With workers being forced to stay home, major disruptions to the supply chain and companies placing travel bans on their employees, the coronavirus outbreak may prove to be the biggest threat to multinational companies in years. However, treasury and finance professionals caution that it’s too early to tell whether this frightening epidemic will hurt business in the long term.
SUPPLY CHAIN IMPACT
The International Monetary Fund (IMF) warned last week that the coronavirus epidemic, along with other factors like the U.S./China trade war and climate-related natural disasters, could derail a projected recovery in the global economy in 2020. Calling the coronavirus the world’s “most pressing uncertainty,” IMF Managing Director Kristalina Georgieva noted that if the spread of the virus is contained soon, the result would merely be a sharp drop in GDP growth in China in the first quarter, but not a major impact for the full year. However, a more widespread outbreak would mean a prolonged slowdown in China, resulting in major supply chain disruptions around the world and a greater drop in investor confidence.
That supply chain impact is already being felt, as production of some products like iPhones has been disrupted considerably. This impacts not only Apple, but also wireless service providers like Sprint and Verizon.
Given the potential hit that companies could take should any production from China be delayed indefinitely, they may want to consider diversifying their supply chains in the future and expanding to different markets. China is obviously a huge supplier for many industries and will continue to be, however, companies ultimately might not be saving any money in China if this epidemic continues. “I would think any supplier who relies heavily on China is evaluating the diversification of their supply chain,” said Jennifer Dale, CTP, assistant treasurer and director of treasury services Sprint. “I think back to 9/11 and when the electric grid in the Northeast went out several years ago, it drove companies to look at geographical diversification.”
Bob Whitaker, CTP, senior vice president of corporate finance for DHL and chairman of AFP's board of directors, noted that manufacturers who can be more flexible are certainly going to shift production in the short term. But generally, most manufacturing is difficult to diversify and he doesn’t see many companies ultimately exiting China over this epidemic. “It is possible something like this a headline, but what will ultimately drive people to move manufacturing from China is automation ,” he said. “Why is it cheap in China? It's because of labor. But the more you automate your processes, the less labor intensive it is, the less you need to locate in China. And people would rather locate closer to the customer because your logistics costs are cheaper.”
IMPACT ON LOGISTICS
For logistics companies like DHL, the coronavirus outbreak is impacting them directly. “If planes don’t fly, and ships don’t sail, we can’t move cargo out of China,” Whitaker said. “You’ve probably read in the news that commercial airline pilots don’t want to fly to China. And what people don’t realize is that only some of the belly space on a commercial flight goes for your baggage check. The rest of it is cargo. So if these commercial airlines aren't flying in and out of China, companies can't put cargo on their planes.”
Whitaker added that there are two key issues impacting operations. “One, there's not enough capacity to get the goods that are building up in the port out. The second is, nobody's manufacturing anymore because everyone's sitting at home,” he said.
At this point, companies like DHL and Sprint are both attempting to gauge whether it will be a short-term or a long-term impact. Using the iPhone example (products which are often shipped by DHL), are consumers who ordered the iPhones going to cancel their orders, or will they just wait an extra month before they get their phones? If it’s the latter, than all of that cargo will eventually flow to the rest of the world and DHL and Sprint will make the money they initially would have made, it just won’t be in the first quarter.
Many companies have imposed travel restrictions on employees due to the widespread impact of the coronavirus. For non-governmental organizations (NGOs) like ChildFund International, whose job is to provide relief efforts, that often isn’t an option. However, the Ebola outbreak that lasted from 2013 to 2016 caused ChildFund to rethink its strategy. That pandemic hit three affected nations where the NGO has operations, Sierra Leone, Guinea and Liberia, and so its employees were traveling back and forth between those areas and its U.S. headquarters.
That led to a lot of conversations within the finance department about how they should handle pandemics and whether they needed to create specific policies around that. It’s a fine line to walk for an NGO, because on one hand, they have a mission to provide aid to certain areas in times of need. On the other hand, there’s the cost that the organization takes on if employees get infected, both in terms of medical insurance and making up for time when anyone is out of the office.
So now with the Coronavirus outbreak, ChildFund has to consider whether it will have to implement travel restrictions. “We have no operations in China, but we are in Myanmar, Thailand, Vietnam, Indonesia, India, the Phillippines, Sri Lanka, and Timor Leste,” said Sassan Parandeh, CTP, treasurer for ChildFund. “Right now, we have no restrictions on travel because we know nobody's going to China. But if the virus all of a sudden starts showing up in our programming countries, we may actually go to a status of essential travel only. In other words, there would have to be a real justification for travel. Are you an expert that's going in to respond? Or, is there really something critical, that we need to get someone out there?”
ChildFund also has a corporate security department that sends updates throughout the organization about areas that are affected by infectious diseases and advises any employees that may need to travel to those regions. “They let us know the status of travel for different places, and keep people posted on what to do, or not to do,” Parandeh said. “Like, if you go over there and you've been exposed to someone, do X, Y or Z. Also, they talk to the country offices, to protect their staff while the pandemic is going on.”
For now, treasury and finance teams are holding their breath and hoping that the coronavirus outbreak will be contained and resolved quickly. If it isn’t, however, it could have major ramifications for the entire year—and beyond.
“I guarantee for a lot of different industries there's going to be an economic impact to this,” said Whitaker. “China's so big. The real question everyone has to ask themselves is if this is a temporary blip because the supply chain slowed, or if it could be a permanent hit as demand moves on. And then, how does this fit into your business planning in the future?"
For insights on how your treasury department can implement an effective business continuity plan to address major disruptions, check out AFP’s Treasury in Practice Guide, Business Continuity Planning: Why Treasury Needs a Plan B, underwritten by Kyriba.