centralised database, and leveraging this database to improve job matching efficiency. 

    New Zealand has successfully established such centers in the early 2000s and consistently depended on them during times of crisis (including today). In their centers, advisors are appointed to manage and cater each individual youth’s needs and skills. These employment centers link job seekers to potential employers via phone calls or other online communication tools. Additionally, under the recently launched “Keep New Zealand Working” initiative, their Ministry of Social Development created an online recruitment portal which provided a database of unemployed local youths in each vicinity to the nearest employment centers. These centers also acted as their headquarters for employment-related emergency task forces established during times of crisis to coordinate nation-wide efforts.

    Policy 2: Increase funding for private TVET centers 

    Malaysian Technical and Vocational Education and Training (TVET) centers, especially private providers, are severely underfunded, limiting their ability to cater the demand for their services. According to the Malaysian TVET Forum in 2019, TVET enrolment for secondary school leavers in Malaysia is 10%, lower than many other developed countries such Germany and Switzerland at 60%. In Budget 2020, RM5.9 billion was allocated to fund these programs in the country. However, 95% of this was received by public TVET centers, while funding for private sectors TVET continued on their multi-year downward decline. Due to lack of funding, the number of private TVET centers in Malaysia fell from 876 to 517 centers from 2015 to 2020. 

    Furthermore, private TVET centers students will have to self-finance their studies often by PTPTN loans. However, high demand for TVET PTPTN assistance resulted in quota restrictions on the number of students private TVET centers absorb. This currently stands at 20,000 students despite then having the facilities to accommodate 60,000 according to the Federation of Accredited Centers of Malaysia.

    Germany has implemented a range of successful TVET programs which Malaysia can emulate. High school students there are able to apply to firms for temporary paid positions and enrol in a curriculum specifically designed to meet industry demands. The program also encompasses over 350 different career paths that require specialized skills, from automotive engineering and finance to retail management. It has been widely credited with keeping the county’s unemployment rate low after the global financial crisis and today at 5.6%, unchanged. 

    Policy 3: Develop and launch a branded, long-term nationwide upskilling program

    We see a lot of value from a nationwide upskilling program leveraging on existing TVET syllabus but with a shortened apprenticeship duration of 6-12 months (vs existing 18-36 months) for those who are unemployed today. This allows students to improve their marketability when they reenter the job market, and improve their long-term salary potential. Employers’ inputs in this program will be crucial specifically to ensure that the syllabus meets their demands and expectations. A well-funded training program alongside consistent firm participation will help prepare youths to acquire the required skill set. 

    Across the causeway, Singapore has recently announced a major reskilling program in their Budget 2021 speech. Through the Workforce Singapore (WSG) agency, those working in the most negatively impacted sectors during the pandemic are eligible to be trained and redeployed to new or higher-value roles through five reskilling programmes. Furthermore, employers who participate in these programmes will receive wage subsidies and training support by the government.

    Policy 4: More “PRIHATIN” for both youths and employers

    Under the current PRIHATIN stimulus package, a special grant worth c.RM2bn is made available for eligible SMEs and their employees. We hypothesise that an increase of these incentives (particularly on wage subsidies) and widening of its reach will reduce further job cuts. But we believe further incentives should be conditional on employers’ not reducing staff headcount for a period of one year. The total sum of incentives provided to each firm should also be structured based on the nature of work and the size of the company.

    The Malaysia@Work initiative, announced during Budget 2020, must also be reprioritised to complement these incentives and encourage further job growth in the market. Recap that Malaysia@Work was allocated a budget of RM6.5 billion and was divided into four categories namely (1) Graduates@Work, (2) Women@work, (3) Locals@Work and (4) Apprentice@Work. The Graduates@Work initiative, in particular, was designed to provide a wage incentive of RM500 per month for two years for graduates who secured a job after a year of being unemployed, and a hiring incentive of RM 300 per month for two years to employers for each new hire.

    On the cash assistance front, we propose a qualification period of 6 months of full-time unemployment with a track record of active job searching to be eligible for further incentives. This allows graduates who take up part-time jobs to not be exempt from the program while eliminating gap-year applicants from the program.

     

    Contributors: Nur Izzat Aiman, Tan Yong Ze, Elizabeth Lee, Tan Zi Yi, Millen Lau, Evon Chew, Durga Panirselvam, Dexter Neo

    Download Article: [download id=”5042″]

    [yikes-mailchimp form=”1″]

  • Rationalising the Behavioural Anomalies of COVID-19

    Rationalising the Behavioural Anomalies of COVID-19

    Introduction

    Traditional economic studies are built upon the assumption of rational human behaviour, where the final decision made is unmoved by emotions and external factors. This is known as the rational choice model. However, in the real world, we often observe irrational behaviour, decisions which lead to economic loss and market failures such as the aggressive practices of financial institutions which led to the global financial crisis in 2008. This can be explained by behavioural economics, a rather recent field of mainstream economics. It is the study of how psychological factors affect the economic decision-making process of individuals.

    Irrational behaviour tends to be more prevalent in the presence of factors such as extraordinary circumstances and emotional disturbances, both of which are present during the COVID-19 pandemic. In this article, we will take a look into behavioural anomalies we have observed throughout these uncertain times.

    Hoard or not

    As nations across the globe pushed for extended lockdowns, demand for essential goods spiked to cope with a change in lifestyle, with healthcare-related items leading the change. The shortage worsened as some individuals began hoarding toilet rolls, sanitizers, and face masks. None of this should come as a surprise as similar trends have been observed in previous turmoils, where toilet rolls were stockpiled extensively during the oil embargo of 1973. Back then, the domestic shortage of oil ignited a chain reaction of hoarding mentality. The situation was quite extreme, as black markets for toilet rolls emerged as it became a tradable commodity. Eventually, the public came to a realization that there wasn’t a shortage of toilet rolls, and the self-fulfilling prophecy died off.

    As herd mentality for sanitizers and face masks becomes normalized, the hoarding of toilet rolls warrants a separate discussion as these items are used for different purposes. Face masks protect against airborne transmission, sanitizers help eliminate infectious pathogens while toilet rolls provide no protective uses in the midst of a pandemic. What seems like fear-mongering actually boils down to the survival instinct of mankind. In the face of danger and uncertainty, our brains are hardwired to prepare for worst-case scenarios, which is an evolutionary trait. If lockdown measures intensify and get extended, the demand for toilet rolls would spike, potentially turning into a tradable commodity or currency, replicating the demand curve of the toilet rolls during the 1973 oil price embargo. Toilet rolls also symbolise hygiene, acting as a contrast to a disease, providing a false sense of security.

    In general, there is a major factor that prompts hoarding. It falls under game theory, where one’s optimal move depends on the behaviour of others. The classic example of a prisoner’s dilemma corresponds to this scenario.

    The table above demonstrates the interaction in the prisoner’s dilemma. If both prisoners remain silent, they receive shorter jail sentences. If both prisoners confess, they receive longer jail sentences. Since the prisoner’s dilemma assumes that individuals act optimally according to self-interest, we dissect the scenario from an individual standpoint. Prisoner A receives either 2 years or 7 years of the sentence when remaining silent and 1 year or 5 years of the sentence when confessing. The same applies to Prisoner B and we can conclude that it is always optimal to confess to minimize jail sentence. These characteristics translate to hoarding.   If the public bought only what they needed, there would be no shortages. However, if a large number of people are panic buying, the optimal play is to follow suit, merely a rational move to increase the odds of securing the said item. Prisoner’s dilemma also assumes that participants are unable to communicate, or at least do not possess perfect information, similar to how individuals are unable to gauge accurately on whether the general public is hoarding or not. Furthermore, the lack of consequences is what fuels hoarding behaviour, given the durability and affordability of healthcare-related goods, especially toilet rolls. Hence, a hoarding will almost always occur under circumstances free of external interventions. Hence, authorities started limiting purchases per person and imposing price controls to prioritize societal benefits. Supermarkets are advised to maintain a strict refund policy on sold items as well.

    Divergence in equity markets

    Diagram 1: Seasonally adjusted quarterly real GDP growth
    (Source: U.S. Bureau of Economic Analysis)

    Diagram 2: S&P 500 index from the start of Q3 2019 to end of Q2 2020
    Source: Tradingview

    COVID-19 had dealt irreversible economic damage, with the quarterly seasonally adjusted real GDP growth reaching a new low. However, a visual comparison of the trajectory of GDP growth rates and the stock market indicates the clear divergence between these 2 factors that are intuitively intertwined. While the economy heads towards greater uncertainty, the fact that global equities are close to previous highs is simply bewildering. It is important to be aware of the driving forces of the stock market, which is ultimately a voting machine, and the ability to predict other’s moves will pay for itself. Hence, we deduce several factors that might have caused the divergence in certain equity markets.

    The outperformance of major components

    Diagram 3: Indexed returns from 1st December 19 to 26th July 2020
    Source: Goldman Sachs Global Investment Research

    Diagram 4: Market cap of FAAMG as a percentage of market cap in the S&P 500 as of 26th July 2020
    Source: Goldman Sachs Global Investment Research

    As we examine the rally of S&P 500, we note that the returns are mostly driven by the top 5 components of S&P 500, the so-called FAAMG, which is Facebook, Amazon, Apple, Microsoft, and Google are up 35% on average. On the other hand, with these 5 components removed, S&P 495 is actually down 5% within the same time frame. Put that together with the fact that the market cap of the top 5 components is at an all-time high, the contribution by FAAMG has become even more significant.

    Diagram 5: Consensus estimated EPS vs Actual EPS vs Earnings Surprise of FAAMG in Q2 2020
    Source: Earnings Whisper

    Furthermore, FAAMG has collectively exceeded the consensus estimate in terms of earnings per share during Q2 of 2020, with a collective average of 114% as an earning surprise. With FAAMG being in the information technology sector which is the least affected by the pandemic, perhaps the 35% increase of FAANG leading to the impressive recovery of broader markets in the specified time period is justified after all.

    Market weighted indexing vs equal-weighted indexing

    Diagram 6: Cumulative return of $1 invested in the S&P 500
    (Source: Seeking Alpha)

    The index recovery is partially due to the way it is calculated using the market-weighted methodology, where the index components would contribute proportionally based on their market capitalization. For example, assuming the market cap of the S&P 500 is $100 whereas the market cap of Facebook Inc being $20, Facebook would contribute 20% of its percentage change to the S&P 500. Components with larger market cap carries a higher influence to the index, in this case, potentially providing a distorted view of current markets. Critics of market-weighted methodology have opted for the usage of equal-weighted methodology, where components are given equal weightage within the index. Equal weighting has several advantages over market weighting. Historically, equal-weighted indexes would outperform market-weighted indexes over long time frames. But one could argue that this is due to the higher weight is given to small-cap companies, where it consistently outperforms large-cap companies on a historical basis at the cost of higher volatility. Equal weighted indexes prevent overexposure to certain companies and sectors. Information technology, financials, and healthcare constitute up to 20.69%, 16.48%, 15.17% of the S&P 500, which might translate to a lack of diversification. With passive investing via index investing gaining popularity in recent years, experts have considered the possibility of an index bubble, where large components would be continuously propped up by index fund inflows to replicate the returns of a market-weighted index if larger components continue to outperform. Lastly, equal-weighted indexes also lean towards value investing, where exposure of underperforming components are increased and exposure of outperforming components are decreased. This might be well suited for investors depending on one’s preference, compared to market-weighted indexes which lean towards momentum-themed investing.

    Expansionary policy

    Government intervention is crucial in cushioning the blow to equity markets. The Federal Reserve has pumped 1.5 billion worth of loan injections into the repo markets during March 2020. By purchasing these collateralized securities, the Fed is said to provide liquidity to financial institutions to smoothen their operations, indirectly allowing financial institutions to increase their equity exposure. Interest rates or yield has also been decreasing since the pandemic began due to the Fed steadily cutting funds rate, which is the rate where commercial banking institutions lend between one another on an overnight basis. The fund rate is directly correlated to base lending rates, fixed deposit rates, saving accounts rate, etc. As the yield of these assets turn unattractive, it is only natural that money flow is sought towards equities.

    The retail madness

    Diagram 7: Retail investor participation as of May 2020
    (Source: Bursa Malaysia)

    Diagram 8: Volume of penny stocks accounted up to a quarter of volume on 8th July 2020
    (Source: Bloomberg)

    As we shift our attention to the local scene, retail participation in the stock market is also on the rise since the pandemic. It is said that the shutdown of gambling avenues has attracted gamblers to search for alternatives. The availability of idle time during lockdowns also allowed retail investors to allocate time to study about investments, which have resulted in an increase in retail participation. One shouldn’t simply attribute the surge of retail trading volumes as uninformed and speculative. But the higher traded volume of penny stocks does indeed indicate so. The number of limit ups, with stocks hitting their upper limit for no apparent reason also increased drastically where Bursa Malaysia had to issue unusual market activity (UMA) queries, prompting the queried company to disclose relevant corporate developments or clarifying rumors that might’ve been driving the increase in prices. Self-declared investing guru’s became a trend on social media, making buy calls that resemble a typical pump and dump process with retail investors following their advice without making their own assessment. Rakuten Trade, a brokerage firm became a victim after certain individuals were found to misrepresent the company in an investment scam. Despite the aforementioned circumstances, there is no short of fixation on the meteoric rise inequities, which induced fear of missing out among the retail investors. After all, it doesn’t feel good when everyone is prospering without you. But abnormal profits like this don’t last forever, and markets always revert to its true mean. Investors are ultimately responsible for their portfolio so that they are not swimming naked when the tide goes out.

    Curbing the craze

    There are several countermeasures that could be taken to reduce rampant speculation. As mentioned before, stocks have been frequently seen hitting limit ups. The upper limit, which is currently 30 cents for stocks below RM1 and 30% for stocks above RM1 can be reduced to prevent prices from spiraling beyond control. Most speculative traders rely on margin financing, where one buys stocks by borrowing from their brokerage and contra trading, which clients are able to buy stocks without having cash upfront, all which allows one to reap short-term gains in an efficient manner. Perhaps brokerage firms can impose limits on the amount of margin financing and contra trading to trim down speculative trading. More unfavorable policies like imposing a tax on stocks that are bought and sold less than a specific number of days, effectively acting as a tax on short term capital gains could also be considered. However, it is important to proceed with caution as these measures directly oppose the principles of a free market, reducing overall liquidity which might deter prospective investments.

    Ban on short-selling

    On 23rd March 2020, Securities Commission Malaysia (SC) decided to impose a short-selling ban until the end of 2020 to mitigate heightened volatility, potentially increasing the upward bias. Market participants are mixed on the decision to extend the suspension on short selling. Some are favouring the move to prevent a continuous downward spiral, which is a bearish phenomenon with continuous selling pressure causing investors to sell their positions, leading to more selling pressure, effectively creating a deadly loop. There are others who disagree due to the unavailability of short selling leading to inefficient prices, in a sense to avoid unrealistic valuations, given that there have been signs of market euphoria.

    Conclusion

    Behind the facade of irrationality, there is always a glimpse of intuition that drives seemingly unreasonable actions. The study of behavioural economics is fairly new compared to other schools of economics, rendering some to view it as pseudoscience. As we delve deeper into behavioural studies and explore more into human behaviour, time will tell whether behavioural economics can stand on its own feet.

    Researcher: Cheong Jian Yan

    Reviewers: Vikky Beh, Yang Ler

    Editors: Adam Jantan, Hui Zhen Tay

    Download Article: [download id=”4943″]

    [yikes-mailchimp form=”1″]

  • Covid-19’s Effect on the E-commerce Industry in Malaysia

    Covid-19’s Effect on the E-commerce Industry in Malaysia

    Introduction

    E-commerce is a business model that refers to the buying and selling of goods and services through the internet. Today, this industry has evolved to making products easier to discover and purchase through online retailers and marketplaces, enabling businesses to scale at a rate that was not possible with conventional offline retail. As the global pandemic hits, many countries have gone into the state of lockdown and quarantine, making travelling to brick-and-mortar stores less practical. In Malaysia’s case, the Movement Control Order (MCO) has deterred many from going out. Hence, we see many businesses trying to shift their products and services online to sustain themselves during this trying time. This article aims to discuss the effect of Covid-19 towards the e-commerce industry by elaborating on how it has affected conventional retail, the consequences of the global supply chain disruption, and the emerging trends in Malaysia’s e-commerce sector.

    How Covid-19 is Changing Traditional Retail

    With the enforcement of a Movement Control Order (MCO), many “non-essential” businesses and retail outlets were forced to haul operations to prevent the virus from spreading through human contact. This meant that many retail businesses had to search for an alternative way to sell their products should they continue business operations. Consequently, the e-commerce industry has experienced a surge in demand. A study done by the Capgemini Research Institute in April 2020 also showed that in the current scenario and for the coming months, consumers will be less likely to have high interactions with physical retail outlets due to health and safety concerns posed by the virus when compared with the situation prior to the outbreak.

    According to a recent live survey done by Ernst & Young, it was recorded that many business owners are pushing for online sales and prioritising marketplace listings to improve their top-line growth, knowing that consumers now are shifting to online shopping. Such an “offline to online” approach not only helps engender a new channel of distribution for retailers but also helps cushion the sales losses at their physical store.

    Furthermore, restriction measures such as lockdown, social distancing and working from home have encouraged consumers to browse the internet more, leading to an increase in online shopping, consumption of streaming services and electronic payment. This is evident through a statistic posted by Iprice Malaysia suggesting that by Q2 of 2020, there was an average of over 50 million visits per month. This represents a 25% increase compared to Q1 of 2020 to popular online platforms – Shopee and Lazada. The ease of use in e-commerce has removed the need to physically visit a store. It is obvious that Covid-19 has shaped the outlook of the e-commerce landscape, bringing  traditional businesses into the digital realm and revolutionizing the way consumers shop. Malaysia Digital Economy Corporation (MDEC) has since projected a 20% annual growth in e-commerce contribution to the digital economy due to changes in consumer behaviour. MDEC is currently expecting an amount as high as RM170 billion (US$40 billion) generated from the digital economy to contribute to Malaysia’s gross domestic product (GDP) in 2020. Prior to the pandemic, Malaysia was expecting the e-commerce industry to contribute only around RM140 billion to its GDP in 2020.

     

    Emerging Trends in the E-commerce Industry

    Amidst this crisis, we have seen government efforts to encourage people to shop online  thus reducing the need to go out. Under the “Penjana E-commerce Initiatives”, the Malaysian government announced 2 campaigns to promote the development of the digital commerce sector, namely the “Shop Malaysia Online Campaign” and the “Micro & SMEs E-commerce Campaign”. The government is committed to promote the digitalisation of businesses by subsidising on-boarding training to relevant partners and providing subsidies for eligible merchants, thus encouraging more enterprises to participate in transitioning their business into a more innovative model. Such government initiative promotes a multiplier effect through injection, thus engendering greater aggregate demand. At a time when global economic uncertainty is prevalent, encouraging consumers to spend and helping merchants digitize their commerce is a pivotal method to boost economic growth.

    On the other hand, online groceries and the livestock marketplace has created an online presence. For instance, vendors are now selling meat (chicken, beef), seafood and fruits(durians, bananas) on Shopee since wet markets and bazaars are not allowed to be opened during MCO. In an NST interview with Shopee, the e-commerce giant said that in April alone, there were about 1,000 fresh and frozen sellers, including farmers and fishermen on Shopee. Generally, many of the sellers that offered assortments of more than 20 types of products in their stores could generate monthly sales of up to RM100,000. This new way of selling groceries and goods is referred to as a sustainable business model that saves vendors the need of a high start-up cost (renting a physical outlet, employing laborers &, etc) to run the business. Therefore, more capital could be invested in enhancing the quality of goods.

    The Effect of Supply Chain Disruptions

    Although the pandemic has created opportunities for many businesses to expand their business to a “Direct To Consumer” model, it is important to also look at how the virus has disrupted the global supply chain to understand its effect on the e-commerce sector.

    When the coronavirus spiraled out of control in China, many factories were forced to close down and halt its production lines. This created a rippling effect to the global economy, especially towards the growing digital economy, causing inventory shortages and revenue reduction. According to Statista, China accounted for 28% of the global manufacturing output and 22% of Malaysia’s total imports. This means that although the demands of goods were increasing, the ability to manufacture and fulfill those purchasing orders were obsolete. This creates a disequilibrium between the demand and supply of the digital market. For example, as more companies adopt the “work from home” policy to reduce large gatherings and human contact in Malaysia, electrical and electronic products such as laptops, computer mice, printers and earphones see a spike in demand for people to set up a “work-environment” in their own comfort of home. However, due to massive closures of factories, China, a vital electronic products exported to Malaysia, contributing approximately 25% of Malaysia’s total electrical and electronic imports in 2019, was not able to fulfill the orders, negatively impacting the electronics e-commerce industry. Overall, many online businesses are facing shortages of products due to the disrupted supply chain and are unable to satisfy the demand of their customers.

    Besides, the pandemic has also caused massive inconvenience in terms of logistics. As Malaysia tightened their border to avoid more influx of COVID patients, the supply of international flights had generally plummeted. For example, the Malaysian Airlines Bhd cancelled more than 4,000 flights from the 18th of March when MCO was announced to combat the spread of Covid-19. This implied that there was less air freight due to the limited space available for parcel and cargo shipments. The International Air Transport Association (IATA) also released data showing that demand for air freights dropped by 27.7% compared to the same period in 2019 and capacity was down 42%, therefore increasing international shipping price and shipping time. The delay in delivery time resulted in many buyers cancelling their orders. Furthermore, cross state borders restriction was in place during the MCO, thus only a handful of drivers were allowed to travel to a different state, causing disruption and delay in product shipments as well.

     

    Conclusion

    Covid-19 has definitely pushed retailers and businesses to an edge, forcing them to find ways to sustain themselves. While some were unable to do so, subsequently going into insolvencies; many thrived by embracing the opportunity presented by the electronic commerce sector. It is also becoming increasingly evident that along with this consumer-driven shift, the need for backend technologies that allow retailers to maximise online opportunities in the most efficient, environmental-friendly, and cost-effective manner will emerge. There is still a myriad of challenges ahead for this sector that will be unveiled over time. However, the rise of the digital economy is indubitably imperative to a country’s growth in the long run as we enter the industrial revolution 4.0. This pandemic has definitely sped up this process.

    Researcher: Jonathan Leng Yu Cheng

    Edited by: Chee Hor

    Download Article: [download id=”4888″]

    [yikes-mailchimp form=”1″]

  • Communicable Diseases and Supply Chain 

    Communicable Diseases and Supply Chain 

    Communicable Diseases and Supply Chain 

    Many would say 2020 did not start with a good note. As the new century dawns onto us, a new string of coronavirus, the COVID-19, has risen and quickly made itself known worldwide. With the first case being reported in December 2019, COVID-19 has taken its 11,002,451st victim on 3rd July 2020. While the rest of the world is scrambling around to take health and safety measures to mitigate the possible loss, many are also concerned about the consequential impact of the pandemic on business continuity, particularly the supply chain. In fact, this is indeed a long-standing problem with all communicable diseases, mostly because they spread so quickly that businesses were often left helpless as their supply chain cannot adapt to the sudden disruption. Accenture has found that over 75% of companies have experienced negative effects in their businesses from COVID-19. In this article, we will look into what communicable diseases are, why are they potentially fatal to many businesses, and what can we do to better prepare our businesses in the future. 

    Background

    In this section, we will first understand the background of communicable diseases before diving into how it will affect businesses and their supply chain. What exactly do communicable diseases mean? Communicable diseases are illnesses that can be spread from one human to another mainly via four separate forms, namely physical contact with an infected person, bites from an infected animal/insect, contact with a contaminated surface, or through airborne particles/droplets. In contrast, non-communicable diseases are illnesses that cannot be spread through these channels to another human, such as cancer and diabetes. In this article, we will be looking into the supply chain issues during four different epidemics, namely SARS, H1N1, Ebola, and Covid-19. The table below will provide a quick summary of these diseases, drawing us the necessary backdrop for further discussion. Do take note that many numbers below are official estimated figures, and many of them are believed to vastly understate the true spread of these diseases. 

    Why then would communicable diseases pose a higher risk to businesses than their non-communicable counterparts? This is because the infectious nature of communicable diseases is likely to incite fear among humans, especially if they are highly contagious such as the COVID-19. The unpredictable nature of a pandemic outbreak induces uncertainties in the business environment causing operations to slow down or even halt entirely. For instance, a pandemic outbreak could trigger the government to enforce emergency response measures such as preventing border movement, which will directly affect firms that carry out international operations. It will also be harder to implement Just-In-Time supply chain practices and lean management strategies since businesses will not be able to forecast demand. Generally, companies are predicted to only be able to last for two to five weeks after their supply is interrupted. Thus, when the market is under a demand shock due to a pandemic, either a spike due to panic buying or a fall due to a general market recession, our supply chain will struggle to keep up. On the other hand, communicable diseases will also potentially cause an economic recession because demand is likely to fall sharply once movement control orders or MCOs are implemented. Once consumers are no longer able to go out, small and medium enterprises (SMEs) especially will be negatively impacted due to the reduced footfalls and consequently reduced sales. Reportedly, SMEs in Malaysia expect to have no cash inflow for at least three months during MCO. Over half of the companies in Malaysia, including both SMEs and larger corporations, have stated that MCO restrictions must be relaxed urgently to allow for economic recovery. Therefore, we can conclude that pandemics are highly disruptive to the economy. This article will highlight one aspect of this disruption, the supply chain, which is famously known as the backbone of many enterprises worldwide.  

    Now, let’s take a deep dive and look into how the business supply chain has been affected by the diseases we have listed above. 

    Supply Chain

    What exactly is the supply chain and why does it affect business performance? In short, a supply chain is every company’s lifeline. A supply chain is an entire system of producing and delivering a product or service, from the very beginning stage of sourcing the raw materials to the final delivery of the product or service to end-users. The Council of Supply Chain Management Professionals (CSCMP) defines supply chain management as the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management strategies. Supply chain management also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. It matches supply and demand by ensuring that requests of purchases will be supplied, fulfilled, and sent into the buyer’s hands. Briefly, it includes sourcing, procurement, logistics, and many more. When there is a communicable disease outbreak, it is often that business operations will be interfered with, causing a breakdown along the supply chain.

    Supply Reliability

    The first roadblock appears from the suppliers. Many companies have a network of suppliers that they rely on to keep their business running. During an epidemic, companies might face the problem of suppliers having to stop their operations or run at half capacity, which would have a direct impact on the supply chain for the rest of the companies. This will be a major problem if the companies only have one supplier or all of their suppliers are located in the same geographical area. 

    During the Ebola crisis, Sub-Saharan Africa’s output in commodities such as oil, minerals, ores, rubber, and agricultural products has been greatly impacted by Ebola. Liberia’s rubber exports faced difficulties during the Ebola outbreak because rubber harvesting is a labor-intensive job that could spark an Ebola outbreak among the plantation workers if poorly managed. Liberia’s exports have suffered during the year, and this was no different from other Ebola-impacted areas in Africa (the further breakdown of all other agricultural supply chains can be found here). The importance of supply reliability was further highlighted in the 2002 SARS and the recent COVID-19 pandemic. As both viruses originated from China, they have brought many difficulties worldwide due to the country’s strong presence in the manufacturing industry. During SARS, Adidas-Salomon AG was forced to move a portion of its production in China to Vietnam and Indonesia to overcome the problems of travel ban and containment orders. Even if a company may have suppliers outside of China, these suppliers might also be dependent on a Chinese factory to supply them with components and intermediary parts.  Apple is one of the well-known brands that feared a disruption in its operations due to its reliance on Chinese suppliers. The company had announced to its investors on February 17 that they might no longer be able to hit their Q2 revenue target. However, their April 30 press release revealed that its revenue was able to grow by 1% as compared to its year-ago quarter, thanks to the stellar growth in its Services and Wearables. Other household names such as Honda, Nissan, and Hyundai are also affected.

    Logistical challenges

    Aside from supply issues, a pandemic will also trigger a chain of logistical issues along the supply chain, such as the travel bans and movement restrictions. Depending on the severity of a pandemic, governments will impose measures to control the spread among its population. When that happens, it is common that many ports and passageways may close, affecting air, land, and sea freight alike. This is widespread during COVID-19 and it has also happened during the Ebola outbreak. With airlines canceling more of the already-dwindling flights in Africa, many businesses struggled with their supply chains as those that rely solely on commercial airlines to ship goods will need to search for alternative cargo airlines. Countries will also start imposing stricter border controls during a pandemic, causing delays in customs clearance and worsening supply lead time. 

    Aside from that, developing countries tend to be worse off when pandemics occur as they may have poor transportation infrastructure and limited access to remote areas. Or, the affected area might be one that is trapped in political turmoil, where wars and conflicts impede humanitarian efforts. Consequently, essential items such as vaccines or medical supplies might not be able to reach rural areas in due time. On top of that, sudden excessive demand also strains the supply chain especially if it exceeds the company’s existing logistical capacity. For example, if a company only has 25 trucks in its fleet, it would be difficult for the company to respond to spikes of demand in short notice if the volume needed to be shipped exceeds what the 25 trucks could move at a time. This situation is only worsened by the fact that it will be difficult for companies to find drivers that are willing to drive during a pandemic, especially if it’s in the affected area. 

    How It Affects Consumers 

    While the idea of business continuity might be unfamiliar to us, its effects on our lives are obvious. When production halts and logistics slows, supply lead time increases, meaning that it will take longer for the goods we seek to end up in our hands. During times of pandemic, these might mean shortages, delayed delivery, and empty shelves. Businesses could no longer respond in time to stockouts, and we consumers are left waiting, helpless to the break-in supply. The imbalance of demand and supply will trigger a change in market price, and we consumers might be required to pay high prices for daily commodities. Besides that, we will also see scarcity in pharmaceutical and medical supplies; from medicines in hospitals to basic protective items such as face masks, hand sanitizer, and gloves. The disruption to supply chains will have a more lasting impact in manufacturing hot spots like China or India. Not only does China supply electronics, but it also supplies clothing, toys, packaging, wedding gowns, and many other day-to-day items. The COVID-19, for example, may cause a wedding gown shortage during summer due to the production shutdowns during the peak of the pandemic in the country. 

    Prevention and Mitigation

    Previous pandemics have enlightened us to the vulnerability of our supply chains. It is often that businesses would focus on profit-generating rather than the long-term stability of their operations, which would prove fatal to their business continuity when crises happen. Lengthening the supply chain too far across the globe might stretch it just a little bit too thin and cause fragility to disruptions. This section will highlight some actions that governments and businesses can take to mitigate losses during a pandemic. 

    Firstly, companies should start investing in increased visibility along their supply chain. Supply chain visibility is a company’s ability to track and trace their products and commodities during transit. For instance, Grab provides good last-mile visibility to their food delivery customers because we can always track and check where our order is on the mobile application. For companies, supply chain visibility can be useful to obtain accurate demand data, to know where stoppages happen during a pandemic, and where their shipments are at a moment’s notice. Increased visibility allows companies to respond and plan for further actions, and make path corrections if so required. Visibility will also be beneficial for the humanitarian supply chain, where oftentimes many institutions and governments will work hand-in-hand.  All humanitarian efforts, such as earthquake disaster relief and vaccine deliveries to affected zones, involve a complex and unpredictable supply chain. Logisticians and companies will have to improvise and adapt their approaches to the differing circumstances for each incident. More often than not, the humanitarian supply chain involves more stakeholders, such as governments and NGOs, than a commercial supply chain. A transparent humanitarian supply chain will allow all parties to work together seamlessly and reduce the possibilities of duplicated efforts and wasted resources. 

    Next, governments must take the initiative to save for a rainy day. Since pandemics cannot be prevented or predicted, nations must ensure that they have an emergency response plan in place. A multilateral regional mechanism can be initiated by nations within regions such as ASEAN, the EU, and Africa, where governments and emergency response groups can convene and lay down the contingency plans in times of crisis. Governments must clearly understand what resources they have at hand, what capacity can they move in short notice, and what organizations or commercial companies can they engage and be involved with humanitarian efforts. Subsequently, these plans must be rolled out clearly to the stakeholders so all parties can understand the role they will play when necessary. In this case, pandemic and disaster response preparedness is very similar, and countries should never make the mistake of overlooking one for another.

    Similar planning will also benefit companies. Companies should place more emphasis on supply chain risk management (SCRM), and address aspects such as business continuity plan, supply chain design for resiliency, and crisis management. Businesses could choose to diversify their sourcing strategy geographically just to avoid putting too many eggs in one basket and growing dependent on their suppliers. It is also important for businesses to map their supplier network, including those that are tier 2 and above (suppliers for tier 1 suppliers) so that they can quickly recognize an incoming supply disruption during an incident. Aside from external plannings, companies should also draft internal continuity plans so that their employees could still maintain a certain level of productivity during an outbreak. Employees will have more confidence in the companies’ management if there are clear health and safety rules imposed across the organization prior to a crisis occurs. Clear guidelines will minimize panic from spreading within the workshop, which would prevent productivity paralysis. A good reference to this would be Cisco’s response during H1N1. Other documents that provide more detail on a company’s best practices during pandemics can also be seen here, here and here. 

    Conclusion

    Fear can quickly obscure our vision during a pandemic outbreak, but businesses have to respond swiftly to counteract the effects that communicable diseases bring to their supply chain or they risk being left behind. While it is important to implement supply chain cost-cutting measures to boost business performance, companies must also realize that investing in its resilience is equally important too. Companies must prepare for the worse, run worst-case doomsday scenarios to thoroughly understand the resources and limits of their business. When the going gets tough, organizations must remain as a strong team to keep the boat afloat, and being prepared will always be a good way to start.

    Researcher: Teh Jia Qi

    Edited by: Chee Hor, Arivaasaran Arjunan

    Reviewed by: Yang Lee

    Download the article: [download id=”4628″]

    [yikes-mailchimp form=”1″]

     

Subscribe to us now!

Interested in achieving financial literacy?