As the deadly coronavirus spreads, with nearly 21,000 confirmed cases globally, business leaders need to make decisions for both the short and long term. Without question, companies are acting quickly as cases of the coronavirus have been reported in more than two dozen countries, raising the potential for a pandemic.
Beyond the urgent response, companies need to look longer term to evaluate their supply chains, ensuring that future access to raw materials, components, and finished goods will not be impeded by another catastrophe of any sort. Although supply-chain diversification is a costly, multiyear process, companies need to reduce future risks from any region in the world.
The coronavirus has spread rapidly from the epicenter of Wuhan, China, with the latest death toll at 425 people in China, one in Hong Kong, and one in the Philippines. The top global priority is protecting lives and limiting the spread of the disease, with measures from traveler bans and quarantines to a race to develop a vaccine.
Beyond the human issues, there are also business considerations. To give some perspective of the global economic impact from the coronavirus outbreak, oil prices have declined sharply due to reduced demand for gasoline, diesel, and jet fuel, prompting Saudi Arabia to urge OPEC nations to implement production cuts.
In the short-term, the response from companies has been swift and prudent. Wuhan is a large industrial hub and the site of business operations for several Chinese and international companies — among them automakers such as Nissan, Honda, and General Motors. In addition, major fast-food chains such as McDonald’s, Pizza Hut, and KFC have branches in Wuhan.
Companies are taking measures to protect people from the threat of contagion, from suspending operations to eliminating noncritical business travel (as Walmart has) during the outbreak. Specific steps include:
- Technology firms are curtailing operations in China. In a statement, Apple said it would close all corporate offices, stores, and contact centers in mainland China through Feb. 9, “out of an abundance of caution and based on the latest advice from leading health experts.”
- Major airlines have suspended flights to and from China, including United, Delta, and American Airlines. China Eastern was the first major Chinese carrier to suspend flights between China and the United States.
- McDonalds and Starbucks have closed stores or reduced service in China. Starbucks has said the outbreak could hit its bottom line after “closing more than half of our stores in China” as it continues to “modify the operating hours of all our stores in the market in response to the outbreak of the coronavirus.”
- Automakers and suppliers have suspended production and limited travel within China. According to reports, VW Group, the largest foreign automaker in China, has asked about 3,500 employees in Beijing to work for home for two weeks, through Feb. 17.
- Large hotel chains – The Peninsula Hotels, Hilton, Marriott International, InterContinental Hotels, and others – reportedly are offering free reservation changes or cancellations in China (and in some cases, other locations) through Feb. 8.
But what of the longer term? Chinese factories normally shut down for the Chinese New Year, which this year started on Jan. 25 and officially lasts for seven days, although holiday-related production disruptions can extend for one or two weeks. Such temporary halts in production, however, are planned, and companies can manage their inventories in advance.
The coronavirus, however, is having an elongated impact on operations, which adds to the uncertainty for both day-to-day operations and how the supply chain should be managed for the future. Manufacturers, technology firms, consumer products companies, and retailers need to evaluate whether they are overinvested in China, in terms of suppliers and their own production of components and finished goods. If they are overly reliant on China (or any single country, for that matter), companies need to weigh how best to diversify their supply chains geographically – just as they diversify among suppliers.
During the U.S.-China trade war, U.S. companies were under pressure from the Trump administration to pull operations from China. To the extent that any companies began that process, the outbreak of the coronavirus may confirm that decision to reduce overreliance on China. But this is not to single out any specific country or region. The fact is clustering operations in any country or region increases the potential that an event — whether natural disaster, political disruption, or geopolitical tensions — could disrupt the global supply chain.
To limit risks and maintain the flow of goods and services, business leaders need to learn from the current disruption to see where they are vulnerable. From these lessons learned, they must implement longer-term solutions to ensure risks are reduced for both people and production in the future.
