Coronavirus China Economic Impact Report by daxue consulting - Comment
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TO ACCESS MORE INFORMATION ON THE CORONAVIRUS IN CHINA, PLEASE CONTACT DX@DAXUECONSULTING.COM dx@daxueconsulting.com +86 (21)5386 0380 1 March. 2020 HONG KONG | BEIJING | SHANGHAI www.daxueconsulting.com EVERYTHING YOU NEED TO KNOW ABOUT THE CORONAVIRUS IN CHINA 2. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Who we are 2 Covered Tier-1 cities Covered Tier-2 cities Covered Tier-3 (and below) cities We are daxue consulting: • A market research firm specializing on the Chinese market since 2010 • With 3 offices in China: in Shanghai, Beijing and Hong Kong • Employing 20+ full-time consultants • Full, complete, national coverage • Efficient and reliable fieldwork execution across China • Using our expertise to draw precise, reliable recommendations • With key accounts from around the world Your Market Research Company in China 3. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED The strengths of Daxue Consulting 6 crucial competitive advantages - Working on each project making exchange and challenges, recruiting the brightest talents in both local & international (1:1), to ensure a comprehensive & scientific logic thinking. - Result-oriented, regular reports with our clients to make sure we align the expected objective. - Teams& proposal are tailor- made depending on the project. - One client = one team. - Using 50+ software - Leveraging alternative data and open source intelligence - Social listening - Our methodologies are rigorous and serious, taking information from the best practice in the world of consulting and research. - Demanding on the results, detail- oriented, respectful towards our commitments. - Corporate presentation. 1. Localized & Creative 2. Responsive& Flexible 5. Innovative 6. Professional - Daxue Consulting does not outsource its services. Deep understanding on the fieldwork and the context within which data was collected. - Transparency of sources and information 3. All In-house Management - We care about results and design our research in order to be operational. - We are driven by metrics such as customer acquisition costs, business plan KPIs, P&L optimization. 4. Actionable recommendations 3 Responsive Manage from A to Z Actionable recommen- dations Innovative Professional Rigorous & creative 4. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Our services 4 ACTION PLAN SOCIAL LISTENING TARGET AUDIENCE PROFILING DECISION-MAKING PROCESS DUE DILIGENCE PERFORMANCE EVALUATION PRODUCT LOCALIZATION BUSINESS INTELLIGENCE DIGITAL STRATEGY BRAND POSITIONING VALUE PROPOSITION ASSESSMENT STRATEGY INSIGHTS INNOVATION CONCEPT TESTING Experienced in answering to a wide variety of strategic business questions 5. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 350+ clients with 600+ projects for the past 7 years Examples of references 5 6. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED A recognized expertise on the Chinese market Regularly featured and quoted in global publications Daxue latest quotationsin recent publications 6 7. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 7 CONTENTS 1. Overview of COVID-19 2. Up close on Wuhan & Hubei 3. What industries are growing 4. Tourism: The most immediate impact 5. F&B: Heavy losses and relying on delivery 6. Supply Chain:What businesses hould know about the COVID-19 impact 7. Manufacturing:Lessons from the crisis 8. What should exporters to China know 9. How the Chinese government is reducing the burden on enterprises 10. Long-term impact 08 17 25 34 41 54 64 68 71 50 8. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 8 Overview of COVID-19 01 9. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 9 2019.12.01 The 1st case of COVID- 19 in Wuhan discovered 2019.12.08 The first case of a new coronavirus was reported by Wuhan Municipal Health Commission 2020.01.21 2020.12.31 2020.01.23 2020.01.25 Wuhan government claimed that there is no apparent human-to- human transmission, hindering the prevention and control measures One COVID-19 patient infected 14 paramedics in Wuhan Wuhan declared to be closed down Many provinces have implemented strict traffic control Timeline of the COVID-19 epidemic in China 2020.02.09 Many companies started to resume work remotely after CNY holiday was extended 2020.02.12 The confirmed cases of Hubei jumped over 10,000 because the protocol for diagnosing changed 10. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Current spread (As of Mar. 10 2020) 10Source: www.voice.baidu.com, DXY.cn Coronaviruses are common causes of respiratory infections. They have previously been implicated in viral outbreaks, including SARS-CoV and MERS-CoV, but are also responsible for some common colds. COVID-19 is a new coronavirus, without any known prior human infection. Cumulative confirmed cases Existing suspect cases Cumulative deaths Cumulative cured cases 80,924 349 3,140 59,982 Transmission rate Disease severity Death rate 1.5-2X Up to 20% < 1/50 11. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Transmission & Spread within China (As of Mar. 10 2020) Shanghai may become the second severely affected area because its huge migrant population will return to Shanghai one after another. 11 Guangdong province, the 2nd largest infected province with 1,353 cumulative confirmed cases Henan province, the 3rd infected province which is next to Hubei, now having 1,272 cumulative confirmed cases Hubei province, the origin of the coronavirus, now has 67,760 cumulative confirmed cases Source: www.voice.baidu.com, DXY.cn Zhejiang province, the 4th infected province with 1,215 cumulative confirmed cases Hunan province, the 5th infected province which is next to Hubei, now having 1,018 cumulative confirmed cases ≥ 10000 1000 – 9999 100 – 999 10 – 99 1 - 9 Number of existing confirmed cases 12. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED How starting during the Lunar new year affects spread 12 Source: National Health Commission of the People’s Republic of China The 2020 Spring Festival migration started on January 10 and ended on February 18. The estimated number of people who have had contact with confirmed cases gradually increased at beginning of the Lunar new year and stabilized until the end of it. That’s because flow of people participating in the Spring Festival Transport is very large, which makes the chance of cross-infection increase and directly lead to the peak of the epidemic. After Lunar new year and the government's restrictions on the flow of people, the confirmed cases have flattened since February 13. Note: Jan. 20 was the first date for National Health Commission of China to release related data Data offered by the National Health Commission, only includes China 291 7,711 24,324 37,198 59,804 74,185 77,150 79,824 80,754 - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 Cumulative confirmed cases The 2020 Spring Festival Transport After 2020 SFT 1,739 32,799 163,844 282,813 451,462 574,418 641,742 660,716 675,338 - 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 Number of people with contact to confirmed cases The 2020 Spring Festival Transport After 2020 SFT 13. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED A comparison between COVID-19 and SARs 13 Similar to SARS, COVID-19 originated in animals and migrated to humans. The animal to human jump of COVID-19 is still unclear. If it could transmit to cats or dogs and then back to people, the disease would be much more difficult to control than SARS. Based on the current data, the novel coronavirus seems to be less deadly than SARS. However, it is spreading much faster. The 2002/2003 SARS outbreak led to a total amount of 8,094 cases over the course of 8 months; whereas, the epidemic of COVID-19 surpassed that number within a couple of weeks. > Source: WHO, RT Magazine, DXY.cn A brief comparison of SARs and COVID-19 SARS COVID-19 (As of March 10th 2020) Origin Foshan, Guangdong Wuhan, Hubei Fatality Rate 9.6% 4.07% (Wuhan), 0.84% (Outside of Wuhan) Total Cases 8,096 80,924 Total fatalities 744 3,140 Number of HCW Affected 1,706 3,387 Period of Outbreak November 2020-July 2003 December 2019- February 2020 Reproduction Number 2 1.4 to 4.0 Incubation Time 4-6 days 2-14 days 14. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED How long will the coronavirus last? 14 As long as no new infections appear during the duration of a full incubation period, then the epidemic can be considered to be officially over. As of early March, the number of infections in China continues to decline, with the exception of Hubei, the infection in all regions seems to be controlled. The rate of infection (R0) is minimized by the quarantine efforts and shutting down of workplaces and public places. Region Current R0 Epidemic Evaluation Expected End of Epidemic Wuhan city 0.83 The effect of increasing treatment has already appeared - Jiangsu province 0.54 The epidemic is controllable, and the effect is obvious Mar. 20th Shanghai city 0.57 Taking the lead to resume work makes epidemic prevention in Shanghai more difficult Mar. 8th Sichuan province 0.53 The epidemic is controllable, and the effect is obvious Mar. 17th Chongqing city 0.45 The epidemic is controllable, and the effect is obvious Mar. 16th China except Hubei province 0.36 The epidemic is controllable, and the effect is obvious Mar. 21th Hubei province except Wuhan 0.35 The epidemic is controllable, and the effect is obvious Mar. 31th Jiangxi province 0.27 Good effect Mar. 14th Anhui province 0.24 Poor results, risk of outbreak expanding Mar. 21th Hunan province 0.18 Outstanding effect, but still need time to verify Mar. 14th Zhejiang province 0.18 Outstanding effect Mar. 5th Source: Aliren Blockchain Alliance 15. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Do we need to worry about the impact of coronavirus on GDP? 15 Judging from the experience of the SARS epidemic, which took China’s GDP growth rate down by 2% during the two most critical months, after SARS eased, consumption and imports & exports significantly supplemented and restored growth. Therefore, once the epidemic is over, China ’s economic recovery is very promising. According to chief economist from Zhongtai Securities and Donghyun Park from Asian Development Bank, the impact on China's GDP growth in 2020 is expected to be between 1.5% and 2%, which will not change the long-term trend of China's economy. The epidemic has a large impact on the economic growth rate in the first quarter, or negatively affects the GDP growth rate of about 2% -3%. The biggest impact of the epidemic on economic growth comes from the service sector, especially the catering, transportation, hotel, tourism, and accommodation industries. The impact on consumption is direct.Source: www.baijiahao.com 16. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Global Economic Impact of the Coronavirus 16 Italy Italy’s epidemic became serious and is coupled with the country ’s financial center being blocked because of COVID-19. Its energy and raw materials are dependent on foreign imports, so the economy will be under greater pressure. China is the largest exporter of intermediate manufactured goods that can be resold between industries, so its problems quickly reverberate through global supply chains. Australia& Brazil Australia and Brazil, are both commodity exporters to China, and both may see growth 0.3 percent below what it would have been without the virus. Australia& Brazil Hong kong Hong Kong’s already struggling economy faces a 1.7 percentage point downdraft in the first quarter, according to Bloomberg Economics. South Korea & Vietnam South Korea and Vietnam both benefit from Chinese tourism and embedded supply chains, may see a 0.4 percentage-point drag in near-term growth. The United States The US exports account for a relatively small proportion of GDP and exports to China are also limited, so the United States will not face the same risks as China. However, combined with trade war pressures, some US companies have decided to move manufacturing outside of China. 17. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Up close on Wuhan & Hubei 02 17 18. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Main industries of Hubei province Hubei is the most developed province in the central region of China with 3.9 trillion RMB GDP in 2018. The province has a large number of industrial clusters in R&D and manufacturing, such as automobile and electronics. Integrate circuit industry Geos patial information industry The next-generation IT industry Intelligent manufacturing industry Automotive industry Digital industry Biological industry Health-care industry New energy source& material industry Aerospace industry Source: http://www.chnci.com Top ten main industries of Hubei province Hubei is rich in agriculture, forestry and hydro power resources. With 50 years of construction and development, the automobile industry in Hubei has established the industrial foundation with “one leading industry and two belts”. The iron and steel industry is one of the main industrial pillars of the local economy. The most renowned company in this sector is the Wuhan Iron and Steel Corporation. After years of development, the biological industry has formed a manufacturing and construction system with large and middle scale enterprises as its backbone 18 19. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Three fortune 500 companies headquartered in Wuhan According to government work report of Wuhan in 2019, electronic information, bio-technology and new medical and medical appliance, and the Automobile industry are the three pillars of the manufacturing industry. Xiaomi Dongfeng Motor Co., Ltd China Baowu Steel Group Co., Ltd (world ranking: 468) (world ranking: 82) (world ranking: 149) Xiaomi, a mobile Internet company focusing on the R&D of intelligent hardware and electronic products opened its second headquarters in Wuhan in 2017, hometown of founder Lei Jun, as it doubles down on R&D in artificial intelligence. Dongfeng Motor Company Limited was established on June 9, 2003, in Wuhan. It is a large-scale automobile enterprise jointly launched by Dongfeng Motor Corporation and Nissan Motor Co., Ltd. China Baowu Steel Group , established by the consolidation and restructuring of the former Baosteel Group and Wuhan Iron & Steel (Group) on December 1st 2016, is headquartered in Wuhan and Shanghai 19 Source: scmp.com, crib.cin.cn, weforum.org 20. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Local company responses to the Coronavirus 20 Xiaomi prepared to resume operations Due to COVID-19, most staff of Xiaomi started working remote from home, some executives have begun to discuss work arrangements in the office. Through Weibo, Lei Jun said when entering enterprise, Xiaomi employees must wear masks and have heir temperature routinely checked. Additionally, the elevators are all disinfected and equipped with paper towels to press the buttons. （This picture was taken by Leijun on Weibo, Feb, 2020) Source:: Weibo, 10jqka.com Dongfeng protected users' rights and interests • Set up special love fund From February 21st to May 31st, for every purchase of Dongfeng light trucks, Dongfeng Motor Co., Ltd will donate RMB500 to help patients with coronavirus pneumonia disease. • Promote online sales service 1. Free rescue services to medical material transport vehicles. 2. Customers of Dongfeng light vehicles whose maintenance and repair are due in the first quarter can be postponed for 3 months. 3. All Dongfeng light vehicle customers can get free medical masks and other items or reimburse them. • Three service promises In order to service consumers who need to buy vehicles during the epidemic, Dongfeng Motor Co., Ltd promoted its online sales platform (its WeChat account) and offers the service of delivering vehicles to buyers’ home, so that they can easily complete the purchase without leaving home. 21. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Automotive industry of Hubei in the global supply chain General motors, Nissan, Renault, Honda and PSA (which owns Peugeot) have large factories in Hubei province. Source: Press reports, S&P Global Ratings,IHS, Chinese Association of Automobile manufacturers Chinese automotive components are a major part of the global auto supply chain, including 8 components factories for Toyota, and 24 plants making cars or parts in China for 40% of Volkswagen production. Hubei province accounts for 9% of total Chinese auto production. German engineering firm Bosch is the world’s largest auto component manufacturer, the brand has dozens of factories in China 2 of them are in Wuhan. About 700,000 cars were produced by Honda in Wuhan per year About 1.5 million cars were produced by Nissan in Wuhan per year 21 22. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Electronics industry of Hubei in the global supply chain Wuhan plays a significant role in the global supply chain of critical electronics components due to a long list of key component manufacturers that reside in the Wuhan area. Wuhan can be said to be a major city for the development of science and technology For example, BOE, Huaxing Optoelectronics, and Tianma (the two largest panel manufacturers in the mainland) have settled in the Wuhan region. Continental memory companies such as Wuhan Changjiang Storage, Wuhan Xinxin, and Zhaoyi Innovation are important local companies. Hubei Province is the production base of Taiwan’s PCB factories, including Taiwan Optoelectronics, Xinxing, Jianding, Nanzi Electric, and Dingying. Industry insiders pointed out that PCB is the “mother of the electronics industry” and is an indispensable key component of all electronic products. It is responsible for fixing electronic parts and providing current connections to parts, which directly affects the reliability and performance of electronic products. If the PCB factory in Taiwan and the Hubei factory are obstructed, it will affect the global electronics industry. Source: https://www.silverdoctors.com/ 22 23. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Hubei contributes much to the progress of the chemical industry Hubei is the largest province of chemical fertilizer in China, its output has reached to 596.56 tons in the first three quarters of 2019, which increased 19% compared to last year. The revenue and the number of enterprises in the chemical industry in Hubei accounts for about 4% of China. Hubei has a high production capacity of sub industries including the phosphorus chemical industry, pesticide industry, and the vitamin industry. 23 Hubei 13% Qinghai 9% Neimenggu 9% Henan 8% Sichuan 8% Shandong 7% Shanxi 7% Guizhou 7% Xinjiang 5% Yunnan 5% Other provinces 22% Output distribution of chemicalfertilizer in China (2019 Jan to Sep) Source:http://www.fert.cn 105.37 70.58 73.75 74.23 78.3 56.24 59.59 49.64 0 20 40 60 80 100 120 1～2 3 4 5 6 7 8 9 Output of NPK fertilizer in Hubei (10,000 ton, 2019 Jan to Sep) 24. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED COVID-19 affects industries in Hubei 24 Harm to the Automotive industry Slumping sales China auto sales fell 2.8% in 2019 amidst global trade tensions, the first decline in nearly two decades, which also affect Hubei auto sales because Hubei province account for 9% of total Chinese auto production. Global automakers forecasted further sales declines in 2020, prior to knowledge of the coronavirus outbreak. Suspended operations Nissan, GM and Honda suspended operations in China through at least February 9, 2020, and these automobile manufacturers anticipate re-opening factories in the coming days to week. After Wuhan postponed production of electronics, China’s supply chain of critical electronics components is facing a catastrophic disruption, because Wuhan a major city for the development of science & technology. About 70% of the world’s smartphones has been affected. According to Strategy Analytics, overall shipments of phones will reduce by 2% in 2020, some consultants believe that COVID-19 will cause demand side decrease. Besides, the first quarter is normally off-season of China‘s semiconductor industry, COVID-19 may further dampen the sales of semiconductors. Electronic industry Source: Press reports, S&P Global Ratings,IHS, Chinese Association of Automobile manufacturers 25. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED What industries are growing 03 25 26. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 26 Chinese daily life goes online during the coronavirus Remote work and study platforms: The Tencent Meetingapp is downloaded 430,000 times a day, up from 370 before the outbreak. Online fitness classes: Keep fitness app registered a 185% increase in followers on the live-streaming platformDouyin. Online Shopping: From January 24 to February 4, JD has delivered 19,000 tons and 4,000 tons of fresh food. Social media and discussionforums: On Weibo, some topics about the COVID-19 reach over 1 million reads per minute. Mobile gaming: Multiplayer online battle arena sector is the most popular with the game Honor of Kings reached more than 100 million daily active users. Source: daxueconsulting.com, Qimai 27. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 27 31.2 57.4 67.168.8 104.2 109.3 CNY 2019 CNY 2020 After CNY 2020 Game for Peace Honor of Kings Mobile Gaming: multiplayer online battle arena sectoris the most popular. Plague Inc. rose ahead until removed from APP stores A blessing for the Gaming Industry Change in revenue of the Chinese mobile gaming sector during CNY 2020 ($ million) DAU of Honor of Kings and Game for Peace (2019-2020, million) Source: Sina, Capitalwatch While the Chinese mobile gaming industry is stimulated by the coronavirus, the development of 5G is expected to accentuate the trend and support the growth of the industry. During the outbreak, Honor of Kings and Game for Peace are the most popular mobile games among Chinese people. During the Chinese New Year 2020, the two games reached a record in the number of daily active users, up to 100 million for Honor of Kings. Plague Inc. is ranked #1 in the paid game sector of the apple store since January 19. +84% +51% 530 688 CNY 2019 CNY 2020 +33% 28. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Chinese are also extensively using video platforms to stay informed and share their feelings during the epidemic. Between January 20 and February 2, 574 accounts on the short video platforms Douyin and Kuaishou each gained between 100k- 500k new followers. The Coronavirus is accelerating the shift towards live-streaming, which already exploded in 2018, with a 745% growth year on year, thanks to improved connectivity and video maturity. The short video sector recorded 569 million daily active users in the post-holiday period, far exceeding 492 million on a regular daily basis. The coronavirus drives traffic to short videos platforms 28 Virtual clubbing entertaining millions A five-hour live-streaming set at OneThird, a nightclub of Beijing, earned the club $285,000 in tips donated by the viewers on Douyin. Banking on the trend, Douyin’s rival Kuaishou is now making deals with clubs across China to stream their shows. 31.8% 32.3% 33.7% 17.3% 15.2% 11.8% 12.2% 8.5% 12.2% 9.0% 7.9% 8.2% 29.7% 44.1% 34.1% CNY 2020 2020 ordinary days CNY 2019 Proportion of the used time of mobile apps during the 2020 CNY Mobile social networks Short video platforms Mobile games News Others Source: QuestMobile, Abacus +2,1% +3,4% 29. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED E-commerce’s sales of health products and daily necessities skyrocket 29 +35,000 New Jobs Since Chinese people are not suggested to go out, they do even more shopping online. During the Chinese New Year in 2020, people were likely to purchase medical products (medicine and masks), hygiene products (hand wash and disinfectant) and food. To support the new growing online demand, more than 35,000 jobs were created across China from the following online retailers: Hema, Suning Xiaodian, Meicai, JD Logistics, JD daojia, and Dada. Due to the shortage of medical products like masks on Chinese e-commerce platforms, consumers have turned to cross border e-commerce. During the Chinese New Year, two cross-border apps, Omall and Haitun, have seen an evident rise in engagement and skyrocketed to the top of the App Store. Source: Fanli.com, JDbigdata, cnn, AppAnnie During the 2020 CNY Online sales of facemasks increased 58.41 times Online sales of disinfectant increased 34.72 times Sales of fresh food materials on JD.com increased 154% Online sales of instant noodles increased 133.34% 30. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 30 The fitness company Keep announces live streaming schedule via WeChat groups. 3 classes per day. The Keep instructor leads the class from his home via livestreaming on Douyin platform. The instructor starts a competition with another KOL and encourages users to comment and follow. 1 2 321 3 220 626 Start of CNY 2020 (25/01/2020) After CNY 2020 (21/02/2020) Change in the number of followers of Keepon Douyin (thousand) +185% While local authorities closed gyms across the country, Chinese are looking for ways to stay in shape. Mobile fitness apps are gaining traction, as they can make people do exercise at home. Although all the offline gyms of Keep are closed until further notice, Keep smartly used the Douyin live streaming feature to move the classes online. With the live-streaming campaigns, Keep boosted its followers by 185% from the start of the Chinese New Year. The Keep app is downloaded eight times more than at the start of the Chinese New Year, reaching more than 100,000 downloads on February 19. Source: Qimai, Douyin Fitness Industry: from offline to online - Keep App 31. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 31 Hello, I am the Intelligent Self-Test Assistant for the New Coronavirus. I have learned "Pneumonia Diagnosis and Treatment Scheme for New Coronavirus Infection" and millions of user consultation cases. Please fill in the following questions truthfully to diagnose you. The self-test is expected to take 1 minute to complete. Question 1: What is your gender? Male / Female Healthtech Services boosted by Chinese AI Around 3.5 billion views Naturally, one of the positively impacted segments is online health services. While the telemedicine services from Ping'an, JD, and Alibaba have seen a peak in usage, WeChat and Baidu’s health section were viewed nearly 2.5 billion and 3.5 billion times respectively. The ‘Health’ section of the Chinese tech giant Baidu, includes the ability to track in real-time the epidemic data of every district in every province. Among other, an AI feature analyze one’s diagnostic probabilities. Whereas it was previously estimated that the market size of China’s healthcare big data industry will exceed 80 billion yuan ($11.4 billion) by 2020, the very wide adoption during the epidemic by millions of people of online medicine services will accelerate this growth. Source: daxueconsulting, technode 32. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Online co-working platforms are booming 32 Most companies have set-up remote work policies to avoid contamination at work. Hence, Enterprise Collaboration Apps facilitated remote working for 200 million Chinese workers after the Chinese New Year. Alibaba's Ding Talk skyrocketed to the very top of the App Store in a few days while Tencent Meeting and WeChat Work are in the second and fifth position, respectively. 370 1,066 28,485 70,522 76,977 76,907 430,640 54,086 27,083 101,686 497,342 500,779 500,378 503,689 0 100000 200000 300000 400000 500000 600000 2020/1/20 2020/1/25 2020/1/30 2020/2/5 2020/2/10 2020/2/15 2020/2/20 Downloadsof Dingtalk and Tencent Meeting apps on the Appstore during the outbreak Tencent Meeting DingTalk Source: Forward-The Economist，AppAnnie, Qimai Source: App Annie 33. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 33 The Coronavirus outbreak does not stop Chinese students from studying. The downloads of some education apps such as Tencent Classroom, and China University Mooc experience a significant increase. Univeristies across the country organize online lectures to ensure the safety of their students. They rely on QQ, a tencent streaming platform to carry out online teaching. Unlike fitness and co-working apps, the online education peak during the coronavirus may not last after the epidemic, with the return of students back to school. Chinese students study online through the Coronavirus outbreak Source: Qimai 2,432 2,044 3,046 14,392 20,329 40,916 50,515 1,581 1,211 2,021 13,190 102,164 80,607 112,102 0 20,000 40,000 60,000 80,000 100,000 120,000 2020/1/20 2020/1/25 2020/1/30 2020/2/5 2020/2/10 2020/2/15 2020/2/20 iOS downloadsof TencentClassroom and ChinaUniversity Mooc apps during the outbreak China University Mooc Tencent Classroom 34. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Tourism: The most immediate impact 04 34 35. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 415 459 150 0 50 100 150 200 250 300 350 400 450 500 2019 CNY 2020 CNY(Forecast data) 2020 CNY(Actual data) The Chinese New Year period is the annual travel peak because most people have work off and either travel to see family or go on vacation. 35 Source: Tai Media APP Sina Finance But since the coronavirus outbreak started in Wuhan, tourist and hospitality industries have been hit hard in China. The damage to the Chinese tourism industry is equivalent to a loss of 1 trillion RMB GDP. Many travel enterprises estimated the ongoing shutdown costs the industry about ¥ 17.8 billion every day. COVID-19 hits the Chinese tourism industry (1/2) Number of Chinese domestic trips (million, 2019 and 2020 Chinese New Year) 36. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED COVID-19 hits the Chinese tourism industry (2/2) 36 As recent research shows, COVID-19 shares 80% of its genome with SARS. Although, COVID-19 might be less deadly than SARS, the cost of coronavirus could be higher than SARS. Compared to SARS, it spreads more easily and is hard to be detective. Unlike SARS, patients with COVID-19 might not experience fevers and headaches, which makes it difficult to diagnose and control. Hard work is needed to fix the tourism crisis to help the hard-hit tourism industry and tourism driven industries. Travel cancellations flared up after the Coronavirus outbreak. The cash flow of airlines, agents, hotels and online travel platforms are deteriorating. Source: Sohu Finance Business Insider Australia Predictors Indictors 2019 2020 Decreased trips and revenue Coronavirus cost Number of Chinese domestic trips (billion) 6,015 4.5-4.8 1.2-1.5 1.7-2.6 Chinese domestic tourism revenue (trillion RMB) 5.69 4.67-4.84 0.85-1 1.3-1.5 Number of inbound overseas tourists (million) 144 90-100 43-50 40-50 Inbound tourism revenue (billion dollar) 130 91-97.5 32.5-39 35-40 Total domestic and inbound tourism revenue (trillion RMB) 6.6 5.43-5.65 0.9-1.2 1.6-1.8 Forecasting of Chinese domestic and inbound tourism core indictors (2019-2020) 37. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED The top international destinations of Chinese outbound tourism 37 Source: Analysys & National TourismAdministrationin different countries Press reports; McKinsey Global Institute 10.4 8.0 5.0 4.8 3.7 3.5 3.4 2.3 2.3 2.0 9.5 7.4 4.0 4.2 3.2 3.3 3.0 2.1 2.1 1.5 9.0% 8.8% 25.0% 13.1% 14.7% 5.0% 11.3% 9.5% 9.3% 36.0% -100% -80% -60% -40% -20% 0% 20% 0 2 4 6 8 10 12 Thailand Japan Vietnam Korea Singapore US Malaysia France Indonesia Russia Number of Chinese tourists in Top 10 outbound destination (million, 2017-2018) 2018 2017 Yoy growth rate In 2018, Chinese tourists represent more than 70% total tourism in Hong Kong and Macao, similarly, more than 25% total tourism in Thailand, Japan, Vietnam and Korea. Chinese tourists prefer to visiting APAC regions rather than the Americas and Europe, only 4%-5% total tourism in US and Italy are Chinese. 38. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 21.6 7.2 9 2.7 10.3 7.9 13.6 9.4 5.9 4.7 21.3 7.4 9.2 2.7 10 7.8 13.3 9.5 6 4.8 0 5 10 15 20 25 Thailand Japan Vietnam Korea Singapore U.S. Malaysia France Indonesia Russia 2017 2018 Top 10 outbound destinations: contribution of tourism to GDP Contribution of travel and tourism to GDP of top 10 outbound destinations (in % of GDP,2017-2018) 38 The countries that are most exposed to the Chinese travel market will be catastrophic for the economies if the Coronavirus lasts for three to six months. As an example, today, Chinese visitors account for 30% of total tourists in Thailand, spending $18 billion in 2019. Source: Time Knoema, World Data Atlas 39. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Top 10 outbound destinations: travel restrictions to Chinese 39 Strictness Level 1 2 3 4 5 Thailand, Korea, France: increased thermal health screening at their international airports Indonesia: suspended visa-free and visa-on-arrival provisions for Chinese citizens and has imposed a requirement for flight crews to undergo a medical inspection upon arrival Japan: banned foreign nationals who have visited Hubei and Zhejiang Provinces within 14 days of arrival in Japan, or who have a Chinese passport issued by these provinces, except under special circumstances for the time being Malaysia: imposed travel restrictions for Chinese visitors from Hubei, Zhejiang and Jiangsu provinces By February 2,2020, 71 countriesissued travelrestriction to Chinese visitors. Source: http://m.hao123.com/news/shoubaiDetail/9179820677607795666 Vietnam,Singapore,U.S., Russia: banned all foreign nationals from entering who had been in China 40. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED COVID-19 poses challenges to top tourism destinations 40 Thailand Japan Singapore Macau Maldives Popular outbound countries for Chinese tourists have seen 30% - 75% drop in arrivals since the COVID-19 outbreak. Stands to lose $3.4 billion in tourism revenue if the virus outbreak lasts to summer Estimates to lose $1.29 billion revenue for tourism in the first quarter of 2020 Tourists arrival estimated to fall by up to 30% in 2020 75% decrease in mainland tourists for the first four days of the Chinese Lunar New Year Expects a 30% drop in tourist arrivals which leads to a $540 million in loss of revenue for hotels Source: Press reports; McKinsey Global Institute Pengpai News 41. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED F&B: Heavy losses and relying on delivery 05 41 42. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED A heavy loss during the 2020 Chinese New Year The Chinese New Year is usually a hot season for the F&B industry, the total revenue of Chinese restaurants in 2019 CNY has reached 724.1 billion RMB (occpied 15.5% of the whole revenue in 2019). But, due to the Coronavirus outbreak during the 2020 Chinese New Year, most of the Chinese resaturants had to close thier business, some local governments also issued an emergency notice to prohibit all restaurants from opening. 42 Around 78% Because of the Coronavirus outbreak, large catering brands have to reduce expense to balance their finance, such as permanently shut down some offline stores and redundancies. Many small restaurants are facing with the risk of bankrupt, since they have very fragile anti-risk capability. The Chinese restaurant industry lost 78% revenue during the 2020 CNY More than 90% Chinese restaurants temporarily closed all or part of stores during the 2020 CNY Only 7% Chinese restaurants continued their operations during the 2020 CNY Source: China Cuisine Association 43. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Huge difficulties caused financial pressure 43 80.2% 78.1% 73.0% 49.8% 37.8% 7.0% Lost huge revenue Still need to pay rent Labor costs Food materials costs Payment for suppliers Others The main difficulties of Chinese restaurants during the Coronavirus outbreak (2020 February) The large revenue loss is the source to many more problems. Restaurants didn't have any revenue during the Coronavirus outbreak , but still need pay high rent and salary, thus they are facing financial pressure. At the same, many Chinese restaurants (around 62%) could not get rent reduction and they still need purchase epidemic prevention products, such as facemasks and thermometers. Source: World Federation of ChineseCateringIndustry 44. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Delivery cannot save the F&B industry Many resaturants tried to focus on delivery to get some profits, but the actually revenue of restaurants' order-out business is much less their normal business. 44 65.8% 16.1% 15.1% 3.0% The revenue of Chinese restaurants’ take-out business (2020 CNY compared with 2019 CNY) The revenue reduced dramatically The revenue had some reduction The revenue increased The revenue was the same 1 2 3 Why delivery cannot take companies out of the negative Online orders decreased Because of the Coronavirus outbreak, many Chinese consumers prefer to cook by themselves since it can guarantee the safety. Hard to deliver In order to reduce the risk of infection, many communities don’t allow outsiders enter their gates and many cities started traffic restrictions, which made food delivery much harder. Extra expense for delivery platforms Restaurants still need to pay commission to those take- out platforms, some platforms even increased the commission. Source: World Federation of ChineseCateringIndustry 45. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED How Chinese restaurants manage the losses 45 Destocking Cooperation Finance In order to reduce inventory, some restaurants sold food materials to consumers and communities at low price, such as QUANJUDE (全 聚德). Some restaurants provide free food to medical staff and government units in epidemic areas. From 1st February, many restaurants temporarily lend employees to Hema (盒马鲜生) which relieved their labor costs. At the same time, KFC launched a contactless delivery service on food ordering platforms, such as Meituan (美团). Because of a lack of funds, some restaurants tried to seek investments and loans. For instance, Pudong bank offered 120 million RMB loans to Xibei (西 贝) restaurant. The large food ordering platform Meituan (美团) worked with banks to finance some restaurants. Source: China Cuisine Association 46. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED The impact of Coronavirus on restaurant chains | Yum China case study 46 2020 Q1 Yum China Revenue and Expenses Hypothesis (Million USD) Revenue 2019 Q1 2020 Q1 Pessimistic Hypothesis Optimistic Hypothesis Sales 2089 731 1,096 Franchise fees 39 39 39 Rev. from transactions with franchisees and affiliates 170 119 170 Other 6 6 6 Total revenue 2304 946 1,311 Expenses 2019 Q1 Pessimistic Hypothesis Optimistic Hypothesis Food and paper 638 223 332 Employee payroll 466 420 396 Occupancy 599 599 450 Admin & other 298 298 298 Total expenses 2001 1540 1,476 OperatingProfit 303 -594 -165 1 2 3 Employeepay Managers will negotiate with employees to take unpaid leave. However, due to China’s strict layoff laws and the likely need for more administration, payroll expenses will not decrease in proportion to sales. We estimate 10-15%. Negotiating rent Some malls and landlords may forgive February’s rent. Stores may also negotiate with landlords. At best, we estimate half of stores were rent-free in Feb. and will have discountsin March. Speedof recovery When sales recover depends on the length of the outbreak. Our optimistic estimate is sales start to recover mid-March. Variables in Yum China’s profit 4 Stores Closed Yum China has reported closing 30% of stores, and the remaining stores are making 50% the revenue as the same time last year. 47. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 47 Data Source: Yum China quarterly reports and daxueconsulting’s calculations Tax changes and investments have not beenincluded incalculations The impact of Coronavirus on restaurant chains | Yum China case study 1 2 3 Variables in Yum China’s profit from Q2 – Q4 Employeepay Most of Yum China’s expenses go to payroll and employee benefits. Chinese layoff laws are strict and the government is discouraging layoffs during the outbreak, putting pressure on expenses. Franchises closing Certain restaurants may be making even less than others, causing them to close down after first quarter. Administrativecosts Administrative costs are unlikely to decrease during and after the outbreak, due to the need for crisis management. -600 -400 -200 0 200 400 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1E Q2E Q3E Q4E OperatingProfit(MillionUSD) Yum China operating profit estimations 2017 2018 2019 2020E Operating Profit Estimated Range 48. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 48 The impact of Coronavirus on coffee chains | Starbucks case study 2020 Q1 Yum China Revenue and Expenses Hypothesis (Million USD) Revenue 2019 Q1 2020 Q1 Pessimistic Hypothesis Optimistic Hypothesis Total Revenue 703 296.6 336.6 Expenses 2019 Q1 Pessimistic Hypothesis Optimistic Hypothesis Cost of Sales 298 197.4 194.7 Store Operating Expenses 201 123.3 80.9 Other Operating Expenses 3 1.7 1.9 Depreciation Expenses 66 66.2 66.2 Administrative Expenses 32 32.5 32.5 Total Expenses 600 421.2 376.1 OperatingProfit 103 -124.6 -39.5 1 2 3 4 Employeepay Managers will negotiate with employees to take unpaid leave. However, due to China’s strict layoff laws and the likely need for more administration, payroll expenses will not decrease in proportion to sales. We estimate 10-15%. Negotiating rent Rent accounts for 25% of operating expenses. Many locations may get subsidies or have February rent forgiven. Starbucks may also negotiate rent with landlords. Speedof recovery When sales recover depends on the length of the outbreak. Our optimistic estimate is sales start to recover mid-March. Stores Closed Starbucks has reported closing more than 50% of stores during the outbreak. A report from Fisheye coffee has claimed that the remained open stores are making 50% of the normal sales. Perishable materials like milk and cream purchased before the outbreak have gone to waste. Variables in Starbuck’s profit 49. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 4949 Data Source: Starbucks quarterly reports and daxueconsulting’s calculations Tax changes and investments have not beenincluded incalculations 1 Losing share to delivery competition Because Starbucks is not on top of mind for coffee delivery, it is likely that during the Coronavirus outbreak customers ordered delivery from competition, which could influence consumption habits in the long term. 2 New Store Development New store opening is an important factor contributing to Starbucks’ revenue. The decrease of sales in Q1 will slow down new- store development in the long term. 3 AdministrativeExpenses Administrative expenses are unlikely to decrease during the outbreak. Starbucks need to invest money to manage the crisis and to take preventive measures against epidemic. The impact of Coronavirus on coffee chains | Starbucks case study -150 -100 -50 0 50 100 150 18Q1 18Q2 18Q3 18Q4 19Q1 19Q2 19Q3 19Q4 20Q1E 20Q2E 20Q3E 20Q4E OperatingIncome(USD$inMillions) Starbucks Quarterly Operating Income Estimation (China) Operating Income Estimated Range Variables in Starbuck’s profit from Q2 – Q4 50. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Supply Chain: What should businesses know about the COVID-19 impact 06 50 51. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED How Coronavirus will impact the Global Supply Chain by Mid-March 51 January 25th Beginning of CNY February 8th End of CNY ~ March 15th Peak of the impact on the global supply chain 2 to 5 weeks of inventory coverage 2 to 5 weeks of shipment lead time Chinese plants closures Source: Harvard Business Review Most Chinese manufacturing slowly started resuming operations at the end of February, but the delays could have a devastating impact on the global supply chain. For most companies, the inventory in stock will is enough to keep up with demand for two to five weeks. Shipping by sea to either the the U.S. or Europe can take around 30 days. This implies that if Chinese plants stopped manufacturing prior to the beginning of the Chinese holiday on January 25, the last of their shipments arrived the last week of February. If lead time from China is shorter than 30 days, the disruption occurs earlier. This is already the case with Hyundai which announced on February 14th the suspension of its production lines from its plants in Korea. 52. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Assessing the impact on electronics supply chains 1/2 52 Most impacted sectors and their integration in the global supply chainConsider the following criteria to assess the level of disruption If most operations are in/near affected areas If products are highly customized, requires skilled talent, and/or specialized equipment/infrastructure If industry is already under stress If China serves a major role in the global supply chain If the industry tends to keep a higher level of component inventory Supply chain integration Low High Computer, electronic, optical/ electrical equipment/ other machinery: Operations are concentrated near the affected areas (~290 of about 800 plants named in Apple’s global supplier list are located in regions that have delayed returning to work). Components are often heavily customized, making it challenging for factories to relocate outside of China in the short term. Intermediate products are deeply integrated in the global technology supply chain. Chinese share of global exports Chinese share of gross output Computer, electronic, optical products 30% 49% Electrical equipment 28% 59% Other machinering and equipment 28% 47% Motor vehicles and trailers 5% 33% Source: McKinsey report 53. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 53 Assessing the impact on electronics supply chains 2/2 30% 54% 8% 1% 7% ElectronicsManufacturers and Suppliersworldwide are Concernedabout the Impact of COVID-19 (Survey between February 11 and February 16*) Extremely concerned Somewhat concerned Not very concerned Not at all concerned Others Manufacturers expect a five week delay from their electronics suppliers, and some companies expect delays longer than nine weeks. Overall, 84% are concerned about delays related to the outbreak. Major electronics companies warn that supply of finished products will be constrained by the coronavirus Apple warned that it would miss its estimate for March quarter revenue due to constrained supply of its products, which are largely manufactured in China. HP, the second largest PC maker, also cut its earnings guidance. Lenovo’ COO Gianfranco Lanci said that “the entire industry will not have enough supply”. *responses provided by 150 electronics manufacturing companies and suppliers Source: IPC report, Apple, HP, Lenovo 54. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Manufacturing: Lessons from the crisis 07 54 55. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Manufacturing activities have been disrupted 55 Possible Scenarios Q1 2020 H1 2020 H2 2020 Full Year COVID-19 peaks in Feb/Mar with quick recovery outside Hubei 5.3% 5.6% 6.2% 5.9% COVID-19 peaks in Feb/Mar with gradual recoveryoutside Hubei 4.2% 5.0% 6.3% 5.7% COVID-19 peaks in April with disruption into March 3.5% 4.6% 6.5% 5.6% Impact on China’s production growth Estimated annual GDP growth rates under three possible scenarios Factories have been disrupted As Chinese government shut down Wuhan and delayed the returning to work, many factories have to face the huge losses, limited supply chain and insufficient raw materials. Labor-intensive manufacturers (such as textile, clothing and plastic products) are significantly impacted, small and medium-size factories are worst-hit areas. According to Morgan Stanley’s report in mid-February, Chinese production had only reached 30% to 50% percent of the usual levels. Health industry avoided negative impact However, health and medicine related products have a huge demand during the COVID-19 outbreak, such as facemasks and medical equipment. Consumers’ attention to health care and health industry will be greatly enhanced even after the epidemic. Since China is the major part of the global manufacturing network, the unrecovered production line will hurt other markets’ capable of producing. Source: NBS, Morgan Stanley Research 56. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Mask manufacturing demand 56 The COVID-19 outbreak caused a large shortage in protective masks. Although many companies have started cross-border production, the shortage of raw materials could not be resolved in the short term. Along with the resumption of work and the ongoing outbreak overseas, short-term global mask shortages will continue. China contributes 50% of global mask production. After the COVID-19 outbreak, the demand of masks has risen rapidly. The production capacity of masks has increased, and price has risen. Mask related manufacturers will benefit during the period. While most believe that masks are a short-term demand. Expanding production would result in oversupply after the outbreak recession. Manufacturers without medical production qualification would be eliminated after the outbreak. 20 54.77 Before COVID-19 outbreak After COVID-19 outbreak Daily output of masks production in China million, data provided on February 24, 2020 Industrial-capacity utilization of masks Data provided on February 24, 2020 Source: Dazhong Bond Newspaper, Sina Finance 110% During the COVID-19 outbreak 60%-70% Before the COVID-19 outbreak 57. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED China is getting back to work The epidemic prevention and control situation in Zhejiang has stabilized and improved. The diagnosis has been single digits since February 14th, laying the foundation for resumption of work and production. Zhejiang government has offered substantial rewards—giving employees cash rewards to encourage rework. Therefore, Zhejiang reached 98.6% ratio of returning to work in industrial enterprises above designated size. 57 > 90% Zhejiang Jiangsu > 80% Shandong Guangdong Liaoning Jiangxi > 70% Hebei Guizhou Shanghai Ratio of industrial enterprises provincesresuming operations by province (Enterprises of at least 20 million revenue per year) As of February 23, 2020 The week after 9th February is the time for migrant workers to return to work, small and medium-sized enterprises need to resume production to boost cash flow. Considering that small and medium-sized enterprises are the main force to absorb the employment of migrant workers , it is important for l o c a l governments t o strengthen policy guidance and financial support. Source: Sina Finance Source: People.cn 58. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Manufacturing learning points from COVID-19 (1/3) 58 Although COVID-19 is a black swan event in the manufacturing industry, it is likely to instill positive changes in the long-term More focus on health, safety and environment management Promote smart manufacturing, employ more high-tech workers Pictures are from Sohu.com If there is cross-infection between employees, it could be a disaster for the enterprise. Therefore, the COVID-19 outbreak will promote manufacturing enterprises to strengthen the management of employees’ health, safety and environment, and to improve infection early warning mechanisms. In the long run, the leaders of manufacturing companies should inevitably pay more attention to intelligent manufacturing and use less manual work with more flexible production. Also, they should hire more highly-skilled and multi-skilled workers which can better respond to labor fluctuations. 59. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Manufacturing learning points from COVID-19 (2/3) 59 Embrace digital workplaces Promote remote intelligence service Many companies chose to work online after the Chinese New Year holiday. Therefore manufacturing enterprises will demand software such as task management, project management, and workflow management for remote collaboration. In this digital transition, enterprises will pay more attention to practical applications of technology such as business intelligence, big data analysis and AI. When unexpected events such as virus outbreaks, earthquakes, and typhoons occur, maintenance services cannot easily reach factories or offices. Therefore, there is a need for remote intelligent services and early warning monitering systems. Pictures are from Sohu.com 60. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Manufacturing learning points from COVID-19 (3/3) 60 Further development of the life science industry Update the concept of smart city, home and transportation Through this crisis, China will pay more attention to the development of drugs and reagents for the detection, suppression and treatment of viruses. Influenza vaccines will also be more widespread. Therefore, more pharmaceutical companies will research and develop innovative drugs and medical devices. After the outbreak, more automotive companies will promote technology related to the health management of drivers and advancing smart car solutions. The COVID-19 outbreak will not only have a profound impact on customer service industry and production service industry in China, but also a huge impact on the development of the manufacturing industry. Pictures are from Sohu.com 61. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Foxconn: The world’s largest electronics contract manufacturer Source: CNBC, NIKKEI Asian Review Foxconn had intended to resume production at Longhua on February 10th, but authorities requested to postpone resuming. Following the local government regulations, companies must: set up infrared thermometers and have a two- week supply of surgical masks and disinfectant before resuming operations. It would take them at least one to two months to return to normal capacity. Furthermore, only local staff were able to return to work at first, but many production line workers are migrant workers and may encounter barriers to returning to their work location. Therefore, many clients of Foxconn are also suffered from its unrecovered production capacity. For example, the iPhone 9 release date will be postponed. 61 Manufacturing case: Foxconn 62. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 62 The impact of Coronavirus on Manufacturing | Foxconn case study 62 2020 Q1 Foxconn Revenueand Expenses Hypothesis (Million USD) Revenue 2019 Q1 2020 Q1 Pessimistic Hypothesis Optimistic Hypothesis Total Revenue 33738 21,939.6 27,766 2019 Q1 Expenses (million USD) Pessimistic Hypothesis Optimistic Hypothesis Operating Costs 31872 21,194.6 26,526.9 Selling Expenses 217 132.3 162.2 Administrative Expenses 562 593.8 582.6 R&D Expenses 572 571.9 571.9 Total Expenses 3322 22,492.6 27,843.5 OperatingProfit 516 -553 -77.6 1 2 3 4 Employeeturnover Foxconn already has a high employee turnover rate and normally has a recruiting season after the Chinese New Year. This year, they have reported having trouble finding workers after the outbreak. Expenses to recruiting firms will rise along with expenses for overtime and monetary rewards to attract workers. Administrativeexpenses The Administrative Expenses will increase due to anti- epidemic measures and crisis management, including checking the health status of workers everyday. Recovery of productivity level Although all factories re-opened between Feb 10-17th , the productivity of the factories is unikely to be at full capacity due to the ability of workstaff to come to work, and barriers in the supply chain and logistics. The earliest we estimate favories will be at full productivity is Q2. Revenue breakdown by product In 2019, Foxconn produced consumer products (43% of Q1 production), corporateproducts (27%) , computing products (24%), and components (6%). Corporate products,including server and networks, are less likely to be influenced by the outbreak due to the increase of remote work. Variables in Foxconn’s profit 63. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 6363 Data Source: Hon Hai quarterly reports and daxue consulting’s calculations Tax changes and investments have not beenincluded incalculations 1 Moving manufacturing out of country Customers and Foxconn itself may be incentivized to move operations outside of mainland China 2 Lowerdemand from customers Foxconn is a supplier for companies like Apple whose revenue will also decline due to the slow pace of production during the outbreak and a possible drop in demand globally. 3 COVID-19 impact on suppliers As a part of a complicated, global supply chain, Foxconn may encounter issues with their suppliers as the outbreak moves outside of China and affects the global supply chain. The impact of Coronavirus on Manufacturing | Foxconn case study -1000 -500 0 500 1000 1500 2000 2500 18Q1 18Q2 18Q3 18Q4 19Q1 19Q2 19Q3 20Q1E 20Q2E 20Q3E 20Q4E OperatingIncome(USD$inMillions) Foxconn Quarterly Operating Income Estimation Operating Income Estimated Range Variables in Foxconn’s China profit from Q2 – Q4 64. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED What should exporters to China know 08 64 65. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED COVID-19 to impact China’s trading partners 65 479.7 303 147.2 109 84 77.9 76.9 73.1 57 49.8 48.7 48 47.5 45.8 44.1 0 100 200 300 400 500 600 China’s top trading partners in exportsales (2018, billion USD) After a slowdown in 2016, China’s imports and exports grew despite the trade war. Due to manufacturing and supply chain shortages during the epidemic, this growth rate is expected to slow down. A rebound in export activities may take place in April, while import activities would slow down until July. China’s top trading partners will suffer from the impact of the coronavirus on the main Chinese export products such as computers, broadcasting equipment, integrated circuits, and smartphones. Source: World top exports, Trading economics Electrical machinery, equipment 27% Machinery including computers 17% Furniture and plastic articles 7% Clothing accessories 6% Vehicles 3% Others 40% China’s top exports (2018) 66. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Congested Transport Routes impact Imports and Exports 66 Overall trucking supply resumed operation at around 60% and is a bit higher in the Southern areas of China. Overall intercontinentalrail capacity has recovered to 60%. Some corridors are fully booked for the coming two weeks. Ningbo, Shanghai, and Tianjin hovers report maximum capacity in their terminals of refrigerated and dangerous products.Sea freight companies recommend avoiding congested ports for transit time- sensitive, perishable commodities. Most commercial airlines that make about 5 to 10% of their revenue from hauling freight remain suspended until mid-April. The capacity situation is becoming critical, especially between the Northern areas of China and North America. The recovery of the supply chain is taken aback by the work resumption ratio, which climbed to 80% for Chinese factories. Staff shortages and provinces level restriction slow shipments across the country, making transport routes congested. While there are no restrictions policies about Chinese exported goods in other countries, imports to China are suffering from very limited air freight capacity and congested Chinese hovers. Source: Bansard International, Maersk 67. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED 67 Identify origin of supply to identify severity of risk. Enhance communication to employees on infection risk concerns. Determine impacted demand to determine required supply. Understand exposure Determine available inventory and consider transport alternatives. Pre-book air freight/rail capacity and try to avoid congested routes. Anticipate shortages How to improve supply chain during the epidemic Find alternative options Review alternatives such as moving supply to non-China countries if multi-sourced, or developing new supplies. Source: McKinsey 68. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED How the Chinese government is reducing the burden on enterprises 09 68 69. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Policy support from the Chinese government (1/2) During the COVID-19 outbreak, stop production, isolation of staff and transportation restriction caused enormous economic losses for enterprises. Policy support and costs reduction are desperately needs.The Chinese local governments released some polices to relieve this situation. 69 Financial support - Shenzhen: Banking institutions are encouraged to lower lending rates and exempt or reduce commission charge at an appropriate level, and strive to cut the comprehensive financing costs of newly issued inclusive loans made to small and micro businesses by 0.5 percentage point compared with that of 2019. Keep employees in their jobs - Shanghai: 50% of the total amount of unemployment insurance paid by companies and employees in the previous year shall be returned if the enterprises do not lay off employees. - Beijing: the government implemented flexible employment policies that allow enterprises to arrange annual vacation rationally. Additionally, managers can negotiate with employees to adjust salary during the COVID-19 outbreak or reduce working hours. - Suzhou: After the approval of government, the pension insurance, unemployment insurance and work-related injury insurance can be postponed for up to 6 months. Enterprises can have more time to reduce funding pressure. Social Insurance Source: Local government, Human Resource and Social Security Bureau 70. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Policy support from the Chinese government (2/2) 70 - Shenzhen: For non-state-owned enterprises, scientific research institutions, medical institutions and individual industrial and commercial households that rent property (including factory buildings, innovative industrial houses, office buildings) held by municipal and district governments and municipal and District State-owned enterprises, 2-month rent shall be exempted. Rent subsidy Tax concessions - Suzhou: If the coronavirus causes enterprises to suffer major losses, meaning their normal production and operation activities are greatly affected, or they have difficulty paying taxes, then the enterprise can apply for relief. Other subsidies - Shanghai: For enterprises affected by the coronavirus, if they organize employees to participate in online training during the shutdown period, the training shall be included in the scope of enterprise training and subsidized by local education additional special funds in each district, and they can enjoy 95% subsidy. E-commerce and new enterprises also can receive online training subsidies. Source: Local government, Human Resource and Social Security Bureau 71. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Long-term impact 10 71 72. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED The epidemic further boosted digitalization 72 5.6 6.1 6.8 7.3 0 1 2 3 4 5 6 7 8 Lunar new year 2019 Weekday 2020 Lunar new year 2020 After Lunar new year 2020 Average daily internet use per capita (2019-2020, hours) +44 mins +30 mins Source: QuestMobile The mobile Internet traffic growth was stabilizing in 2019, however, the COVID-19 outbreak pushed it to reach a new high. During the epidemic, both the number of users and the time spent online had a dramatic increase. mobile social networking, news and information, medical services, short videos, mobile games, fresh e-commerce and other sectors have achieved considerable development. In the mean time, some traditionally offline industries have turned to e-commerce to relieve losses. This may help digital industries discover new users who were introduced to the digital world because of the outbreak. 2.72 million Terabytes The total mobile Internet traffic during the 2020 CNY, which increased 36.4% compared with 2019 CNY. 337 million The number of daily active mobile shoppers during the 2020 CNY, which increased 14.6% compared with 2019 CNY. During the 2020 CNY, the total used time of all mobile apps increased 26% compared with 2019 CNY 73. © 2019 DAXUE CONSULTING ALL RIGHTS RESERVED Lowered consumer confidence could affect the luxury market • Chinese consumers make up more than 50% of global growth in luxury goods spending between 2012 to 2018. • In 2018, Chinese consumers spent $115 billon on luxury items, accounting for more than 30% of the global luxury market. 73 33% 22% 18% 10% 17% Global power of the luxury market in 2018 Chinese American Europeans Japanese Others COVID-19 is a downturn to the global luxury market. In Shanghai, Beijing, Shenzhen, Guangzhou and Wuhan, the passenger flow in large shopping malls and luxury brands stores declined more than 80% during the 2020 CNY. Also, due to the COVID-19, most Chinese consumers are more focus on healthy and rational consumption, many luxury products buyers plan to spend less on luxury goods, more on medical products. When COVID-1 |
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| Posted by : peter88 | Post date : 2020-03-25 14:11 | ||
| Category : Health & Medicine | Views : 531 | ||
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