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The next dollar is definitely coming from those avenues that flow harmoniously with the overriding global themes of decentralisation, de-homogenisation and individualisation in the wake of the thematic changes brought about by an event such as COVID-19, says Krishnan Unni Madathil

| | Jun 23, 2020 | 7:01 pm
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I have often been asked to what extent has COVID-19 already redefined the way we do business.

Let me preface my answer by saying this: My aim here is to avoid the chest-beating, wailing and plain hysteria that has been blared out from so much of the media, mode notwithstanding, and to instead look at the situation with sombre eyes, and find the most reasonable ways to navigate the situation.

COVID-19 has presented a thematic shift in the conduct of affairs at all the levels one would reasonably be expected to care about. It did not have to be a virus; it did not have to be COVID-19 – it could have been any other phenomenon. We are at a hinge. The current setup was always poised for a shift.

The shift in the status quo can broadly be attributed to the change in behaviour of three core forces – centralisation, homogenisation and collectivised responsibility.

Centralisation

By the term, ‘centralisation’ I am referring to the tendency among people, across the ages, to create arrangements in order to streamline their interactions and make them more efficient. When formalised, these arrangements became institutions, complete with codes of operation and strict modus operandi. Over a period of time, these institutions slowly ended up accruing more and more power for themselves, cannibalising from the losses in the organisational ability, agency and flexibility of smaller, less-complex entities, leave alone the individual.

These tendencies are not new; the large political empires of history were little more, in this view, than attempts at centralisation. However, they were, for the most part, short-lived, for the practical technologies to effectuate this did not really exist, as impressive as their attempts were. With the progress of technology, and the rapidity of its advance in the 20th century, the forces of centralisation have been turbocharged. Indeed, the world has not witnessed a greater period of centralisation as it has since the formation of the order of 1945, which still holds to a great degree. This is rare and unusual in the history of the world, and has been made possible only by the technology underpinning it.

Homogenisation

The Industrial Revolution brought with it the ability to drastically reduce the cost of goods manufactured through a simple theory first reflected on, at that time, by Adam Smith of Scotland, when he posited that the cost of manufacture of a part of a product was dramatically reduced if the processes that went into its manufacture were separated and repeated – that is, “specialisation of processes”.

Homogenisation has to do with consumption patterns, and could also be referred to as the “concentrated specialisation of consumption patterns”. This, again, is a tendency that had its early beginnings with the Industrial Revolution and the mercantilism of the early modern age, but which underwent successive turbocharges in the period after 1945, when the geopolitical ascendance of mass manufacturing and the industrial economy was reconfirmed; after 1991, after the free market triumphed over autarky; and after 2001, when China joined the WTO.

Never before in history have so many people with so many patently observable differences eaten the same food; sipped the same (branded) beverage; worn similar clothes; read similar books; lived in similar dwellings; spoken the same language; heard or watched exactly the same news; reacted to situations in the same way; entertained themselves in similar ways; had similar or matching thought processes; communicated using the same devices; even, had the same diseases; essentially, lived the same template lives. It is as terrifying as it is saddening, but “diversity” is a lost phenomenon, and most among us don’t even understand its true meaning or the depth of its deficit; our understanding of it is – to put it pithily – skin-deep.

Collectivised Responsibility

A corollary of the increasing centralisation of institutions has been the gnawing away of the individual’s sense of personal responsibility towards various expressions of more collectivised responsibility. There is a reinforcement of sorts here – in return for the acquisition of greater, more intrusive powers to the centralised institutions, those institutions promised ever greater incentives for the individual to part with what would have been usually considered his personal concerns, which would incentivise the institutions to acquire even more, and so on.

Early calls for this began with the Revolutionary French call for “Liberté, Êgalité, Fraternité”; formalised first in the welfare state of Imperial Germany; and it met its apogee in the social programmes of the Soviet Union in the 20th century, parts of which even found adoption in the freest society of them all – the United States – with the various programmes coming under the New Deal and the War on Poverty, all of which are now part of public policy du jour.

Versions of this have been adopted in pretty much every single country in the world, leaving practically the entire world dependent on the state, or institutions with similar powers, in some way or another in matters, which would have previously been considered, again, strictly personal concerns.

These three forces – centralisation, homogenisation and collectivised responsibility – have progressively reinforced each other, in turn, and the velocity of this reinforcement has been turbocharged at key inflection points over the preceding 20, 30, 60, 100, even 300 years. The physical manifestations of the interplay of these forces have been nation-states, complex governmental bureaucracies, powerful inter-governmental organisations, large domestic and multinational corporations and other similarly large, monolithic social orders, entities and lifestyles.

To all of these institutional arrangements and the forces reinforcing them, the novel coronavirus presents a systemic, thematic challenge. We are, therefore, looking at a future, where these forces will turn in on themselves – that is, we are moving towards greater decentralisation, de-homogenisation and greater assignment of responsibility, accountability and choice to the individual (and a greater diffusion of power). This is the great phenomenon we are on the verge of witnessing.

It is not that these countervailing forces have not acted during the course of history – they, indeed, have. The key difference in the current scenario, when compared to previous eras, is the extreme simplicity, rapidity and convenience of information flows, which will significantly temper the global societal response to the situation we find ourselves in. The pace of change, therefore, has the potential to be multiplied manifold. Many of the countervailing forces, in the form of rapid technological advances, that had already been chipping away at the prevailing social, economic and business order leading up to January 2020 will only reinforce themselves and accelerate the pace of change still further, owing to the thematic change in the status quo brought about by COVID-19. Adjustment times, however, will have shrunken rapidly – for governments, for businesses, for people.

The powers that be the world over will do everything they can to maintain the status quo – cue the bankruptcy filings, bailout calls, “too big to fail” arguments, maniacal money-printing (quantitative easing, of course!) all due in short order over the next few months the world over – but it will likely be beyond them to maintain it, and they will be met inevitably with disillusionment and failure; indeed, the countervailing forces are simply too strong, in most cases. The organisations – and the people – who survive this phase and thrive in the next will be those who understand this fundamental shift in the play of forces and manoeuvre accordingly.

So, is it reasonable to expect a rebound soon enough, or are we in for a protracted period of uncertainty? All analyses here forth are valid and useful only until a vaccine is developed, after which it can be expected reliably for people to return to their old ways. My working assumption is that such a remedy will not be developed for quite some time. This makes for a more sombre analysis, based on more earthy assumptions. Quite a few things are being learnt and discovered even during the course of the restrictions – the most revealing has been the great extent to which information and communications technology has rendered the traditional office irrelevant, from an organisational perspective. Cue a severe crash in office real estate prices the world over.

I have already indicated the primary forces at play – forces that have been chipping away at the edges of the status quo heading to the outbreak of the pandemic. The velocity of these forces will only ever accelerate. Over the past couple of months, we have been hearing debates over the “shape” of the recovery curve – whether it will be a U-shaped curve, a V-shaped one, or any among the 26 English alphabets. All this presumes that the vanguards of the current status quo will definitely emerge after the hinge; and that it will be business as usual after that. In my view, the presumptuous lot are ignoring the fundamental forces at play.

One is looking at not an alphabet-shaped recovery curve but rather at a starburst, with a lot of creative destruction.

So, where will the next dollar come from? The next dollar will definitely come from those avenues that flow harmoniously with the overriding global themes of decentralisation, de-homogenisation and individualisation in the wake of the thematic changes brought about by an event such as COVID-19.

Prospectors must understand how these forces apply to their goldmines (revenue sources or customers), and then tailor their business structure to enable these forces to act smoothly and robustly, making a healthy buck in the bargain. Businesses that do not do this are the ones that will make the headlines – for the wrong reasons – in double-quick time over the next 12 months.

Cashflow and financial stability

Which brings us to the existential question on cashflow and what we, indeed, must do to ensure financial stability. The high and mighty have already started doing what I have been prescribing elsewhere. Cut costs. Rapidly. It is important for businesses to survive, so that they can be the providers of opportunity in the future. It is important to identify the densest cost centres and trim them down to size.

In the GCC region, these tend to be payroll. It is worthwhile for managers to consider renegotiating the type of contracts they have with their human resources, and consider deploying their services, for instance, on a contract basis rather than on an employment basis. It is important, of course, to make good on the contractual obligations to existing employees, but a clear review must be had of onerous expenses, and prompt action taken to arrest these.

The other main burden on cash flows tends to be payments to lenders. Early, honest, transparent communications and information-sharing with institutional lenders will at least ensure a modicum of space and time in which to organise sufficient finance to make good on contractual obligations to institutional lenders.

Where does the HVACR industry stand in all this?

Now, if cashflow is one aspect, building confidence for inter-stakeholder commercial transactions to go through is another. The stakeholders in the case of the HVACR industry would typically be consultants, contractors, FM professionals, manufacturers, suppliers and building owners. So, what course of action or direction should they take to build confidence and regain lost ground?

Well, in my view, there are no magic bullets for any stakeholders to bite that could suddenly get them back to where they were immediately before the onset of the COVID-19 pandemic. An event like COVID-19 will have a thematic effect on the economy, affecting even the nature of contracts on which employment is secured.

It will be important, most of all, for stakeholders to cultivate the necessary linkages among themselves and maintain professional acquaintance and contact using the latest communications technology in order to sustain the degrees of confidence required for transactions to continue to take place. I would say the key attributes, going forward, will be flexibility, reachability and raw technical competence.

There are, of course, two types of HVACR industries – one that focuses on industrial air conditioning, and the other that focuses on residential and commercial air-conditioning. The pandemic will impact either branch separately. I follow on from the model I spoke of earlier – decentralisation, de-homogenisation and dissipated responsibility.

The activities of industrial enterprises will fluctuate depending on the changes in the global supply chain model. The China-centric model of global manufacturing and industrial activity will make way for a more dispersed, coagulated model, settling at the regional or national level, which for the GCC and the wider MENA region will mean a renewed spurt in industrial activity for the local market. This, of course, will be after a necessary adjustment phase.

As for the residential and commercial sector, the following few months will possibly witness a dramatic downturn in occupancy, at first. There could then be a renewed push among the resident populations to resort to dispersed living, as opposed to apartment-based accommodation. It is telling that the coronavirus has impacted those countries hardest where the populations live in close, dense clusters; countries where the population is far more dispersed, such as much of non-urban Sub-Saharan Africa, even non-urban India (despite their drawbacks on other counts) have gotten off quite lightly by comparison; even if I admit this is a developing story. This push towards more dispersed living could either be government-incentivised or be self-propelled from among the residents themselves.

Speaking of government, as a corollary to the real estate industry, the HVACR industry can expect to be an indirect beneficiary of government support for the real estate industry in various markets. For some participants in the HVACR sector that are government-owned, there could be direct support from the government by way of grants or cash contributions, but here, too, support to the HVACR industry will inevitably be presaged by the requirements of the real estate sector as a whole.

On the whole, it must be understood that the state, as such, is not the go-to unit of authority or accountability it once was – despite what you read in the news. State apparatuses are very much not in control of the situation, and their primary aim is to limit the damage, to themselves first, and then to their prime constituencies. If anything has been revealed by COVID-19, it is that the state can only do so much in the face of the forces unleashed by the sudden stoppage of a global system, which relied, above all, on a constant churn in activity.

 

 

The writer is a Chartered Accountant, a member of the ICAEW and Audit Partner with Bin Khadim, Radha & Co. Chartered Accountants. He may be contacted at krishnan.madathil@binkhadimradha.com.


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