COVID-19 and its impact on business

Less than ten weeks have passed since China reported the existence of a new virus to the World Health Organization. This virus, now known as SARS CoV-2, causing COVID-19 disease, spread quickly in the city of Wuhan and throughout China. The country has experienced a deep humanitarian challenge, with more than 80,000 cases and more than 3,000 deaths.

COVID-19 progressed quickly beyond China’s borders. Four other major transmission complexes are now established across the world: East Asia (especially South Korea, with more than 7,000 cases, as well as Singapore and Japan), the Middle East (centered in Iran, with more than 9,000 cases), Europe (especially the Lombardy region in northern Italy, with more than 12,000 cases, but with widespread transmission across the continent), and the United States, with more than 1,000 cases.

Each of these transmission complexes has sprung up in a region where millions of people travel every day for social and economic reasons, making it difficult to prevent the spread of the disease. In addition to these major complexes, many other countries have been affected.

What we know now for the corona virus:

• The virus is highly transmissible. Both observed experience and emerging scientific evidence show that the virus causing COVID-19 is easily transmitted from person to person. The US Centers for Disease Control and Prevention estimates that the virus’s reproduction number (the number of additional cases that likely result from an initial case) is between 1.6 and 2.4, making COVID-19 significantly more transmissible than seasonal flu.
• The virus disproportionately affects older people with underlying conditions. Epidemiologists Zunyou Wu and Jennifer McGoogan analyzed a report from China Centers for Disease Control and Prevention that looked at more than 72,000 cases and concluded that the fatality rate for patients 80 and older was seven times the average, and three to four times the average for patients in their 70s.1 Other reports describe fatality rates for people under 40 to be 0.2 percent.

Implications on the business:

For many companies around the world, the most important consideration from the first ten weeks of the COVID-19 outbreak has been the effect on supply chains that begin in or go through China. As a result of the factory shutdowns in China during Q1, many disruptions have been felt across the supply chain, though the full effects are of course still unclear.

Hubei is still in the early phases of its recovery; case count is down, but fatality rates remain high, and many restrictions remain that will prevent a resumption of normal activity until early Q2. In the rest of China, however, many large companies report that they are running at more than 90 percent capacity as of March 1. While some real challenges remain, such as lower than usual availability of migrant labor, there is little question that plants are returning back to work quickly.

We believe that the prevalent pessimistic narrative (which both markets and policy makers seem to favor as they respond to the virus) underweights the possibility of a more optimistic outcome to COVID-19 evolution.

The coronavirus crisis is a story with an unclear ending. What is clear is that the human impact is already tragic, and that companies have an imperative to act immediately to protect their employees, address business challenges and risks, and help to mitigate the outbreak in whatever ways they can.

Obviously, the epidemic had a great impact on China’s tourism, catering, film, education and other industries. However, we are still optimistic that China’s overall consumer market will also have a “retaliatory” growth after the epidemic is gradually controlled.

About E.J. McKay

E.J. McKay（www.ejmckay.com）is a Shanghai-headquartered investment bank with a special focus on mergers & acquisitions. We are one of the most long standing independent investment banks in China, with core business of mergers & acquisitions and financing advisory.