Update as of February 10, 2020

2019-nCoV Outbreak Update: Status, Risks, and Implications

1

2019-nCoVUpdate as of 10 Feb.

Cautious optimism based on most recent data: New cases of 2019-nCoV outside Hubei province have plateaued for a week, and very recently started to slow within Hubei

However, downside scenario still on the table—cannot rule out a pandemic until vaccine is in hand; Core risk dimensions:

Cycle risk: 2019-nCoV outbreak represents exogenous cycle risk, yet bar is high for viral pandemic to end the expansion

Financial risk: Confidence shocks can transmit to real economy, though would have to be both deep and sustained

Sector impact: relative clarity on current production and revenue risk, a serious acceleration of outbreak would blur impact

Knock-on effects: 2019-nCoV fits pattern of potential cascade of intersecting risk and uncertainty (human, economic, institutional…)

What firms can do: Invest in resilience, incl. precautionary containment measures, either as a tactical response to 2019-nCoV and/or pre-emptively for future threats

2

More than 40k 2019-nCoV cases, but highly concentrated

Hubei Province

Source: World Health Organization, National Health Commission China, Johns Hopkins CSSE, BCG Henderson Institute analysisNote: The data of n-COV cases was updated as of Feb. 10.

20,000

10,000

00

50 100 150 200

30,000

# of infected cases

Days since first infected case

SARS (8k Cases)

2019 n-COV (more than 40k Cases)

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99% of cases in Chinese Mainland; 72% in Hubei provinceProvince1 Cases Casualties

Hubei 29631 871

Guangdong 1159 1

Zhejiang 1092

Henan 1073 6

Hunan 879 1

Anhui 830 3

Jiangxi 771 1

Jiangsu 492

Chongqing 473 2

Shandong 466 1

Sichuan 405 1

Beijing 337 2

Heilongjiang 331 7

Shanghai 299 1

Fujian 261

Hebei 218 2

Shaanxi 213

Province1 Cases Casualties

Guangxi 210 1

Yunnan 149

Hainan 138 3

Shanxi 119

Guizhou 109 1

Liaoning 108

Tianjin 95 1

Gansu 86 2

Jilin 80 1

Inner Mongolia 58

Ningxia 49

Xinjiang 49

Hong Kong 38 1

Taiwan 18

Qinghai 18

Macau 10

Tibet 1

Rest of the World 391 11. Provincial level administrative units in mainland China (includes provinces, municipalities, autonomous regions and special administrative regionsSource: National Health Commission China Data & other regional data as of 10th Feb, BCG Henderson Institute analysis

4

3%

Context: 2019-nCoV seems to have comparatively low fatality rate but high contagiousness

Outbreak Period Spread Deaths

2019 nCoV 2019-China and 24

others9082

Swine Flu 2009-10 World-wide 150-300 K

SARS 2003-04China and 26

others800

Hong Kong Flu 1968-70 SEA, USA, Europe 1-4 Mn.

Asian Flu 1957-58China, USA,

Europe1-2 Mn.

Spanish Flu 1918-19 World-wide 25 Mn.

Fatality rate Contagiousness1

1. R0: Avg. # of people infected by each sick person at peak of disease (changes over time based on public health response) 2. Data updated as of 10 Feb. Source: Bridgewater Associates, National Health Commission China, American Journal of Epidemiology, US National Library of Medicine, BCG Henderson Institute analysis

10%

0.03%

10% 3.0

1.5

2.0

1%-2% (est.) 1.5-3.5 (est.)

~0.2%

~0.2%

2.0

1.8

5

Current status (2/10/20): Cautiously optimistic on 2019-nCoV if you dare to extrapolate trends…

444

2,618

2,000

0

1,000

3,000

4,000

9-

Feb

Daily number of new cases detected

4-

Feb

30-

Jan

23-

Jan

24-

Jan

29-

Jan

25-

Jan

1-

Feb

26-

Jan

28-

Jan

31-

Jan

2-

Feb

3-

Feb

5-

Feb

6-

Feb

7-

Feb

8-

Feb

Hubei

province

Non-Hubei China

Non-China52

3,062

27-

Jan

60

40

20

-20

0

80

160

30-

Jan

4-

Feb

9-

Feb

Change in new cases detected (2-day avg. %)

26-

Jan

25-

Jan

6-

Feb

27-

Jan

7-

Feb

28-

Jan

29-

Jan

5-

Feb

31-

Jan

1-

Feb

2-

Feb

3-

Feb

8-

Feb

Hubei province

All Non-Hubei

Hubei cases

slowed in last

2 daysWuhan

lockdown

announced

Non-Hubei cases

plateaued at

start of Feb.

TotalWHO declares health

emergency

Source: National Health Commission China, BCG Henderson Institute analysis

2/10 00:00 2/10 00:00

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Cautious optimism, not complacency

Despite cautious optimism, firms need to remain vigilant

and prepare for downside scenarios:

Elevated level of risk remains until vaccine is in hand

Current situation fragile, virus could spread to regions

with less capacity to respond forcefully

Re-acceleration possible, as happened in 1957-58 Asian

flu, with second wave more deadly than first

2019-nCoV a pattern of broader, multi-dimensional

risk landscape

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Start

(US)

Start

(HK)

Peak

(US)

Economy: High bar for virus to end an expansion, even when cycle vulnerable and epidemic is severe

Hong Kong flu (1968-69)

Epidemic U.S. cyclical tightness1 (unemployment rate, %)

1. We use US data for this analysis because the most granular historical economic data is available there 2. De-mobilization lead to rise in unemployment/recession in 1918 not shown hereSource: NBER, Bureau of Economic Analysis, WHO, BCG Henderson Institute analysis

1968

8

1962 1964 1966

4

1970

6

Spanish flu(1918-20)

U.S. cyclical narrative

Very long, tight expansion Vulnerable to exogenous

shocks, similar to today Hong Kong flu hits in 1968,

but didn't cause economic recession immediately

19201914 19191915 1916 1917 1918 19210

5

10 Spanish flu intersects with end

of WWI (1918) De-mobilization of war effort

primes economy for recession2

Yet, recession does not hit until 1920

Recessions

US WW I effort

Peak

(US)

RecessionsRecessions

8

Financial risk: Confidence shocks can transmit to real economy, but requires deep and sustained drawdown

5

450 650500 7006005500

10

15

HH savings rate (%)

HH Net Worth / Disposable income

2009-19 expansion:

Savings rate elevated

Source: NBER, BEA, Federal Reserve Board, BCG Henderson Institute analysis Financial shocks shrink household wealth…

…pushing up

the savings

rate/reducing

consumption

Transmission mechanism: Market

sell-off (confidence shock) can

transmit to real economy, as wealth

shrinks, savings rise, and consumption

drops

Higher bar: in the U.S. a sell-off

would need to be both deep and

sustained to feed through to real

economy

High savings rate: Current expansion

has seen high savings rate, suggesting

some household resilience to wealth

shocks

Savings rate currently high, suggesting some

household resilience to financial shocks

1

2

9

Sector impact: Relative clarity on current impact dimensions, downside scenario requires re-think

Revenue

risk

(demand)

Production risk (supply chain)

Pharma

Healthcare

providers

Electronics

manufacturer

Oil

producers

Airline

Automotive

Illustrative exposure in baseline scenario: Plateau/decline continues

Note: Illustrative examples of potential exposure; will vary by company

Illustrative Exposure in downside scenario: Outbreak intensifies

Upside

Downside

Gaming

industry

Revenue

risk

(demand)

Production risk (supply chain)

Pharma

Healthcare

providers

Electronics

manufacturer

Oil

producers

Airline

Automotive

Upside

Downside

Gaming

industry

?

?

?

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Coronavirus fits pattern of rising, intersecting risks

Institutional

Medical/human

…

EconomicUnknown

dimensions…Domestic

political economy repercussions

Multilateral

institutional cooperation

Growth

Markets

Uncertainty

Coronavirus

outbreak

Spectrum of elevated, intersecting risks:

Potentially

proliferating, multi-

dimensional risk

landscape

Need to build

resilience into

supply chains,

strategies

Tactically

(2019-nCoV) or

pre-emptively

(future threats)

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Hope for the best, prepare for the worst

What companies can do:

• Monitor leading indicators: trend of new cases,

change in contagion rate, spread to new locations

• Assess exposure by developing multiple scenarios

and identifying potential impact on your business

and operating models (as well as your suppliers' or

customers')

• Take or prepare specific resilience initiatives, e.g.

increasing supply chain adaptiveness, keeping

financial buffers, shrinking decision cycles

• Develop containment plans and clear

travel/mobility guidelines

• Leverage an opportunity to reevaluate broader

resilience and risk management strategies

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BCG are ready to support clients in these areas during this extraordinary period

Global health

Contingency planning &

crisis response

Strategy

Macroeconomics

Sector-specific responses

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