Risk
Practice
COVID-19: Implications
for business
The coronavirus outbreak is first and foremost a human tragedy, affecting
hundreds of thousands of people. It is also having a
growing impact on the global economy.
by Matt Craven,
Linda Liu, Mihir Mysore, and Matt Wilson
March 2020
© Xia yuan/Getty Images
This article is intended to provide business
leaders with a perspective on the evolving COVID-19 situation and the
implications for their companies.
The outbreak is moving quickly, and some of these perspectives may fall
rapidly out of date. This article reflects our view as of March 1st, 2020. We
will update it regularly as the outbreak evolves.
What we know about the outbreak
COVID-19 crossed an inflection point during the week of February 24,
2020. Cases outside China exceeded those within China for the first time, with
54 countries reporting cases as of February
29. The outbreak is most concentrated in four transmission
complexes—China (centered in Hubei), East Asia (centered in South Korea and
Japan),
the Middle East (centered in Iran), and Western Europe (centered in Italy).
In total, the
most-affected countries represent nearly
40 percent of the global economy. The daily movements of people and
the sheer number of personal connections within these transmission
complexes make it unlikely that COVID-19 can be contained. And while the
situation in China has stabilized with the implementation of extraordinary
public-health measures, new cases are
also rising elsewhere, including Latin America (Brazil), the United States
(California, Oregon, and Washington), and Africa (Algeria and Nigeria). The US
Centers for Disease Control and Prevention has set clear expectations that the
United States will experience community transmission, and evidence is emerging
that it may be happening
already.
While the future is uncertain, it is likely that countries in the four
mature transmission complexes will see continued case growth; new complexes
may emerge. This could contribute to a perception of “leakage,” as the
public comes to believe that the infections aren’t contained. Consumer
confidence, especially in those complexes, may erode, and could be further
weakened by restrictions on travel and limits on mass gatherings. China will
mostly likely recover first, but the global impact will be felt much longer. We expect
a slowdown in global growth
for 2020. In what follows, we review the two most likely scenarios for
economic impact and recovery
and
provide insights and best practices on how business leaders can navigate this
uncertain and fast-changing situation.
Economic impact
In our base-case scenario (Exhibit 1), continued spread within
established complexes, as well as community
transmission in new complexes, drives a 0.3- to 0.7-percentage-point
reduction in global GDP growth for 2020. China,
meanwhile, continues on its path to recovery, achieving a near-complete
economic restart by mid-Q2 (in spite of the current
challenges of slow permissions and lack of migrant- worker capacity). As
other geographies experience continued case growth,
it is likely that movement restrictions will be imposed to attempt to stop or
slow the progression of the disease. This will almost certainly drive
a sharp reduction in demand, which
in turn lowers economic growth through Q2 and early Q3. Demand recovery
will depend on a slowing of case growth,
the most likely cause of which would be “seasonality”—a reduction in
transmissions similar to that seen with influenza in the northern hemisphere as
the weather warms. Demand may also return if the disease’s fatality ratio
proves to be much lower than we are currently seeing.
Regions
that have not yet seen rapid case growth (such as the Americas) are
increasingly likely to see more sustained community transmission (for example,
expansion of the emergency clusters in the western United States). Greater
awareness of
COVID-19, plus additional time to prepare,
may help these complexes
manage case growth. However, complexes
with less robust health systems could see more general transmission. Lower
demand could slow growth of the global economy
between
1.8 percent and 2.2 percent
instead of the
2.5
percent envisioned at the start of the year.
Unsurprisingly, sectors will be affected to different degrees. Some
sectors, like aviation, tourism, and hospitality, will see lost demand (once
customers choose not to eat at a restaurant, those meals stay uneaten). This
demand is largely irrecoverable. Other
Exhibit 1
Businesses should consider three scenarios as part of their contingency planning.
1. Quick recovery (least likely): Intracomplex transmission contained; economic impact
mostly restricted to Q1
 |
 |
Q1 Q2 Q3 Q4
l Ex-Hubei China economic restart >80% complete, with most migrant workers returning
l Hubei starts to return to normalcy; result of a large- scale health
response
having an effect
l Community transmissions in East Asia and Europe are brought under control
l Community transmissions in Middle
East are controlled.
Consumer
confdence starts to return, even in
setting of sustained transmission, due to lower case fatality ratio,
case-growth slowdown, promising treatment options
l Cases peak in multiple regions; evidence mounts that the virus is seasonal. Aviation, tourism, hospitality sectors back to normal as countries lift travel bans
2. Base case: global
slowdown. Sustained intracomplex transmission; global slowdown
in 2020
 |
 |
 |
 |
Q1 Q2 Q3 Q4
l Ex-Hubei China restart
>80%
complete, with most migrant workers returning
l Hubei starts to return to normalcy; result of a large-scale
health response having an effect
l East Asia, Middle
East, and Europe transmission complexes all see
continued case growth until early Q2, contributing to perception of “leakage,”
causing signifcant impact
on economic growth in all three
regions; early Q2 is
the frst time they see a reduction in new cases
l Consumer confdence remains dampened into Q3. Demand
recovery depends
on evolution of disease; some
sectors (eg, consumer goods) recover faster
l Aviation, tourism,
hospitality start to return
to normalcy
as governments, corporations lift travel restrictions
3.
Pessimistic:
global pandemic and recession. Transmission jumps, new complexes; a recession in 2020
Pessimistic:
global pandemic and recession. Transmission jumps, new complexes; a recession in 2020 |
|
Q1 Q2 Q3 Q4
l Ex-Hubei China restart
>80%
complete, with most migrant workers returning
l Hubei starts to return to normalcy; result of a large- scale health
response
having an effect
l East Asia,
Middle East, Europe, and western America transmission
complexes all see continued
case growth until mid Q2,
potentially
with less robust health/containment response. Signifcant impact on economic
growth in all three regions; mid Q2 is the frst time they see a reduction in
new cases
l Disease expands to other parts of the world, including confrmed transmissions in the rest of North America, Africa, and India
l Consumer
confdence remains low, and air-travel restrictions remain in place until late 2020
sectors will see delayed demand. In consumer goods, for example,
customers may put off discretionary spending because of worry about the
pandemic
but will eventually purchase such items later, once the fear subsides and
confidence returns. These demand shocks—extended for some time in regions that
are unable to contain the virus—can mean
significantly
lower annual growth. Some sectors, such as aviation, will be more deeply
affected.
In the pessimistic scenario, case numbers
grow rapidly in current complexes and new centers of sustained community
transmission erupt in North America, South America, and Africa. Our
pessimistic scenario assumes that the
virus is not highly seasonal, and that cases continue
to grow throughout 2020.
This scenario would
see
significant impact on economic growth throughout 2020, resulting in a
global recession.
In both the base-case and pessimistic scenarios, in addition to facing
consumer-demand headwinds,
companies will need to navigate supply-chain challenges. Currently, we see that companies with strong, centralized procurement teams and good relationships with suppliers in
China are feeling more confident about
their understanding of the
risks these suppliers face (including tier-2 and
tier-3 suppliers). Others are still grappling with their exposure in
China and other transmission complexes. Given the relatively quick economic
restart in
China, many companies are focused on temporary stabilization measures
rather than moving supply chains out of China. COVID-19 is also serving as an
accelerant for companies to make strategic, longer- term changes to supply
chains—changes that had often already been under consideration.
To better understand which scenario may prevail, planning teams can
consider a set of leading indicators like those in Exhibit 2.
Where business should focus
Seven actions can help businesses of all kinds.
Protect your employees. The COVID-19
crisis has been emotionally challenging for many people, changing day-to-day
life in unprecedented ways. For companies, business as usual is not an option.
They can start by drawing up and
executing a plan to support employees that is consistent with the most
conservative guidelines that might apply
and has trigger points for policy changes. Some
companies are
actively benchmarking their efforts against others to determine the right
policies and levels of support for their people. Leaders must communicate with
employees with the right level of specificity and frequency.
Set up a
cross-functional COVID-19 response team. Companies
should nominate a direct report of the CEO to lead the effort
and should appoint
members from every function
and discipline to assist. Further, in most cases, team members
will need to step
out of their
day-to-day roles and dedicate most of their time to virus response. A few
workstreams will be common for most companies: a) employees’
health, welfare, and ability to perform their
roles;
b)
financial stress-testing and development of a contingency plan; c) supply-chain
monitoring, rapid response, and long-term resiliency (see below for more); d)
marketing and sales responses to demand shocks; and e) coordination and communication
with relevant constituencies. These subteams should define specific goals for
the next 48 hours, adjusted continually, as well as weekly goals, all based on
the company’s agreed-on planning scenario. The response team should
install a simple operating cadence and discipline that focuses on output and
decisions, and does not tolerate meetings that achieve neither.
Ensure that liquidity is sufficient to
weather the storm. Businesses need to define scenarios tailored to the
company’s context. For the critical variables that will affect revenue and
cost, they can define input numbers through analytics and expert input.
Companies should model their financials (cash flow, P&L, balance sheet) in
each scenario and identify triggers that might significantly impair liquidity.
For each such
trigger, companies should define moves to stabilize the organization in each
scenario (optimizing accounts payable and receivable; cost reduction;
divestments and M&A).
Stabilize the supply chain. Companies
need to define the extent and likely duration of their supply-chain exposure to
areas that are experiencing community transmission, including tier-1, -2, and
-3 suppliers, and inventory levels. Most companies are primarily focused on
immediate stabilization, given that
most Chinese plants
are currently in restart mode. They also need to consider
rationing critical parts, prebooking rail/air-
freight capacity, using after-
Exhibit 2
Critical indicators of the impact of COVID-19 (March 3, 2020)
Disease phases around the world¹
Stage 1
Small number of cases identifed and no sustained local transmission
Stage 2
Disease spread and sustained local transmission
Stage 3
Government
action/shift in public behavior²
Stage 4
Case growth/stretched health systems
Stage 5
New-case
drop, activity resumption
¹The map includes a representative sample of transmission sites.
There are other sites at stages 1
and 2 that
are not represented
on this map.
The previous version of the map
used community transmission and local transmission interchangeably, based on
the WHO defnition. ²Not all affected regions enter stage 3, but signifcant government intervention/economic impact signal prolonged
recovery.
Source: CNBC; Economist; EgyptAir; International Air
Transport Association; Johns Hopkins
Center for Systems
Science and Engineering;
New York Times; OAG Aviation
Worldwide; Reuters; World Health Organization situation reports
 |
Source: Baidu QianXi; Centers for
Disease Control; Columbia University; Economist; EgyptAir; Jakarta
Post; Johns Hopkins Center for Systems Science and Engineering; London School of Hygiene
& Tropical Medicine; National Bureau of Statistics of China; New York Times; OAG Aviation Worldwide; Organisation for Economic Co-operation Development;
Peking University HSBC
Business School; Reuters; TomTom
Traffc Index; World
Health Organization situation reports; Xian Jiaotong University;
McKinsey Global Institute
Exhibit 2 continued
Critical indicators of the impact of COVID-19 (March 3, 2020)
|
¹Latest data from Guangdong and Shandong as
of Feb 21, 2020, Zhejiang, and Jiangsu as of Feb 24, 2020. 2 Nitrogen dioxide
7-day average (Feb 24 to March 2) compared with 2019. ³Latest
data from Guangdong
as of Feb 14, 2020, while other provinces were as of Feb 17, 2020. 4The Baidu migration
index
represents
the movement of population into a particular province in China. The index
magnitudes are proportional to the volume of people as of Feb 24, 2020.
 |
1Car traffc only.
Congestion level measures % increase in travel time compared with free-fow
condition. ²Year-over-year comparison.
Companies that navigate disruptions better often succeed because they invest in their core
customer segments and anticipate their behaviors.
sales stock as a bridge until production restarts, gaining higher
priority from their suppliers, and, of course, supporting supplier restarts.
Companies should start planning how to manage supply for products that may, as supply comes back on line, see unusual spikes in demand due to hoarding.
In some cases, medium or longer-term stabilization may be warranted, which
calls for updates to demand planning, further network optimization, and
searching for and accelerating qualification of new suppliers. Some of this may
be advisable anyway, absent the current crisis, to ensure resilience in their
supply chain—an ongoing challenge that the COVID- 19 situation has clearly
highlighted.
Stay close to your customers. Companies
that navigate disruptions better often succeed because they invest in their
core customer segments and anticipate their behaviors. In China, for example,
while consumer demand is down, it has not disappeared—people have dramatically
shifted toward online shopping for all types of goods, including food and
produce delivery. Companies should invest in online as part of their push for
omnichannel distribution; this includes ensuring the quality of goods sold
online. Customers’ changing preferences are not likely to go back to pre-
outbreak norms.
Practice the plan. Many top
teams do not invest time in understanding what it takes to plan for disruptions
until they are in one. This is where roundtables or simulations are invaluable.
Companies can use tabletop simulations to define and verify their activation
protocols for different phases of response (contingency planning only,
full-scale response, other). Simulations should clarify decision owners, ensure
that roles for each top-team member are clear, call out the “elephants in the
room” that may slow down the response, and
ensure that, in the event,
the actions needed
to carry out the plan are fully understood and the required
investment readily available.
Demonstrate purpose. Businesses
are only as strong as the communities of which they are a part. Companies need to figure out how to
support response efforts—for example, by providing money, equipment, or
expertise. For example, a few companies have shifted production to create
medical masks and clothing.
The checklist in Exhibit 3 can help companies make sure they are doing
everything necessary.
 |
Exhibit 3
COVID-19 response: Companies can draw on seven sets of immediate actions.
1 Protect employees 3 Financial stress-testing and contingency plan
Follow the most conservative
guidelines available from leading global and local health authorities (eg, CDC,
WHO)
Communicate with employees
frequently and with the right specifcity; support any affected employees per
health guidance Benchmark your efforts (eg, some companies have started to curb
Defne
scenarios that are tailored to the company. Identify planning scenario Identify
variables that will affect revenue and cost. For each scenario, defne input
numbers for each variable through analytics and expert input
Model cash fow, P&L, and balance
sheet in each scenario; identify input-variable triggers that could drive
signifcant liquidity events (including breach of covenants) Identify
trigger-based moves to stabilize organization in each scenario (A/P, A/R
optimization; cost reduction; portfolio optimization through divestments,
M&A)
4
Supply chain
nonessential
travel)
|
Set up cross-functional response
team
Defne extent and timing of exposure to areas that are experiencing community transmission (tier-1, -2, -3 suppliers; inventory levels)
Immediate stabilization (ration
critical parts, optimize alternatives, prebook rail/air-freight capacity, use
after-sales stock as bridge, increase priority in supplier production, support
supplier restart)
Overall lead
should be at the CEO or CEO-1 level; team should be cross-functional and
dedicated Create 5 workstreams: a) employ- ees; b) fnancial stress-testing and
contingency plan; c) supply chain;
d) marketing
and sales; e) other relevant constituencies
Defne specifc, rolling 48-hour and
1-week goals for each workstream based on planning scenario
Ensure a simple but well managed
Medium/longer-term
stabilization (updated demand planning and network optimization—solve for cash,
accelerate qualifcation for alternative suppliers, drive resilience in supply
chain)
5 Marketing and sales
Immediate
stabilization (inventory planning, near-term pricing changes, discounts)
Medium/longer-term stabilization (investment and microtargeting for priority
segments with long-term growth)
6 Practice plan with top team through
in-depth tabletop exercise
operating
cadence and discipline that’s output and decision focused. Low tolerance for
“meetings for the sake of meetings”
Present minimum viable products:
a)
rolling 6-week calendar of milestones; b) 1-page plans
for each workstream; c) dashboard of
Defne activation protocol
for different phases
of response (eg, contingency
planning only, full-scale response, other)
Key considerations: clarity on
decision owner (ideally a single leader), roles for each top-team member,
“elephant in room” that may slow response, actions and investment needed to
carry out plan
7 Demonstrate purpose
progress and triggers; d) threat map Support
epidemic efforts where possible
The coronavirus crisis is a story with an unclear ending. What is clear
is that the human impact is already tragic, and that companies have an
imperative to act immediately to protect their
employees, address business challenges and risks, and help to mitigate
the outbreak in whatever ways they can.
We welcome your comments and questions at coronavirus_client_response@mckinsey.com.
For more of the latest information on COVID-19, please see reports from
the European Centre for Disease Control and Prevention, the US Centers for
Disease Control and Prevention, and the World Health Organization; and Johns
Hopkins University’s live tracker of global cases.
Matt Craven is a partner in McKinsey’s
Silicon Valley office. Linda Liu is a partner in the New York
office, where Matt Wilson
is a senior
partner. Mihir Mysore is a partner in the Houston office.
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