COVID-19 and the effects on Turkey Point of view April 2020 Executive summary COVID-19 facts and the global economic impact The COVID-19 pandemic has hundreds of thousands of confirmed cases, and it is spreading rapidly around the world. The outbreak has impacted the global economy, and GDP growth is projected to plummet. High-risk industries such as manufacturing; tourism, travel, and transportation; and retail have been struggling the most. COVID-19 has already had a negative impact on key industries in Turkey, including automotive, retail, and transportation. Going forward, we foresee three scenarios of the coronavirus impact on Turkey: The impact on Turkey’s economy – V-shape. Quick recovery (two to three months): 3–5% negative impact on GDP – U-shape. Recession (four to five months): 6–8% negative impact on GDP – L-shape. Downturn (more than nine months): 14–16% negative impact on GDP Most of Turkey’s trade partners are being impacted by the coronavirus, and supply chains will be drastically disrupted. A focus on five areas can minimize the impact of the global pandemic on your business: Building resilient businesses 2 – Employee management – Supply chain and planning – Cash, liquidity, and external management – Operations – Customer engagement Developing a customized survival plan can lessen the impact of the global pandemic on your business. Kearney XX/ID 1. COVID-19 facts and the global economic impact 2. The impact on Turkey’s economy 3. Building resilient businesses 3 Kearney XX/ID 1. COVID-19 facts and the global economic impact 4 Kearney XX/ID The COVID-19 pandemic has hundreds of thousands of confirmed cases, and it is spreading rapidly around the world. Comparison of COVID-19 to other diseases Key remarks Total number of countries the disease spread to Because of the reproduction rate of the virus and globalization, COVID-19 spread around the world, unlike many other diseases in the past. Scientists are unable to predict the end date of the pandemic, raising serious concerns in terms of health and the economy. 150+ 30 COVID-19 5 SARS 27 MERS 18 Influenza H1N11 10 Ebola 2x average 4% reproduction rate compared with the flu fatality rate 10x increase in 2 Notes: 1. Influenza H1N1 in 2009. 2. Number of deaths/number of confirmed cases as of March 20, 2020 Sources: World Health Organization, Johns Hopkins Medicine; Kearney analysis new cases outside of China over the past two weeks Kearney XX/ID Most countries have been affected by the pandemic, but some have taken a harder hit. COVID-19 geographic impact1 Italy, Spain, France, and Germany are among the countries experiencing the highest growth of new cases. China Cases are declining in China as a result of strict quarantines and hospital construction. United States Iran The United States has been struggling to test for the virus, which has delayed diagnosis. Iran is struggling to contain its outbreak, and the number of cases are rising rapidly. Outbreak 6 Europe Notes:1 As of March 20, 2020 Sources: International SOS; Kearney analysis Local transmission Imported cases only N/A Kearney XX/ID Global GDP growth is projected to drop significantly. Global economic growth slowdown GDP growth projections have been downgraded for almost every country, and more downgrades are expected. -20% 6.1 5.6 4.9 Manufacturing activity slowdown China’s PMI dropped to 40 points, and other economies are likely to follow a similar decline. 51.5 40.3 2.9 3.0 2.4 2.3 3.2 2.0 1.9 2019 Manufacturing and services are slowing down, and as a result, stock markets around the world are declining. China 7 Effects will be more visible outside of China in the upcoming months as the virus spread accelerated in March. 53.4 51.8 51.3 52.5 52.6 49.4 ? ? ? 51.8 26.5 United States Turkey Eurozone 2020 (old forecast) 2020 (new forecast) Stock market rout Major stock indices show a decline in the year-to-date view.1 -25.99% -29.28% BIST 100 S&P 500 -28.67% -29.53% Nikkei 225 Index STOXX Europe 600 1Note: China’s services PMI dropped to 26 points. Other economies are likely to follow a similar decline. 1.2 1.3 0.8 China United States Turkey Eurozone Jan Feb Mar China United States Turkey Eurozone Jan Feb Mar Lowering government bond yields The 10-year government bond yields of major economies have declined. (%) Major drop in China’s projected GDP, manufacturing, and services PMI Effects will be more visible outside of China in the upcoming months as the virus spread accelerated in March. 51.9 50.7 51.3 52.4 49.2 ? 47.9 ? ? 2.7 0.9 World Services activity slowdown 12.0 13.0 3.2 2.7 Turkey 1. As of March 20, 2020 Note: PMI is Purchasing Managers Index. Sources: OECD, Moody’s, Istanbul Chamber of Industry, Kearney analysis China 1.9 1.0 0.8 0.5 United States 1-Jan-20 United Kingdom 20-Mar-20 Kearney XX/ID Automotive A variety of highrisk industries have been struggling the most. Even though China is slowly getting back to work, the automotive industry is still at less than 50 percent of its pre-virus production rates. China, one of the largest automotive markets, saw an 80% sales drop in February. Many original equipment manufacturers, including Fiat Chrysler Automobiles, PSA Group, Renault Group, and Volkswagen, have temporarily shut down their factories in Europe. Retail Heading Sub-heading Text level – First bullet level – Second bullet level Foot traffic to US retail stores decreased 31% in mid-March compared with last year. Industry experts are expecting 15,000 US stores to go out of business this year. In China, retail has been one of the hardest hit sectors as stores of all sizes have been empty or closed. Kearney estimates indicate that retailers in China will lose $213 billion to $426 billion in the first quarter of 2020 alone. Tourism, travel, and transportation 8 Source: Desktop search, Kearney analysis Tourism and travel is one of the world’s most severely hit industries: – The global hotel chain Marriott has said it has seen a 75% drop in revenue in most locations around the world. The world’s biggest airlines are all facing huge drops in revenue as a result of international travel bans: – Europe’s biggest low-cost carrier, Ryanair, announced it will reduce seat capacity by 80% for April and May. Kearney XX/ID The impact on Turkey’s economy 9 Kearney XX/ID As cases of COVID-19 have started to increase in Turkey, precautions and safety measures have been strengthened. Turkey has imposed travel bans on 68 countries, including China, South Korea, Iran, Iraq, All schools in Turkey have been suspended, and distance education has started via Italy, Germany, France, Spain, Norway, Denmark, Belgium, Austria, Sweden, Netherlands, the United Kingdom, Switzerland, Saudi Arabia, Egypt, Ireland, and the United Arab Emirates. online channels and TV. Additionally, all gathering places such as cafes, cinemas, theaters, and gyms Turkey decided to quarantine all passengers returning from the countries with the travel ban for 14 days and have already quarantined 10,330 people COVID-19 test labs have increased from 4 to 16 for fast diagnosis of potential cases. have stopped their business activities. that returned from Umrah. Citizens who are older than 65 and suffer from a chronic illnesses have been restricted from leaving home. Restrictions also include walking in open areas such as parks and gardens. 10 “Pandemic hospitals” are extended to private hospitals and are required to dedicate several wards and ICUs for patients who have COVID19. Note: As of March 22, 2020 Source: Kearney analysis Kearney XX/ID COVID-19 has already had a negative impact on key industries in Turkey. Ford Otosan announced it will suspend production in its Kocaeli Gölcük factory. Toyota announced it will suspend production After Turkey imposed travel bans on 68 countries, including some of its most important markets, the country’s aviation sector is expected to experience a $5 billion drop in its Sakarya factory for two weeks. in revenue in 2020. Hyundai announced it was unable to start Many tourism reservations have been cancelled, and hotel occupancy rates have dropped below 30% in some areas. producing i20s because the expert technicians from South Korea were unable to come to Turkey. With consumers avoiding leaving home, visits to shopping malls have decreased more than 50%, and many malls have been forced to shut down. Leading Turkish and international brands have stopped their brick-and-mortar operations across the country. 11 Sources: TÖSHİD; Kearney Source: Desktop search, Kearneyanalysis Kearney XX/ID To minimize the impact of the virus, Turkey is launching fiscal and monetary stimulus packages. Turkey has announced a 100 billion TL stimulus package with 19 action items Turkey’s central bank has decreased reference interest rate by 100 bps Major action items include the following: The one-week repo rate has been discounted from 10.75% to 9.75%. – The Credit Guarantee Fund (KGF) loan limit has been increased from 25 billion TL to 50 billion TL. – Principal and interest rate payments of bank loans for impacted firms have been delayed for three months. – Exporter companies can get inventory financing support to tackle slowing exports. The central bank is ensuring it will meet all liquidity requirements for banks. The central bank will begin additional threemonth maturity repo tenders. Required reserve ratios have been decreased by 5% for foreign-denominated reserves. – The minimum pension level was increased to 1500 TL. – Financing support is available for households in need. 12 Source: Kearney analysis Kearney XX/ID Looking ahead, we see three possible scenarios for the coronavirus impact on Turkey. V-shape: quick recovery V The virus is contained across Turkey’s major economies and trade partners within the next few months. A negative impact of the virus lasts from mid-March until the end of May. Disturbance to business is mild. 2–3 months U-shape: recession U Containment of the virus is largely unsynchronized initially, with strict cooperation among countries from the middle of the second quarter of 2020. The negative impact of the virus lasts from mid-March until mid-July. The disturbance to business is real but manageable. L-shape: downturn L Containment of the virus is largely unsynchronized. The negative impact of the virus lasts from mid-March at least until the end of 2020. Disturbance to business is real, and economic prospects remain pessimistic. 4–5 months More than 9 months 13 Source: Kearney analysis Kearney XX/ID In our baseline scenario of a moderate recession, we predict a 6 to 8% negative effect on Turkey’s GDP. 14 V U L Quick recovery Annual GDP converges to last year’s performance. Most industries rebound starting in June. Travel and tourism industries are severely hit but rebound during the second half of the year for a mild recovery. There is a lagged consumption boom in the second half of 2020. 3–5% negative impact on GDP Recession Annual GDP is moderately below 2019. Some industries struggle to recover in the second half of 2020. Travel and tourism industries slowly recover in the fourth quarter, but a strong stimulus is required. Small industrial players are severely hit. Cash-flow management in all players is a hot topic. Consumption is weak across durable and semi-durable goods. 6–8% negative impact on GDP Downturn Annual GDP is significantly below 2019. Most industries struggle to recover in the second half of 2020. Travel and tourism industries are on the brink of collapse. All industrial players are severely hit. Bankruptcies roll out. Consumption is concentrated on basic goods. 14–16% negative impact on GDP Kearney XX/ID Critical industries are expected to be severely impacted by the COVID-19 outbreak. Automotive Tourism, travel, and transportation Construction Retail Textiles and garments manufacturing Domestic car sales plummeted last year and were expected to rebound in 2020. However, with the expected shift in consumption to nondurable goods, the chance of growth is low. With significant restrictions for nonessential travel globally, the halt of flights to more than 68 countries, and reservation cancellations, the tourism industry is being severely hit with a low chance of a rebound, at least until the middle of the third quarter of 2020. Private projects are expected to slow down, which will create significant cash-flow bottlenecks to the construction industry as most work is done through progress billings. Durable and semidurable goods are expected to be more severely hit than nondurable goods. Domestic garment sales will be severely hit as a result of the halt in brick-and-mortar sales. Major retail players in apparel have already halted their brick-andmortar channels, which will severely impact shopping malls. International sales will be severely hit with order cancellations that already started in midFebruary. Automotive and original equipment manufacturer sales have a large concentration to exports, where the European Union has a 70% share. With an outbreak in major EU economies, automotive exports are expected to plummet. 15 Passenger travel will be severely affected both domestically and internationally. Public projects are expected to see a milder impact. However, because of the potential redirection of public institutions’ budgets, a slow-down is inevitable. The shift to online sales will accelerate with most players increasing their capabilities and online infrastructure. More than 70% of garment production and more than 50% of textile production are targeted to export markets, where Europe is the largest buyer. The effect on cargo is expected to be milder since there have been no restrictions to cargo movements. Source: Kearney analysis Kearney XX/ID Outbreak. There are more than 1,000 cases, locally acquired cases in many areas, and many exported cases. Local transmission. Cases have been acquired in the country, and some may have no known links to confirmed cases. 52.8% of total exports 7% United Arab Emirates $4.3 bn United Kingdom $5.4 bn South Korea $5.6 bn France $6.4 bn India $6.6 bn $8.6 bn Italy $11.2 bn United States $18.0 bn Germany Local transmission Europe (excluding EU-27 and the United Kingdom) Europe (excluding EU-27 and the United Kingdom) North Africa 7% 6% Middle East and Caucasus Outbreak 19% Imported only Turkey’s import composition (2019, $ billion) Turkey’s export composition (2019, $ billion) Remaining Asia $18.5 bn $7.6 bn France Imported only Russian Federation $7.7 bn Spain Romania $3.9 bn $8.1 bn United States Israel $4.4 bn $9.0 bn Iraq Netherlands $5.4 bn $9.3 bn Local transmission China Outbreak Italy $10.9 bn United Kingdom $15.4 bn of total exports $22.5 bn 47.5% Germany Most of Turkey’s trade partners are impacted by the coronavirus, and supply chains will be highly disrupted. Turkey’s top 10 export partners are affected by the outbreak in varying degrees 15% North America 5% Middle East and Caucasus 8% North America 6% 7% Others 23% 171.5 202.7 14% Others Remaining Asia 16 49% EU-27 and the United Kingdom Sources: International SOS, TÜİK; Kearney analysis 34% Kearney XX/ID EU-27 and the United Kingdom Consumption will be hit by a massive blow to tourism and restrictive domestic activity. At least 60% of household consumption segments are under significant pressure Housing, rent Leisure and shopping make up the majority of inbound tourists, which is non-essential travel 24% Food, non-alcoholic beverages Transportation Restaurant, hotels Furniture, house appliances Clothing, footwear Other Downside pressure 20% 10% 18% Family visit 7% 19% 6% 5% Alcoholic beverages, tobacco 44 million inbound tourists1 71% 4% Leisure and shopping 16% Others Total household consumptıon 100% Consumer confidence has not been severely hit but is weak The tourism industry makes up a significant portion of the economy, and any disruption will hurt growth Consumer confidence index (January 2018 = 100) Ratio of tourism income to exports (%) Ratio of tourism income to GDP (%) 105 1Note: 1.Excluding accompanying persons Sources: TÜİK,TÜRSAB; Kearney analysis 20.1% 1% 0% 2019 17.5% 2018 2017 16.7% 2015 2014 12% 2016 15.5% 21.9% 21.8% 16% 21.3% 2% 19.2% 20% 2013 17 3% 2012 70 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 75 24% 20.8% 80 4% 2011 85 28% 21.9% 90 5% 2010 95 32% Kearney XX/ID Ratio of tourism income to GDP (%) Ratio of tourism income to exports (%) 100 The share of investment in GDP was 25% in 2019 Total investment (% of GDP) Foreign direct investment, net inflows (% of GDP) Foreign direct investment, net inflows (current $) $40bn 32% 2.5% $35bn 30% 2.0% $30bn 28% $25bn 1.5% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $8.4bn $13.1bn $19.3bn $11.5bn $0bn 1.0% $14.0bn 20% $13.3bn $5bn $13.6bn $10bn 22% $13.7bn $15bn 24% $16.2bn $20bn 26% $9.1bn Investment is a crucial part of GDP, and FDI in 2020 will be severely affected as international investments are expected to slow down globally. Foreign direct investments are poised to drop below 2019 levels 0.5% 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 18 Note: FDI is foreign direct investment. Sources: TÜİK, TCMB; Kearney analysis Kearney XX/ID Building resilient businesses 19 Kearney XX/ID Focusing on five areas can minimize the impact of the global pandemic on your business. Employee management 1 Build a dedicated committee, and give employees clear direction and reliable information to alleviate pandemic-related stress. Review the organization’s policies, and involve relevant partners to ensure appropriate, applicable, and flexible plans. Cash, liquidity, and external management 4 Stabilize cash flows to ensure enough liquidity. Ensure continuous and transparent communication to all external stakeholders. Supply chain and planning 2 Diversify the supply chain to reduce the risk of a supply shortage. Re-evaluate inventory and safety stock levels to increase buffers and maintain service levels. Customer engagement Operations 3 Identify points of lower utilization, and prioritize supporting activities, such as educational activities and annual or regular maintenance. Keep operations at a minimum while retaining the agility to ramp up quickly. 5 Establish a transparent communication line for B2B and B2C customers. Reconsider marketing and sales channels with a potential shift to online. 20 Note: B2B is business to business; B2C is business to consumer. Source: Kearney analysis Kearney XX/ID We have identified key actions in each focus area (1/3). 1 2 Employee management Supply chain and planning 1. Employee management Create a committee, a single point of coordination between HR, C-level executives, senior leaders, and representatives to formulate a centralized response, ensure consistent messaging, and quickly develop a solid plan Assign HR as the organizational source of truth to headquarter communications in one trusted place and provide consistent messaging for e.g. changes in working hours, communication of work-from-home policy Review your organization’s policies (sick leave, vacation, customer visits, meetings, travel), and consider allowing negative sick leave balance, not counting sick days used during the crisis, allowing employees to take care of dependents Provide support in setting up the infrastructure to work from home 3 Companies have already started establishing a dedicated committee, providing clear direction, reliable information, and a transparent response to alleviate pandemic-related stress 4 Provide educational content for prevention, e.g. informing employees on simple tips, important global news Follow guidelines from global authorities (e.g. WHO) Cash, liquidity, and external management Involve partners (health and life insurance, international SOS, emergency evacuation partners) to ensure appropriate, applicable, and flexible plans for emergency situations Boost morale of employees with ongoing communication and virtual video check-in calls Real-life examples – About half of companies in the US have taken measures to handle the crisis: 5 21 Operations – Temporary remote working (46%) Customer engagement – Travel restrictions and mandatory virtual meetings (55%) – Postponed international conferences (47%) Sources: Dun & Bradstreet, Willis Watson; Kearney Kearney XX/ID We have identified key actions in each focus area (2/3). 1 Employee management 2. Supply chain and planning Develop models to test scenarios on what will happen on the ground and identify areas of shortage, and develop “sense and pivot” capability accordingly Identify the effects on transportation networks and pre-book logistics capacity Build a network of alternative suppliers, prioritizing potential areas of shortage 2 Supply chain and planning Diversify the supply chain, identify points of single sourcing in the supply chain and evaluate multiple sourcing to reduce the risk of supply shortage Incur necessary expenditures to secure alternative sources and expedited shipping Consider nearshoring, focusing primarily on shorter supply chains 938 of the Fortune 1000 companies have a tier 1 or 2 supplier already affected by the virus 3 Operations 4 Cash, liquidity, and external management Maintain a real-time full view of product inventory across delivery channels Continuously review demand forecasts, identifying challenges and addressing corresponding news updates 2. Supply Chain & Planning Reallocate inventory across sales channels to address fluctuating demand, and ‒… consider radical shifts toward e-commerce and home delivery Re-evaluate inventory and safety stock levels to increase buffers and maintain service levels in the crisis period for customer satisfaction and competitive differentiation Identify business-critical suppliers and extend financial support if possible Real-life examples 5 22 Customer engagement – Food Retailer Association (GPD) in Turkey increased the inventory levels especially for hygiene and personal care to prevent stock outs Source: Kearney Kearney XX/ID We have identified key actions in each focus area (3/3). Global companies started keeping operations at minimum while retaining the capacity to ramp up. Turkish retail companies started providing updates regarding their sales channels 1 Employee management 2 Supply chain and planning 3 Operations 4 Cash, liquidity, and external management 5 Customer engagement 23 Source: Kearney 3. Operations Keep operations at a minimum, while retaining the capacity and agility to ramp up quickly once the situation begins to resolve Identify points of lower utilization, prioritize supporting activities (e.g. educational activities, maintenance) Shift capacity/resource allocations to emerging product lines or services Real-life examples 4. Cash, liquidity, and external management Assess risk exposure regarding financial implications and additional financing need Stabilize cash flows to ensure enough liquidity, e.g. hiring freeze, opex, capex, working capital Ensure continuous and transparent communication to external stakeholders Real-life examples 5. Customer engagement Establish transparent communication line for B2B and B2C customers Provide fact-based reports to communicate the situation and set proper expectations for customers Reconsider marketing channels, and avoid freezing all marketing activities; lean in to online Conduct investigation on core customer segments to anticipate customer behavior Real-life examples Major automotive manufacturers in Turkey partially shut down operations (e.g. Ford, Toyota, Honda, Temsa) Although all major companies are focused on increasing liquid assets during the crisis period, a potential gap exists for many companies including Ak Enerji, Carrefoursa with cash debt ratio <20% Major airlines including Turkish Airlines and Pegasus established communication line to provide regular announcements to update customers Kearney XX/ID Four steps can help you develop a customized survival plan to lessen the impact of the global pandemic on your business. Assess industry strength The impact significantly differs depending on the industry: – Assess the impact on the company’s industry to take appropriate measures. – Conduct competitive analysis with a focus on operations. – Leverage automation features to minimize personal contact. – Identify labor-intensive operations, and develop alternative scenarios. Evaluate supply chains The transportation and logistics industry is feeling the epidemic on a massive scale: – Maintain full visibility in the entire supply chain. – Evaluate suppliers, and identify potential points for shortages. – Identify diversification and nearshoring opportunities. – Re-evaluate inventory and allocation across channels. Review business forecasts Revising business plans and strategy is mandatory. Existing plans are now inapplicable: – Anticipate changes in demand for different segments. Develop a survival plan The repercussions are expected to be felt for more than a year: – Establish a detailed and flexible survival plan focusing on required investments and personnel. – Identify emerging segments. – Develop a scenariobased business forecast for the next three to 12 months. 24 Source: Kearney analysis Kearney XX/ID Thank you Sean Wheeler Partner firstname.lastname@example.org +90 530 234 1051 Istanbul, Turkey Onur Okutur Principal email@example.com +90 530 234 1060 Istanbul, Turkey Coşay Kaçar Associate firstname.lastname@example.org +90 530 688 9128 Istanbul, Turkey With the contribution of: Ulvi Abdullazada Idil Sezal Can Yücel Stay connected with Kearney This document is exclusively intended for selected client employees. Distribution, quotations and duplications – even in the form of extracts – for third parties is only permitted upon prior written consent of Kearney. 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