As governments and medical researchers redouble their efforts to contain the highly contagious coronavirus, executives are just beginning to assess the economic effects. An early estimate of the impact on China’s economy is a 0.2% to 0.5% reduction in GDP, or as much as 500 billion renminbi.
Lessons learned from China’s experience with SARS suggest that food and beverage, discretionary consumer products, automobiles, electronics, machinery, electrical equipment and traditional retail businesses will be particularly hard hit, with manufacturing in these sectors likely to suffer a short-term slowdown. We see early signs suggesting that production of certain chemicals has declined by 15% to 20%. China's exports are also likely to fall.
One key question for global companies is: How resilient is my supply chain to the coronavirus—or other shocks? Apple already has reported interruptions to its supply of smartphones and lowered its sales forecast as partner manufacturing sites outside Hubei province return to work more slowly than anticipated.
In our experience, it’s complications with second- and third-tier suppliers that often catch leadership teams unprepared. China is the world’s biggest manufacturer of lithium-ion batteries, for example, and factory closures imposed by the Chinese government could reduce output by as much as 10% in 2020, according to energy research group Wood Mackenzie. A significant decline in battery cell production would interrupt the global supply chains for all kinds of battery-powered products, including electric vehicles, personal computers, cell phones, power tools and electricity grid storage systems.
In addition to supply shortages, the coronavirus epidemic is causing unprecedented demand volatility in certain sectors. For example, since the outbreak, the demand for surgical facemasks has soared to more than 240 million a day just for transportation, medical and manufacturing workers. With total domestic manufacturing capacity at only 20 million units per day, Chinese and foreign companies are working to help close the gap through increased production and rapid distribution.
While it’s too early to forecast the total cost of coronavirus on Chinese and global businesses, our experience shows that taking a wait-and-see approach to uncertainty often results in higher costs and greater disruption. Companies that act now to mitigate risks will fare better both during this crisis and through the recovery. Leadership teams can start with a few key questions that will highlight the company’s exposure to supply chain disruption caused by the coronavirus:
- Which of our suppliers, or our suppliers’ suppliers, could face delays or interruption, and what are the alternative sourcing strategies?
- How can we communicate with customers in advance to safeguard sales and service?
- Do we have a command center with a cross-functional crisis response team that has access to vital data and top management?
- Have we mapped out several likely scenarios and developed contingency plans for each one?
Leading companies elevate critical risks to the C-suite and executive board to quickly mitigate any harm to the business. Responding rapidly to supply challenges can significantly reduce their impact on cost, operations, customer service and revenue.
Over time, leadership teams will determine how to build the right level of redundancy into their supply chains with alternative suppliers, flexible manufacturing and optimized inventory levels. The key is balancing resilience and cost.
New technologies offer a leap forward in managing risk. A growing number of companies are creating “a digital twin” of their supply chain and investing in control tower solutions for end-to-end visibility across the supply network. Those tools allow executives to model disruptions in real time and respond rapidly—capabilities that could become critical to success in an increasingly uncertain world.
Allison Kahler is a partner with Bain & Company’s Performance Improvement practice and is based in the Chicago office. Peter Guarraia leads Bain’s Global Operations practice and is also based in Chicago.