By: Neil Burnard, Chief Executive Officer at Expense Reduction Analysts (ERA), UAE, the international cost reduction consultancy
Burnard sets out the lay of the land with the fact the first cases of the deadly Coronavirus were confirmed in the United Arab Emirates, by the Ministry of Health and Community Protection, on Wednesday 29th January. Burnard says the world is at peak hysteria over the outbreak in China with global markets fiercely reacting to the impact on economic growth in the world’s second largest economy and the UAE’s largest trading partner. Locally, he says, business conditions in the UAE worsened for the first time in over a decade as the outbreak risks further disruption to the Gulf’s trade and tourism which he says are evident simply by walking around the major malls in Abu Dhabi and Dubai.
Burnard highlights China as the biggest spender on international tourism, the leading exporter of clothing and textiles and its essential role in the global supply chain. He shares estimates by Warwick McKibbin, Professor of economics at Australian National University, the global hit from this new outbreak could be three to four times larger than the $40 billion blow from SARS in 2003.
Operating conditions in the UAE, the second-largest Arab economy, deteriorated in January, according to IHS Markit. The country’s Purchasing Managers’ Index which shows the country’s non-oil private sectors statistical measure of change, dropped to 49.3, moving down from the threshold of 50 that separates contraction from growth, he adds. Burnard expects the UAE industries that will be hit the worst will be hospitality, tourism, luxury retail and construction.
Burnard quotes the IHS Markit economist, David Owen, who said about the UAE’s recent Index report “Key to the decline were firms’ efforts to reduce employment at one of the fastest rates on record in order to streamline costs.” Burnard warns this approach, coupled with the impact of the recent virus on the local economy, is likely to show significant drops in profit margins in the next quarter and recommends businesses instead review current overheads, claiming almost all medium to large businesses are able to save an average of 20 per cent of annual expenditure when reviewed by experts. Successful implementation would enable immediate recovery and rebalance recent losses.
A good example of the effect on the construction industry’s supply chain from China was recently shared. In New Zealand, a bath furnishings seller was forced to explain the German-designed shower head he ordered is unavailable because the factory in Shanghai is closed. In the Middle East, a decrease in demand for crude oil, which dropped 16 per cent in price since China identified the Coronavirus, is prompting Saudi Arabia, the leader of the Organization of the Petroleum Exporting Countries, to hold an emergency meeting, OPEC officials said.
The UAE’s General Civil Aviation Authority (GCAA) has already announced the suspension of flights to China, excluding its capital Beijing, and will come into effect today. Over the weekend, Oman, Saudi Arabia, Iraq and Egypt also saw the suspension of flights to China. That’s already going to mean a drop in corporate travel, event attendance, tourism and retail expenditure by one of the biggest feeder markets of all the aforementioned Burnard explains.
Chinese shoppers make up 40 per cent of the global market for luxury goods, both bought within China and during their travel internationally. Burnard explains tour cancellations by free-spending Chinese have hit luxury retailers hardest and quotes a senior official with one of Dubai’s leading luxury groups who said even if only five per cent of that spending happens at UAE stores, that’s still a significant amount to lose. With reduced footfall, businesses within the FMCG and Facility Management industries will be under huge pressure to reduce costs as they rely on volume for profit due to small margins he states.
Burnard says UAE businesses expecting a surge in tourist arrivals over the EXPO 2020 period are now faced with an immediate need to cover their current losses to still ensure gain from the big event this October. He advises the best way to make profit during this period of reduced sales and supply is to reduce existing costs. He says he often experiences senior staff members say they are too busy and are without in-house expertise to resource and execute meaningful cost savings, he advises now is the time to bring in the experts before next quarters profit margins are reported on. Act now.