The coronavirus epidemic, which originated in China last December, is spreading rapidly across the globe threatening both human lives and economic growth. Following a week-long rout at the end of February, stocks lost some 10% of their value in global markets, prompting media outlets to call this the “worst week since the 2008 crisis.”
As the world reels under the shock, what role can companies play in leading the recovery from such disasters? Knowledge at Wharton discussed this question with Wharton management professors Michael Useem and Tyler Wry as well as George Washington University’s Luis Ballesteros. Their research indicates that corporations can play a positive role in the recovery from disasters like the coronavirus epidemic. The reason is that companies can react faster than traditional relief providers such as governments, multilateral agencies and non-governmental organizations.
An edited transcript of the interview appears below. (Listen to the podcast at the top of this page.)
Knowledge at Wharton: Your research is very topical in view of the coronavirus contagion. What is your assessment of the disaster? Is this something you see as being short-lived or will it require a longer recovery process?
Luis Ballesteros: We recently completed a study on several types of disruptions, including pandemics, and their economic consequences for business organizations.
What is potentially damaging for companies in the case of the coronavirus is the reliance on China. Arguably, the internationalization of business in the last 20 years has been highly driven by the role of China and the role of technology. If you consider what China was in 2002-2003, when we had the last big pandemic, China’s share of global GDP at the time was around 4%. Now, that same number is close to 20%. That tells you the dependence that the global economy has on China, and the importance it has for not only large companies that are located in Wuhan city [from where the virus originated], but also small- and medium-sized enterprises that are able to compete at a global level because they have been outsourcing their production to China to achieve a lower labor cost.
The situation is still evolving; no one knows what is going to happen. Some large companies like Apple and the car companies located in Wuhan have reduced their annual growth estimates. Small and medium enterprises are likely to suffer the most from this shock. There are estimates coming from China that around 97% of small and medium Chinese enterprises may be financially hit by the virus. We know from our research that around 75% of them might be out of market if they do not get back to operate within three weeks, simply because they are going to run out of cash.
Other estimates suggest that the virus could make the global economy lose over $1 trillion in income. This is an evolving situation, and the fact that the business organizations have been highly affected has driven their response.
“The fact that the emergency is assessed by business organizations faster than governments is really important because the ultimate cost of the shock depends on what happens during the first weeks.” –– Luis Ballesteros
Tyler Wry: I think Luis hit it on the head. The big challenge that comes from something like this is the disruption to companies that have ties with China. And because the global economy is so intertwined, this has huge implications for global supply chains and especially for small- and medium-sized enterprises that rely on these to be competitive, both in domestic and global markets. In terms of what the overall effects of this virus are going to be, I think it’s still an open question. It’s probably going to lead to some firms failing. Larger firms will be able to absorb the hit, but how disruptive this becomes, how long-term the consequences are, and what the recovery period looks like – all that will depend on how long it takes to get this under control.
If we look at previous pandemics — SARS, MERS, other coronaviruses — this will come to an end. A vaccine will be developed. It will be brought under control, and things will get back to normal until the next disruption. But if this ends up being something that takes a while because of the specifics of this disease and how communicable it is, it could create bigger challenges than some others have.
Michael Useem: To put that into perspective, SARS, back in 2002-2003 is estimated to have knocked about 1% out of the annual growth of the Chinese GDP. We’ve already heard Luis mention that maybe worldwide it could be at least a couple of points and even more. That’s a way of saying that this is a crisis of a magnitude potentially that exceeds anything that we’ve seen in recent years.
That said, what’s especially interesting to us is the fact that companies now [realize], appreciating the kinds of numbers we’re looking at, that they have to become involved in several ways. On the more — let’s call it the “reactive” side — companies we know from direct contact are now spending a lot of time thinking about the impact on their employees, especially if they have operations in China. Like Apple, for instance, where the suppliers are in China.
The first concern, of course, is the health of the employees, and many companies now are making a lot of phone calls to make certain that’s the primary agenda. Then there are all these, call them “very important” — not even secondary — very important, though second-concern agendas — of making payroll, of getting parts for auto-making even in Korea, which has been affected directly by its part suppliers around Wuhan.
And third, many companies now are beginning to think about what they can do more proactively to help China, to stop the epidemic spread. So makers of medical equipment, as happened in the case of Ebola in West Africa, are mobilizing to contribute equipment and expertise. For us, that’s one of the new developments of the last 15 years, where companies worldwide quickly work to defend their own self-interests and concerns, obviously the health of their employees among those, but they are increasingly playing an active role on the global stage in providing equipment, supplies, expertise and beyond.
Knowledge at Wharton: We have here a natural link to your research, in terms of how companies respond to lead the recovery process. Could you talk about your study and some of the key findings?
Wry: What makes a case like this interesting is that it’s different from other types of natural disasters, where you have some sort of destruction of physical infrastructure. When you look at earthquakes, hurricanes, floods, a lot of the corporate response is, “Okay, how can we quickly get in to restore market function?” You know, build the infrastructure back up, get markets working again, and get back to business as usual.
There is a really interesting question about what the corporate response looks like in a context like this, where the human suffering is not as acute or on the same sort of scale as the rapid-onset natural disaster. As Mike was saying, companies are coming in to lend support, logistics and expertise to aid in the recovery. I think that is going to happen because there is interest in getting things back up and running and doing everything that companies can to minimize the amount of disruption this is going to cause. What does that looks like in this specific context? I’m not sure.
“We know from our research that if companies get involved faster it tends to have a positive effect on recovery.” –– Tyler Wry
Ballesteros: That’s an important point. This is a specific type of disruption that is evolving. That complicates the response and changes the potential effect of aid coming from traditional sources like governments and multilateral agencies, but also private companies. But what is interesting, and basically fits what Tyler, Mike, and I have been studying, is the rapid response by business organizations. This space is much faster than whatever response comes from traditional actors. This is basically at the center of what we think is the factor explaining the effect of why countries that receive a substantial amount of aid from multinational enterprises recover faster. The fact that the emergency is assessed by business organizations faster than governments is really important because the ultimate cost of the shock depends on what happens during the first weeks.
If you saw what happened with the coronavirus, it’s precisely what we have seen in so many other cases, especially in natural disasters. There was the traditional period of assessment by the World Health Organization in trying to understand whether or not this should be a global public-health emergency. It took time for them to ring the bell and when they called an emergency, reports suggest that they did not have an accurate appreciation of the Chinese efforts to manage the disruption. We saw, for instance, a huge spike in the number of victims that happened in just one day. The reason for that is that we know now that there was an undercounting of the magnitude of the crisis. This has a lot of implications for funding that comes from abroad, and especially funding that comes from traditional sources, such as the OECD and national governments. The activation of the traditional system relies on the formal declarations of emergency.
So there’s a lot of uncertainty among sources of emergency aid. On the other hand, you see cases of multinational enterprises that have local operations in Wuhan that were responding before any formal declaration of emergency; helping their employees just a few days after the first news of the crisis. It took several days for traditional responders to come to the area.
Useem: Every crisis of this magnitude often feels like, well, this is an event we haven’t dealt with before — which is partly true. This is, in a sense, as unique as the Fukushima disaster after the tsunami in Japan back in 2011. Who would have ever anticipated that those nuclear power plants located at Fukushima would be close to full meltdown? But that did happen. And with the coronavirus now, I think nobody truly anticipated it would break out with the scale that it has displayed.
That said, we’re in a different era now than we were 20 years ago. Companies have accepted the norm that a company of any magnitude, regardless of country, when a new crisis of this magnitude comes along, they have to step forward, first of all to ensure employee safety, and secondly to get the business operating. Call it “resilience.”
The third and really interesting avenue that we’ve been tracking is that since the relief coming from governments, the World Bank, United Nations and NGOs no longer matches the need for support, for supplies, for face masks in the case of China, companies are increasingly stepping forward. This is because of the norm that if you are a company or a human, in a crisis like this you have to do something that goes beyond your own immediate self-interest. So what’s remarkable, and we’re going to see more of this in China I think, is you’re going to see companies probably still in the germination stage in executive thinking, saying, “What can we do, not bottom line, not getting our supply chains going again — but what can we do to help China and the people of Wuhan dig out of the disaster that they’ve encountered?”
Knowledge at Wharton: What are some of the most important lessons that can be learned — from past disasters and the way companies responded to them — that could help people today in dealing with the coronavirus crisis?
Ballesteros: The elements that we observed in the different studies that we have worked on are related to the capacities that business organizations have in normal market operations that are used during the responses to these grand challenges. There are two ways business organizations normally respond — one is donating cash and the other is donating in-kind resources.
In-kind resources might be related with a company sending their engineers to the affected area to use their skills to orchestrate a response. You have companies like DHL that have played a central role in logistics, in navigating the delivery of disaster goods to the affected area, coordinating with national governments, in airports, to deliver to the victims.
Coca-Cola, during the tsunami of 2004, transformed the bottling line to produce water and used their own trucks to deliver to the victims. So what Tyler, Mike, and I observed is that the effect of the response by multinational enterprises is the highest. The reason is that the response builds on the core competencies and skills that companies have in the markets they serve.
“If you are absent from the field when there is a crisis, and you could have done something, people are relatively unforgiving of those that sat on their hands during a tough moment.” –– Michael Useem
When that happens, there are many things that are important. One, for the organization it’s less costly to respond, because it’s tapping into its own resources. On the other hand, the efficiency is higher because there is this particular set of abilities and resources that the company has, that no other entity has — and those are used during the response. With the coronavirus, for instance, you have technology companies donating equipment to build a new field hospital in Wuhan. Auto companies coordinating with emergency teams on the ground in the area to try to help the victims, and especially their employees, fits this narrative. We cannot actually measure what’s going to be the impact of that, but if we can extrapolate any lesson from our previous research, it’s precisely that. What we’re seeing is a coordinated effort by business organizations, especially those organizations whose supply chains rely on China. And when that response taps into their core competencies and market activity, it is a win-win situation for the firms and for the affected communities.
Wry: One of the really interesting things about a case like this with the coronavirus is it raises the question of what the companies do when a disaster is in the process of unfolding. When you have a discrete event, the efforts become much more around recovery. But when there is something that is unfolding, and it is something that might fall a little bit outside of the core competencies that businesses have, what is their role in helping to deal with this? Obviously they’re motivated. And we know from our research that if companies get involved faster it tends to have a positive effect on recovery. But how can companies learn from previous instances where there have been pandemics, epidemics — both in China and in different parts of the world? What are the mechanisms that can increase the learning and the effectiveness and the coordination of these collective corporate responses and how can they best work with other players who are on the ground and have the main expertise in epidemiology, immunology and the domains that are going to be really important for getting this under control?
I think that this is an area for future research. We certainly have some interesting suggestions that companies can, should, and do play a role here. But in terms of what are the lessons that you take? How do we ensure that learning takes root and companies become progressively more effective in dealing with these things? I think we’re still looking for the answers.
Useem: Here’s a final thought building on what’s just been said. A belief, a norm, a kind of an almost world culture in business has now emerged, that companies should be engaged — not just with delivery and shareholder value — but helping governments develop policy. When a company has a unique position of being present in a country, or having a supply chain that’s able to divert its resources in a different direction, as that understanding has developed, companies, just like humans, have to be involved. Sitting in a company office or a university office, for that matter, we ought to be asking: “What can we do to help contribute in our own way — goods, supplies, expertise, money — to help solve the problem?”
We have found in several instances, building now from experience and not from research — but I think it’s going to be a research-supported proposition, too – that if you are absent from the field when there is a crisis, and you could have done something, people are relatively unforgiving of those who sat on their hands during a tough moment.
For example, we tracked one bank during the Fukushima crisis in Japan after the tsunami in 2011. It was on the verge of withdrawing its 1,000 employees from Tokyo. It had a huge presence. It’s one of the world’s great banks. It opted to stay the course, to not evacuate when others were. And to this day, the government of Japan is thankful to the company for taking this stand. It’s a judgment call on how that is done, of course. It has to be exquisitely exercised. But the bigger point, I think, from our research is that as companies, as universities, we have to get involved when there’s a crisis of this magnitude.