Coronavirus COVID-19 Crisis Response · McKinsey & Company 2 Executive summary (February 14, 2020)...

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company

is strictly prohibited

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.


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


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

https://www.who.int/news-room/detail/30-01-2020-statement-on-the-second-meeting-of-the-international-health-regulations-(2005)-emergency-committee-regarding-the-outbreak-of-novel-coronavirus-(2019-ncov)


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

https://www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports/


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


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)


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


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


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


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


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)


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


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


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


Appendix


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


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


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


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


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


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


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


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


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


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

Coronavirus COVID-19 Crisis Response · McKinsey & Company 2 Executive summary (February 14, 2020)...

Documents

Transcript of Coronavirus COVID-19 Crisis Response · McKinsey & Company 2 Executive summary (February 14, 2020)...