The Economist - USA (2020-05-16)

The EconomistMay 16th 2020 Business 53

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D

ing shizhong, the founder and boss of

Anta, the world’s third-biggest sports-

wear firm by market capitalisation, refused

to let the covid-19 pandemic interfere with

sales. In early February, as the virus forced

shops to close, Mr Ding gave each of his

30,000 employees a new assignment:

hawk Anta’s apparel and shoes to personal

contacts on WeChat, a messaging platform.

Such resolve to protect revenues is admira-

ble. Yet it reflects insecurity.

Anta, established in 1991, has long been

runner-up on its home turf to Nike and

Adidas. The Western sportswear power-

houses together accounted for over two-

fifths of China’s market in 2019, according

to Euromonitor, a market-research firm.

Anta has a sixth of the market but it is mov-

ing fast. Revenues grew by over 40% in

each of the past two years, double the rate

of the industry. Operating profit hit 8.7bn

yuan ($1.2bn) in 2019. But that is still only

half the sum made in China by Nike.

 Anta’s aim is to become “a Chinese

brand that stands out in the world”. It is

perhaps best known in the West as the shoe

sponsor for Klay Thompson, a star player

with the Golden State Warriors basketball

team, and Manny Pacquiao, a Filipino box-

er. But the brand generates few foreign

sales. Even in China, many urban young-

An ambitious Chinese sportswear firm

does some fancy footwork

Chinese brands

Upping the Anta

Sportswear, after a fashion

E

uropean businessmen who filed for

bankruptcy used to be treated harshly.

The word “bankrupt” derives from banco

rotto, the practice in medieval Italy of

smashing the benches that merchants sold

their goods from if they did not pay their

debts, to force them to stop trading. Until

the mid-19th century defaulters were

thrown into debtors’ prisons. Bankruptcy

proceedings are now less violent, but in

many European countries they mostly end

in liquidation rather than restructuring.

The fear of multiple bankruptcies and

mass unemployment because of measures

imposed to contain the covid-19 pandemic

is the main reason European governments

are subsidising businesses on a vast scale.

“No healthy company should go bankrupt

because of corona,” promised Peter Alt-

maier, Germany’s economy minister, in

mid-March when he announced extended

credit lines, liquidity guarantees and

grants for German businesses amounting

to €750bn ($807bn). At the end of March the

German government suspended insolvent

firms’ obligation to file for bankruptcy un-

til the end of September (and perhaps until

March 2021)—provided they can prove

their troubles were caused by covid-19.

France, Spain and other European coun-

tries have introduced similar exemptions.

These emergency measures are buying

time. Bankruptcies and unemployment

have not yet risen sharply. According to the

Institute of Economic Research in Halle

(iwh) bankruptcies in March and April in

Germany were no higher than in the same

months last year. Yet rescue measures

probably just postpone a surge in bank-

ruptcies, says Steffen Mueller of the iwh.

Mr Mueller thinks “zombies” will be swept

away later this year, but worries that even

healthy companies may not survive.

Governments have learned a lesson

from the global financial crisis. Bankrupt-

cies increased by 32% in western Europe in

2008. Ludovic Subran of Euler Hermes, a
      Paris-based credit insurer, is forecasting a
      rise of 19% compared with 2019 to 178,365
      insolvencies this year. The corporate car-
      nage was so brutal in 2008 because of the
      credit crunch, explains Mr Subran. A sud-
      den slump in the availability of loans
      sealed the fate of many firms. This time eu
      governments have reacted far faster by
      pumping liquidity into the economy.
      Moreover, the rate of bankruptcies was
      very low between 2002 and 2007 whereas
      this time Europe has seen a clean-out in the
      past five years, with many firms going bust.
      Mr Subran’s forecast seems optimistic
      considering that some industries suddenly
      lost all their business. The most vulnerable
      firms are in the hospitality, transport and
      non-food retail sectors. They were among
      the most insolvency-prone businesses be-
      fore the covid crisis. Germany’s Karstadt
      Kaufhof, an ailing department-store chain,
      and France’s Orchestra Prémaman, a trou-
      bled clothing retailer, both filed for receiv-
      ership in April. In Britain Carluccio’s, a res-
      taurant chain, Brighthouse, a rent-to-own
      retailer, and Laura Ashley, a fashion chain,
      tumbled into administration in March.
      The other weak link is Europe’s 25m
      small and medium-sized enterprises (de-
      fined as firms with fewer than 250 staff ),
      which employ over 90m people. According
      to smeunited, a European lobby group,
      90% of Europe’s small firms are affected by
      the pandemic and 30% of them say they are
      losing 80% of sales or more. cpme, France’s
      small-business federation, says 55% of
      small firms are concerned about bankrupt-
      cy. The French government’s €7bn solidar-
      ity fund for small companies has already
      been tapped by 900,000 firms.
      Behemoths have been rescued by the
      state, as so many jobs depend on them.
      France and the Netherlands are providing a
      taxpayer-funded bail-out of about €10bn to
      salvage Air France-klmfrom bankruptcy.
      Germany will follow with a bail-out for
      Lufthansa. Small businesses will suffer
      most in spite of short-term work schemes,
      cash payments, delays to tax deadlines and
      credit guarantees. But never before have
      governments done so much to try to help
      them avoid the Schuldturm—the prison
      tower that was the destination, in the past,
      for those who couldn’t pay their debts. 7

BERLIN

A big surge of defaults is expected in

the autumn

Bankruptcies in Europe

Buying time

ity into firms in different ways.” He reckons

few want to force liquidation because “if

you can kick the can down the road, maybe

a vaccine comes and...there is a better

chance of getting a recovery for creditors.”

Many hedge funds and non-traditional

lenders (though not stodgy banks) are opt-

ing for debt-for-equity exchanges. That is

so they “get the upside when the economy

recovers”, says Thomas Salerno of Stinson,

a bankruptcy lawyer.

So the good news is that many squeezed

firms staring at bankruptcy might be saved

through restructuring. Mr Derrough, a vet-

eran of financial crises, explains that this

involves five steps: stopping the bleeding;

evaluating the injuries; performing the

necessary surgery; rehabilitating the vic-

tim; and returning it to health. The bad

news is that America Inc is at the start of

phase one. As he puts it, “Most of what we

are doing is blood transfusions. We haven’t

even gotten to stopping the bleeding.” 7