Cascading business impact of the Coronavirus

February 21, 2020 (MLN): Deadly coronavirus has been sweeping across the world, affecting the Chinese economy and global business with operations or suppliers from the ground zero of this outbreak, Hubei. 

The cries of despair can be seen as the economic damages are mounting around the world as a result of the devastating outbreak which can further impact businesses and supply chains, and the economy at large in near future.

The research report by Dun & Bradstreet, a leading global data provider, has analyzed the data, providing insights and near-term recommendations for businesses looking to mitigate risk and further disruption to their supply chains.

However, it may be too early to define the exact impact the coronavirus outbreak will have on global businesses, past pandemics are helping to develop a scenario-driven assessment of economic conditions for the region in the short and medium-term that can be used to assess the level of risk and potential impact to their operations.

According to the research note, the Chinese economy which makes up about 20% of global Gross Domestic Product (GDP) has the cascading effect which might cause a drag of approximately one percentage point on global GDP growth if containment is delayed beyond the summer of 2020.

As a result, the Dun & Bradstreet has presented the research hypothesis about an area of concern i.e. a major portion of China’s employment and sales emanate from the businesses within the impacted region and have intricate ties to the global business network.

The data of Dun & Bradstreet revealed that the most impacted provinces among the sample of 18 provinces; Guangdong, Jiangsu, Zhejiang, Beijing, and Shandong provinces accounted for 90% of all active businesses in China.

With a vast portion of business activity being concentrated in the impacted region, the top five major sectors; services (personal and business), wholesale trade, manufacturing, retail, and financial services command a majority of employment and sales volume that is nearly 80% of all businesses.

As a nerve centre of businesses representing several industry verticals, it is not surprising that the impacted region has commercial ties throughout the globe. The countries with the highest dependency on the impacted region include the USA, Japan, Germany, the UK, and Switzerland.

Moreover, many global businesses are dependent on the area to fuel their supply chain, at least 51,000 (163 Fortune 1000) companies around the world have one or more direct or Tier 1 suppliers in the impacted region, and at least five million companies (938 Fortune 1000) around the world have one or more Tier 2 suppliers in the impacted region.

Regarding possible economic impact of the coronavirus outbreak, Dun & Bradstreet underscored that it is unpredictable as expectations for Chinese economic performance also remain unfavourable based on its performance in the recent quarters given that fact that the Chinese economy grew 6.1% in 2019, dropping from 6.8% in 2018 and 7% in 2017.

Further, Trade tensions with the United States may be a major cause for the slowdown. A partial “Phase 1” trade deal went into effect in late 2019 and eased uncertainty for both countries, but most tariffs still remain in place.

To stimulate the growth pattern in China, Dun & Bradstreet projected two scenarios; (i) containment by Q22020 (ii) delayed containment beyond Q42020.

The research note identified that in both scenarios, consumer demand is expected to become concentrated on emergency medical services and supplies, and food deliveries within the Hubei province and throughout China as the outbreak spreads. The primary and secondary industries are expected to shrink throughout the course of the outbreak, limited to reduced food production and less demand for most retail and wholesale goods.

However, the manufacturing sector is worth mentioning here, which could remain active for the production of medical supplies, and the construction sector, which could be boosted initially with the building of medical facilities, clinics, or hospitals. The Tertiary Industries are expected to run depending on a few sub-sectors, the study added.

No matter which scenario plays out, the Hubei region, China, and the global economy are indicated to see a churn in their business population and some lacklustre employment and revenue growth in the near-term.

When (not if) containment and eradication is achieved, factors within the impacted geography are bound to generate economic activity with consumers, satisfying pent-up demand once improved conditions are underway. The study highlighted that the sum of the efforts to revitalize the region will place the global economy back on track for sustained growth.

As the final impacts to companies with business operations in the affected regions are uncertain, the research of Dun & Bradstreet recommended some near term and long-term best practices to mitigate further risk to a company’s supply chain which are given below:

  • Develop a risk-based assessment process and monitor the risks continuously
  • Complete an assessment of suppliers to ensure your suppliers’ suppliers are not going to negatively impact your business.
  • Identify alternative suppliers in non-impacted regions of the world to diversify the supply chain.
  • Periodically test and revise your strategy to account for organizational growth and environmental change.

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Posted on: 2020-02-21T17:25:00+05:00