Coronavirus outbreak poses multiple challenges to companies, above all in China

While the outbreak clearly has major global implications, China is experiencing by far the most severe immediate impact. This note outlines some initial scenarios and key considerations for clients facing the crisis in China, from a non-medical perspective.

Plan for the long haul

China’s National Health Commission on11 February said that the number of reported confirmed COVID-19 cases in the country had risen to 42,638, with 1,016 deaths, by the end of 10 February. Some experts have suggested that the outbreak could peak in early or mid-February but others have emphasised the possibility of a significantly longer timeframe. Researchers at the University of Hong Kong’s medical school have reportedly estimated that the infection rate may not peak until April or May, and warned of a pandemic. The 2003 Severe Acute Respiratory Syndrome (SARS) episode lasted roughly six months.

Companies can hope that predictions of a shorter timeframe turn out to be correct, but they must plan for a more sustained crisis lasting months rather than weeks. Forecasting the evolution of the outbreak remains highly speculative, but the below narrative may be a useful reference for planning and decision-making, as it outlines key features and considerations of a rough baseline scenario. Detailed medical and travel security information can be found on the International SOS website here.

Sketching scenarios

The type of restrictions already present in China will likely be extended in scope and last for several weeks – at least into March. For companies in China this will mean that major restrictions on movement will continue beyond the Lunar New Year period (in several locations employees are not allowed back to the workplace until 9 February). Companies must plan for staff being unable to return to their workplace after the holidays – either to comply with government directives, such as residential quarantines, by company decision, or due to local restrictions on movement.

For some firms this implies severe disruption, for example in manufacturing or services businesses that cannot operate with greatly reduced staffing. For others the emphasis may be on quickly optimising arrangements to work remotely, with skeleton staffing amid severe restrictions on travel. Most organisations have already limited non-essential travel to China but must anticipate even essential travel becoming inviable or inadvisable.

Most organisations have already limited or stopped non-essential travel to China. Several countries, including the US and the UK, are advising their citizens not to travel to China. Several countries have imposed restrictions on those arriving from China, ranging from medical screening at their destination to quarantines and outright bans. Several major airlines have cancelled or significantly reduced flights to China, and numerous domestic Chinese flights have been cancelled. All of this means that international business will be significantly affected, and a greater degree of advance planning will be needed to ensure business continuity.

Living with lockdown

Cross-border travel will be limited by many governments’ advice against travel and reduced availability of flights (and some overland transport) into and out of China. Many companies will also deem travel inappropriate on grounds of duty of care. The situation is already, and will remain, especially distressing for staff in China. Companies face difficulties balancing business continuity priorities with challenges of staff welfare, human resources and communications. The latter concerns could be exacerbated by growing social media rumours, or weak internal communications. Another consideration is the status of foreign nationals in China, as several governments have already evacuated citizens from Wuhan and some are advising that citizens consider leaving. There is also growing concerns about stigmatisation of Chinese nationals working outside China.

Numerous locations have imposed “lockdown” restrictions, with the most stringent largely found in Hubei. Even if major air and rail routes continue to operate between most major cities, reduced services, extra screening, and individual concerns about exposure during travel will make domestic journeys more difficult, less reliable, and in most cases undesirable for staff. This scenario also involves minimised movement within cities, with many people staying home as much as possible. Bans on returning to workplaces have been lifted in several locations, but in some places, advance approval is required. Moreover, some staff may be uncomfortable taking public transport or taxis (which will be less available), limiting normal movement, meetings and events for at least several weeks.

Based on SARS and other past episodes, it is possible that many of the considerations currently affecting the mainland may later apply to Hong Kong. Movement across the border between Guangdong province and Hong Kong has been greatly restricted and quarantine requirements for some arriving from the mainland are now in place. Since 5 February, the number of reported infections in Hong Kong has risen from 17 to 42 (with one fatality) – fewer than Japan and Singapore, but more than South Korea and Thailand.

Remember, this is China

While companies focus on their internal, global and commercial or operational considerations, it is essential that they do not lose sight of the need to comply with Chinese government directives, including directives that may mandate additional compensation or benefits for employees unable to return to work. This may not always be straightforward, as many instructions will come from local governments as well as the central authorities and may often be unclear. Monitoring, understanding and responding to official directives may take significant focus and resources, but should be a priority.

Companies must be mindful that Chinese authorities view the situation as not only a public health emergency, but also a crisis with potential political and even national security implications. They could therefore react strongly to any perceived failure to comply with special measures or regulations. They will also be sensitive to perceived “rumour spreading”, criticism or questioning of official information.

In addition to complying with directives, companies should also consider how any actions or statements during the crisis could be perceived by the government, the public or media in China. For example, they should assume that some of their internal comments and policies could become public, either through social media or in traditional media (many major news organisations are closely covering corporate responses to the crisis). There could also be a strong reaction if a foreign firm was associated with a public or social media comment that was perceived as critical or making light of the situation.

We're talking one percent of GDP growth...

In this baseline scenario, there will be a very significant impact on China’s first quarter and probably second quarter growth, and some major sectors such as tourism and transport will clearly be affected globally. Several economists have suggested that the virus outbreak could cut around one percentage point from China’s first-quarter GDP growth. These estimates seem to assume that the crisis peaks in February. Oxford Economics has downgraded its 2020 China GDP growth forecast from 6% to 5.4%, estimating that the virus will take more than two percentage points off first quarter growth.

In China, implications will be similar to the types seen in the SARS crisis, but based on the current trajectory, the impact of the COVID-19 outbreak seems likely to be greater. China’s share of global GDP is now roughly four times larger than at the time of SARS, and this outbreak has already affected more people and places than the 2003 SARS outbreak  (albeit with a lower mortality rate). In addition to dramatic falls in international and domestic travel, there is reduced movement within cities and a significant reduction in demand across a wide range of sectors. Supply chain disruption is a key consideration for businesses with significant dependence on production in China, many of which are already beginning to experience disruption.

This is not only a consideration for facilities in areas subject to lockdown restrictions. With tens of millions of people potentially unable to travel home until mid-February or later, and the possibility of extended restrictions on people returning to their workplace even within localities or disruptions from quarantine requirements, the impact could be very wide. Restrictions on Wuhan – Hubei’s provincial capital and a significant rail, water and air transport hub – could also have indirect supply chain consequences.

Alternative scenarios

Most impacts and considerations for corporate crisis management and business continuity would be similar to the baseline scenario, but exacerbated in an episode with significantly greater duration and severity. Companies would be much more likely to have staff directly affected by the virus. Other features of the scenario could include shortages of essential goods in some areas amid panic buying and reduced supplies, and possible protests and interruption of essential services. However, such problems are unlikely to exceed the Chinese government’s very considerable capacity to ensure essential supplies and public order.

What questions are business leaders asking?

A large number of organisations are already engaging with Control Risks as they determine how to monitor the crisis and respond effectively to ensure the safety of their personnel, and the continuity of their business operations. Some common themes are starting to emerge which may be instructive for other companies addressing this issue:

• Do we have the most up-to-date and accurate analysis of the instructions issued by provincial and city-level authorities in China?
• How do we ensure company and employee compliance with rapidly changing regulations stemming from the authorities’ responses to the crisis?
• What are the short- and longer-term operational impacts to our business and supply chains, and how do we plan to overcome these and recover?
• How are our peers in the industry responding? What is working well and what isn’t?
• What are the trigger points and scenarios that we need to be watching for and including in our decision making?
• When can we resume “business as usual” operations? Are there exemptions from the precautionary measures for certain industries or locations?

 
Control Risks is directly helping clients to manage this situation in three key ways:

1. Monitoring and analysis: Our analysts are providing comprehensive, nuanced monitoring of the current situation, as well as alerts and analysis of any important developments and their implications for business.

2. Scenario planning: Working with our team of experts, we identify specific trigger points, potential scenarios and impacts on people and operations. This allows you to prioritize planning and optimize critical decision making, resources and recovery options.

3. Crisis response and business continuity: We help to ensure you are communicating effectively with your critical stakeholders; to rectify potential gaps in your current pandemic and business continuity planning; and to facilitate a disciplined approach to crisis response that enables you to filter out the rumors and speculation to help you make decisions with a view to the medium- or long-term recovery.