Coronavirus COVID-19

Crisis Response
Updated: February 14, 2020

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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.
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.
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.
McKinsey & Company 2
COVID-19 – basic information

Coronaviruses are common causes of respiratory infections. They have previously been implicated Public Health Emergency
in viral outbreaks, including SARS-CoV and MERS-CoV, but are also responsible for some common of International Concern
colds. Coronavirus COVID-19 is a new virus, without any known prior human infection. (PHEIC)

Declaration by the World Health

Our knowledge on the disease characteristics are evolving daily1…
Organization recognizing the
outbreak as a public health risk
requiring a coordinated
international response.
Transmission rate Disease severity Rate of people with
infections dying The World Health Organization
declared a Public Health
1.5-2x Up to 20% <1/50 Emergency of International
Concern on January 30, 2020.2

higher transmission patients have Patients are at risk of Historically, declarations of

compared to the flu3 severe disease dying, with refined data PHEIC led to a number of other
societal responses, such as
to come additional travel advisories,
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
market fluctuations and cross-
through public health officials
2. Statement by the World Health Organization available online here
country collaboration.
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 McKinsey & Company 3

COVID-19 – transmission and spread

COVID-19 transmission status Reproduction number

The average number of individuals infected from each infected individual

Russia H Measles
Finland
Sweden
Canada G Polio
UK Germany High (>4)
France
Viral control and
Smallpox K
Spain
Italy China
Japan USA improved case
Nepal D Chickenpox
India Republic of Korea management will
Thailand
UAE Cambodia COVID-19 MERS-CoV J push COVID-19
Vietnam
Sri Lanka Philippines Medium
Singapore
Malaysia F SARS-CoV to behave more
(2-4)
closely to recent
Australia Influenza and
C Zikavirus Zikavirus
Influenza H2N2 1957 E Influenza 1918 I
Number of confirmed cases B outbreaks
A Influenza H1N1 2009 Ebola (West Africa 2014)
1-2 Low (<2)
3 - 10
11 - 100
101 - 500
> 500 Low (<2%) Medium (2-15%) High (>15%)
Hubei province ​China

Country, area or territory with cases Case fatality ratio2

Proportion of deaths among confirmed cases

Virus has spread across Identification of cases early in the disease (i.e. with fewer symptoms), intensification
over 25 countries of viral control methods, and deployment of treatments (when available) will drive
down the reproduction number and reduce case fatality
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 McKinsey & Company 4

 COVID-19 – impact to date
COVID-19 SARS Ebola

LAST UPDATED: Feb 14, 2020 Relative severity Rationale (examples)

Impact to date
Mild Severe
~67,0001 Confirmed cases
Recovery
At the time of writing, about ~20% experience severe
symptoms from COVID-19 (e.g., require hospitalization)
1,500+1 Deaths
Long-term health impacts unknown

25+1
Disability Ebola – 1-year disability rate of 78%3, while most patients
Countries affected Clinical
effects with SARS who recover suffered few long-term effects2
(biological)
Estimated impact LAST UPDATED: Feb 4, 2020
Death
Current estimates of ~1-2% fatality ratio2 (by comparison:
Influenza: ~1-2%, Ebola: ~50%, SARS: ~5-10%)
Estimated annual
~$90B+2 economic impact based
Mode of
Pathogens that spread via droplet or aerosolized routes pose
on ~0.1% shock to transmission
much higher risk than those requiring direct physical contact
global economy with infected fluids (such as Ebola)

Estimated reduction in High public awareness, in line with other outbreaks of

~0.2-0.8pp2 2020 annual GDP Individuals
international concern (e.g., Ebola)
growth in China Proliferation of information (and mis-information) enabled by
social media, 24/7 news cycle
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 Widescale corporate response, including mass closures,
numbers are available from a number of sources, including daily situation reports from the supply chain rerouting, scaling back or stoppage of
World Health Organization available here Social operations, travel bans – across sectors
Corporations
2. Highly preliminary - plausible global impact as of February 4, 2020; total economic GDP responses
impact of prior pandemic potential viral outbreaks; heavily dependent on severity of Certain industries (e.g., automotive, tourism) facing acute
outbreak, effectiveness of response and recovery; exacerbated by China’s significance in negative impact
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) Unprecedented response by Chinese government authorities
Governments –affecting ~60M people in China; border closures by other
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) countries

Source: Press search, literature review McKinsey & Company 5

Key factors that will influence the containment and
severity of impact of COVID-19
Differentiating factors relative to the SARS epidemic in 2003 (not exhaustive)
Exacerbating factor
Clinical effects 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) Mitigating factor
(biological)
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
Total economic impact of
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 COVID-19 dependent on:
Improvements in genome sequencing assets, enabling rapid characterization of the virus (e.g., identifying and quarantining the Effectiveness and speed of
origin, tracking genetic changes during the epidemic) control measures (e.g.,
Improvements in vaccine development technology and creation of Coalition of Epidemic Preparedness Innovations “CEPI”, the containment)
leading vaccine development group that led (and funded) the development of the vaccine for MERS
Ability to and effectiveness of
Increased flow of information, driving awareness (e.g., > 9x access to internet today versus 2003); significant media attention treatment – supported by a
Socio- Individuals Significant propagation of misinformation given uncontrolled communication number of tailwinds (e.g.,
economic strengthening of healthcare
Modern transportation infrastructure accelerates spread of infectious disease; launch of high-speed rail in 2008 has quadrupled
responses public transport passenger traffic from 2013 to 2019; timing of outbreak coincided with Lunar New Year, largest annual human migration systems in China,
aggressiveness of government
Wuhan and Hubei as central hub for multiple industries, e.g., automotive manufacturing (with plants for Nissan, PSA, Honda, GM,
action) and
Companies Renault, etc.), high-tech (e.g., semiconductor); broader China impacted as other provinces had had factory shutdowns
China as significantly larger contributor to global economic growth today vs 2003 (4% vs. 16% share of global output); Wuhan was Headwinds (e.g., supply chain
forecasted to grow faster than national average in 2020 dependency on Hubei) and
Greater global connectivity and supply chain dependency on China and reliance on Chinese consumption to drive growth – tailwinds (e.g., strength of
certain sectors heavily exposed (e.g., >$250Bn Chinese tourist spend a year); Chinese contribution greater for certain sectors (e.g., contingency planning by
hospitality, tourism, aviation, luxury goods) that suffered the most during the SARS outbreak; in general, greater economic fragility corporations, criticality of
suppliers in Hubei)
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
Governments
Early recognition of importance of data sharing, evidenced by more openness in rapid publication and dissemination of information
(e.g., viral genome)
Likely underreporting of cases given challenges in data collection, shortage of testing kits and reagents in Hubei
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
McKinsey & Company 6
Three possible epidemiological scenarios
Stage of Outbreak Epidemic Pandemic
virus spread
Sustained
transmission in 3+
Sustained regions
transmission in at
Multi-regional case least 2 regions Active and sustained
identification viral transmission in
Potential Regional extension Virus has spread to
Virus has spread to a multiple countries
evolution of multiple continents
outbreak to Localized spread Initial outbreak still number of countries, with multiple new foci
pandemic has limited spread but with limited evidence
Virus spreads to of transmission
Localized outbreak with increased of sustained
surrounding areas regional transmission transmission
Emergence of more Scenario 3 : Global pandemic
observed
cases than expected Similar to 1918 Spanish Influenza pandemic
at baseline Scenario 2 : Foci of disseminated
transmission • Sustained COVID-19 transmission across
Scenario 1 : Contained mostly in China Similar to 2003 SARS outbreak most countries and/or individuals, e.g.,
Similar to 2014-2015 Ebola outbreak where 10+ countries, large population at risk
almost all cases were localized in three • Sustained transmission demonstrated in • Situation becomes new “life as usual”,
West African countries subset of countries similar to other periodic outbreaks (e.g.,
Possible • Weaker health systems increasing risk flu)
scenarios • Transmission is limited beyond mainland exposure
China • Majority of countries are successful in
Potential • Cases in Hubei province peak March - limiting number of cases
scenarios May, then progressively decline
• Case fatality decreases as understanding
evolves and treatments emerge

McKinsey & Company 7

Potential evolution of the macroeconomic situation
Examples of different scenarios to consider as part of contingency planning
1 Quick recovery
• Impact of disease acute for Wuhan and
Hubei province, but disease is largely
contained; severity and mortality remain in
low single digits or less
Potential • New cases peak by February 29th (Wuhan
quarantine commenced January 23rd)
scenarios
• Supply chains temporarily affected, but
economic activity resumes across most
sectors / industries within weeks or months
• Lagging consumer demand recovers
• Severity and mortality rate for COVID-19
“What you will continue to stay in-line with (or below)
have to those of the flu
believe” – • Individuals can reasonably protect
not themselves from infection from COVID-19
exhaustive 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
2 Partial recovery (BASE CASE) 3 Global slowdown
• China restarts economic activity within next 4-6 weeks, • “Straw that breaks the camel’s back” scenario –
in a controlled setting, especially in certain provinces COVID-19 virus outbreak as trigger for global
(Guangdong, Shandong) and in certain sectors critical to economic recession
global supply chain and/or less vulnerable to outbreak
• Widespread transmission in a number of countries
impact (e.g., semi-conductor, automotive); acute impact
persists for several months in Hubei province and in • Disease peaks in Q3 2020, with exponential growth in
tertiary sectors such as travel, hospitality, leisure additional key hot spots (e.g., areas with poor
• Consumer confidence takes longer to return, esp. in infrastructure, but central transportation hubs)
China, with consumer spending remaining muted until • Companies make irreversible decisions such as
Q2 2020, but rapidly recovering once disease is wholesale shifts in supply chain, distribution channels –
perceived to be “under control” (e.g., fatality rate lower, supply chain broken, especially in certain sectors
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
• Near-term treatment options not effective or not readily • No disease-modifying interventions (e.g., vaccine, drugs
available – vaccine development and at-scale production to lower risk of acquisition or duration of viral shedding) are
takes 1+ year but trials commence within the year found
• Economic restart and return of workers does not prompt
• Global spread of virus including additional self
second spike in cases
sustaining sites outside of China; global governments
• Effective means to prevent transmission (e.g.,
unable to contain/quarantine the virus in the near term
factories implement effective screening and containment
measures) • Global economies unable to react or sustain near-term
• China and more broadly the world learn to live w/ “2 solvency in face of global quarantines
flus” situation, pressing through while vaccine
development takes year(s)
• Economic pressure plus more insulated industries
means that economy “restarts” in those sectors first
McKinsey & Company 8
 Impact on manufacturing by sector Economic exposure
Low High
(by metric1)

Economic exposure Assessing level of disruption

Computer, electronic, optical/ Electrical
Supply chain integration Demand
Within the manufacturing equipment/ Other machinery:
Chinese % of Chinese share of industries, certain sectors are
Most impacted Chinese share of intermediate Chinese share of global ▪ Concentrated operations near the affected
Sectors likely to be more vulnerable areas (e.g., ~290 of about 800 plants named
global exports good exports gross output consumption
than others as a result of in Apple’s global supplier list are located in
Computer, electronic, optical products 30% 28% 49% 38% higher level of anticipated regions that have delayed returning to work)
disruption (e.g., idle plants in
Electrical equipment 28% 21% 59% 54%
affected regions) combined ▪ Components often heavily customized,
Other machinery and equipment 28% 14% 47% 44% with greater global economic making it challenging for factories to relocate
exposure. outside of China in the short term
Motor vehicles and trailers 5% 7% 33% 33%
▪ Intermediate products deeply integrated in
Furniture, safety, fire, other 34% 10% 27% 18% the global technology supply chain
Overall, vulnerability can be
Other non-metallic mineral products 29% 21% 58% 57% assessed by considering the
Rubber and plastics 18% 14% 35% 38% following criteria: Motor vehicles:

Basic metals 1% 7% 52% 46%

▪ If most operations are ▪ Since 2003, China has since established
in/near affected areas itself as an automotive powerhouse and
Mining and quarrying 1% 1% 25% 29%
▪ If products are highly now serves as a major supplier to global
Chemicals 12% 9% 42% 40% customized, requires automakers – COVID-19 poised to be much
skilled talent, and/or more disruptive now
Paper and paper products 11% 8% 30% 30%
specialized ▪ More than 60% of Chinese automotive light
Other transport equipment 9% 21% 30% 30% equipment/infrastructure vehicle production is based in provinces
Pharmaceuticals 4% 5% 35% 39% ▪ If industry already under currently affected by government mandated
stress production shutdowns, leading to an estimate
Textiles, apparel, and leather 41% 32% 58% 46% of 9 bn USD productions losses per week
▪ If China serves a major role
Coke & refined petroleum products 7% 5% 22% 23% in the global supply chain ▪ The outbreak comes at a time of already
slumping sales, heightened trade tensions
Food, beverages, and tobacco 7% 4% 33% 34% ▪ (for where China produces and dampened forecasts
intermediate goods) if the
Fabricated metal products 0% 19% 30% 29%
industry tends to keep a
Wood and wood products 19% 9% 40% 34% higher level of component
25% inventory
Printing and media 11% 4% 26%
Agriculture, forestry, and fishing 4% 1% 31% 32%
1. color scale based on percentiles within each metric McKinsey & Company 9
Source: IHS Markit; McKinsey Global Institute analysis
Is China restarting activity? The answer varies by province

COVID-19 Cases Majorly impacted province, Large industrial base, can Urban center, driver of
per million (Feb 08, 2020) likely to have longer be engine of faster Chinese consumer
Bubble size is proportional to size of manufacturing sector economic impact manufacturing recovery behavior
518
Hubei  Hubei is the worst impacted province, with more than 500 cases per million
people. The taxed healthcare situation in several areas, especially Wuhan, will
20 Zhejiang mean slower return to work and ramp-up of productivity, and sustained acute
Jiangxi
impact across sectors (both manufacturing and services), unless cases peak by
18 end of February
Beijing
16 Chongqing  Guangdong, Jiangsu and Shandong are all large industrial bases with
Hainan Hunan lower cases per million. Key goals for them are to maintain public health while
14 Anhui
attempting a restart of manufacturing activity. The largest of these is Guangdong,
Shanghai
12 which has provided detailed guidelines for how companies can return to work – a
Henan
regime of stringent processes, checking travel and exposure history of
10 Heilongjiang Shaanxi Guangdong
Ningxia
employees and ensuring a safe environment; factor restarts commencing work
Guangxi
8 the week of February 10, but slow and staggered – reports of 10-30% employees
Fujian
Tianjin return to date
6 Qinghai Jilin Jiangsu
Sichuan  Beijing and Shanghai are the highest profile urban area to monitor for
Shanxi Shandong
4 return to work and resumption of consumer demand. The earliest leading
Yunnan
Guizhou indicator for economic recovery is whether the return of nearly 16M migrant
2 Inner Mongolia
Xinjiang Hebei
Gansu
drives a spike in cases over the next 5-10 days (post-Lunar New Year); if it does,
Liaoning it could set recovery back by months, since it will be taken as a sign that
0
0 200 400 600 800 1,000 1,200 1,400 restarting economic activity is difficult without risking public health. Near-term
GDP (2018) focus on basic services (e.g., utilities, hospital access); economic restart and
$B USD economic restart based on greater possibility to work from home given higher
significance of white collar work

McKinsey & Company 10

 Leading indicators

Clinical & Economic leading indicator dashboard for COVID-19

Current Gap to 2019 value Pos. trend Neg trend Pending addl. data
Clinical indicators to monitor New clinical case definition is Economic indicators to monitor
contributing to recent large
Global clinical indicators of outbreak spread increase Supply chain restart in China
Restart authorized Workers present Goods moving out
6 NO 25 12% 8% Week of 2/10 Inbound movement of population to major industrial
# of site outside of Evidence of # of countries 2/11 to 2/13 2/8 to 2/10 4 0 provinces in China7 TBD
Wuhan with significant with new # of identified plant # of identified plant % of major port occupancy
confirmed 3rd gen transmission via confirmed cases restarts in other key restarts in Hubei by containers compared to
Global confirmed case 11% 15% 8%
transmission aerosol route in the last 14 industrial centers5
21%
20198
(compound daily growth %)2
(severity)1 days (breadth)
5 79% 89% 85% 92%
# of reported potential
production shifts to Southeast Guangdong Jiangsu Shandong Hubei
China-specific clinical indicators of outbreak spread Asia (decisions pending
further development of virus)6
3.82 - - - Late- Feb
Signals of demand restart in China
China: Ratio of China: Ratio of China: % China: % Expert
last day’s latest day increase of increase of consensus on Consumer confidence restoring Demand increasing
confirmed suspected daily daily peak of case
cases to cases to prior confirmed confirmed count in Peak congestion level in major cities in China9
previous max day cases cases 1 week cases 1 week China4 +/- 0% TBD
daily after migrant after factory 14% 24% 24% 15% CapitaLand REIT (owns 12 % of major mall parking lot
29%
confirmed worker return3 restart2 malls across China) week over occupancy compared to 20195
86% 76% 76% 71%
cases 85% week value
Shenzhen Beijing Shanghai Nanjing Wuhan

# of Top 10 trading partners with free flowing travel10

None Partial Full 5% (-0.7%)
4 4 2 S&P 2020 China GDP growth
estimate

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;

Source: WHO Situation Reports; National Bureau of Statistics of China; McKinsey Global Institute; OCED Data, Johns Hopkins CSSE, London School of McKinsey & Company 11
Hygiene and Tropical Medicine, Columbia University, Xian Jiaotong University, press research, TomTom traffic index, Baidu QianXi
 Leading indicators

While factory restarts have been announced, it is

unclear if there is much production activity restarting
Not returned to work Returned to work

Y Factory estimated restart planned (date)1

G Factory stated to have restarted (date) Estimated number of workers
returned to work, %`
2019 nCoV (per million) (2/8)
>500 cases Heilongjiang
20 to 500 cases
Y FAW-Volkswagen Automotive (2/17) ~10-30%
Y Toyota (2/17)
10 to 20 cases
Jilin G FAW-Volkswagen Automotive (2/10)
0 to 10 cases
Y BMW (2/17)
Liaoning
Xinjiang Inner
Mongolia Beijing G Beijing Benz Automotive Co. (2/10) 90%
Tianjin G Lenovo (TBD)
Hebei  Initial reports suggest 10-
Shanxi G Suzuki Motor G Changan Ford Mazda Engine Co. (2/10)
Ningxia
Shandong Corp. (2/10) 30% of workers
Y Suzuki Motor Corp. (TBD)
Qinghai presenting to work2 at
Gansu
Shaanxi Jiangsu G SAIC VW Automotive (2/10) re-opened factories
Henan
G Tesla Giga Shanghai (2/10)
Tibet Shanghai  Restart is expected to take
Anhui Y Shanghai Lingang Joyson Safety
Sichuan
Hubei Systems Co., Ltd (TBD) a slow, staggered
Chongqing
Zhejiang Y Honda / Dongfeng Motor (2/13) approach, over at least 5
Hunan
Jiangxi Y PSA Group (2/14) weeks
Fujian Y Nissan / Dongfeng Motor (2/14)
Guizhou
G Foxconn (2/10)
Y Lenovo (TBD)  While restarts have been
Taiwan announced, transportation
Unknown Province G Lenovo (2/10) Yunnan Guangdong Y Cargill (TBD)
SAIC VW Automotive (2/17) Isuzu Motors Ltd. (TBD)
Guangxi challenges for migrant
G Jiangling Motors Corp. (2/10) workers, supply chain lock
Sony Corp (2/10) General Motors (2/15)

NEC Corp (2/10) Cargill (2/10) Y Toyota (2/16) ups, and ongoing public
Y Mitsubishi
Sharp Corp (2/10) Honeywell (2/10) Hainan Motors (2/16) Y Honda (TBD) concern over the virus,
1. Dates estimated given latest available information - situation rapidly unfolding and subject to change G Foxconn (2/10) may slow down the
2. Exact reasons are not clear at this time; this could be driven by ongoing recommendations to stay home, personal fear, limitations in G Lenovo (2/10) restart
mobility (e.g., lack of transport to work), or other reasons
Source: Japan Times, Automotive News Europe, Reuters, Xinhua Net, Expert interviews McKinsey & Company 12
 Leading indicators

Population movement and traffic indicators provide insights in

economic restart signals and consumer confidence
Inbound movement of population in China, Representative Peak congestion level, % travel 2/12/2020 2/12/2019
movement index arbitrary unit1 cities in selected time increase compared to free flow 2/11/2020 2019 lunar year equivalent
provinces condition2
What this tells Are workers returning to work locations? Are inhabitants resuming regular Drivers for Implications
us daily activities? gap
Movement of population is
Jiangsu
2
Nanjing
9  Extended Lunar an early signal for
15 57 New Year holiday potential economic
6 8 in many cities and restart
Guangdong Shenzhen staggered
29 61
resumption of Resumption of
1 manufacturing
Shangdong Data unavailable manufacturing activities
8 activities across are starting faster in
1 3 China are delaying Guangdong (hub for
Top 10 Zhejiang Hangzhou
21 42 the return of electronics) and Hebei
provinces and
migrant workers provinces (hub for
select cities by 1
size of Henan Data unavailable metallurgy) compared to
7  Travel /
manufacturing others
1 20 transportation
sector Fujian Xiamen
6 69 restriction, such as Hubei and Zhejian, the
quarantine periods two most affected
0 4
Hubei Wuhan in home location or provinces, are showing
5 45
upon arrival, is the lowest level of
2 20 limiting movement
Hebei Shijiazhuang movement and activities
10 43 of population compared to historic levels
1 8 across China
Sichuan Chengdu
5 57 Consumer demand,
 Work from home especially for retail and
1 17 policies in place by
Hunan Changsha entertainment, is likely
4 67 major companies to be slow to recover as
3 12 are reducing the current inhabitants of
Shanghai Shanghai need for travel
10 59 major cities are reluctant
Urban centers during rush hours to, or not required to, leave
3 11
Beijing Beijing home
14 62

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 McKinsey & Company 13

Immediate actions to take in response to COVID-19
Detail follows

PRELIMINARY

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
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

Protect employees & create purpose

Improve financial resiliency & customer base
Draw up & execute a clear plan to support employees that complies
with applicable health advice and guidelines Ensure adequate access to credit in conservative scenarios
Be proactive and transparent when communicating with employees, Define long-term high growth customer segments and execute programs to
providing relevant updates on clinical and business impacts drive loyalty
Assess opportunities to strengthen purpose and morale among
employees

Consider ways to support response efforts (e.g. financial, R&D,

medical staff, etc.)

McKinsey & Company 14

Immediate supply chain actions to take in response to COVID-19

Take action to address Ensure resources Understand

Understand exposure anticipated shortages required to restart additional options
1. Determine truly critical components 7. Optimize limited production 13. Work with supplier to 16. Determine what portion
(i.e. parts required to operate a line) determining highest margin and source PPE for of supply can be swung
highest opportunity cost / penalty production lines to another site (non-
2. Define current inventory buffer and
production operating in China China) if shutdown
locations1
(government is requiring persists based on
3. Work with Tier 1 suppliers to assess
8. Pre-book air freight2 / rail capacity glasses, gloves and sourcing strategy
interruption risk from Tier 2 as required by current exposure masks) (single, dual, multi)
onwards 9. Collaborate with all parties to 14. Clearly communicate to 17. Identify ways to
4. Identify origin of supply (Hubei/ jointly leverage freight capacity, employees on infection expedite qualification
Wuhan v. Guangdong) to identify new/alternate supply sources, etc. risk concerns (e.g., process and/or insource
severity of risk 10. Look to ramp up now on disseminate facts about
virus known to date from 18. Determine possible
5. Conduct scenario planning to alternative sources if supplies are geographies and
understand financial and operational in Hubei credible source)
supplier shortlists
implications in prolonged shutdown 15. Consider short-term utilizing tools like
11. Watch for extending lead times to
(scenarios 2 and 3) stabilization for McKinsey clean-sheet
gauge performance and capacity
6. Work with S&OP to get 3-6 month against supplier promises suppliers (e.g., low- tool, SC Designer, and
accurate demand signal segmenting interest loan) to allow for a Source 4 Growth3 in case
likely to be impacted demand to 12. Use after sales stock as bridge to faster restart alternate supply is
determine required supply keep production running required

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.
McKinsey & Company 15
Appendix

McKinsey & Company 16

Bringing the best toolkit to bear on global pandemics
Our 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 17

A snapshot of our work in pandemics & crisis response
Over 150 cross-sector crises globally in the last 15 years, including 40 in disease outbreak management

2015: Zika

1 Supported governments across multiple Latin American

countries to respond to Zika, both in the acute phase and in
building resilience against the disease

2
2014: Ebola
Worked on multiple aspects of the global response, including
emergency operations, funding, planning and R&D coordination 4
3

3
2014: MERS-CoV
Supported immediate response & contingency planning for the
1 2
2014 MERS CoV outbreak
5

4
2009: Influenza
Helped develop a plan to address the threat of pandemic
influenza, with a focus on sufficient vaccine production
c

5
2019: Twin Cyclones
Helped an NGO improve its Emergency Operations Center
after a twin cyclone in Mozambique

McKinsey & Company 18

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
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
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
Global public health, inc. epidemics
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
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
Sanjiv Baxi (Engagement Manager, Silicon Valley)
Leader in the Healthcare Practice with significant
expertise in Epidemiology, serving clients on strategy
and operations topics
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
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 19
How we could support you over the next 2-3 weeks

Stand up central ❑ Stand up a central team to maintain a real-time view of the situation and oversee and coordinate response
activities
“nerve center” ❑ 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 ❑ Define range of 3 potential scenarios for how the situation could evolve based on evolution of epidemiology and
socioeconomic responses
scenarios and ❑ Conduct stress testing to assess impact to P&L, balance sheet, for each scenario, in coordination with financial
conduct stress test planning and other functions, as necessary

Create portfolio of ❑ Develop contingency plans and mitigation actions for likely scenarios (e.g., if supply chain exposure, engage
Tier 1 to create mapping of Tier 2+)
mitigating tactics ❑ 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 ❑ Create and conduct table-top exercises for executive / operating committee to align on triggers and actions to
take, by scenario
exercises

Supply chain ❑ Form central transparency hub to identify critical components and coordinate with Tier 1 suppliers to map
out Tier 2+ suppliers
sourcing hub
McKinsey & Company 20
Example: Nerve center
Illustrative
Executive Committee
Scenario Planning
Key  Define relevant scenarios and
activities 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
Members  Strategy
 Finance
 Economists
 Commercial, procurement,
supply chain, and logistics
1. Includes procurement, supply chain, and logistics
COVID-19 Response Lead
Situation Analysis
 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
 Data
 Finance
 Economists
 Leads overall response effort
 Has authority to act on behalf of organization
 Steers and provides oversight, day-to-day guidance
Advisory  Provides advice to ensure
(Legal, Human Resources) adherence to regulations
Operations1 Communications
Serve as ‘one source of truth’  Develop and implement
for operations fact base communication strategies at
 Maintain view on resources, global, national, and regional
operational performance, and levels
status of each  Develop stakeholder-specific
Provide relevant inputs to the communications plan
economic impact model owned  Coordinate internal and
by Scenario Planning external communications
including media social media
 Operations  Communications
 Procurement  Investor Relations
 Supply chain  Human Resources / Employee
 Logistics Relations
McKinsey & Company 21
Industry deep dive: Luxury Goods
COVID-19 is derailing Chinese luxury spending domestically and abroad, signaling losses through 2Q 2020
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)
Source: Press reports, McKinsey China Luxury Report 2019, IATA
Sector-specific considerations Examples
 COVID-19 will likely have a greater impact on the luxury goods sector than the SARS  Given widening travel restrictions,
epidemic did in 2003 companies are anticipating that
— In 2003, China saw rapid recovery in the luxury goods segment in 2H 2003 once the SARS decreased spending patterns of
crisis abated, fueled by months of unmet demand Chinese customers will negatively
impact sales over coming weeks
— However, China commands a much larger portion of the market today than in 2003
 Local footfall examples:
 Domestic footfall in China’s boutiques and luxury shopping malls has plunged with
— 24 of Burberry’s 64 stores in
gov’t-imposed restrictions and Chinese consumers social distancing
Mainland China are closed
— Significant drop in social gatherings, group entertainment, afflicting demand for non-staple
with remaining stores operating
luxury goods such as wines, spirits
with reduced hours and seeing
— Offline shopping for luxury goods to remain main spending modality; however, companies significant footfall declines
are reporting 80-90% drop in foot traffic
— European luxury retailer
— Online purchasing (<15% of luxury spend) unlikely to be viable substitute for luxury goods operating in China reported
and is also affected by transportation challenges foot traffic decreased from
 Precipitous fall of Chinese spend on luxury goods outside of China are likely to result in between 600-800 people in a
more detrimental impact than decreases in domestic footfall day, to no more than 5
— Over 50 countries or territories have imposed travel restrictions and tightened visa customers entering the store
requirements on Chinese travelers; relaxation of such restrictions likely dependent on per day
perception of disease being “under control” (e.g., fatality rate lower, case growth down,  Significant outlook adjustments
containment measures effective ex-Hubei) plus economic/trade pressure — Tapestry Inc. estimated loss of
— Over 70 airlines have canceled or suspended flights to China (e.g., American through April; sales of $200-$250M in sales
British Airways through March, excluding Hong Kong) for the second half of its
 In base case, consumer confidence will take longer to return than economic restart. fiscal year as a result of the
Consumer spend to remain muted until Q2 2020; but the luxury sector is likely to, as with SARs, coronavirus
rapidly recover once disease is perceived to be “under control” (customers deferring spend — Capri Holdings reduced its
rather than not spending at all); if the disease peaks by April/May, recovery would start in 2H sales outlook for the quarter
 Next two weeks will be critical – staggered, slow restart in consumer demand likely, by by $100M; ~150 of Capri
province, mirroring but behind economic restart (e.g., Beijing, Shanghai first, provinces without Holdings’ 250 stores in China
sustained transmission); early reports indicate slow-ramp – reports of only 10-30% of remain closed
employees coming to work after re-opening
McKinsey & Company 22
Industry deep dive: Automotive industry
COVID-19 poses significant challenges to the automotive industry with a pronounced impact on OEMs
Overview Sector-specific considerations Examples

 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  Impact on top global automakers
industry than the 2003 SARS epidemic — The coronavirus outbreak will force carmakers in China
— COVID-19 has already outpaced 2003 SARS epidemic in to slash production by about 15% in the first quarter,
both number of confirmed cases and number of deaths requiring a new customer first “pull” mindset
— In 2003, China had not established itself as an — Based on idled plants and lack of component supply from
automotive powerhouse and did not serve as a major tier-chain – current inventory for some Japanese OEMs
supplier to global automakers to fully produce is less than a week - losses could reach
» Chinese’s car parc was only at 24M units then, ~10x 9 billion USD per week1,2
less than it is now (200M units) » More than 60% of Chinese automotive light
vehicle production is based in affected provinces
» Chinese car sales increased during ARS epidemic as
people bought cars to avoid taking public transit » Central government is encouraging local
» While Chinese automotive production declined during governments to incentivize production re-start
the SARS crisis, overall automotive sales and — Nissan, VW, Ford, Tesla, GM, Honda, Daimler, BMW,
revenue were increasingly positive Suzuki and Toyota suspended operations in China
 The outbreak comes at a time of already slumping sales, through at least February 9, 2020
heightened trade tensions and dampened forecasts » Ford, Tesla were planning to reopen factories this
— China auto sales fell 2.8% in 2019 amidst global trade week but will ramp slowly up to pre-outbreak capacity
tensions, the first decline in nearly two decades » GM, Toyota, Honda, Suzuki, Nissan, BMW anticipate
— Global automakers forecasted further sales declines in re-opening factories in the coming days to week
2020, prior to knowledge of the coronavirus outbreak  Impact on global supply chain outside of China
 Prolonging of the crisis could prove financially disastrous — Missing manufacturing components are slowly
for global automakers, causing depletion of parts reserves production globally, especially in APAC including
and supply chain bottlenecks Hyundai in South Korea, Nissan’s plant in Kyushu,
— Fiat Chrysler and Ford unprofitable in China; GM facing Japan, and Renault in Busan, South Korea
decreased profits in the region — Fiat Chrysler may suspend production at a European
production plant due to supply chain disruption
— 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 For more information, please connect with Bill Peng, and
Arthur Wang, our dedicated partners in Hong Kong

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 McKinsey & Company 23
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) Source: Press reports, S&P Global Ratings, IHS, Chinese Association of Automobile Manufacturers
 Industry deep dive: Automotive industry – OEM segmentation

Southwest China North China Northeast China

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
Supplier base for Korean OEMs
▪ Hyundai, Kia, Hyundai Mobis, and
Mando established their plants in north
China, attracted and developed local
supplier base
Supplier base for German OEMs
▪ BMW, VW, Bosch and ZF have
established their plants, attracted and
developed local supplier base
East China
R&D capabilities
▪ Suppliers including ZF, Yanfeng
Visteon, Magna, Bosch set up their
R&D centers in Shanghai and nearby
regions

South China
Central China
Supplier Base for European and local
Supplier base for Japanese automotive
automakers
▪ Toyota, Honda, Denso, Aisin, Yazaki,
Hubei Province - General Motors, Nissan, Renault,
established their plants in Guandong,
Honda and PSA Group (owns Peugeot)
attracted and developed local supplier
all have large factories in Wuhan
base
Supplier base for auto components
New energy vehicle suppliers
- German engineering firm Bosch, the
▪ BYD buildup world’s largest fuel cell
world's largest auto component
factory in Foshan, Guangdong
manufacturer, has dozens of plants in
Province
China including two in Wuhan
Electronic components
▪ Guangdong province alone produces
about 20% of world’s electronics
industry products

SOURCE: China Automobile Industry Association, McKinsey McKinsey & Company

| 24
 Industry deep dive: Tourism / hospitality
COVID-19 is dampening tourism/hospitality sector, with precipitous drop in APAC expected to continue through Q2 2020
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
For more information, please contact Steve Saxon and Jackey
Yu, dedicated leadership in our Greater China offices
Source: Press reports; McKinsey Global Institute
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 year
McKinsey & Company 25