Fear of the uncontrollable spread of COVID-19 virus compelled governments around the world to lock down cities and close national borders.
Ever–diminishing consumer demand led to a near-collapse of industrial production and complete shutdown of service industries. As the crisis triggered massive layoffs, unemployment reached double digits.
At the early signs of trouble, stock markets plummeted. Major indices such as S&P500, Japan’s Nikkei Index, and Singapore’s Straits Times Index started dropping on February 19 and lost approximately 30 per cent of their value in a month.
As crisis devastated national economies, most major economies faced unprecedented recessions. According to OECD Economic Outlook, the world is headed for an almost 13 per cent decline in the global gross domestic product (GDP) in the first half of 2020.
Closer to home, Singapore’s GDP fell by 41.2 per cent in the second quarter of 2020, while the government projected as much as 7 per cent decline of annual GDP.
As the global situation looks extremely bleak, observers wonder if there is a silver lining.
Creative Destruction
Austrian Economist Joseph Schumpeter argued the economic growth relies on daring entrepreneurs, evolving institutions, and innovative technologies. Without daring entrepreneurship and innovation almost all businesses fail.
Moreover, major crises reveal true survivors – businesses resilient enough to weather the most challenging conditions. It is often in such extreme circumstances and the excessive volatilities, that we witness creative destruction.
Creative destruction is based on the principle that the existing system needs to be challenged so that innovative products or services can replace the outdated ones. Effectively, the existing equilibrium gets disrupted, market dynamic changes, and routine practices get transformed.
Typically, innovative solutions spring to life. As innovative technologies replace existing technologies, the resources are more efficiently reallocated by the market, thus allowing economies to grow. This economic progress is chaotic and often unpleasant and thus the moniker “creative destruction.”
Indeed, we witnessed creative destructions in action many times before.
Dotcom Bubble
When the dotcom bubble burst twenty years ago, the Nasdaq index plummeted by almost 80 per cent. Moreover, a majority of dotcom companies quickly ran out of cash and went bankrupt. Unsurprisingly, doomsayers predicted the end of the Internet era.
Even though the dotcom era witnessed a glut of bankrupt companies, massive layoffs, and wipe-outs of market values, some of the capital was invested in a very high throughput backbone for the Internet. That initial infrastructure has enabled the development of companies that changed the business models of the modern era.
Indeed, companies that had survived the dotcom bubble and had a spectacular growth include Amazon and Google – some of the largest companies in the world. If we group all companies that were built on the success of the dotcom era such as Facebook, Alibaba, and Tencent, half of the ten largest publicly traded companies rose out of the ashes of the dotcom bubble.
COVID–19 pandemic
Similarly, the global COVID–19 pandemic triggered plunges in market indices, widespread bankruptcies, and worldwide recession. Yet, the destruction often creates space for innovative players and thus this COVID–19 crisis may provide the impetus to creative destruction.
The question becomes, “What will be destroyed and what will replace it?” Some industries such as airlines and tourism are very difficult to forecast. Yet, the theory of creative destruction implies a complete shake-up and major innovations in these industries.
It is easier to predict industries such as e-commerce.
Since the invention of the Internet, the online sector has been consistently chipping away the market share from brick-and-mortar stores.
According to the US Commerce Department, online sales beat general merchandise stores for the first time in February last year. According to eMarketer, US e-commerce sales are estimated at approximately US$700 billion in 2020 (14.5 per cent of total US retail sales), compared to slightly above US$600 billion in 2019. The e-commerce share of total retail sales is estimated to reach 15.5 per cent in 2022.
Unsurprisingly, Amazon and eBay saw their stock prices soaring since the beginning of the year.
Closer to home, the internet economy in six largest Southeast Asian markets with a population of 570 million surpassed US$100 billion last year, according to the 2019 e-Conomy Southeast Asia report. While most countries were growing at 20–30 per cent, Indonesia and Vietnam grew over 40 per cent a year.
By mobile internet usage, four South East Asian countries rank in the top ten in the world. Driven by a high mobile internet penetration rate, young consumers, and an increase in disposable income, South East Asia’s online sector is expected to hit US$300 billion by 2025, while e-commerce sector was projected to be worth US$150 billion by 2025.
The study reported US$600 billion in online payments last year, while gross transactions were projected to exceed US$1 trillion by 2025.
COVID-19 pandemic will provide further impetus for this growth. In fact, according to Accenture, COVID-19 crisis spurred Singapore’s digital economy to earn US$500 million, while some businesses saw up to three times their normal growth.
Indeed, online purchasing soared due to worldwide lockdowns and people’s inability to do the shopping in brick-and-mortar shops. Bain & Company projected digital payments to account for 67 per cent of total transaction values in 2025 – up 10 percentage points from their pre-COVID-19 prediction.
COVID–19 pandemic caused loss of human lives and destroyed jobs, but there is a silver lining to the crisis. The ensuing creative destruction will likely spur innovation, innovative technologies will replace existing technologies, and thus the resources will be more efficiently reallocated by the market.