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Startups endure like Alibaba during SARS

By Gloria Ai | China Daily | Updated: 2020-02-21 07:56

Pedestrians walk past a Xibei northwestern cuisine restaurant in Shanghai on Feb 12. [Photo/China Daily]

The novel coronavirus epidemic broke out unexpectedly, but the ones hit the hardest should be entrepreneurs who cannot leave their homes.

"We hope the epidemic will pass quickly, but we are especially worried about the reality."

In a dialogue with iAsk Media and Capital, quite a number of entrepreneurs echoed those concerns.

Jia Guolong, the chairman of Xibei Group which operates more than 400 restaurants in over 60 cities across the country, is one of them.

In an interview, he said that almost all Xibei restaurants had been closed. Some 100 places and several takeaway businesses are still running. During this year's Spring Festival, which ran from Jan 24 to Feb 2, the estimated revenue loss of the company stood between 700 million yuan ($100 million) and 800 million yuan.

What worries Jia the most is the future.

"More than 20,000 employees are standing by and the monthly expenditure is 150 million yuan. If the epidemic is not effectively controlled within a short period of time, the cash flow will not last for three months," the Xibei Group chairman said.

The case for one of China's top catering giants is severe. The challenges for the majority of small-and medium-sized enterprises are just as evident.

Some media stories have reported that since the third quarter of 2019, the "cash crunch" for these firms has been aggravated in the primary market.

The date showed that in 2019,China's new economy sector had a total of 3,802 fund-raising cases, with a year-on-year decline of 46 percent which is greater than in previous years. The volume is less than 40 percent of that in 2015.

The primary market is short of cash. There are many reasons behind this, but the startups immediately felt the pressure and responded. Given the "cash crunch", the shadow of "layoffs" has always been there.

The arrival of the "black swan" in the novel coronavirus outbreak became the last straw that crushed many startups. The entrepreneurs were trapped and could do almost nothing.

In their conversations with iAsk, anxiety can be felt from virtually every owner.

Manufacturers worry about the labor shortage and export crisis, the catering industry has not recovered from the Spring Festival season, the transportation and tourism industry is stagnating. Everyone is worried about the loss of confidence in capital.

"How to feed the team?"

"How to keep the business?"

"How to survive?"

Chinese entrepreneurs who had previously operated smoothly have to rethink the basics of their company in 2020. They are just like the entrepreneurs who encountered the 2003 SARS crisis.

Dangers and opportunities co-existed for Chinese entrepreneurs in 2003. But there is a difference in recalling that year. China has undergone tremendous change compared to 17 years ago.

The internet is ubiquitous and deeply affects all aspects of the economy and life. There is close intersection between online and offline, and the circle effect is obvious. The information is extremely developed and complex, with useful or useless information abundant all around.

But the contemporary Chinese in 2020 should give thanks to 2003.The outbreak of SARS cost China dearly, but it has also brought the country valuable experience and gains from modern public health methodologies. The economic trends in 2003 can also inspire people to a certain extent.

When we analyze the future of 2020 with the experience gained in 2003, we come to two conclusions.

First, the epidemic will definitely impact China's economy, which may last for a long period of time. Second, in the long run, it is not necessarily a bad thing.

In 2003, China's GDP was at 13.74 trillion yuan, of which the contribution rate of primary industry was 3.1 percent, the secondary industry 57.9 percent and the tertiary industry 39 percent. China at that time was a newly industrialized and emerging country.

When SARS struck, the most impacted industries were manufacturing-based industrial companies, State-owned enterprises, foreign corporates and private companies. They suffered from labor shortages, pending export orders and serious damage to their benefits.

The fragility of the tertiary industry was also revealed under the emergency. In 2003, the direct loss to the domestic and foreign tourism industry was as high as 140 billion yuan. Aggravated by various indirect effects on the economy of tourism, catering, retail, and logistics, the total losses reached about 300 billion yuan.

After the financial crisis in 2008,China started the transformation from industrial to service industries, and made industrial adjustments by learning from the experience of developed economies such as the United States, Japan, and South Korea to avoid the middle-income trap. In 2014, it launched the "mass entrepreneurship and innovation" projects, followed by an acceleration in its transformation.

Data released at the end of 2019 showed that the current proportion of China's tertiary industry's added value is 53.3 percent of GDP, surpassing the level of 17 years ago.

Without a doubt, the impact of the epidemic on the economy will far exceed that of SARS. The GDP growth rate this year will be lower than expected, which is basically a foregone conclusion. But is this a definitely bad thing?

In its past economic transformation, China's economy developed like it was walking on thin ice. It must maintain growth while poking holes in asset bubbles. In the past few years, the bubbles have mainly come from real estate, and now the internet bubble has weighed even more.

In the internet environment, entrepreneurship seemed so easy. Three or five people come up with an idea and can start a company immediately. The sharing economy has reduced the cost of trial and error to a minimum. Entrepreneurship has quickly become a routine gamble.

The reason for the bubble is simple: people swarm into a field, use similar technology, copy ideas from each other, compete for traffic until they get the favor of capital, and then start a new round of cash burning.

In the view of iAsk, it is a huge waste of resources. The winner who takes all is often the one with the most solid foundation, but it may not meet the real needs of a society. This is also the underlying logic of "giving on a needed basis", raised by iAsk.

At the beginning of 2020, as soon as enthusiastic entrepreneurs set sail, they encountered the headwinds of a black swan event.

It is similar to the scenario in 2003, when Chen Tianqiao's Shengda Game company slumped because the internet cafe lost traffic, Liang Jianzhang's Ctrip was on the edge of bankruptcy because of the sharp decline in orders, and Yu Minhong's New Oriental took loans from friends because their cash flow completely dried up.

Of course, the best entrepreneurs persisted and got mature, such as Jack Ma and his Alibaba Group. On May 6, 2003, a SARS case was confirmed at Alibaba. Subsequently, the entire company was put in quarantine. Ma had no choice but to organize the "online office".

"Almost all conditions pointed to a disastrous end for Alibaba. Missing the peak of business development is a disaster. Employees had problems at work, which interrupted business processes. Most employees complained, which is a distraction. Jack Ma, the leader, was also frustrated," a financial writer said in documenting that time.

However, Ma and Alibaba survived, stabilizing the morale of people through care and motivation. It also discovered the real needs of society in online shopping. Taobao was born in the quarantine period, and Alibaba was reborn. Since then, the interior underpinning of the firm is solidarity, which formed Alibaba's most powerful weapon.

The real needs of a society are always changing. When everyone thinks that internet innovation is coming to an end, spending five years nurturing the group buying app Buy Together showed that new needs and opportunities can emerge because of this crisis.

Of course, not everyone who sees the trend can succeed.

At least in recent years, there will be continued caution from capital, which also means that after the epidemic, the "cash crunch" will still exist.

Instead of blindly pursuing traffic and capital, startups must discover the real needs of a society, find the diamond in the ashes, and more importantly, persist. This is the ingredient for mankind's eventual victory over the epidemic, and the essence of success.

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