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Updated: February 14, 2020
Coronavirus COVID-19 Crisis Response
McKinsey & Company 2
Executive summary (February 14, 2020)
2019-Novel Coronavirus Acute Respiratory Disease (COVID-19) has caused close to 67,000 confirmed cases and over 1,500 deaths as of February 14, 2020.
About 99% of the cases have been in China. The transmission rate appears to be 1.5-2x higher than the flu, but may fall with public health measures. About 20% of
cases have required hospitalization, and 0.1-4% of all confirmed cases have been fatal. A robust Chinese and global response has helped slow disease spread.
China is attempting to resume economic activity in waves, as migrant workers (>15M in Shanghai and Beijing alone) return from the Lunar New Year holiday.
The first priority is infrastructure, basic supplies (food, water, electricity, gas, communications, transport, government), and medical supplies. The government is allowing
factory restarts if companies can ensure a safe working environment and adherence to stringent processes, including checking employee travel and exposure history.
This will likely lead to a restart of manufacturing activity but it may take weeks. Other than Hubei (where there are 518 laboratory-confirmed cases per million
inhabitants), all of China’s other provinces have fewer than 20 laboratory-confirmed cases per million. China appears to be betting that this relatively contained number
will not worsen dramatically with a controlled restart of its factories. For instance, Ford, Honda, Hyundai, Kia, Nissan, Tesla are planning to restart their China plants
before February 14. Such actions will help mitigate the impact of the outbreak on automotive supply chains globally. However, full productivity may prove elusive: Some
returning workers are subject to 2-week quarantines; schools remain closed – a challenge to working parents; personnel concerns about the outbreak remains high,
amplified by the death of Dr. Wenliang. Public travel and return to work could drive a spike in new cases, which will significantly set back the restart. New rules to avoid
contact between workers (no meetings, lunchtime rotas, work from home) will affect productivity.
What companies need to do: Besides the basics on protecting employees and following health advisories, now is the time to establish a systematic nerve center to
respond to the crisis. The first task is to assess the company’s financials in the potential scenarios, and ensure that there is a robust response for supply chain, inventory
management, working capital and balance sheet management. The company should consider establishing a portfolio of tactics based on clear triggers for when to act.
On the supply chain side, a number of quick actions may be needed: e.g., optimize limited production determining highest margin and highest opportunity cost / penalty
production, pre-book air freight or rail capacity, look to ramp up now on alternative sources if supplies are in Hubei, monitor lead times to gauge performance and
capacity against supplier promises, use aftersales stock as bridge to keep production running.
In addition to evaluating a restart, some manufacturers are temporarily moving their manufacturing, but most companies are focused on a smooth restart
versus supply alternatives. Some manufacturers are shifting temporarily to Southeast Asia (e.g., Philippines) to account for a shortfall in their production, but there is a
limited ability to do this due to lower Southeast Asian factory capacity and high degree of component customization, which makes the Chinese supply base sticky.
In our base case, China sees a partial recovery: Supply chains restart but the service sector remains dampened. Manufacturing may return over the next 4-6
weeks, but the service sector (e.g., retail, transport) will remain dampened – possibly until May – until personnel concerns are alleviated sufficiently for public gatherings
to resume. We believe that personnel concerns will remain elevated until some combination of the following conditions occurs: Case growth remains at current levels in
spite of migrants’ return and factory restart; existing drug cocktails prove to be effective; case growth peaks; fatality rates are confirmed to be lower than current
estimates and more comparable to the flu.
McKinsey & Company 3
COVID-19 – basic information
Coronaviruses are common causes of respiratory infections. They have previously been implicated
in viral outbreaks, including SARS-CoV and MERS-CoV, but are also responsible for some common
colds. Coronavirus COVID-19 is a new virus, without any known prior human infection.
1. These numbers reflect the latest thinking at time of writing; information is expect to evolve rapidly and change; this should not replace the latest available information
through public health officials
2. Statement by the World Health Organization available online here
3. Evidence on exact numbers are emerging, however expected to decreased as viral containment measures intensify and treatments are developed
Source: Literature review, World Health Organization
Public Health Emergency
of International Concern
(PHEIC)
Declaration by the World Health
Organization recognizing the
outbreak as a public health risk
requiring a coordinated
international response.
Historically, declarations of
PHEIC led to a number of other
societal responses, such as
additional travel advisories,
market fluctuations and cross-
country collaboration.
The World Health Organization
declared a Public Health
Emergency of International
Concern on January 30, 2020.2
McKinsey & Company 3
Our knowledge on the disease characteristics are evolving daily1…
1.5-2x
higher transmission
compared to the flu3
Transmission rate
<1/50
Patients are at risk of
dying, with refined data
to come
Rate of people with
infections dying
Up to 20%
patients have
severe disease
Disease severity
McKinsey & Company 4
Australia
China
Republic of Korea
Japan
Singapore
Sri Lanka
Canada
USA
Vietnam
ThailandCambodia
India
Philippines
Nepal
China
Low (<2)
Medium
(2-4)
High (>4)
D
C
G
K
I
H
BA
E
F
J
Case fatality ratio2
Proportion of deaths among confirmed cases
Zikavirus
Chickenpox
SARS-CoV
COVID-19
Polio
Measles
Influenza 1918
Smallpox
MERS-CoV
Ebola (West Africa 2014)
COVID-19 – transmission and spread
1. Latest numbers are available from a number of sources, including daily situation reports from the World Health Organization available here
2. Case fatality numbers are reflective of the outbreak setting and depend on a number of factors, including patient's age, community immunity, health system
capabilities, etc. This graphic aims to offer a broad comparison
Source: World Health Organization
Germany
France
Finland
Number of confirmed cases
1 - 2
3 - 10
11 - 100
101 - 500
> 500
Country, area or territory with cases
Hubei province
COVID-19 transmission statusThe average number of individuals infected from each infected individual
Virus has spread across
over 25 countries
Viral control and
improved case
management will
push COVID-19
to behave more
closely to recent
Influenza and
Zikavirus
outbreaks
Reproduction number
Identification of cases early in the disease (i.e. with fewer symptoms), intensification
of viral control methods, and deployment of treatments (when available) will drive
down the reproduction number and reduce case fatality
Influenza H1N1 2009
Influenza H2N2 1957
Medium (2-15%) High (>15%)Low (<2%)
UAE
Malaysia
Sweden
Italy
Russia
China
UK
Spain
McKinsey & Company 5Source: Press search, literature review
COVID-19 SARS Ebola
1. On February 12, Chinese authorities broadened their definition of COVID-19 to include
those “clinically diagnosed” with the virus, prompting an increase of 15,000+ cases. Latest
numbers are available from a number of sources, including daily situation reports from the
World Health Organization available here
2. Highly preliminary - plausible global impact as of February 4, 2020; total economic GDP
impact of prior pandemic potential viral outbreaks; heavily dependent on severity of
outbreak, effectiveness of response and recovery; exacerbated by China’s significance in
and integration with global economy. China GDP growth impact based on compilation of
analyst estimates, reports (Bloomberg Economics, The Economist, Moody’s, Reuters, New
York Times, Financial Times, analyst reports)
3. Jagadesh et al, Disability Among Ebola Survivors and Their Close Contacts in Sierra Leone:
A Retrospective Case-Controlled Cohort Study, Clinical Infectious Diseases (Jan. 2018)
COVID-19 – impact to date
Social
responses
Relative severity Rationale (examples)
Mild Severe
GovernmentsUnprecedented response by Chinese government authorities
–affecting ~60M people in China; border closures by other
countries
Disability
Long-term health impacts unknown
Ebola – 1-year disability rate of 78%3, while most patients
with SARS who recover suffered few long-term effects2
RecoveryAt the time of writing, about ~20% experience severe
symptoms from COVID-19 (e.g., require hospitalization)
DeathCurrent estimates of ~1-2% fatality ratio2 (by comparison:
Influenza: ~1-2%, Ebola: ~50%, SARS: ~5-10%)
Individuals
High public awareness, in line with other outbreaks of
international concern (e.g., Ebola)
Proliferation of information (and mis-information) enabled by
social media, 24/7 news cycle
Corporations
Widescale corporate response, including mass closures,
supply chain rerouting, scaling back or stoppage of
operations, travel bans – across sectors
Certain industries (e.g., automotive, tourism) facing acute
negative impact
Mode of
transmission
Clinical
effects
(biological)
Pathogens that spread via droplet or aerosolized routes pose
much higher risk than those requiring direct physical contact
with infected fluids (such as Ebola)
Confirmed cases~67,0001
Deaths1,500+1
Countries affected25+1
Impact to date
Estimated impact Estimated annual
economic impact based
on ~0.1% shock to
global economy
~$90B+2
~0.2-0.8pp2Estimated reduction in
2020 annual GDP
growth in China
LAST UPDATED: Feb 4, 2020
LAST UPDATED: Feb 14, 2020
McKinsey & Company 6
Key factors that will influence the containment and severity of impact of COVID-19
Mitigating factor
Exacerbating factor
Total economic impact of
COVID-19 dependent on:
Effectiveness and speed of
control measures (e.g.,
containment)
Ability to and effectiveness of
treatment – supported by a
number of tailwinds (e.g.,
strengthening of healthcare
systems in China,
aggressiveness of government
action) and
Headwinds (e.g., supply chain
dependency on Hubei) and
tailwinds (e.g., strength of
contingency planning by
corporations, criticality of
suppliers in Hubei)
Socio-
economic
responses
Governments
Companies
Individuals
Faster spread of cases - within 5-week window, the total number of cases had already surpassed the total case counts for SARS-CoV
(which occurred over 6-7 months) and MERS-CoV cases (which spanned years)
Increased individual mobility with higher population density (relative to 2003) likely to increase spread
Asymptomatic transmission might be possible; it did not occur with SARS-CoV and was rare (but did occur) with MERS-CoV; no
confirmed evidence of airborne transmission
Healthcare system significantly improved in China since SARS, with increases in public funding for health, improved access to
healthcare and modernization of the healthcare infrastructure
Improvements in genome sequencing assets, enabling rapid characterization of the virus (e.g., identifying and quarantining the
origin, tracking genetic changes during the epidemic)
Clinical effects
(biological)
Improvements in vaccine development technology and creation of Coalition of Epidemic Preparedness Innovations “CEPI”, the
leading vaccine development group that led (and funded) the development of the vaccine for MERS
Increased flow of information, driving awareness (e.g., > 9x access to internet today versus 2003); significant media attention
Wuhan and Hubei as central hub for multiple industries, e.g., automotive manufacturing (with plants for Nissan, PSA, Honda, GM,
Renault, etc.), high-tech (e.g., semiconductor); broader China impacted as other provinces had had factory shutdowns
Aggressive actions to curtail spread of COVID-19 at a scale never seen before in history – e.g., restrictions on travel, school /
restaurant / company closures; effective quarantine of over 50M people
Significant propagation of misinformation given uncontrolled communication
China as significantly larger contributor to global economic growth today vs 2003 (4% vs. 16% share of global output); Wuhan was
forecasted to grow faster than national average in 2020
Greater global connectivity and supply chain dependency on China and reliance on Chinese consumption to drive growth –
certain sectors heavily exposed (e.g., >$250Bn Chinese tourist spend a year); Chinese contribution greater for certain sectors (e.g.,
hospitality, tourism, aviation, luxury goods) that suffered the most during the SARS outbreak; in general, greater economic fragility
Early recognition of importance of data sharing, evidenced by more openness in rapid publication and dissemination of information
(e.g., viral genome)
Modern transportation infrastructure accelerates spread of infectious disease; launch of high-speed rail in 2008 has quadrupled
public transport passenger traffic from 2013 to 2019; timing of outbreak coincided with Lunar New Year, largest annual human migration
Differentiating factors relative to the SARS epidemic in 2003 (not exhaustive)
Medical supplies, beds, facilities in short supply, exacerbated by lockdown preventing supplies from reaching hospitals; quick actions
taken (e.g., building two additional hospitals in <10 days) likely insufficient to meet demand
Likely underreporting of cases given challenges in data collection, shortage of testing kits and reagents in Hubei
McKinsey & Company 7
Three possible epidemiological scenarios
Potential
scenarios
Stage of
virus spreadOutbreak PandemicEpidemic
Potential
evolution of
outbreak to
pandemic
Localized spread
Virus spreads to
surrounding areas
Regional extension
Initial outbreak still
has limited spread but
with increased
regional transmission
observed
Multi-regional case
identification
Virus has spread to a
number of countries,
with limited evidence
of sustained
transmission
Localized outbreak
Emergence of more
cases than expected
at baseline
Sustained
transmission in 3+
regions
Active and sustained
viral transmission in
multiple countries
Sustained
transmission in at
least 2 regions
Virus has spread to
multiple continents
with multiple new foci
of transmission
Possible
scenarios
Scenario 1 : Contained mostly in China
Similar to 2014-2015 Ebola outbreak where
almost all cases were localized in three
West African countries
• Transmission is limited beyond mainland
China
• Cases in Hubei province peak March -
May, then progressively decline
• Case fatality decreases as understanding
evolves and treatments emerge
Scenario 2 : Foci of disseminated
transmission
Similar to 2003 SARS outbreak
• Sustained transmission demonstrated in
subset of countries
• Weaker health systems increasing risk
exposure
• Majority of countries are successful in
limiting number of cases
Scenario 3 : Global pandemic
Similar to 1918 Spanish Influenza pandemic
• Sustained COVID-19 transmission across
most countries and/or individuals, e.g.,
10+ countries, large population at risk
• Situation becomes new “life as usual”,
similar to other periodic outbreaks (e.g.,
flu)
McKinsey & Company 8
Potential evolution of the macroeconomic situationExamples of different scenarios to consider as part of contingency planning
Potential
scenarios
Quick recovery1
• Impact of disease acute for Wuhan and
Hubei province, but disease is largely
contained; severity and mortality remain in
low single digits or less
• New cases peak by February 29th (Wuhan
quarantine commenced January 23rd)
• Supply chains temporarily affected, but
economic activity resumes across most
sectors / industries within weeks or months
• Lagging consumer demand recovers
Partial recovery (BASE CASE)2
• China restarts economic activity within next 4-6 weeks,
in a controlled setting, especially in certain provinces
(Guangdong, Shandong) and in certain sectors critical to
global supply chain and/or less vulnerable to outbreak
impact (e.g., semi-conductor, automotive); acute impact
persists for several months in Hubei province and in
tertiary sectors such as travel, hospitality, leisure
• Consumer confidence takes longer to return, esp. in
China, with consumer spending remaining muted until
Q2 2020, but rapidly recovering once disease is
perceived to be “under control” (e.g., fatality rate lower,
rate of case growth down, containment measures
effective ex-Hubei).
• Impact to the global economy is muted – strong Asia
demand overall combined with a strong US economy
averts a sustained global slowdown
Global slowdown3
• “Straw that breaks the camel’s back” scenario –
COVID-19 virus outbreak as trigger for global
economic recession
• Widespread transmission in a number of countries
• Disease peaks in Q3 2020, with exponential growth in
additional key hot spots (e.g., areas with poor
infrastructure, but central transportation hubs)
• Companies make irreversible decisions such as
wholesale shifts in supply chain, distribution channels –
supply chain broken, especially in certain sectors
“What you
have to
believe” –
not
exhaustive
• Severity and mortality rate for COVID-19
will continue to stay in-line with (or below)
those of the flu
• Individuals can reasonably protect
themselves from infection from COVID-19
through simple and inexpensive precautions
(e.g., washing hands, face masks)
• Post-LNY does not result in significant
spike or partial restart of transmission in low-
impacted regions (e.g., Shanghai, Shenzhen)
• Economy resilient against softening in
consumer demand in Hubei/Wuhan
• Near-term treatment options not effective or not readily
available – vaccine development and at-scale production
takes 1+ year but trials commence within the year
• Economic restart and return of workers does not prompt
second spike in cases
• Effective means to prevent transmission (e.g.,
factories implement effective screening and containment
measures)
• China and more broadly the world learn to live w/ “2
flus” situation, pressing through while vaccine
development takes year(s)
• Economic pressure plus more insulated industries
means that economy “restarts” in those sectors first
• No disease-modifying interventions (e.g., vaccine, drugs
to lower risk of acquisition or duration of viral shedding) are
found
• Global spread of virus including additional self
sustaining sites outside of China; global governments
unable to contain/quarantine the virus in the near term
• Global economies unable to react or sustain near-term
solvency in face of global quarantines
McKinsey & Company 9
Impact on manufacturing by sector
Source: IHS Markit; McKinsey Global Institute analysis
Sectors
Computer, electronic, optical products
Electrical equipment
Other machinery and equipment
Furniture, safety, fire, other
Other non-metallic mineral products
Rubber and plastics
Basic metals
Mining and quarrying
Chemicals
Paper and paper products
Other transport equipment
Pharmaceuticals
Coke & refined petroleum products
Food, beverages, and tobacco
Fabricated metal products
Wood and wood products
Printing and media
Agriculture, forestry, and fishing
Chinese share of
global exports
Chinese % of
intermediate
good exports
Economic exposure
Supply chain integration
Chinese share of
global
consumption
Demand
Chinese share of
gross output
59%
47%
27%
58%
35%
52%
25%
42%
30%
30%
35%
22%
33%
30%
40%
26%
49%
31%
28%
28%
34%
29%
18%
1%
1%
12%
11%
9%
4%
7%
7%
0%
19%
11%
30%
4%
21%
14%
10%
21%
14%
7%
1%
9%
8%
21%
5%
5%
4%
19%
9%
4%
28%
1%
38%
54%
44%
Textiles, apparel, and leather 58%41% 32% 46%
18%
57%
38%
46%
29%
40%
30%
30%
39%
Motor vehicles and trailers 33%5% 7% 33%
23%
34%
29%
34%
25%
32%
Low High
(by metric1)
Economic exposure
1. color scale based on percentiles within each metric
Computer, electronic, optical/ Electrical
equipment/ Other machinery:
▪ Concentrated operations near the affected
areas (e.g., ~290 of about 800 plants named
in Apple’s global supplier list are located in
regions that have delayed returning to work)
▪ Components often heavily customized,
making it challenging for factories to relocate
outside of China in the short term
▪ Intermediate products deeply integrated in
the global technology supply chain
Motor vehicles:
▪ Since 2003, China has since established
itself as an automotive powerhouse and
now serves as a major supplier to global
automakers – COVID-19 poised to be much
more disruptive now
▪ More than 60% of Chinese automotive light
vehicle production is based in provinces
currently affected by government mandated
production shutdowns, leading to an estimate
of 9 bn USD productions losses per week
▪ The outbreak comes at a time of already
slumping sales, heightened trade tensions
and dampened forecasts
Within the manufacturing
industries, certain sectors are
likely to be more vulnerable
than others as a result of
higher level of anticipated
disruption (e.g., idle plants in
affected regions) combined
with greater global economic
exposure.
Overall, vulnerability can be
assessed by considering the
following criteria:
▪ If most operations are
in/near affected areas
▪ If products are highly
customized, requires
skilled talent, and/or
specialized
equipment/infrastructure
▪ If industry already under
stress
▪ If China serves a major role
in the global supply chain
▪ (for where China produces
intermediate goods) if the
industry tends to keep a
higher level of component
inventory
Assessing level of disruption
Most impacted
McKinsey & Company 10
Is China restarting activity? The answer varies by province
4
0
20
18
600200 1,000
16
8
6
10
0
2
1,200
12
14
1,400
518
800400
GDP (2018)
$B USD
Guangxi
Shanxi
Henan
Beijing
Shanghai
COVID-19 Cases
per million (Feb 08, 2020)
Chongqing
Hubei
Tianjin
ZhejiangJiangxi
Hainan
Heilongjiang
Jiangsu
GuangdongShaanxi
Sichuan
Ningxia
Hebei
Gansu
Qinghai
Shandong
Hunan
Jilin
Guizhou
Liaoning
Inner MongoliaXinjiang
Fujian
Anhui
Yunnan
Hubei is the worst impacted province, with more than 500 cases per million
people. The taxed healthcare situation in several areas, especially Wuhan, will
mean slower return to work and ramp-up of productivity, and sustained acute
impact across sectors (both manufacturing and services), unless cases peak by
end of February
Guangdong, Jiangsu and Shandong are all large industrial bases with
lower cases per million. Key goals for them are to maintain public health while
attempting a restart of manufacturing activity. The largest of these is Guangdong,
which has provided detailed guidelines for how companies can return to work – a
regime of stringent processes, checking travel and exposure history of
employees and ensuring a safe environment; factor restarts commencing work
the week of February 10, but slow and staggered – reports of 10-30% employees
return to date
Beijing and Shanghai are the highest profile urban area to monitor for
return to work and resumption of consumer demand. The earliest leading
indicator for economic recovery is whether the return of nearly 16M migrant
drives a spike in cases over the next 5-10 days (post-Lunar New Year); if it does,
it could set recovery back by months, since it will be taken as a sign that
restarting economic activity is difficult without risking public health. Near-term
focus on basic services (e.g., utilities, hospital access); economic restart and
economic restart based on greater possibility to work from home given higher
significance of white collar work
Bubble size is proportional to size of manufacturing sector
Majorly impacted province,
likely to have longer
economic impact
Urban center, driver of
Chinese consumer
behavior
Large industrial base, can
be engine of faster
manufacturing recovery
McKinsey & Company 11
Clinical & Economic leading indicator dashboard for COVID-19
Leading indicators
Pending addl. dataPos. trend Neg trend
Source: WHO Situation Reports; National Bureau of Statistics of China; McKinsey Global Institute; OCED Data, Johns Hopkins CSSE, London School of
Hygiene and Tropical Medicine, Columbia University, Xian Jiaotong University, press research, TomTom traffic index, Baidu QianXi
1. Germany, China, including Hong Kong, Singapore, UK, France , other (cruise ship off the coast of Japan); 2. China updated definition of confirmed cases on 2/13/20 to include people diagnosed by clinical criteria and diagnostic kits instead
of diagnostics kits only, which may impact these statistics; calculated where (FV/PV) ^ (1/days) - 1; 3. Available Tuesday/Wednesday during week of Feb 17 at provincial level; 4. Verified with 3 sources. 5. Shandong, Jiangsu,
Guangdong; 6. Aisin Seiki Co, Toyota Boshoku Corp., Fujitsu General Ltd., LPP. Ftech shifted production to Philippines on 1/30/20; 7. Measures movement of population into destinations 8. Metrics pending access to additional
data sources. 9. Car traffic only. Congestion level measures % increase in travel time compared to free flow condition 10. United States, European Union, Japan, South Korea, Australia, Vietnam, Malaysia, Brazil, India, Russia; Full
represents no restriction, partial represents restricting some travelers or ports of entry, none represents complete closure of ports of entry;
6 25
Global confirmed case
(compound daily growth %)2
12% 8%
Clinical indicators to monitor
Global clinical indicators of outbreak spread
3.82 - - - Late- Feb
NO
China-specific clinical indicators of outbreak spread
China: Ratio of
last day’s
confirmed
cases to
previous max
daily
confirmed
cases
China: Ratio of
latest day
suspected
cases to prior
day cases
China: %
increase of
daily
confirmed
cases 1 week
after migrant
worker return3
China: %
increase of
daily
confirmed
cases 1 week
after factory
restart2
Expert
consensus on
peak of case
count in
China4
Evidence of
significant
transmission via
aerosol route
# of site outside of
Wuhan with
confirmed 3rd gen
transmission
(severity)1
# of countries
with new
confirmed cases
in the last 14
days (breadth)
2/11 to 2/13 2/8 to 2/10
Goods moving outWorkers present
Economic indicators to monitor
Supply chain restart in China
% of major port occupancy
by containers compared to
20198
# of reported potential
production shifts to Southeast
Asia (decisions pending
further development of virus)6
# of identified plant
restarts in other key
industrial centers5
Week of 2/10
TBD
5
04
# of Top 10 trading partners with free flowing travel10
Inbound movement of population to major industrial
provinces in China7
4 4 2
FullPartialNone
Peak congestion level in major cities in China9
Signals of demand restart in China
% of major mall parking lot
occupancy compared to 20195
TBD
S&P 2020 China GDP growth
estimate
5% (-0.7%)
Restart authorized
Demand increasingConsumer confidence restoring
79%
21%
Current Gap to 2019 value
89%
11%
Guangdong Jiangsu
15%
85%
Shandong
92%
8%
Hubei
14%
86%
Shenzhen
24%
76%
Beijing
24%
76%
Shanghai
29%
71%
Nanjing
15%
85%
Wuhan
CapitaLand REIT (owns 12
malls across China) week over
week value
+/- 0%
# of identified plant
restarts in Hubei
New clinical case definition is
contributing to recent large
increase
McKinsey & Company 12
While factory restarts have been announced, it is unclear if there is much production activity restarting
G
Y Factory estimated restart planned (date)1
Factory stated to have restarted (date)
2019 nCoV (per million) (2/8)
>500 cases
20 to 500 cases
10 to 20 cases
0 to 10 cases
Source: Japan Times, Automotive News Europe, Reuters, Xinhua Net, Expert interviews
Leading indicators
1. Dates estimated given latest available information - situation rapidly unfolding and subject to change
2. Exact reasons are not clear at this time; this could be driven by ongoing recommendations to stay home, personal fear, limitations in
mobility (e.g., lack of transport to work), or other reasons
Estimated number of workers
returned to work, %`
90%
~10-30%
Initial reports suggest 10-
30% of workers
presenting to work2 at
re-opened factories
Restart is expected to take
a slow, staggered
approach, over at least 5
weeks
While restarts have been
announced, transportation
challenges for migrant
workers, supply chain lock
ups, and ongoing public
concern over the virus,
may slow down the
restart
Not returned to work Returned to work
Shanghai
Xinjiang
Gansu
Qinghai
Ningxia
Inner
Mongolia
Heilongjiang
Jilin
Shandong
Hebei
Liaoning
Shanxi
Tibet
Sichuan
Yunnan
Guizhou
Guangxi
HenanShaanxi
Hubei
Chongqing
Hunan
Guangdong
Fujian
Jiangxi
Anhui
Jiangsu
Zhejiang
Tianjin
Taiwan
Beijing
Hainan
G FAW-Volkswagen Automotive (2/10)
SAIC VW Automotive (2/10)
Tesla Giga Shanghai (2/10)
Shanghai Lingang Joyson Safety
Systems Co., Ltd (TBD)
G
G
Y
Honda / Dongfeng Motor (2/13)
PSA Group (2/14)
Nissan / Dongfeng Motor (2/14)
Lenovo (TBD)
Cargill (TBD)
Y
Y
Y
Y
Y
G Changan Ford Mazda Engine Co. (2/10)
Suzuki Motor Corp. (TBD)Y
Toyota (2/16)
Honda (TBD)
Foxconn (2/10)
Lenovo (2/10)
Y
Y
G
G
Y FAW-Volkswagen Automotive (2/17)
Y Toyota (2/17)
Suzuki Motor
Corp. (2/10)
G
G Beijing Benz Automotive Co. (2/10)
Lenovo (TBD)G
G Foxconn (2/10)
G Lenovo (2/10)
G Jiangling Motors Corp. (2/10)
Mitsubishi
Motors (2/16)
Y
Y BMW (2/17)
Unknown Province
SAIC VW Automotive (2/17)
Sony Corp (2/10)
NEC Corp (2/10)
Sharp Corp (2/10)
Isuzu Motors Ltd. (TBD)
General Motors (2/15)
Cargill (2/10)
Honeywell (2/10)
McKinsey & Company 13
Population movement and traffic indicators provide insights in economic restart signals and consumer confidence
Leading indicators
2019 lunar year equivalent2/11/2020
2/12/2020 2/12/2019
1. Measures movement of population into destinations 2. Car traffic only. Peak congestion is defined as the point of day where travel time is the longest compared to free flow condition
Source: TomTom traffic index, Baidu QianXi
Top 10
provinces and
select cities by
size of
manufacturing
sector
Urban centers
Extended Lunar
New Year holiday
in many cities and
staggered
resumption of
manufacturing
activities across
China are delaying
the return of
migrant workers
Travel /
transportation
restriction, such as
quarantine periods
in home location or
upon arrival, is
limiting movement
of population
across China
Work from home
policies in place by
major companies
are reducing the
need for travel
during rush hours
Drivers for
gap
Movement of population is
an early signal for
potential economic
restart
Resumption of
manufacturing activities
are starting faster in
Guangdong (hub for
electronics) and Hebei
provinces (hub for
metallurgy) compared to
others
Hubei and Zhejian, the
two most affected
provinces, are showing
the lowest level of
movement and activities
compared to historic levels
Consumer demand,
especially for retail and
entertainment, is likely
to be slow to recover as
current inhabitants of
major cities are reluctant
to, or not required to, leave
home
Implications
Representative
cities in selected
provinces
Inbound movement of population in China,
movement index arbitrary unit1Peak congestion level, % travel
time increase compared to free flow
condition2
2
6
1
1
1
1
0
2
1
1
3
3
15
29
8
21
7
6
5
10
5
4
10
14
Jiangsu
Hubei
Sichuan
Guangdong
Shangdong
Hebei
Henan
Shanghai
Zhejiang
Fujian
Hunan
Beijing
9
8
3
20
4
20
8
17
12
11
57
61
42
69
45
43
57
67
59
62
Data unavailable
Data unavailable
Nanjing
Shenzhen
Wuhan
Hangzhou
Shijiazhuang
Xiamen
Chengdu
Changsha
Shanghai
Beijing
Are workers returning to work locations? Are inhabitants resuming regular
daily activities?
What this tells
us
McKinsey & Company 14
Immediate actions to take in response to COVID-19
Get control & craft trigger-based portfolio of actions
Set up a nerve center dedicated to managing the COVID-19 outbreak.
Ensure high decision authority to allow for speed of decisions
Defined tailored scenarios for the company, and evaluate impact to
P&L and balance sheet in each situation
Define portfolio of actions that are appropriate under different
scenarios, triggered by a small number of practical leading indicators
Conduct a table-top to ensure full alignment on triggers and actions
under different scenarios by the leadership team
Protect employees & create purpose
Draw up & execute a clear plan to support employees that complies
with applicable health advice and guidelines
Be proactive and transparent when communicating with employees,
providing relevant updates on clinical and business impacts
Assess opportunities to strengthen purpose and morale among
employees
Consider ways to support response efforts (e.g. financial, R&D,
medical staff, etc.)
Improve supply chain robustness
Understand exposure by determining critical components, defining buffer and
current inventory, creating tier-transparency, cost scenarios and priority component
lists and action plans
Take action to address anticipated shortages including using available
inventory and alternate transport options
Ensure supplies, materials and personnel required to restart production
including PPE source, employee communications, etc.
Understand additional options including supplier task forces, moving supply to
non-China countries if multi-sourced, and/or developing new supplies
Improve financial resiliency & customer base
Ensure adequate access to credit in conservative scenarios
Define long-term high growth customer segments and execute programs to
drive loyalty
PRELIMINARY
Detail follows
McKinsey & Company 15
Immediate supply chain actions to take in response to COVID-19
1. Buffer stock from Chinese New Year may provide a cushion and potential false sense of security. Impact likely to be felt first in JIT supply chains (e.g. automotive).
2. Given costs, airfreight might not be an option for many industries; availability is already limited
3. Source 4 Growth is a comprehensive database with supplier coverage in every major global region with capability to generate supplier shortlists based on requirements and industry.
Understand exposure
1. Determine truly critical components
(i.e. parts required to operate a line)
2. Define current inventory buffer and
locations1
3. Work with Tier 1 suppliers to assess
interruption risk from Tier 2
onwards
4. Identify origin of supply (Hubei/
Wuhan v. Guangdong) to identify
severity of risk
5. Conduct scenario planning to
understand financial and operational
implications in prolonged shutdown
(scenarios 2 and 3)
6. Work with S&OP to get 3-6 month
accurate demand signal segmenting
likely to be impacted demand to
determine required supply
Ensure resources
required to restart
13. Work with supplier to
source PPE for
production lines
operating in China
(government is requiring
glasses, gloves and
masks)
14. Clearly communicate to
employees on infection
risk concerns (e.g.,
disseminate facts about
virus known to date from
credible source)
15. Consider short-term
stabilization for
suppliers (e.g., low-
interest loan) to allow for a
faster restart
Take action to address
anticipated shortages
7. Optimize limited production
determining highest margin and
highest opportunity cost / penalty
production
8. Pre-book air freight2 / rail capacity
as required by current exposure
9. Collaborate with all parties to
jointly leverage freight capacity,
new/alternate supply sources, etc.
10. Look to ramp up now on
alternative sources if supplies are
in Hubei
11. Watch for extending lead times to
gauge performance and capacity
against supplier promises
12. Use after sales stock as bridge to
keep production running
Understand
additional options
16. Determine what portion
of supply can be swung
to another site (non-
China) if shutdown
persists based on
sourcing strategy
(single, dual, multi)
17. Identify ways to
expedite qualification
process and/or insource
18. Determine possible
geographies and
supplier shortlists
utilizing tools like
McKinsey clean-sheet
tool, SC Designer, and
Source 4 Growth3 in case
alternate supply is
required
McKinsey & Company 16
Appendix
McKinsey & Company 17
Bringing the best toolkit to bear on global pandemicsOur Global Health Practice, with McKinsey Crisis Response, bring proven toolkits to pandemic management
Pandemics pose a major threat to global health,
social development, and the economy. Frequently
they threaten our most vulnerable communities
High-functioning nerve centers, and end-to-end,
trigger-based contingency planning, can go a long
way towards improving effectiveness and speed of
scarce resources in an emergency pandemic
situation
Through our work with over 150 public and private
crises around the globe in the last decade alone,
as well as over 40 engagements disease outbreak
management, McKinsey’s Global Health Practice,
together with McKinsey Crisis Response, have
developed multiple tools and approaches that
support more effective responses that helps
organizations navigate pandemics more effectively
McKinsey & Company 18
A snapshot of our work in pandemics & crisis responseOver 150 cross-sector crises globally in the last 15 years, including 40 in disease outbreak management
1
2
3
4
5
3
1
5
c
2
4
2015: Zika
Supported governments across multiple Latin American
countries to respond to Zika, both in the acute phase and in
building resilience against the disease
2014: Ebola
Worked on multiple aspects of the global response, including
emergency operations, funding, planning and R&D coordination
2014: MERS-CoV
Supported immediate response & contingency planning for the
2014 MERS CoV outbreak
2009: Influenza
Helped develop a plan to address the threat of pandemic
influenza, with a focus on sufficient vaccine production
2019: Twin Cyclones
Helped an NGO improve its Emergency Operations Center
after a twin cyclone in Mozambique
McKinsey & Company 19
Our team of experts in epidemiology, crisis management, supply chain, and stress testing are here to support you
Crisis management experts
Mihir Mysore (Partner, Houston)
Global leader of the Crisis Response
Practice with extensive crisis management
experience across multiple sectors on
topics including crisis preparation,
simulation, and response
Global public health, inc. epidemics
Ophelia Usher (Expert, New York)
Experience in private and public sector crisis
management with specific expertise in threat
identification, stakeholder assessment and
strategy, and business continuity
Linda Liu (Partner, New York)
Core leader in the Crisis Response
Practice serving public sector and
Fortune 100 clients on enterprise risk
management, long-term strategic
planning, crisis response &
preparedness, regulatory remediation
David Chia (Senior VP, Miami)
Core leader in the Transformation
Practice and expert in travel,
transportation, logistics, and healthcare
strategy and operations in the crisis
management context
Matt Wilson (Senior Partner, NYC)
Overall leader of the Global Health Practice focused on
infectious diseases, and healthcare systems and services
Matt Craven (Partner, Silicon Valley)
Leader of our work in Infectious Diseases; Medical doctor
with deep expertise in outbreak response; leadership role
in the WHO’s Ebola Response in Sierra Leone; work on
multiple other outbreaks with McKinsey
Marie-Renee B-Lajoie (Engagement Manager, Boston)
Global public health expert focused on response
preparedness operations and supply chain
Practicing emergency physician with 10+ years experience
in humanitarian response
Sanjiv Baxi (Engagement Manager, Silicon Valley)
Leader in the Healthcare Practice with significant
expertise in Epidemiology, serving clients on strategy
and operations topics
Michael Conway (Senior Partner, Philadelphia)
Former leader of the Global Public Health Practice
and work on multiple prior outbreaks, including Zika,
MERS, influenza and Ebola
Supply chain risk management
Knut Alicke (Partner, Stuttgart)
Leader of Manufacturing & Supply Chain
Practice, with deep expertise across sectors
including travel, logistics, advanced
industries, pharmaceuticals
Anna Strigel (Associate Partner, Berlin)
Leader in Manufacturing & Supply Chan
Practice, with experience across advanced
industries, automotive
Global macroeconomics and stress testing
Arvind Govindarajan (Partner, Boston)
Leader of Risk Dynamics, deep expertise
across sectors including banking,
gas/energy
Sree Ramaswamy (Partner, DC)
Leader in McKinsey Global Institute; deep
expertise in economic analysis and policy,
productivity, tech
Ezra Greenberg (Associate Partner, Stamford)
Leader in Strategy & Corporate Finance; deep
expertise in macroeconomic analysis and
forecasting
McKinsey & Company 20
How we could support you over the next 2-3 weeks
Stand up central
“nerve center”
❑ Stand up a central team to maintain a real-time view of the situation and oversee and coordinate response
activities
❑ Set up emergency response leadership construct including clearly defined decision authority
❑ Create stakeholder maps to understand potential impacts on employees, customers, and suppliers
❑ Create communications plan (e.g., employee FAQ) for information dissemination
Define tailored
scenarios and
conduct stress test
❑ Define range of 3 potential scenarios for how the situation could evolve based on evolution of epidemiology and
socioeconomic responses
❑ Conduct stress testing to assess impact to P&L, balance sheet, for each scenario, in coordination with financial
planning and other functions, as necessary
Create portfolio of
mitigating tactics
❑ Develop contingency plans and mitigation actions for likely scenarios (e.g., if supply chain exposure, engage
Tier 1 to create mapping of Tier 2+)
❑ Identify leading indicators – e.g., triggers indicating economic restart, resumption of consumer demand – and
create real-time dashboard that displays curated, relevant information
Conduct table-top
exercises
❑ Create and conduct table-top exercises for executive / operating committee to align on triggers and actions to
take, by scenario
Supply chain
sourcing hub
❑ Form central transparency hub to identify critical components and coordinate with Tier 1 suppliers to map
out Tier 2+ suppliers
McKinsey & Company 21
Example: Nerve center
COVID-19 Response Lead
Key
activities
Serve as ‘one source of truth’
for operations fact base
Maintain view on resources,
operational performance, and
status of each
Provide relevant inputs to the
economic impact model owned
by Scenario Planning
Operations1
Source and maintain fact base
on evolving situation
Perform relevant research on
media and monitor threats and
leading indicators of situation
Review and synthesize relevant
surveillance, communication and
monitoring data
Situation Analysis
Define relevant scenarios and
conduct modeling to understand
implications for organization
Model economic impact to the
organization at the local,
regional, and global levels
Develop contingency plans
Develop prioritized list of risks
and mitigation plans
Scenario Planning
Develop and implement
communication strategies at
global, national, and regional
levels
Develop stakeholder-specific
communications plan
Coordinate internal and
external communications
including media social media
Members Operations
Procurement
Supply chain
Logistics
Data
Finance
Economists
Strategy
Finance
Economists
Commercial, procurement,
supply chain, and logistics
Communications
Investor Relations
Human Resources / Employee
Relations
Communications
Leads overall response effort
Has authority to act on behalf of organization
Steers and provides oversight, day-to-day guidance
Executive Committee
Advisory(Legal, Human Resources)
Provides advice to ensure
adherence to regulations
1. Includes procurement, supply chain, and logistics
Illustrative
McKinsey & Company 22
Industry deep dive: Luxury GoodsCOVID-19 is derailing Chinese luxury spending domestically and abroad, signaling losses through 2Q 2020
Source: Press reports, McKinsey China Luxury Report 2019, IATA
Overview
In 2000, the Chinese market represented only
2% of luxury sales; by contrast, Chinese
consumers delivered >50% of global growth in
luxury spending between 2012–2018
In 2018, Chinese consumers spent $115Bn on
luxury items, representing >30% of the global
luxury spend
China’s luxury spending is projected to nearly
double from 2018 to 2025, representing ~40%
of global spend on luxury goods in 2025
— Explosion in upper-middle-class
households, which continue to purchase in
luxury categories even as growth in China’s
economy has eased
— Even if China’s growth slows, luxury spend
will likely continue to grow as consumer
behaviors continue to shift from investment
to consumption
70 percent of Chinese consumers did their
luxury spending overseas but this ratio is
shifting toward more domestic spend as a result
of government actions (e.g., repatriation, cutting
taxes on some luxury imports)
Vast majority of luxury goods profit in China
is secured by the top 20 percent of
companies, creating a polarized market
dominated by a subset of “super winners”
“Made in China” manufacturing of luxury
goods growing (e.g., up to 20% of Prada goods)
Sector-specific considerations
COVID-19 will likely have a greater impact on the luxury goods sector than the SARS
epidemic did in 2003
— In 2003, China saw rapid recovery in the luxury goods segment in 2H 2003 once the SARS
crisis abated, fueled by months of unmet demand
— However, China commands a much larger portion of the market today than in 2003
Domestic footfall in China’s boutiques and luxury shopping malls has plunged with
gov’t-imposed restrictions and Chinese consumers social distancing
— Significant drop in social gatherings, group entertainment, afflicting demand for non-staple
luxury goods such as wines, spirits
— Offline shopping for luxury goods to remain main spending modality; however, companies
are reporting 80-90% drop in foot traffic
— Online purchasing (<15% of luxury spend) unlikely to be viable substitute for luxury goods
and is also affected by transportation challenges
Precipitous fall of Chinese spend on luxury goods outside of China are likely to result in
more detrimental impact than decreases in domestic footfall
— Over 50 countries or territories have imposed travel restrictions and tightened visa
requirements on Chinese travelers; relaxation of such restrictions likely dependent on
perception of disease being “under control” (e.g., fatality rate lower, case growth down,
containment measures effective ex-Hubei) plus economic/trade pressure
— Over 70 airlines have canceled or suspended flights to China (e.g., American through April;
British Airways through March, excluding Hong Kong)
In base case, consumer confidence will take longer to return than economic restart.
Consumer spend to remain muted until Q2 2020; but the luxury sector is likely to, as with SARs,
rapidly recover once disease is perceived to be “under control” (customers deferring spend
rather than not spending at all); if the disease peaks by April/May, recovery would start in 2H
Next two weeks will be critical – staggered, slow restart in consumer demand likely, by
province, mirroring but behind economic restart (e.g., Beijing, Shanghai first, provinces without
sustained transmission); early reports indicate slow-ramp – reports of only 10-30% of
employees coming to work after re-opening
Examples
Given widening travel restrictions,
companies are anticipating that
decreased spending patterns of
Chinese customers will negatively
impact sales over coming weeks
Local footfall examples:
— 24 of Burberry’s 64 stores in
Mainland China are closed
with remaining stores operating
with reduced hours and seeing
significant footfall declines
— European luxury retailer
operating in China reported
foot traffic decreased from
between 600-800 people in a
day, to no more than 5
customers entering the store
per day
Significant outlook adjustments
— Tapestry Inc. estimated loss of
sales of $200-$250M in sales
for the second half of its
fiscal year as a result of the
coronavirus
— Capri Holdings reduced its
sales outlook for the quarter
by $100M; ~150 of Capri
Holdings’ 250 stores in China
remain closed
McKinsey & Company 23
Industry deep dive: Automotive industryCOVID-19 poses significant challenges to the automotive industry with a pronounced impact on OEMs
Source: Press reports, S&P Global Ratings, IHS, Chinese Association of Automobile Manufacturers
Overview
China is the world’s largest automotive market with 25.7
million cars produced in 2019, compared to 2.3 million
cars in 2001, an 11x increase in less than two
decades
Global automakers have a substantial footprint in
Wuhan, Hubei Province, and China more broadly
— Wuhan and the rest of Hubei province account
for 9% of total Chinese auto production.
General Motors, Nissan, Renault, Honda and PSA
(owns Peugeot) have large factories in Wuhan,
» Nissan produces ~1.5M cars/year in Wuhan
» Honda produces ~700K cars/year, equal to
50% of its production capacity in China
» GM operates 15 assembly plants with its
Chinese partners
» Ford has 6 assembly plants and Fiat
Chrysler has 2 plants in China
» BMW has three factories in northern China
Chinese automotive components are a major part of
the global auto supply chain, including 8
components factories for Toyota, and 24 plants
making cars or parts in China for 40% of the
Volkswagen production
— German engineering firm Bosch, the world's
largest auto component manufacturer, has
dozens of plants in China including two in Wuhan
— Other parts suppliers including Schaeffler, ZF
Friedrichshafen, Faurecia and Valeo have
significant operations in the country
Sector-specific considerations
The COVID-19 will be more harmful to the automotive
industry than the 2003 SARS epidemic
— COVID-19 has already outpaced 2003 SARS epidemic in
both number of confirmed cases and number of deaths
— In 2003, China had not established itself as an
automotive powerhouse and did not serve as a major
supplier to global automakers
» Chinese’s car parc was only at 24M units then, ~10x
less than it is now (200M units)
» Chinese car sales increased during ARS epidemic as
people bought cars to avoid taking public transit
» While Chinese automotive production declined during
the SARS crisis, overall automotive sales and
revenue were increasingly positive
The outbreak comes at a time of already slumping sales,
heightened trade tensions and dampened forecasts
— China auto sales fell 2.8% in 2019 amidst global trade
tensions, the first decline in nearly two decades
— Global automakers forecasted further sales declines in
2020, prior to knowledge of the coronavirus outbreak
Prolonging of the crisis could prove financially disastrous
for global automakers, causing depletion of parts reserves
and supply chain bottlenecks
— Fiat Chrysler and Ford unprofitable in China; GM facing
decreased profits in the region
— Inventory surplus estimates differ but range between 2-6
weeks; any delays in production beyond this timeframe
(including ramp up time) could signal deep financial losses
Examples
Impact on top global automakers
— The coronavirus outbreak will force carmakers in China
to slash production by about 15% in the first quarter,
requiring a new customer first “pull” mindset
— Based on idled plants and lack of component supply from
tier-chain – current inventory for some Japanese OEMs
to fully produce is less than a week - losses could reach
9 billion USD per week1,2
» More than 60% of Chinese automotive light
vehicle production is based in affected provinces
» Central government is encouraging local
governments to incentivize production re-start
— Nissan, VW, Ford, Tesla, GM, Honda, Daimler, BMW,
Suzuki and Toyota suspended operations in China
through at least February 9, 2020
» Ford, Tesla were planning to reopen factories this
week but will ramp slowly up to pre-outbreak capacity
» GM, Toyota, Honda, Suzuki, Nissan, BMW anticipate
re-opening factories in the coming days to week
Impact on global supply chain outside of China
— Missing manufacturing components are slowly
production globally, especially in APAC including
Hyundai in South Korea, Nissan’s plant in Kyushu,
Japan, and Renault in Busan, South Korea
— Fiat Chrysler may suspend production at a European
production plant due to supply chain disruption
1 Estimate of immediate vehicle production losses assuming ongoing production halts in China and lack of parts outside of China - could be compensated over the FY through increased production in later quarters
2 Effect on global OEMs based on missing supply from Chinese exports of automotive parts based on following: ~9% of global trade volume of automotive (Tier-1) parts, assuming 50% average import share, negation of additional effects (e.g. affected Tier-x-suppliers from China, production stops based on single missing
parts and mitigation efforts of OEMs)
For more information, please connect with Bill Peng, and
Arthur Wang, our dedicated partners in Hong Kong
McKinsey & Company24|
SOURCE: China Automobile Industry Association, McKinsey
Supplier base for commercial vehicle
components
▪ IVECO, Dongfeng and Sha1qanxi
Automobile Group have set up plants
and developed local supplier base
Supplier base for French OEMs
▪ PSA, Faurecia, Valeo established their
plants in China, attracted and
developed local supplier base
Southwest China
Supplier base for Japanese automotive
▪ Toyota, Honda, Denso, Aisin, Yazaki,
established their plants in Guandong,
attracted and developed local supplier
base
New energy vehicle suppliers
▪ BYD buildup world’s largest fuel cell
factory in Foshan, Guangdong
Province
Electronic components
▪ Guangdong province alone produces
about 20% of world’s electronics
industry products
South China
Supplier base for Korean OEMs
▪ Hyundai, Kia, Hyundai Mobis, and
Mando established their plants in north
China, attracted and developed local
supplier base
North China
Supplier base for German OEMs
▪ BMW, VW, Bosch and ZF have
established their plants, attracted and
developed local supplier base
Northeast China
R&D capabilities
▪ Suppliers including ZF, Yanfeng
Visteon, Magna, Bosch set up their
R&D centers in Shanghai and nearby
regions
East China
Hubei Province
Supplier Base for European and local
automakers
- General Motors, Nissan, Renault,
Honda and PSA Group (owns Peugeot)
all have large factories in Wuhan
Supplier base for auto components
- German engineering firm Bosch, the
world's largest auto component
manufacturer, has dozens of plants in
China including two in Wuhan
Central China
Industry deep dive: Automotive industry – OEM segmentation
McKinsey & Company 25
Industry deep dive: Tourism / hospitalityCOVID-19 is dampening tourism/hospitality sector, with precipitous drop in APAC expected to continue through Q2 2020
Source: Press reports; McKinsey Global Institute
Overview
Today, China is one of the largest markets for
outbound travel and tourism spending
— China grew to million travelers in 2019 - a
10x increase from 2002
— China’s inbound tourism grew to 142 million
tourists in 2019 - a 3.7x increase from 2002
— 16% of international tourism spending was
from China ($277B) in 2018, with 51% of
travel and tourism GDP in APAC from
China
Chinese New Year (CNY) is one of the most
important periods for tourism industry thanks
to the week-long holiday
— In 2019, CNY period accounted for nearly
10% of the total tourism year spending
— CNY total travel market has been
consistently growing in both spending and
number of people traveled each year (8% of
growth from 2018 to 2019)
Chinese tourists favor visiting APAC regions
over the Americas and Europe based on
convenience and affordability
— Chinese tourist accounts for >70% total
tourism in Hong Kong and Macao in 2018
— Similarly, >25% of total tourists in Thailand,
Japan, Vietnam and Korea are Chinese
— On the contrary, only 4 – 5% total tourism in
US and Italy are Chinese
Sector-specific considerations
Travel bans by over 50 countries or territories have already had precipitous impact (10% - 23% decrease by region)
— APAC dropped 15.1% in Chinese air arrival booking one week after the travel restriction; the Americas dropped 22.5%; Africa and Middle
East dropped 9.9%
— Occupancy fell 75% over 2 weeks in mainland China in January (landed at 17% on Jan 26th); 150 Hilton hotels (approximately 33,000 room)
are closed in China as a result of the outbreak
Top outbound destinations for Chinese tourists have seen 30% - 75% drop in arrivals since the outbreak
— Macau reported at 75% decrease in mainland tourists for the first four days of the Chinese Lunar New Year
— Thailand stands to lose $3.4B in tourism revenue if the virus outbreak lasts to summer
— Maldives expects a 30% drop in tourist arrivals which leads to a $540 million in loss of revenue for hotels
— Singapore tourist arrivals estimated to fall by up to 30% in 2020
— In addition, business travelers are holding off travel to other Asia destinations, e.g., Singapore, Mumbai, Kuala Lumpur
Corporations downward adjusted expectations for year; e.g., Hilton expects a $25 - $50M hit on annual adjusted EBITA if the outbreak lasts 3
– 6 months; Experts predict a drop of 4.6 million hotel room nights sold in the U.S. for the year
Impact likely similar to what happened in 2003 SARs episode – acute impact but recovery once disease perceived to be “under control”
— SARS in 2003 caused tourism arrivals to fall by up to 20-25% (at least $85Bn lost from aggregate travel income; plus $15Bn in corporate
income); international tourist arrivals dropped by >9M, resulting in loss of $30-50Bn
— Hong Kong (near epicenter of Guangdong) faced 41% reduction in tourism’s contribution to GDP, while mainland China saw 3.2% decrease
on hospitality’s impact to Chinese GDP (lost $3.5B in domestic tourism)
— In 2003, losses were succeeded by subsequent gains, so annual margins were affected marginally
In today’s base case, consumer confidence would likely take longer to return than manufacturing restart which is happening slowly in
stages in ex-Hubei provinces. Consumer spend, including on tourism and leisure, will likely remain muted until Q2 2020, which means that summer
season might be impacted; in best case scenario, recovery by end of summary
— Consumers to refrain until, as with SARs, disease is perceived “under control” across China (e.g., fatality rate lower, case growth down,
containment measures effective ex-Hubei); accordingly, only then will travel, group entertainment, etc., be perceived to be safe, governments
likely to relax restrictions, and resumption of consumer demand
— Potential difference in rebound time between Chinese tourists traveling domestically/globally versus foreign travelers visiting China (latter
could take up to a year, as in SARS)
Next two weeks will be critical in evolution of disease given post-Lunar New Year return of migrant workers across China – second spike likely to
exacerbate fears and prolong recovery. Experts predict tourism might be able to recover at the tail end of summer based on postponed
summer school holidays this yearFor more information, please contact Steve Saxon and Jackey
Yu, dedicated leadership in our Greater China offices