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The first item is an interview with Karen Wood, chair of South32 and is entitled “How an Australian resources company makes ESG a priority”.
The second feature is dealing with climate change and is entitled “Sizing up the climate risk challenge in Asia“.
The third article is on the “Three things China can do to fight climate change” and offers some new aspects.
The fourth item treats health aspects and is entitles “Building a healthcare ecosystem in India: A conversation with Shobana Kamineni”offering many new aspects of this industry that came suddenly to the limelight during the pandemic.
The fifth article is on “COVID-19 and European small and medium-size enterprises: How they are weathering the storm” offering many new aspects on SME’s and how they have to affront many hindrances to survive.
Here starts the first item:
How an Australian resources company makes ESG a priority
Karen Wood, chair of South32, talks about what makes the company’s purpose and strategy resilient in unpredictable times. This interview was conducted by Michael Ellis, a senior partner in McKinsey’s Sydney office.
The consequences of risk, from pandemics to climate change, dominate the business agenda. They also underscore the importance for business leaders to strengthen their companies’ environmental, social, and governance (ESG) propositions, says Karen Wood, chair of the board of South32, a diversified resources company headquartered in Australia that does business in around 60 countries. Before assuming the role of chair, Wood served as independent nonexecutive director and part of the remuneration, sustainability, and nomination and governance committees for South32. Prior to that, she was part of the executive leadership team at BHP from 2001 to 2014.
While the resources industry has long made ESG a priority, industry veteran Wood believes the COVID-19 pandemic has led broader industry to become more focused on the importance of the social element too. “We need to be focused on the economic and the social cost that comes from addressing this issue,” she says of the pandemic’s unequal impact on different segments of society. In August, Wood spoke with McKinsey’s Michael Ellis on how her role as chair of the board has been affected by the pandemic, the steps South32 is taking to prepare for a low-carbon world, and the opportunities for multistakeholder collaboration to tackle some of the world’s pressing challenges.
The Quarterly: How has COVID-19 affected your views on the role South32 can play in the world?
Karen Wood: There is a real opportunity for us to think about how we approach our work and open up a different conversation about some of the issues that we need to confront, both as a business and as a society. From a South32 perspective, we’re taking this as an opportunity to have that different conversation and use this as a catalyst to take that forward.
We’ve seen real collaboration across forces including employee groups, unions, businesses. That’s given us all an enormous amount of confidence about what might be achieved when we can align behind a common goal. It’s an opportunity that I’d hate to see squandered.
The Quarterly: What’s changing?
Karen Wood: The ESG agenda has come to the fore, with the social aspect being critically important. I think about the countries where South32 does business, such as South Africa and Mozambique, where the COVID-19 pandemic presented a significant challenge and has required a collaborative approach between government, business, and civil society. We all have a role to play in addressing the crisis.
An obvious example for us is the fact that we operate on land that is owned by other people. And, very often, by traditional owners who have a deep and abiding connection with the land that goes back, in some cases, millennia. Those people need to be better off for us being there than not.
We believe we can make a genuine difference in [four areas]: first, education and leadership, empowering young people to take leadership roles in their community; second, supporting participation in the [local] economy; third, [helping with] mental-health issues, which have been a concern for a long time in some of the remote communities where South32 operates; and fourth, in natural-resource resilience.
The Quarterly: How have the purpose and values of South32 been tested during this period?
Karen Wood: A clear purpose statement is a unifying statement and a benchmark to test decisions. Ours is built off of three planks. First, to make a difference by developing natural resources to improve people’s lives. The second plank is to [consider the impact on] future generations. Third, to earn the trust of our owners and our partners so they know that we realize the value of their resources. That purpose is underpinned by our values—care, excellence, togetherness, and trust. They have been the foundation for our decision making through the pandemic and are the foundation we will rely on to confront the challenges that emerge post-pandemic.
During the pandemic, keeping our people safe and well has been the primary objective; second, maintaining safe and reliable operations; third, supporting our communities. Those three things fit so neatly into the purpose of South32. We haven’t had to go back and say, “Gee, you know, what is our reason for being?”
The Quarterly: What are your investors’ responses to South32’s ESG focus?
Karen Wood: Even before COVID, discussions with shareholders had been much more centered around the ESG risks we confront as a company. People are actively looking for a dialogue on what part companies are playing in that space. The days of separating shareholder interests from broader social interests are gone.
There was a time [in this industry] when we talked about a trade-off between production outcomes and safe outcomes. That hasn’t been the case for a very long time, as we’ve recognized that you can’t have a productive asset unless you’ve got a safe asset. [In the same way,] you can’t have a productive company unless you’ve got one eye on your impact.
The Quarterly: What does this mean, in practice, for the board?
Karen Wood: We’re in an industry that is used to making decisions where we’re talking about deploying large amounts of capital with a long-term impact. We often have the luxury of a decision-making process that can go on for months or years. In this scenario, that wasn’t the case. We thought about our work in three phases: What do we need to do immediately to address the health crisis to keep our people safe and support local communities? What do we need to do in the medium term to make sure that our business is protected? And what does the long term look like?
The board is thinking about it in those three phases, because, as I said, right at the outset we do not want to lose the opportunity for a different conversation, a different way of thinking to come to grips with what the world is going to look like when we emerge on the other side of this.
The Quarterly: What are the implications for company strategy?
Karen Wood: The strategy has not changed. Clearly, we’ve had to make some short-term decisions. We’ve had to suspend some work that wasn’t business critical, and we’ve had to free up teams to address the health crisis.
But the strategy has not changed. One plank is to optimize the operations that we have, the second is to unlock the value in those operations, and the third, to identify opportunities for growth. In that third plank, we have a bias to base metals because we [favor] commodities that will have a long-term future in a low-carbon world.
You see it in a number of recent initiatives: the planned divestment of the energy coal business in South Africa; the investment in the Hermosa Project in Arizona, a silver, lead, and zinc deposit; and our participation in the joint venture with Ambler Metals in Alaska for copper, silver, lead, and zinc.
The Quarterly: How does that affect your capital allocation?
Karen Wood: Our capital-management strategy, which underpins the broader strategy of optimize, unlock, identify, is also unchanged and has shown the flexibility needed to react in these unprecedented times. It’s also focused on three things: maintaining safe and reliable operations and retaining our investment credit-grade rating; second, returning 40 % of our underlining earnings to shareholders through ordinary dividends; and third, setting up competition for the capital that is left.
Within the third plank sits opportunities of the M&A kind that might emerge through this crisis, but they have to compete for remaining capital. We’ve also had the flexibility inside our capital-management strategy to respond—by suspending the buyback, for instance—until we get more certainty about what the long-term ramifications of the pandemic might be. As you know, our business is conducted in developed and developing countries around the world, the latter of which may not come through quite as quickly as some of the more developed nations. So we feel very confident that both our business and capital-allocation strategies are robust and will see us through this period.
The Quarterly: How is South32 dealing with increased unpredictability and instability in global trading relationships?
Karen Wood: Global free trade is an absolutely critical part of our business. As a society, we cannot address global challenges without global free trade. Look at China, where millions of people have been lifted out of poverty as a result of industrialization—fueled, in part, by resources that come from Australia.
So the global tensions are concerning, not least because they have an impact on commodity markets. We need to watch closely and run our business as efficiently as possible. But we also need to make sure that we have open and constructive relationships with our customers around the world. That is absolutely critical. South32 has a very diverse customer base. We have relationships with customers around the world that go back decades. We need to focus on the interdependencies between companies, which are the platform for constructive relationships.
It’s not a particularly secret ingredient, is it, that trust-based relationships are the basis upon which all strong business relationships are built? But it does really underpin the success of South32’s model.
The Quarterly: One final question: Where do you see the mining industry and South32 20 years from now?
Karen Wood: From a South32 perspective, I feel very confident that the strategy of optimize, unlock, and identify will lead us to a simpler commodity portfolio with a bias toward base metals. It will be a portfolio with the sort of commodities that are necessary in a low-carbon future. South32 has made a commitment to carbon neutrality by 2050, and our broader capital-management strategy is consistent with that.
By 2050, we will all be well beyond this debate about shareholder interest versus broader stakeholder interest. That debate will be well and truly settled—these are shared interests that can both be met simultaneously. The world cannot possibly address the critical challenges it faces unless corporations take a broader perspective that looks at impact and how corporations can make a fundamental difference.
Here starts the second article
Sizing up the climate risk challenge in Asia
A preview of new and comprehensive McKinsey research aims to help Asian leaders assess and combat the effects of climate change
By guest authors Mekala Krishnan leading the McKinsey Global Institute’s research on gender economics, inclusive growth, and economic development and Yuito Yamada leading McKinsey’s Chemicals and Agriculture sector in Japan and is the leader of the Sustainability Practice in Asia. Coordinating McKinsey’s activity in the Specialty Chemicals, Agriculture/Food and material sectors.
As Asia begins to recover from the worst effects of the coronavirus pandemic, it must not lose sight of another existential risk: climate change.
Our analysis finds that climate risk could be more severe in the Asia-Pacific region than in other parts of the world in the absence of adaptation and mitigation. For example, a substantial proportion of people living in areas with rising risk of lethal heat waves by 2050 are in Asia, capital stock in the region is also at higher risk from riverine flooding than elsewhere, and the share of time spent in drought conditions is projected to increase, based on our estimates.
The effects of the changing climate are already being felt: The 2017 floods in China’s Hunan province affected 7.8 million people and resulted in USD 3.55 billion in direct economic loss. In Australia, the risk of extreme weather conditions that result in fires as severe as the ones observed there last year has increased by at least 30 % since 1900.
The effects of climate change, however, will not be felt equally across the Asia-Pacific region. In fact, our research underscores two characteristics of climate risk: that climate risk is spatial (it needs to be understood in the context of a geographically defined area) and that it’s regressive (in other words, the poorest parts of the world will be hit hardest).
In August, we released the first part of an extended research endeavor that aims to answer how Asia will tackle climate change in the coming years. Below we illustrate the scope of climate risk in Asia, both the physical hazards and potential socioeconomic consequences, before highlighting measures and potential opportunities for adaptation and mitigation in a forthcoming report. Our estimates are based on a high-emissions scenario absent adaptation and mitigation, also known as RCP 8.5.
Under the high-emissions scenario, average temperatures in Asia could increase by more than 2 degrees by 2050 compared with preindustrial levels. These intensifying climate hazards will have a growing socioeconomic impact.
Large cities in parts of India, Bangladesh, and Pakistan, for example, could be among the first places in the world to experience heat waves that exceed the survivability threshold for healthy human beings in the shade. Chronic increases in heat and humidity levels could also impact labor productivity, reducing effective working hours. This could cost Asia up to USD 4.7 trillion in annual GDP by 2050; that accounts for more than two-thirds of the total annual global GDP impact. Parts of South Asia—including Bangladesh, India, and Pakistan, where such effects will be felt most extremely—could see 7 to 13 % of GDP at risk in an average year by 2050.
The risk of extreme precipitation events could increase three- or fourfold by 2050 in some areas including eastern Japan, central and eastern China, parts of South Korea, and Indonesia, according to models from Woods Hole Research Center. While climate change is unlikely to increase the frequency of typhoons in Asia, it could boost their average severity. The likelihood of severe typhoon precipitation—an event which had a 1 % annual likelihood between 1981 and 2000—is expected in some areas to triple by 2040.
Finally, about USD 1.2 trillion in capital stock in Asia could be damaged by riverine flooding in a given year by 2050, equivalent to about 75 % of the global impact.
While some regions in Asia are expected to experience a surplus in water supply due to extreme precipitation, others can expect to spend most of the time in drought conditions. The share of a decade spent in a drought condition could grow to more than 80 % in southwestern Australia by 2050, and some parts of China could spend 40 to 60 % of a decade in drought.
Fortunately, Asia is well positioned to address these challenges. Infrastructure and urban areas are still being built out in many parts of Asia, which gives the region the chance to build more resilient assets. To maintain its current growth trajectory, Asia must invest $1.7 trillion annually through 2030, according to the Asian Development Bank. Incorporating climate adaptation into projects will make a difference to regional development and resilience. Like all parts of the world, Asia can also contribute to reducing emissions through decarbonization and by furthering the development of low-carbon technology.
In our forthcoming report on climate risk and response in Asia, we will explore these issues further, and highlight measures that Asian policymakers and business leaders could consider to protect lives and livelihoods from physical climate risk across three dimensions: integrating climate risk into business and policy decisions, adopting measures that are effective in adapting to the changing climate, and seeking to mitigate climate risk through decarbonisation.
Read more in the McKinsey report Climate risk and response in Asia: Research preview
Now the third item:
Three things China can do to fight climate change
China could greatly limit its exposure to both physical climate risk and transition risk, while tapping new sources of economic growth.
By guest author Jonathan Woetzel, Leads research on China, Asia, and global economic and business trends, helps cities and regions create sustainable growth, and supports the transformation of Asian companies into global champions
In the post-coronavirus world, countries are going to grapple with restarting economies amidst a recession. However, we cannot afford to leave the climate risk agenda off the table. Climate change is here, with the associated risks to our lives and livelihoods.
All countries will be affected by climate risks, but China is among the few that have the political, technological, and economic capacity to shape the global response to climate change. In less than a decade, China—along with the rest of the world—will be hard hit by climate change. By 2030, under a high-emissions scenario, extreme heat could affect up to 45 million people in the country; the lost outdoor working hours alone could cost China up to USD 1.5 trillion equivalent in GDP in an average year by 2050.
By stepping up to rapidly and significantly reduce greenhouse gases, China could greatly limit its own and the world’s exposure to physical climate risk. As the annual producer of 20 % of the world’s greenhouse gases, China could help reduce the growth in global emissions to an extent that almost no other nation can. By developing and scaling the technologies needed to reduce its emissions, China could also tap new sources for economic growth.
Doing so will require China to set bolder goals for its contributions to the fight against climate change. China has pledged to revise its current plans but it is not clear whether there is alignment around a net-zero commitment—that is, to cut global greenhouse gas emissions to net zero by 2050. As of December 2019, about 80 countries, including almost all of the European Union, have taken this pledge. Taking up this challenge—by announcing bold actions and delivering them—could have a powerful catalytic effect on other countries, encouraging them to move more quickly onto a low-carbon path.
Higher goals will also require new approaches to develop and scale carbon solutions, mobilize green finance, and support international climate collaboration. This post will look at the ways China can contribute to the battle against climate change and to sustainable economic development:
1. Develop, scale, and share climate solutions
Given its financial and technological resources, China can invest more to develop global-scale low-carbon technology. As the world moves toward a low-carbon economy, the demand for eco-friendly technologies will increase dramatically. China already leads the world market for solar panels and is seeing growing demand around the world for wind turbines, batteries, and electric vehicles.
To get ahead of the curve, China could align its technology investments to what the world will want next. Specifically, China could invest in the following products and services to address both domestic and global needs for climate solutions:
- Alternative proteins and other solutions to reduce methane emissions from livestock
- Electrolysers, fuel cells, and the supporting infrastructure and components that will be crucial for sustainable hydrogen production
- Carbon capture, use, and storage (CCUS), which will be needed to decarbonize industry
- Sustainable aviation fuels, likely derived from organic waste or bioenergy initially
- Batteries and electricity storage technology, building upon China’s expertise in electric vehicles
- Resiliency planning and risk assessment modeling for city infrastructure
China also ranks second globally in both inbound and outbound foreign direct investment. That makes it a major player. It could use its position as a hub for global foreign investment to build truly global clusters of excellence in green technology and finance. China could consider including stricter, legally binding environmental requirements into cross-border investment deal terms. It could also revise the government’s encouraged and restricted outbound investment list. Explicitly including green sectors, such as renewable energy, and excluding activities like coal production, would send a much stronger signal to host countries to step up their green game.
2. Mobilise capital for green development globally
China could make bigger and bolder financial commitments to support the transition to a low-carbon world. That would be good in and of itself; it might also catalyze the growth of global green finance markets. Leading global climate finance initiatives could take many forms.
China can mobilise investment into global green finance by expanding its carbon markets. China is already one of the largest issuers of green bonds globally but questions remain about standards and disclosure, and foreign participation is minimal. As China moves to establish its carbon trading market, expanding its scheme to more sectors and provinces, it will create one of the biggest opportunities for green investors globally. Because the cost of carbon reduction in China is lower than many other locations, investors will find China’s green investment opportunities attractive. The sheer size of the Chinese market will enhance global green finance liquidity and product sophistication. China will have to work closely with global capital market players to ensure credibility as it develops these opportunities.
China’s financial resources could also directly shape development financing and support a low-carbon future globally. It could drive multilateral collaboration through emerging institutions such as the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB), as well as leadership roles at the World Bank and other development banks. Development banks can jointly review and define more stringent standards based on the Paris Agreement, then reform and implement their energy, transport, and sustainable city investment strategies. China can also prioritize green projects that cross borders and encourage other countries where it has a major investment to consider the climate impacts of their own infrastructure.
3. Support global climate collaboration
Dealing with climate change is the challenge of the 2020s. The next 10 years are critical if the world is to mitigate the risk of even more extreme climate change. The fixed “carbon budget” means that the further we delay our actions, the steeper our future decarbonisation path will need to be. Meeting that budget requires a rapid transition in all sectors, everywhere. For China, this is an opportunity to carve out a new role as it contributes to global climate collaboration.
China could expand its involvement in international trade groups to elevate the climate agenda within sectors. Many have called on businesses to align their trade associations’ climate policy advocacy to be consistent with the goal of net-zero emissions by 2050. Chinese businesses could play a leading role orchestrating changes in sectoral practices.
China could support international discussions to set standards on effective carbon mechanisms and pricing. China, together with the rest of the world, could rethink the optimal international carbon mechanism, be it an emission trading scheme or a carbon tax system.
Dealing with climate risk will continue to be a top global priority and will force change in many industries. Although this transition will be difficult, it is time for China to show how it can contribute in a new, low-carbon economy.
Read more in our report Leading the battle against climate change: Actions for China.
Here starts the fourth article
Building a healthcare ecosystem in India: A conversation with Shobana Kamineni
Shobana Kamineni is the executive vice chairperson of Apollo Hospitals. Axel Baur is a senior partner in McKinsey’s Hong Kong office and leads the Healthcare practice for Asia. This is an edited transcript from the Southeast Asia 2020 Virtual Congress of the McKinsey HealthTech Network, organised by Hann Yew, associate partner in McKinsey’s Singapore office.
The COVID-19 pandemic led to public-private partnerships that reflect the evolving nature of healthcare.
Changing how a country of 1.4 billion people approaches healthcare—amid a global pandemic—is not a task for the fainthearted. Yet Shobana Kamineni, executive vice-chairperson of India’s Apollo Hospitals, has built a healthcare ecosystem that comprises more than 7,000 physicians and 30,000 other healthcare professionals. By mid-2020, six months after launch, Apollo 24/7, Apollo’s holistic digital health platform, had enrolled 4 million people, with around 30000 downloads a day.
In August 2020, during the Southeast Asia 2020 Virtual Congress of the McKinsey HealthTech Network, moderated by McKinsey senior partner Axel Baur, Kamineni discussed the travails of establishing a healthcare ecosystem at such scale. A condensed and edited version of Kamineni’s remarks and the subsequent discussion follows.
Insights amplified by COVID-19
Today we’re entering a new era defined by insights and discoveries that elevate the greater well-being of the human on this planet. The information age has moved now to the age of insights, and I want to bring out five insights that the pandemic has amplified.
The greatest shift in the pandemic is undoubtedly toward digital health, and my first insight concerns telehealth. Customer adoption has skyrocketed, from 11 % of US customers using telehealth in 2019 to 46 % now using telehealth to replace canceled healthcare visits. In India, 50 million Indians accessed healthcare online from March to May 2020, with 80 % of all telemedicine users and patients using it for the first time.
Second, huge shifts are going to take place for hospitals, from inpatient to outpatient care and from outpatient to home care. What was once done in a hospital room may be done in offices or in homes, including procedures such as chemotherapy and X-rays. A lot of hospital care is becoming more mobile. We were thinking about home care from a perspective of increasing our geography at lower costs for patients and ourselves, because, per bed, hospitals are really expensive. Now, we’re seeing that patients prefer home care because they think it’s safer to stay home than to come into a hospital for an elective procedure.
The Internet of Things—connected devices—is my third insight, and actually it’s a no-brainer. Smart devices have become more prominent as people have invited them into their lives to help fight COVID-19 and to share data with their doctors. However, a study said while people are benefiting from this technology, their concerns about how data are used is rising exponentially. Of healthcare consumers surveyed, 70 % said that they were concerned about data privacy and businesses tracking their online activities, behaviors, locations, and interests. Digital health of the future has to address how we’re going to protect data privacy.
COVID-19 has not slowed digital innovation, but amplified it to historic levels. Healthcare organizations are elevating technology agendas to explore emerging digital technologies that provide the right infrastructure to help people feel safer.
Fourth, the metrics of healthcare will change. They say you need one doctor for every thousand patients, but today with telehealth it could be one for every 1800. Doctors, nurses, everyone is getting more efficient. In India, 60 % of hospitals, 75 % of pharmacies, and 80 % of doctors are in urban areas. This creates a rural ‘famine’ for health, but we can actually change this metric with better connectivity. Across the world, there are new productivity metrics that are not tethered to geography, but possibly to latency, and healthcare collaboratives will emerge as hospitals, tech companies, insurers, and governments start converging.
My last insight concerns much greater public-private engagement. This pandemic has brought out two great partnerships in India. One is a project, which Apollo is part of, that is a coalition of hundreds of digital health companies and hospitals that has launched a nationwide telemedicine platform for COVID-19 care. The second is eSanjeevani, which was promoted by the Ministry of Health, and includes the Aarogya Setu app for contact tracing, which 150 million Indians have downloaded. The situation has accelerated engagement between the public and private sectors at the intersection of digital technology and healthcare experiences, and the future of care will demand rethinking core assumptions about the intersection.
The power of the digital and the physical
So, here we have a 37-year-old hospital system. We have 10000 beds, 70-plus hospitals across India, 300 clinics, and close to 4000 pharmacies. We were in health insurance, and we are still a third-party administrator (TPA). 1 We had this entire ecosystem, probably the only one in the country with such a presence in the physical world. We already knew before the pandemic that we could never live just in the physical world—but during the pandemic we had to turn on a dime.
We were fortunate to already have had digital technologies available with Apollo 24/7. Out of this, we envisioned an ecosystem where a person could get everything: you could get it virtually, but you could also get it physically. Whether you wanted a doctor consult, the medicine you required, or a diagnostic test, it was available, and as an added benefit your records were all in one place. What we were able to do was make the whole healthcare system a giant ecosystem. Without something like this, hospitals across the world would have lost so much money because the beds are empty.
Our Kavach project is an example of how the pandemic accelerated these efforts. We integrated 2500 of our hospital beds and another 2000 hotel beds, plus home care, to create a complete COVID-19 solution for thousands and thousands of Indians. It’s the largest effort outside government in the country so far. While we were fighting the pandemic, we were also growing our network. Today, we have about 4 million users of Apollo 24/7, and out of the 4 million, we’ve seen 25 % of them come back week after week.
That’s the power of the digital and the physical. The healthcare model can never be just virtual. It has to be anchored in the omni, the duality of physical and virtual that is this new age of health. When people ask me about the healthcare system of the future—will it be second opinion networks or any of these apps they think are very cool to talk about—I tell them it’s never going to be anything unless it’s anchored by the reality of the care you want to give to a patient.
Breaking traditional attitudes
Changing internal attitudes toward healthcare was very tough. We started Apollo 24/7 in February 2020, just a month before the lockdown took place in India. Doctors said they were always too busy with their practices because, first and foremost, patients in India want to trust when they can see their doctor. Patients can go online and choose from 100000 doctors, but at the end of the day, they want that one doctor they can trust. We said because of our brand, patients choose our brand and they use our doctors.
We brought on board 3000 doctors within the first 60 days alone, and today we have more than 7000 physicians and 30000 other healthcare professionals with us. And we have a larger ecosystem of Apollo doctors asking to be brought on board. Recruitment became easy, but it would have been really tough to bring to scale if the doctors had remained very difficult to convince [to join the Apollo network].
Understanding that the virtual cannot be disconnected from the physical was also powerful. For this to really work, I had the CEO of our pharmacies attend and participate in a lot of what we do in 24/7 because we expect all the deliveries to be done from the stores. Across almost 500 towns and cities, 45 % of India’s population lives within 30 minutes away from an Apollo pharmacy. So, unless we could really connect and make our pharmacy team believe in the 24/7 proposition, it would have been so much more expensive for us to promise to deliver medicine to these customers within two hours.
And finally, coming from a fiscal reality, we don’t know how to invest without a path to profitability. In some way I’m still old school, and as we were drawing up our business models, we always made sure that in the ecosystem we could deliver at a lower cost and could be more productive.
Facing down the digital competition
At the beginning, we said that we’re not going to give away investors’ money and just burn it like that. We realized that it’s not just discounts driving customers, it’s lifetime value. If you sign on with us, we have the ability to cure your disease. When you come in, you would be cared for better. We can give you better medication, make sure you take it on time, keep up with the reminders and refills, and make sure that if new medicines come in, you will have access to them and make sure you have safe medication. And, we will wrap it up in a medical package that is actually looking after you, saying, for instance, if you take these tests, we can make sure that with compliance your diabetes won’t progress, your blood pressure will be under control.
The views and opinions expressed are those of the interviewee and are not necessarily those of McKinsey & Company.
And here starts the fifth item
COVID-19 and European small and medium-size enterprises: How they are weathering the storm
By guest authors Jonathan Dimson, Zdravko Mladenov, Ruchi Sharma, and Karim Tadjeddine, Jonathan Dimson is a senior partner in McKinsey’s London office, where Zdravko Mladenov is a partner and Ruchi Sharma is an associate partner; Karim Tadjeddine is a senior partner in the Paris office.
The authors wish to thank Emily Birch, Marie Godefroid, Hashi Ibrahim-Hashi, Oliver Ried, and Nadya Snezhkova for their contributions to this article.
Small and medium-size enterprises have been the lifeblood of the European economy. But more than half of those surveyed worry they might not be in business in 12 months.
Small and medium-size enterprises(SMEs) have been the lifeblood of the European economy, accounting for more than two-thirds of the workforce and more than half of the economic value added. 1 Yet the results of a recent McKinsey survey, conducted in August, 2020, of more than 2,200 SMEs in five European countries—France, Germany, Italy, Spain and the United Kingdom—indicate just how hard their prosperity has been hit by the COVID-19 crisis.
Some 70 % said their revenues had declined as a result of the pandemic, with severe knock-on effects. One in five was concerned they might default on loans and have to lay off employees, while 28 % feared they would have to cancel growth projects. In aggregate, more than half felt their businesses may not survive longer than 12 months—despite the fact that 20 % of those surveyed had already taken advantage of the various forms of government assistance aimed at easing their financial distress, such as tax breaks or payments to furlough staff.
The vast majority of SMEs surveyed have seen revenues fall; although, as one might expect, the picture differs by country, reflecting the severity of measures to control the virus and their impact on business activity. Italian and Spanish SMEs have been hardest hit: 30 % and 33 % , respectively, said their revenues had been greatly reduced. That compares with 23 % in Germany (Exhibit 1). and 33 % , respectively, said their revenues had been greatly reduced. That compares with 23 % in Germany (Exhibit 1).
Few SMEs appear optimistic about the prospects for improvement anytime soon given their views on the state of the economy. Overall, 80 % weighed the economy as somewhat weak to extremely weak. But here, too, we see material country variations. In Germany, where the economy is forecast to contract less than elsewhere, 39 % of SMEs weighed the economy as somewhat strong to extremely strong. By comparison, in Italy the figure was just 10 % (Exhibit 2).
There were also differences across countries on the extent to which the pandemic is impacting SME financial positions, challenging the ability to retain staff or pay loans and leases. For example, Spanish SMEs are consistently among the more pessimistic (Exhibit 3). Thirty % of Spanish SMEs were concerned about being able to pay back loans, compared with 14 % in Germany. Similarly, 38 % of Spanish SMEs feared they might not be able to retain their employees—a figure that drops to only 16 % in Germany and France. Noteworthy, too, is that on average across Europe, 14 % of SMEs said they were struggling to staff their operations due in part to so many people being on sick leave or having to quarantine.
Growth projects are also at risk. Overall, 28 % of those surveyed said they were concerned they might have to postpone them, though the figure rose to 37 % among Spanish SMEs and 30 % among UK ones. Hardest hit will be the accommodation, food services, arts, entertainment, and recreation sectors, according to the survey. Nearly 40 % of SMEs in these sectors said projects might have to be put on hold, compared with 20 % of SMEs in sectors at the other end of the scale, namely health, agriculture, and construction (Exhibit 4).
Exhibit 5 shows how all this influences SMEs’ concerns about their survival by country, sector, and company size. Overall, 11 % said they expected to file for bankruptcy within six months. Concern was highest among the largest companies (those with 50 to 249 employees) in Italy and France, where 21 % —almost double the average—expected to file for bankruptcy in the next six months. By comparison, sole traders in Spain were most concerned, with 19 % expecting imminent bankruptcy compared to only 6 % of companies with 50 to 249 employees. Among industrial sectors, logistics had by far the highest number of expected bankruptcies (22 % ). Agriculture, accommodation, food services, retail, and wholesale followed, though at a considerably lower rate (13–15 % ).
The number of SMEs that ultimately fail to survive will depend in large measure on the uncertain future course of the pandemic and the toll it takes on company revenues. We, therefore, asked survey participants to consider how their businesses would fare under three different scenarios, where revenue held steady, decreased, or increased. They reported the following:
- If revenues were to remain steady, 55 % of SMEs worry they may shut down by September 2021.
- If the situation were to worsen and revenues decreased by a further 10 to 30 % , 77 % of SMEs said they may be out of business by September 2021.
- If the situation were to improve and revenues increased by 10 to 30 % , 39 % of SMEs said they may nevertheless be out of business by September 2021.
Those scenarios could be influenced by the extent to which SMEs continue to receive government support. Governments across the European Union have previously introduced measures, largely aimed at giving SMEs liquidity to withstand the immediate crisis, but now the Organisation for Economic Co-operation and Development (OECD) reports that policies are beginning to shift from those aimed at helping SMEs survive to those helping them recover. 2 Yet the survey data shows a large proportion of SMEs still plan to apply for the liquidity support measures on offer. Exhibit 6 shows that while nearly 20 % of SMEs had already applied for some form of government assistance, an additional 30 % planned to do so. Again, there are material differences between the large EU economies: in France and Italy, more than 35 % were still planning to apply, while in the United Kingdom and Germany the figure stood at 20 % and 25 % , respectively.
Different governments will take different approaches to supporting their SMEs from hereon. The extent of their support will also differ, with much depending upon local market conditions. But the survey underscores the need to consider both the immediate survival of SMEs as well their longer-term strength. Research has shown that around the world, the productivity of SMEs is well below that of larger companies. As and when the crisis fades, governments might therefore choose to help SMEs strengthen their resilience by, for example, helping them to find new markets or digitize more rapidly. SMEs have the potential to be an economic and employment engine after the crisis, but governments’ responses could prove critical.
The Newsletter of last Week
IMF’s October 2020 World Economic Outlook, and Re-imagining consumer-goods innovation for the next normal https://textile-future.com/archives/59621
The highlights of TextileFuture’s News of last week. For your convenience just click on the feature.
The COVID-19Illustration, Renegade choreographyonTikTok, the Impossible Vegan Burgerand a clean water sanitationproject with Jaden Smith: Design Museum announces Beazley Designs of the Year nominees https://textile-future.com/archives/59657
Artistic enigma decoded by cosmic Czech start-up https://textile-future.com/archives/59661
EIT Awards 2020: announcement of nominees https://textile-future.com/archives/59659
Mesdan cotton Stickiness testing method recognition https://textile-future.com/archives/59667
Lenzing wins State Prize for Innovation with sustainable nonwovens technology https://textile-future.com/archives/59732
Motherhood Maternity eeceives 2020 Ovia Family Award for Best Maternity Clothing Brand & Best Maternity Jeans https://textile-future.com/archives/59736
Valmont Barcelona Bridal Fashion Week supports the industry in the global dynamisation of the market https://textile-future.com/archives/59819
Gap Launches Holiday ‘DREAM THE FUTURE’ Campaign – A Celebration Of Modern American Opitimism https://textile-future.com/archives/59691
Interface Launches Embodied Beauty, unveils First Carbon Negative Carpet Tile Styles https://textile-future.com/archives/59697
Syngenta Group announces that Syngenta AG completed a successful EUR 200 million tap of its existing EUR 600 million Eurobond and a new CHF 265 million bond issue https://textile-future.com/archives/59575
Freudenberg – New Website about New Technology: Friction Inserts https://textile-future.com/archives/59587
Breaking News: Rieter Order intake is picking-up https://textile-future.com/archives/59781
Local Motors’ Parent Firm Receives USD 15 million Investment for Autonomous 3D Printed Shuttle, Olli https://textile-future.com/archives/59755
August 2020 compared with July 2020 Production in construction up by 2.6 % in Euro Area and by 2.4 % in EU https://textile-future.com/archives/59638
Third Swiss Quarter 2020: External Trade takes again off https://textile-future.com/archives/59654
Second quarter of 2020 compared with first quarter of 2020 Government debt up to 95.1% of GDP in Euro Area, up to 87.8 % of GDP in EU https://textile-future.com/archives/59807
Second quarter of 2020 – Seasonally adjusted government deficit at 11.6 % of GDP in the Euro area and 11.4 % of GDP in the EU Highest quarterly deficit published in the time series since 2002 https://textile-future.com/archives/59793
Provision of deficit and debt data for 2019 – second notification – Euro Area government deficit at 0.6 % and EU at 0.5 % of GDP Government debt at 84.0 % and 77.6 % respectively https://textile-future.com/archives/59827
Focus on climate specific innovations to drive sustainability in denim https://textile-future.com/archives/59617
Legent™ Bourbon Partners with American Menswear Designer Todd Snyder to release a Bourbon-Inspired Denim Jacket https://textile-future.com/archives/59766
AATCC and Runway of Dreams Foundation Announce the 2021 “Fashion for All” Student Design Competition https://textile-future.com/archives/59888
China Wants to Be the World’s EV Factory – It May Succeed https://textile-future.com/archives/59851
EU invests a further EUR 144.5 million in world-class supercomputers for researchers and businesses https://textile-future.com/archives/59724
EU Commission launches knowledge centre to reverse biodiversity loss and protect Europe’s ecosystems https://textile-future.com/archives/59746
INDIA ITME virtual technical Seminar & Pre-Event Buyer Seller meet December 3 – 5, 2020 https://textile-future.com/archives/59752
Retailers to front UK House of Commons inquiry on Uyghur forced labourhttps://textile-future.com/archives/59706
Indonesia launches safeguard investigation on articles of apparel and clothing accessories https://textile-future.com/archives/59720
Wipo’s creative Economy Notes on the Opera and other industries https://textile-future.com/archives/59885
Arena Icons meets ISKO for a timeless lifestyle outfit https://textile-future.com/archives/59727
ICIS Training course – an introduction to Plastic Recycling https://textile-future.com/archives/59592
Pandemic causes a record 11000 UK shops to close in 2020 https://textile-future.com/archives/59595
Fighting Corona with smart Chemistry: CHT produces and sells a solution for the antiviral functionalisation of textiles https://textile-future.com/archives/59700
Samsara Luggage Expands D2C with Launch of Sarah & Sam Fashion and Lifestyle Collection https://textile-future.com/archives/59672
FERRO-PLAST and SANITIZED AG: New strategic sales partnership for the Sanitized® antimicrobial polymer additives in Italy https://textile-future.com/archives/59684
Re-election of Ingeborg Neumann as President of the umbrella association of the German textile and fashion industry https://textile-future.com/archives/59867
Liming Chen appointed to Supervisory Board of BASF SE https://textile-future.com/archives/59867
L’Oréal Executive Committee Nominations – Barbara Lavernos is appointed President, Reseach, Innovation and Technologies, Antoine Vanlaeys is appointed President, Operations https://textile-future.com/archives/59867
At Calvin Klein and Tommy Hilfiger, a New CEO Adapts to How We Shop Now https://textile-future.com/archives/59867
WTO and UNCTAD welcome Pamela Coke-Hamilton as new International Trade Centre Head https://textile-future.com/archives/59867
M&S hires Next digital trading boss for newly-created role https://textile-future.com/archives/59867
Daren Tang Assumes Functions as WIPO Director General https://textile-future.com/archives/59867
The Swissmem Board elected Martin Hirzel as new Swissmem President as of January 1, 2021 https://textile-future.com/archives/59867
The EU Commission appoints a new Deputy Director-General for the migration and home affairs department https://textile-future.com/archives/59867
Turning streetwear into solar concentrators – Wearable solar concentrators https://textile-future.com/archives/59801
UK Hamleys to cut more than 25% of staff https://textile-future.com/archives/59584
Burberry uses gaming technology to streamline fashion design process https://textile-future.com/archives/59605
Edinburgh Woollen Mill’s Philip Day plots to rescue Peacocks https://textile-future.com/archives/59612
Vestiaire Collective x BCG: The Consumer Behind Fashion’s Growing Secondhand Market https://textile-future.com/archives/59709
By 2030, the sensor market in water and wastewater networks is predicted to be over USD 2 billion https://textile-future.com/archives/59741
Are US Shoppers returning to Apparel? https://textile-future.com/archives/59579
Voucher Shares supports World Land Trust during COVID-19 crisis and makes sustainable online shopping easier for millions of UK consumers https://textile-future.com/archives/59713
Signet Jewelers Accelerates Path to Brilliance to Reinvent the Holiday Shopping Experience for Jewellery https://textile-future.com/archives/59716
Toppen Malaysian Shopping Centre unveils plans for pedestrian bridge and welcomes new offerings https://textile-future.com/archives/59898
The TC19i: A new benchmark for man-made fibre processing by Truetzschler https://textile-future.com/archives/59676
WTO Members cite role of trade facilitation in ensuring access to goods to tackle COVID-19 https://textile-future.com/archives/59791
An exclusive license from Procter & Gamble offers the best for nonwovens – First class wipes with Phantom technology https://textile-future.com/archives/59847