With the spread of the recently identified novel coronavirus Covid-19 to every continent, and cases nearing 100,000, we look at the advice businesses need to keep calm and carry on.
Rarely has a new disease made such a dramatic arrival.
As 2019 drew to a close, a spate of unusual illnesses in Wuhan, China were detected, described at the time as an ‘unidentified pneumonia outbreak’. But within days, a novel coronavirus, thought to be similar to the viruses behind SARS and MERS, flared into an outbreak, then an epidemic.
Now, with the World Health Organisation poised to declare the spread of virus Covid-19 a pandemic, the impact of tens of thousands of cases are being felt not just in hospitals but on global stock markets and in the risk management meetings of business leaders everywhere.
So with fear posing as significant a threat to economic confidence as an actual outbreak of disease, what are the steps businesses need to do to combat rising panic?
Baker Tilly experts across the globe are helping companies prepare.
Countries and companies exposed to new threat
The speed of the virus has caught business — and supply chains — by surprise.
The World Health Organisation says Covid-19 cases are spreading quickly beyond the initial outbreaks in China, forcing authorities to move from in-country containment to actions designed to minimise the spread in vulnerable populations.
As of March 5, there were cases in more than 75 countries, most significantly in South Korea, Italy and Iran. The WHO has resisted declaring it a global pandemic but it has urged governments to act swiftly and aggressively to contain the virus.
“Outbound freight from China into major market economies such as the US are on lockdown and not expected to re-open until April.”
– Jeff Jorge
Sports and cultural events are being cancelled, while Italy, Japan, Iraq and Dubai are following China and Hong Kong in closing schools, and travellers through the most affected countries are increasingly being asked to self-quarantine.
Italy closed all schools and universities on Wednesday until at least mid-March and barred fans from sporting events. United Arab Emirates’ schools and colleges are to close for 4 weeks and the virus is being blamed in part for the collapse of low-cost airline Flybe.
One of the immediate impacts for businesses that trade with, or manufacture, products out of China has been the impact of factory and business closures across the nation referred to as ‘the world’s factory’.
Dun & Bradstreet estimate close to 90 per cent of China’s active businesses are located in the 19 provinces most affected by the viral outbreak, counted as those with at least 100 cases per province, with wholesale and manufacturing businesses making up about 40 per cent of these.
An estimated 51,000 companies around the world have one or more direct, Tier 1 suppliers in the impacted region, and at least 5 million global businesses have one or more Tier 2 suppliers from the area.
The Tier 1-impacted group includes at least 163 companies in the Fortune 1000, Dun & Bradstreet says, while 94% of these large companies have Tier 2 exposure.
Jeff Jorge, Principal Firm Leader, International Services at Baker Tilly US, says reconfiguring supply chains has been a pressing issue for US firms for the past year or more, as lingering US-China tariff dispute affects trade.
The latest disruption among suppliers will only exacerbate that pressure.
“Supply chain effects are already being felt in the US and other countries,” Mr Jorge says.
“Outbound freight from China into major market economies such as the US are on lockdown and not expected to re-open until April.
“This places a major strain on businesses that depend on Chinese-sourced items to remain in business.
“The fallout effect likely to be significant should said importers not make a change to the supply base or source.”
He says clients who were previously looking to avoid tariff pressures by rebalancing their supply chain with non-Chinese sources now needed to act urgently.
“From the US perspective, this current suspension of trade routes from China has heightened the strategic benefit of near-sourcing the supply base to markets such as Mexico,” he says.
“We have encouraged clients to accelerate such a shift and have been engaged in recent weeks to help them do so in turnkey manner — reducing risk and fast-tracking time to market.”
While largely able to avoid the US-China trade war, European businesses are now feeling the impact of Covid-19 disruption.
Johannes Becker, Partner at TPA Romania, says the current crisis shows the limits of over-optimisation in supply chains, including the reliance on just-in-time inventory, in which delivery of materials is designed to be synchronised to reduce the time stock or parts are left waiting around.
“Reducing stocks to the absolute minimum and large-scale outsourcing has its merits in reducing costs and improving cash flow,” Mr Becker says.
“But once something out of the normal is happening, it can backfire.
“Just as with body builders who reduce their fat reserves to almost zero and have to be hospitalized in case of minor health issues, so companies that optimise to the limits become increasingly vulnerable.”
Michael Sonego, Partner Corporate Finance at Baker Tilly’s Australian firm Pitcher Partners, says businesses that have not identified alternative supply chains as a matter of course will now struggle to replace suppliers given the changeable nature of the outbreak.
Clients across Australia have reported shortages of goods and components that would normally travel easily from China, he says, but the window of opportunity to establish second and local sources of supply has likely closed.
“If you haven’t already identified alternative sources of goods or thought about how you would reconfigure your supply chain, it is probably too late for now,” Mr Sonego says.
“From the time you identify alternative sources to getting that in place can be several months.
“What you can do is use this time to look at how you might reconfigure the way you do business, and for many people that will be a faster and easier change if they start moving now.”
THE CONVERSATION TO HAVE RIGHT NOW: We have seen in previous disasters, from the Sendai earthquake to Hurricane Katrina, that when companies haven’t mapped their upstream supply chains, they can be left exposed.
Map your suppliers as far back as you can and open the channels of communication, so you know if and when they are facing delays or disruption, before the wave reaches you. Even if your current exposure is low, it is past time to look at building supply chains with second sources, including local suppliers where feasible.
At the same time, businesses need to avoid knee-jerk transfers of existing relationships to other markets and should work to ensure secondary supplies supplement the existing supply chain where possible.
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