The impact of the coronavirus on business is real as the virus fallout disrupts global supply chains. International brands with critical dependencies on China are being impacted. The global impact could be much greater than many expect and possibly even provide the kind of “black swan” event that could trigger a slump after the long economic boom enjoyed since 2009.
Three months after the outbreak, by the end of March 2020, the global financial impacts have taken a major hit, with markets losing many trillions of dollars in value.
“This is not a drill”, was the blunt warning from World Health Organisation chief Tedros Adhanom Ghebreyesus as coronavirus rapidly spreads globally with little sign of it slowing down.
In our last publication: Coronavirus: Know the risk, impact and review your pandemic plan now, we looked at the coronavirus risks and strategies organisations can take to prepare and respond. In this publication, we will look at the financial impact of a coronavirus, particularly COVID-19, on large global organisations.
Dun & Bradstreet’s supply chain data and proprietary analytics confirm that at least many thousands of companies around the world have at least one direct (Tier 1) supplier in the impacted region of China. That number increases to five million companies globally when second tier (Tier 2) suppliers in the impacted region are included. These companies constitute over 900 of the Fortune 1000 companies.
Adverse business impacts
Within months of the outbreak, here are examples of some negative businesses impacted by the coronavirus:
- The boss of Alibaba, China’s biggest listed company, described the COVID-19 coronavirus outbreak as a “black swan” event that could have a significant economic impact. The outbreak presents significant near-term challenges for Alibaba, with many of the merchants who use its platform unable to return to work.
- Under normal circumstances, Lunar New Year is one of China’s largest and most profitable holidays. Due to the outbreak, the Chinese government postponed the end of the holiday to prevent mass gatherings and prevent further spread of the virus. Between impact to holiday celebrations and restrictions on travel, service providers in China are experiencing strain.
- JCB, the British digger maker, has cut working hours and suspended overtime for 4,000 UK employees after the coronavirus outbreak prompted a shortage in parts coming from China.
- Under Armour told investors that its revenues in the first few months of 2020 — and potentially beyond — would take a hit of $50 million to $60 million because of the outbreak.
- FedEx has reached an agreement with its pilots’ union, the Air Line Pilots Association, allowing crew members to decline trips to China.
- Royal Caribbean cancelled 18 Southeast Asia Cruises and impact will reduce earnings by 65 cents a share.
- Mattel says the virus is to delay toy production. While Mattel has no manufacturing in Wuhan, the city at the centre of the epidemic, Chinese government guidelines are affecting the availability of a manufacturing work force elsewhere.
- Fiat Chrysler Automobiles is planning to halt operations at its assembly plant in Serbia due to a lack of parts from China.
- General Motors Co. is trying to shield some of its most profitable U.S. plants from running out of components sourced from China, as the threat of a parts shortage at the factories is growing.
- Hyundai, the world’s fifth-largest automaker, said that it would temporarily stop production lines at its factories in South Korea because of shortages of Chinese parts.
- Nissan temporarily closed factories outside China because they couldn’t get parts.
- Volkswagen has cited problems with the nationwide restarting of supply chains as well as limited travel options for its production employees.
- Disneyland theme parks in Shanghai and Hong Kong have been shut. Hong Kong’s government received consent from Disneyland to use part of its land for quarantine purpose. The closings are expected to reduce the company’s operating income by $175 million in the second quarter.
- Starbucks has closed more than half its 4,300 stores in China and delayed a planned update to its 2020 financial forecast, saying it expects a material but temporary hit.
- Several hundred of the approximately 3,300 McDonald’s restaurants in China have closed.
- Burger King restaurants in China have also been affected by the virus and it’s closed half of its restaurants in the country.
- Nintendo, which makes video games and gaming devices, said shipments of its Switch game console to Japanese customers would be delayed.
- Tim Cook, the chief executive of Apple, told analysts that its suppliers could be disrupted and that traffic to its stores in China had dropped. Apple has a large sales presence in China and assembles most of its products there. Mr. Cook said that some Apple suppliers would remain closed. Also, Apple’s manufacturing partner in China, Foxconn, is facing a production delay.
- Harrods Department Store, a big tourist attraction in London for Chinese shoppers, has prohibited staff from wearing masks when dealing with customers because of the “risk of spreading further anxiety” about the virus.
- About half the Nike stores in China have shut down, and those that remain open have shortened hours, the company said. Nike has not released a numerical estimate of the financial repercussions, but told investors that it expected “the situation to have a material impact on our operations in greater China.”
- Burberry warned investors that the outbreak was having a “material negative effect on luxury demand.” Twenty-four of its 64 stores in mainland China are closed, and those that remain open, with reduced operating hours, have fewer shoppers than usual.
- Estée Lauder, warned that the outbreak would hurt its financial results “in the near term,” predicting that sales in the third quarter of 2020 would be the most affected. The spread of the virus has slowed air travel and tourism, reducing store traffic in key global shopping areas.
- British Airways, Air France, and Dutch airline KLM, have axed flights. Around 25 airlines have cancelled flights to and from China. Global airline revenues are expected to fall by $4-5 billion in the first quarter of 2020 as a result of flight cancellations, according to a report from the UN’s International Civil Aviation Organization (ICAO)
- French spirits maker Pernod Ricard said profit growth would be slower than previously expected. Nightclubs and bars are all closed in China, and those bars and restaurants that are not closed are empty.
- The Chinese city of Macau asked its 41 casinos to close for half a month. The move will hit casino operators in the region. Wynn Resorts is losing $2.4 million to $2.6 million every day that its casino in Macau remains closed because of the coronavirus.
- Ralph Lauren, the US fashion brand, said the outbreak would cost it between $55m and $70m in lost sales. Two-thirds of its stores on the Chinese mainland had been closed.
- Future prices for Brent crude oil hit their lowest point since December 2018. The International Energy Agency expects demand for oil to fall by 435,000 barrels per day for the first three months of the year compared to last year. This would be the first quarterly contraction in more than 10 years.
- Maersk has the largest exposure out of all shipping companies to a slowdown in the Chinese economy with $27bn dollar exposure according to analysis.
- Marine insurers will be impacted. The outbreak is expected to have a ‘significant impact’ on the marine insurance market as the volume of cargo shipments within Asia and across the globe reduces drastically.
- Property and casualty (P&C) insurers that insure companies in the entertainment industry, large manufacturers and companies in the tourism and hospitality sector have a higher level of exposure and potentially higher claim costs from the coronavirus.
- Travel insurers Aviva, InsureandGo and the Post Office have followed LV and withdrawn cover for future coronavirus claims, just after the World Health Organization declared a pandemic on March 12, 2020.
- For small to medium business, the risk of credit default is increasing due to travel restrictions, enforcing social distancing, prevention of mass gatherings, broken supply chains and tightening economic conditions.
- Investment portfolios are not immune to market volatility, worrying some savers, retirees and companies that they may lose valuable assets and returns on their investment portfolio.
- In the midst on the COVID-19 outbreak, Lloyds Bank and Halifax experienced a systems outage, with 2,000 customers being locked out of their accounts across both banks. Physical branches have also started implementing remote working and one Halifax call centre in Northern Ireland sent 1,000 staff home after one employee tested positive for coronavirus.
- Rating firms have downgraded a flurry of companies, which can reduce their access to the public markets or result in higher cost of debt. Fitch Ratings has revised its outlook for the underlying fundamentals of the global reinsurance sector and the non-life insurance industry in APAC region to negative from stable due to the impact of COVID-19.
- State Street’s Global Equity Systemic Risk Index, a measure of market fragility, was reported to have the most extreme jump in four years last week. The hike highlighted the heightened fragility apparent from the recent movements of ‘risky asset’ prices due to drivers of volatility such as coronavirus fears and markdowns to global growth.
- Audit firms are taking precautions to protect against the coronavirus as they carry out responsibilities. Nonessential work travel is restricted at some firms, and staffers are encouraged to use remote-work tools.
- Sporting events cancelled or postponed. Formula One called off the Australian Grand Prix after McLaren was forced to withdraw follow a positive coronavirus test by one of its team members. Arsenal’s Manager tested positive for the coronavirus, as a result a number of Arsenal personnel, including the full first-team squad have self isolated. The National Basketball Association (NBA) has postponed all games indefinitely this season. The National Hockey League (NHL) also suspend the 2020 season opening.
- Major community events have been impacted as a range of social distancing policies are enforced. In California and Oregon, two states with confirmed community COVID-19 spread, governors put a stop to all gatherings of more than 250 people statewide. In New York City, officials postponed the St. Patrick’s Day parade. In Australia, the federal government put a stop to all gatherings of more than 500 people.
- Major conferences cancelled. The Australian Securities and Investments Commission (ASIC) postponed the ASIC Annual Forum and Annual Dinner 2020 due to uncertainty.
- Significant financial impacts as broad business shutdowns are having knock on effects and compounding overall business and economic damage. Companies are cutting expenses—not for profit, but to preserve cash. CFOs are leading the charge in extending credit lines, bolstering emergency cash reserves and tapping bond markets, as they revise debt strategies and seek to avoid mistakes from past crises.
- As businesses activity reduces, staff are being stood down or terminated creating long job ques and a strain on social services and welfare.
Positive business impacts
So can there be a positive impact of the coronavirus? Yes, some organiations can do well.
The gold price has sky rocketed to a seven-year high. Investors are obviously spooked by the coronavirus, fearing that it may be more difficult to contain than previously reported by China. Investors certainly seem to be diversifying into gold, and pushing up the price.
Protective Gear – Amid rising infection cases and deaths from the new coronavirus, protective gear like face masks have surged in sales. Demand is up to 100 times higher than normal, and prices are up to 20 times higher, according to the WHO. Retailers on multiple continents are running out of masks, and prices for a box of masks on online retailers like Amazon have surged to hundreds of dollars. To meet the shortfall, some Chinese companies in unrelated industries have started making masks. 3M is also seeing increased demand for respiratory-protection products.
With people in self isolation or preferring to stay home to eat, food delivery is on the rise. Domino’s, Uber Eats and Menulog are capitalising and are offering no contact delivery to keep customers and staff safe during the coronavirus pandemic.
Retail – Transaction volumes in most retail sectors have seen a 74 percent rise in March compared to the same period last year. Quarantine has changed lives, with consumers buying electronics and furniture—to support work, communication, school and entertainment—as well as items such as home goods and DIY products.
Logistics – Retailers are dependent on logistics. While supply chains have been upended due to the virus’s spread, logistics is a sector that has experienced a crisis and a boost at the same time as food deliveries and online shopping come to the rescue of people who cannot leave their homes.
Pharmaceutical and medical devices – The crisis has increased demand in medical supplies and care. No medications or vaccines are yet available for coronavirus, so huge amounts of resources and money continue to be poured into trying to find vaccines or treatments.
Pandemic is driving global e-commerce growth.
Online retail – Online retailer sectors experienced rising transaction volumes in March 2020. Home products and furnishings: +97 percent, DIY products: +136 percent, Garden essentials: +163 percent, Electronics: +26.6 percent, Telco: +18.6 percent.
Online insurance – Amidst all the mass hysteria surrounding the coronavirus outbreak, people in affected Asian countries seem to be avoiding face-to-face interactions and staying indoors as much as possible. This has led to many venturing online to seek services from digital insurers and health service providers.
Online banking – Starling Bank, is working on a split system of A and B teams working remotely during alternate periods. The method has been tested successfully in the past ensure high availability with less stress on systems.
One eBay seller is hawking a ‘coronavirus protection kit’. Some sellers have also listed respirator masks, air purifiers and disposable fluid-resistant jackets, invoking “coronavirus” in their listing titles. A $21.99 “coronavirus virus protection kit,” which claims to offer “full body protection,” includes a 3M mask, splash-resistant goggles, a disposable white coverall, medium and large pairs of nitrile gloves, antibacterial wipes, alcohol hand sanitizer and a clinical-waste bio-hazard bag.
One online game related to disease outbreak have surged in sales. The strategy and simulation game Plague Inc., which has players “bring about the end of human history by evolving a deadly, global plague” as the world scrambles to defend itself, became China’s best-selling app, according to the BBC.
The home entertainment sector is the beneficiary of all the travel bans, mandated self-quarantines for returning travellers, and social-distancing measures. Online streaming has come to the rescue as sports venues and movie theatres are shuttered.
Virtual reality (VR) offerings are on the rise for museums, art galleries, and historic sites — the Guggenheim, the Sistine Chapel, and the Great Wall of China have joined those offering virtual experiences — and real estate companies are also expanding VR’s role due to the coronavirus. One company, VirtualHealth, the provider of software-as-a-service care management platform HELIOS, has deployed complete end-to-end capabilities for identifying and managing suspected and confirmed cases of COVID-19.
Virtual healthcare is on the rise. The global outbreak has made every country painfully aware of the limits of its own healthcare systems. Virtual healthcare services, especially portable and via internet will make individual healthcare and diagnosis more immediate, safer and accessible to the general public.
Contactless technology is being used to reduce the probability of spreading the virus. No-contact practices will be championed by some in society — and that creates room for innovation and creativity in products that support no-contact and make less contact more bearable for humans.
Electronic transfers – Notes and coins carry germs, and this crisis has only made people more aware that hard cash can be a vehicle for pathogens. The pandemic has led some countries to take measures to prevent people from physical exposure to cash, even quarantining money. At the peak of its outbreak China disinfected, isolated, and burned banknotes from infected provinces. The crisis will boost mobile platform services like Samsung Pay, Google Pay, Apple Pay, PayPal, and the online banking services.
Social media platforms are also gaining new groups of users as people look for more ways to interact with the outside world from home. In February, social video app TikTok was the most popular nongaming app; Business Insider reported that it outperformed WhatsApp, Instagram, and Facebook and is now nearing 2 billion installs partially due to the consequences of the coronavirus pandemic.
E-learning – School and university closures have impacted 1.5 billion learners in more than 180 countries. Readily available remote learning technologies meant many programmes could instantly be reformatted for online, with colleges shifting to distance learning and many teachers trying their hand for the first time at Google Classroom or web apps like Seesaw for students as young as kindergarten. Many parents are also making their first foray into home-schooling.
Workplace agility at hyper-speed
Organisations have fast-tracked moves to greater workplace and workforce mobility, adaptability and agility. With governments implementing more serious measures such as full or partial lockdowns, and businesses struggling to find ways to maintain adequate levels of productivity, many are turning to remote working apps and software to help maintain some form of business continuity to safeguard against the impact of coronavirus (COVID-19), a hyper-speed evolution to a more flexible, mobile workplace is underway.
Many businesses are making their first moves into remote work and gravitating toward the biggest players, like Zoom or Microsoft Teams. Zoom alone saw 109% download growth.
China is the world’s second-largest economy and leading trading nation, so economic fallout from coronavirus also threatens global growth and will have economic impacts for many countries:
- For China, most forecasters expect the Chinese economy to take a big hit to growth in the first quarter before recovering—thanks to government-fueled stimulus—later in 2020. China’s economic growth expected to slow to 4.5% in the first quarter of 2020 – the slowest pace since the GFC – global financial crisis. With tens of millions of workers now in quarantine and technology parts becoming short in supply, China is struggling to get economic activity and businesses back on track.
- South Korean President Moon Jae-in declared an economic emergency, calling for desperate measures to limit the damage to an economy deeply inter-meshed with China.
- Singapore cut its 2020 growth and exports forecasts due to the expected economic blow from the new coronavirus outbreak, flagging the chance of a recession this year.
- Malaysia has cut growth expectations and planning an economic stimulus of its own to contain the damage.
- Thailand has cut own growth expectations.
- Japan, which has the most virus cases outside China, may be facing the biggest challenges after an already poor fourth quarter showed a shrinking economy, with the biggest contraction in more than five years.
- Brazil, which relies on the Chinese market as its largest trading partner, will likely see slower growth this year due to the fallout from the outbreak.
- Australia’s education sector (at $34bn, revenue from overseas students) is Australia’s second biggest export behind iron ore – is also crucial, and again highlights how exposed Australia is if students cannot leave China to start their courses this month. Latest insights reveal that by mid-February, around 1 in 6 Australian businesses had already been affected by the coronavirus, with education, manufacturing and wholesale industries hit the hardest. Other industries also feeling the effects of the coronavirus include accommodation and food services which includes travel and tourism businesses, community services, administrative and support services, and property and business services. Australia’s Department of Treasury has flagged an urgent need for targeted stimulus, as new modelling shows $34 billion could be wiped from Australia’s economy this year.
- The virus’s sudden upsurge in Europe will also test the EU’s ability to act in a policy area where virtually all power lies with national governments, and where there is little recent experience of coordinating to fight a major contagion. The public-health threat, and the mounting anxiety prompted by the virus, could create pressure on EU countries to consider travel controls. The bloc’s commitment to free movement last came under political pressure during the migration crisis of 2015-16.
- Italy reported death from the coronavirus, as authorities imposed quarantines and other restrictions in the country’s economic heartland. Italian authorities have shut down schools, universities and museums across the country’s north, and banned public and private gatherings, including soccer matches and cultural events. In Milan, the famed Scala opera house was closed. Venice ended its annual carnival early. Catholic Church leaders announced the suspension of Masses.
- Austria temporarily halted trains from Italy after concerns that two passengers on one train might have the virus.
- In Iran, the death toll from the disease rose. Iranian authorities said the epicentre of the outbreak there was Qom, one of the country’s main pilgrimage sites, and officials asked people not to leave the city but stressed that there wasn’t a quarantine there.
- In Israel, officials scrambled to reach people who might have come into contact with a South Korean tour group that had visited Israel and the West Bank, after at least nine members tested positive for the coronavirus after returning to South Korea. Israel has now banned all foreigners who had been to South Korea and Japan over the past two weeks from entering the country over concerns they could spread the coronavirus. Israel is already denying entry to visitors from China, Hong Kong, Macau, Thailand and Singapore.
- In the US, President Trump signed a bipartisan $8 billion deal to provide emergency funding to combat the coronavirus outbreak. $3 billion for developing treatments, including $300 million for the government to purchase drugs from manufacturers at “fair and reasonable” prices. $2.2 billion for public health measures to help prevent its spread. More than $1 billion to be sent overseas.
- According to the International Monetary Fund (IMF), the coronavirus impacts will hold 2020 global output gains to their slowest pace since the 2008-2009 financial crisis.
- Our elected leaders should make it clear that the financial stimulus benefits to people and business are not really free; in the long run, they are loans. The government is providing liquidity now that ultimately will need to be paid back through higher taxes unless we want to assume that the national debt will never be reduced.
- With the growing realization of our dependency on China for key inputs, including for medical uses (masks, drugs, etc.), there will likely be a strong push to move significant strategically important production out of China.
- The Securities and Exchange Commission said that public companies that have trouble meeting filing obligations because of the coronavirus outbreak might qualify for regulatory relief under certain conditions.
- Safe Work NSW issued Qantas with a breach notice, saying it has an “inadequate system of work”. The regulator believes cleaners and passengers are exposed to the risk being infected with COVID-19.
COVID-19 fraud scams – Beware!
- With surgical masks and other medical supplies in high demand yet difficult to find in retail stores as a result of the COVID-19 pandemic, fake shops, websites, social media accounts and email addresses claiming to sell these items have sprung up online.
- Phishing emails claiming to be from national or global health authorities, with the aim of tricking victims to provide personal credentials or payment details, or to open an attachment containing malware. In many cases, the fraudsters impersonate legitimate companies, using similar names, websites and email addresses in their attempt to trick unsuspecting members of the public, even reaching out proactively via emails and messages on social media platforms. The National Fraud Intelligence Bureau (NFIB) said there had been 21 reports of fraud since Feb. 10, totalling over 800,000 pounds who paid for masks that never arrived.
- Telephone fraud where criminals call victims pretending to be clinic or hospital officials, who claim that a relative of the victim has fallen sick with the virus and request payments for medical treatment.
The coronavirus has spread to over 100 other countries and regions, facilitated by the Chinese New Year and international travel. The coronavirus outbreak has shaken the global economy, disrupting supply chains and closing off access to lucrative consumer markets. Death rates and the number of infected people are still increasing, and we expect the adverse economic impact to continue.
Pandemics are now on the radar and even at the top of many risk registers in many countries and organisatons – the coronavirus is no exception. Every outbreak of a potentially dangerous infection sees authorities and business leaders ask rational sets of questions and consider response options that can be implemented.
Business that invest, in strategic, operational and financial resilience to emerging global risks and outbreaks will be better positioned to respond and recover quickly in future cases.
How we can help
InConsult is committed to helping organisations become more resilient to a range of disruptions including pandemics. We have extensive experience in risk management, crisis management, business continuity, emergency management, disaster management and pandemic planning.
If you feel the coronavirus may have an adverse impact on your business and would like to discuss strategies to be better prepared and respond, contact us to discuss your needs.