By Jonathan Doochin, Soligent CEO
Coronavirus – What Does This Really Mean For You?
There has been a big question of what Coronavirus means for our families, our businesses and the economy. I will step through the Coronavirus basics, the economic picture, the energy and solar supply chain disruptions, the demand disruption, and what you should do about it for your business and your loved ones. I will provide my current best guess on what that will look like but please note that this is not advice, it is just my opinion. Don’t hesitate to skip to any section that is most useful for you.
The Coronavirus has been around for a long time, but there are different mutations of it. This virus is spread by coughing and sneezing large droplets. This is not spread through the air. It is noted that surfaces where these droplets land can be infectious for up to a week. The medical advice suggests that the virus lives on surfaces and you will not be infected unless your unprotected face is coughed or sneezed upon or you touch it with the virus. Virus infection happens via your (mucus membrane) nose, eyes or mouth via your hands or an infected cough or sneeze onto or into your nose or mouth.
The early numbers and the World Health Organization warning show up to 2-4% mortality rates. The markets have reacted dramatically to the media coverage and fear, and understandably, people are concerned. That said, we believe there are potentially a lot of mild and unreported cases that could when counted drive the actual mortality rate down to as low as less than 1%. This puts the Coronavirus potentially in line with influenza (the flu) or a little worse, which is known to have a mortality rate of 0.5% to 1.5% depending on the healthcare system. But this is just our view. Early reports are saying that most people will be ok, though if you have a compromised immune system or health issue, to be very careful. The best source of information is the CDC and you can see a tracker of cases reported at Johns Hopkins. We also expect the Coronavirus will continue to spread across the U.S. and globe and be difficult to quarantine fully.
What Is The Bigger Economic Picture Here?
When it comes to the economy, fear is not a good stimulus. We are at the end of a strong ten plus year growth cycle and historically, one would naturally expect a slow down for macroeconomic reasons which I will spare you. The government and world will do everything to prevent the following scenario but it is worthwhile to know what they are avoiding and the potential ramifications.
Fear itself can keep factories from going to work (productivity), countries from consuming goods as they stay home (consumption), and thus drive lower corporate earnings bringing the public markets down (equities; a good chunk of individual’s wealth, further building on lower consumption). Lowering the interest rates has been a traditional government tactic to stimulate slowing economies (think of it as low-cost free-flowing money); in my opinion, this will help, but not work as well in the short term this time due to the drivers mentioned above. Though, lower interest rates will lighten the burden of corporate debt costs helping their performance in a tough time. Moreover, ten-year treasuries hit an under 1% interest rate just recently, suggesting the expectations of lower growth in the U.S. over a ten year period. The low-interest-rate environment in the U.S. and abroad may have already pushed a good chunk of potential traditional bond and note investors into the equities market due to the seeking of higher returns. Thus lower interest rates may help stimulate the economy less than usual.
When you think about consumers and how they impact the economy, individual consumers make up ~60% of U.S. consumption which drives GDP and growth; if stock portfolios decline dramatically in value (due to market shocks or poor corporate performance from a virus), we all feel the impact on our wealth and often reduce our spending, slowing the economy. This also means not as many jobs are needed to produce fewer consumer goods, and if people are out of work, it further reduces consumer spending. All these effects build on each other and again, the governments of the world will work swiftly to avoid this downward cycle.
In a period of prosperity, which we have seen over the last ten years, social unrest is often balanced. That said, the U.S. has seen some indications of social unrest (wealth gap, politics, etc) over this time. If a large downturn were to occur, which we will hopefully avoid, social unrest can often come to a head as it has historically across the world. When it does, it changes politics, and often the mindset and culture of a country. Countries can go from a growth mindset of mutual respect through reasonable disagreements, to focus on the divide between people. And if you think of it as a crew boat, just one person pulling the wrong direction causes the boat to lose balance, momentum, and the team individually and collectively have a very bad outcome (losing, fighting, etc). As business leaders all trying to do good in the world, we have a responsibility (in my view) and ability to collectively not let that happen in our backyards, as backyards are what make up our country.
My best estimate of the way our country will approach the Coronavirus is to keep the virus quarantined as much as possible, to keep the fear as low as possible, and get life returned to normal as soon as possible. A slow down of consumption and production can leave highly leveraged big corporations, or corporations with limited cash on hand, needing further financial support. The government may have to put together programs that help support organizations that are highly leveraged with debt if it looks like things go further south with the economy. This not only props up corporate earnings and the stock market (people’s wealth) but also keeps the job numbers as high as they can be which allows people to have money to spend to keep stimulating the economy. Moreover, the government is expected to again lower interest rates to help drive a stimulus.
Personally, I am rooting for the edge case of March Madness (sports) to provide a welcomed distraction from the fatigue driven by the media on consumer mindsets, and to reduce fear through distraction – boosting consumer activities and productivity.
How Does The Solar and Energy Supply Chain Get Impacted?
The first thought people have is about the shortage of supply. As Soligent, we are constantly in touch with our manufacturers understanding their supply situations. The easiest way to think about supply disruptions and when they will hit is to think about the supply chain in pieces. Most of the finished goods in the U.S. solar market do not come from China (due mostly to high tariffs) but often other countries – however, they do use Chinese materials in their products. A disruption in China takes months to hit the U.S. market and we expect a potential slight disruption of supply at the end of Q2. Moreover, as of the first week of March, Roth and SSX estimated supply continuity now occurring with over 80%+ factory utilization in East Asia / China; that said, there are some potential short term shortages on some smaller components (junction boxes, etc), though they can be expedited by air once manufactured.
Let’s take a panel manufacturer that operates out of Vietnam for example. You can think of it as you have about 5 weeks of supply or more in transit from China to Vietnam, you have about 4-8 weeks of supply in inventory in Vietnam, then you have about 8-10 weeks of supply on the water to the U.S. from Vietnam, and then you have 6-10 weeks of supply in the U.S. through stocking distributors. As such, an issue in early January could take up to 33 weeks to see disruptions in supply to installers depending on how much inventory is at each stage. Likely we expect potential disruptions starting the end of May but we have worked hard to assure supply for our customers. This example is illustrative (not exact lead time and simplifies the situation) but gives you an idea of how to think about disruption. And meanwhile, there are ways to speed up shortages like air freight and other tactics that allow for quicker responses to issues if the supply of components are available and factories are producing things as small as junction box wires.
That said, in other parts of the world who might be served by Chinese products, a shut down for 3 weeks in China means that if a company produces say $1B of solar products to serve China or another country, and there is demand, you could see a shortage of product from that supplier. This would impact their earnings as they would produce roughly 3 weeks less supply in a 52 week year or roughly a 6% annual decrease that could be difficult to make up and also may cause a future shortage in quarterly earnings due to production loss. Moreover, we would expect short term demand to slow due to labor availability and some consumption slowing. These scenarios are what Soligent has analyzed and planned for in order to support our customers with stability even in hard times.
How Does My Solar & Energy Sales Demand Get Impacted
We don’t see large changes in commercial volumes in the U.S. due to the ease of signing a contract remotely. Though, labor could become sick and unavailable, slowing installation time frames and slowing earnings for installers; sales can also be slowed by the removal of face-to-face meetings as well as attention is focused on a “crisis management” mindset vs a growth mindset. On the residential project front, we may see people fearful, slowing consumption, and not opening their door to strangers. As such, if you see appointment cancellations for your sales team, you can think about how your sales team can adapt. For example, people will be home to answer calls or do video calls more now than ever, even if they don’t answer the door. With such low-interest rates and markets that are in flux, solar and storage can provide not only a strong year over year return story but also security in a time of electricity and health uncertainty.
What Should I Do About It
Our suggestions internally to our team is to treat this like a very nasty version of the flu. Get hand sanitizer, get sanitized wipes and do activities that enhance your immune system (exercise, sleep, vitamins, avoid alcohol, etc.). For contingency plans for businesses, think through and appoint someone to create a plan around having to work remotely. Think through how you will support your team if issues arise and how to care for them. Think through your PTO policy to support your people. Thinking about your cash flow plan during a potential slow down of three to six months. McKinsey has done a great job making a checklist you can review and use as well as provided scenario planning for your business, which you can find here.
My Personal Mantra on Staying Healthy
What I have stocked in preparation for a large scale spread to the US:
I, as many others do, hope that this virus will be reasonably contained. That said, we don’t expect any drug or vaccines available to protect against the virus this year. As such, it comes to good hygiene and retraining yourself to not touch your face. Staying healthy by getting adequate sleep, exercise, maintaining a healthy diet, while avoiding things that tend to weaken your system (stress, sugar and alcohol).