COVID-19
How CEOs can respond to the crisis
and start building a resilient future
By John Jullens
Contact the author: John Jullens | Principal, Strategy | P: 313-230-3000 | E: jjullens@kpmg.com
John has more than 25 years of management consulting and industry experience in North America,
Europe, and China. He specializes in developing growth strategies for clients in the automotive and
industrial manufacturing sectors.
COVID-19 has become a global public health emergency, with over 127,000 confirmed cases in more than 115
nations. On March 11, it was declared a global pandemic by the World Health Organization. Around the world,
countries are trying to contain the spread of the virus, banning foreign travelers, imposing restrictions on public
gatherings, and asking people to just stay home. Schools and offices are closing.
The outbreak is also shaping up to be the biggest challenge chief executives of U.S. multinationals have faced
since the global financial crisis in 2008. They must take action to help protect employees, customers and
partners. And, as the epidemic spreads and the negative economic effects multiply, CEOs need to act quickly to
protect their businesses.
In this brief paper, we discuss how companies can manage the immediate challenge to their business and
also address the systemic risks that the COVID-19 outbreak exposes—risks that will not disappear when the
COVID-19 pandemic is over.
Economic contagion
As with the outbreak itself, no one knows the extent of as consumers stop shopping, traveling and dining out.
the economic disruption. But we do know that economists Already, airlines are flying half-empty planes and tourism is
around the world are raising their estimates of the impact falling off sharply.
on global growth. As of March 10, KPMG’s economists
The outbreak has underscored just how much U.S.
are forecasting a drop in U.S. GDP in 2020, due to the
multinationals—and the global economy—rely on China.
effects of COVID-19 on business activity. As the likelihood
Back in 2003, when the spread of SARS set off alarms
of recession rises, central banks in Europe and the United
about global supply-chain disruption, China accounted
States have made pre-emptive rate cuts and governments
for only 4 percent of the global economy. Today China
are floating stimulus plans.
accounts for 16 percent of global GDP. In those years,
Economically, COVID-19’s impact is unfolding on two international trade increased dramatically and supply chains
fronts: a supply shock, as parts and finished goods from all over the world have become far more interconnected.
affected geographies stop flowing, and a demand shock This makes isolating high-impact events much less likely.
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What-if scenarios
The pattern and extent of the COVID-19 spread is unfolding How severe the economic downturn becomes depends
on a daily basis, and expectations about the economic largely on how long the pandemic lasts. If the outbreak
impact are also evolving. Containment scenarios—with peaks by summer, there would be an intensifying scramble
minor and brief business disruption—seem increasingly to reroute supply chains around affected areas and a
unlikely. It is not yet clear how well containment efforts will potential increase in the number of companies facing
succeed in the U.S. In Europe, the outbreak is spreading bankruptcy due to falling sales, according to the Eurasia
despite strong containment efforts in Italy and elsewhere, Group, a global risk consulting firm. If the outbreak
and central bankers are bracing for recession. KPMG continues through the end of 2020, Eurasia Group expects
economists say that a U.S. recession could start in the a severe decoupling from cross-border trade and rising
second quarter and continue into the first quarter of 2021. risk of a global recession. As of this writing, economists
In China, extensive measures finally appear to be stabilizing are divided on whether the pandemic will cause a global
the outbreak, but it is unclear how quickly normal business recession, but the odds are rising.
activity will resume.
This is a warning of things to come
Even as they organize their response to the COVID-19 customers in all parts of the world. But, as COVID-19 has
crisis, CEOs should understand that this is not a one-off. made abundantly clear, the hyper-efficient, low-cost-country
Perhaps nobody could have predicted that this particular supply model is not resilient.
outbreak could have caused so much disruption. But it is
When the epidemic hit and supply lines were threatened,
completely predictable that low-probability/high-impact
few companies had sufficient backup supplies or
events will continue to happen—novel diseases, severe
redundancy in their supply chains to weather a disruption of
weather, earthquakes, social unrest, banking crises, etc.
more than a few weeks. In a recent Financial Times article,
And, in a deeply interconnected, global economy, the
the head of a supply-chain mapping company said U.S.
impacts of such events are increasingly unlikely to be
firms should be prepared for six months of disruption.1
confined within one country’s borders.
CEOs everywhere should take the COVID-19 crisis as a
Indeed, the COVID-19 outbreak exposes the systemic risks
warning. It is time to confront the risks inherent in global
inherent in how global businesses operate. By creating
business strategies and seriously consider reducing over-
super-lean, just-in-time global supply chains, companies
exposure to any single source of supply or market that
have increased efficiency and made it possible to serve
seems like a surefire source of growth.
What to do now
CEOs face immediate and longer-term challenges as a risk-management capabilities to inform future strategy
result of COVID-19. First, they must address the impact and better prepare the company for the next shock(s). In
of COVID-19. This will involve protecting employees, addition, for companies that are highly exposed to China,
helping customers and partners, and preparing for supply there are specific actions to take to get going again and
shortages and falling demand. At the same time, CEOs recalibrate China strategy and operations (See Rethinking
should make sure that they are building the strategic strategy, footprint, and partnerships).
Crisis Management
The most immediate priority, of course, is to keep people want to limit travel and face-to-face meetings, and ensure
safe. Companies must take steps to make sure that that employees have the laptops and connectivity they
employees take precautions—wherever they work—and need to work from home. Companies should be prepared
have permission to “self-quarantine” if they believe that to pay affected workers who must take a leave of absence,
they have been exposed to COVID-19. Companies may also and continue their benefits.
Patrick McGee and Andrew Edgecliffe-Johnson, "Companies’ supply chains vulnerable to coronavirus shocks," Financial Times, March 8, 2020.
© 2020 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated 2
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
In addition, companies must take steps to help their With the outbreak in more than 115 countries, the threat of
most important customers, channel partners, and other disruption is now global. Quick action now can help
stakeholders withstand the impacts of this outbreak. protect supply lines and businesses. For example,
This can involve waving certain fees and penalties, simulations can be highly effective in identifying potential
increasing sales incentives, and providing selective disruptions as well as possible mitigation steps, such
financial assistance. as identifying alternative suppliers, making engineering
changes to product specifications, and exploring various
We see leading companies rising to this challenge. They are
emergency shipping options.
preparing for the impact of the pandemic and a possible
recession by setting up crisis response teams, developing When trying to identify supply-chain risks, companies
a range of business impact scenarios, and conducting should look beyond the obvious. Typically, major disruptions
financial stress tests to ensure business continuity. stem not from high-volume and/or high-value parts,
but from seemingly less critical commodities buried
Companies are setting up war rooms and SWAT teams that
somewhere deep in the supply chain. For example, only
work around normal processes to make critical decisions,
when an earthquake hit in 2011, did automakers fully realize
sometimes on an hourly basis. This is tacit recognition
just how dependent they were on Fukushima, Japan for
that organizational complexity and slow decision-making
metallic paints.
processes tend to get in the way. The emergency is
teaching even the largest companies that they can move Of course, we recognize there are inherent conflicts
with speed and agility when they have to. This should for business leaders in this situation. It costs money to
be a lasting lesson that helps companies act quickly and carry extra inventory and invest in redundant supply
decisively in all business conditions. chains—and there will be no immediate returns in the
earnings statement to show for it. But the super-lean
One of the most important things right now is developing
operating model that has boosted ROI now looks like a
mitigation plans for potential supply-chain disruptions.
potential liability.
Upgrade strategic risk management capabilities
It is not surprising that many companies were not prepared situations, such as COVID-19. ERM departments also
for an event like COVID-19. With standard approaches to usually reside in a silo several levels below top decision
risk-management, most companies had a limited sense makers, reducing their clout.
of how vulnerable their lean supply chains could be. In
Companies can expand both the remit and influence of
the early stages of the outbreak, a survey of businesses
risk functions by more tightly integrating risk into strategic
operating in China found that 70 percent had no plan for a
decision-making and planning processes. Many companies
supply interruption lasting more than a few weeks.2
will need to build up analytical toolkits to model the
To build resilience against unpredictable events such impact of possible events, using simulations, war games
as disease outbreaks, companies need to develop true or table-top workshops. Simulations, for example, can
strategic risk management capabilities that go well beyond be used to understand all the ramifications of locating a
the typical Enterprise Risk Management (ERM) process. plant in a particular city—including the potential impact of
ERM departments are very good at managing discrete catastrophic events--or the likely payback on investments
operational risks--in, compliance, safety, ethics and in supply-chain redundancy. The output feeds into strategic
accounting, for example. But traditional ERM is simply not decision making and provides the basis for mitigation plans,
designed for highly complex, low-probability/high-impact which should be pressure-tested periodically for changing
circumstances.
2
Economist Intelligence Unit
© 2020 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated 3
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Rethinking strategy, footprint, and partnerships
With the worst of the COVID-19 outbreak apparently past in China, multinationals can start to focus on restarting
operations again. This will take some time and will be challenging. Supplier capacity will come back on line at different
times, workers may not be available immediately or at all, and moving goods in and around China will likely prove
difficult for some time to come. This is also a good time to ask fundamental questions about doing business in China.
China is an increasingly important market for multinationals and remains a critical source of supply that can’t easily be
replicated. But ongoing changes in China—slower growth, credit and real estate bubbles, and a strained relationship
with the U.S.—change the calculus for China strategies.
Do we need to re-assess Should we reconfigure
Are our partnerships
our strategy? our footprint? still working?
For U.S. multinationals, the future As they adjust business strategies, Part of the China reset should be
will most certainly not look much like companies will need to rethink re-evaluating partnerships. Do the
the past. Top-line growth will slow, operational footprints as well. Some existing partnerships still meet their
and demand in China will continue plants, warehouses, and activities may objectives, given market, regulatory,
to shift inland and down-market. need to be moved to China’s interior and other changes? For example,
Regulatory scrutiny will increase, regions, while others might be sent in the auto sector, the Chinese
and domestic players will become to lower wage countries, such as government is gradually rolling back
increasingly competitive. In addition, Vietnam. It may even prove beneficial restrictions that require foreigners
labor costs are no longer as attractive to “re-shore” certain activities back to to enter through joint ventures and
and U.S.-China relations will likely North America. The optimal footprint never become majority owners. Soon,
remain strained for years to come. should take into account not just the foreign automakers may wish to
This may result in at least a partial underlying operational economics, establish majority control or even go it
decoupling of the two economies. but also tax considerations and the alone. In other parts of the economy,
As a result, it may be time for U.S. investments in, redundancies to China is tightening rules for foreigners,
multinationals to revise growth and make supply chains more resilient in potentially making local partners more
profit targets, reconfigure product a post-pandemic world. important.
mix (e.g., premium vs. mid-market),
open up new distribution channels,
and adapt their organizations (e.g.,
rebalancing local/global responsibilities
and decision rights).
Conclusion
Unpredictable, high-impact risk events are inevitable, given today’s global business environment. The
COVID-19 outbreak is—we hope—an extreme example of how such events can affect businesses and economies
everywhere. In this case, the impact includes a sudden turn toward a global recession. It will take smart planning,
decisive action, and courage to bring companies safely through this downturn. It will also take courage and
determination to make the investments in resilience that could reduce future low-probability/high-impact events
to hiccups, rather than dire threats.
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