3/12/2020 Relationships between Accounting Performance and Promotions 0

March 11, 2020

Kristen Jaconi,

Associate Professor of the Practice in Accounting

Director, Risk Management Program

Leventhal School of Accounting

Coronavirus: A Black Swan?

What Is a Black Swan?

• Outlier

• Extreme impact

• Retrospective predictability

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What Is Giving Wings to the Black Swan?

• Reproductive Number or R0

– SARS vs. COVID-19

• Interconnectedness

– Apple, Armani, and Acetaminophen

• Risks, Responses, Risks of Responses:

– Hand Hygiene and Respiratory Etiquette

– Social Distancing

• Quarantines and lockdowns

• Cancellations and closures

• Working remotely

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How Do SARS and COVID-19 Compare?

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Breaking News: It’s a Pandemic

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What Is R0?

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Apple’s Supply Chain ….

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• Apple’s Seventh Risk Factor (2019)

The Company depends on component and product manufacturing and logistical services provided by outsourcing partners, many of which are located outside of the U.S.

Substantially all of the Company’s manufacturing is performed in whole or in part by outsourcing partners located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations…The Company relies on single-source outsourcing partners in the U.S., Asia and Europe to supply and manufacture many components, and on outsourcing partners primarily located in Asia, for final assembly of substantially all of the Company’s hardware products. Any failure of these partners to perform can have a negative impact on the Company’s cost or supply of components or finished goods. In addition, manufacturing or logistics in these locations or transit to final destinations can be disrupted for a variety of reasons including, but not limited to…public health or political issues...

Source: Apple’s Annual Report on Form 10-K

Apple’s Supply Chain ….

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• Apple’s Second Risk Factor (2003)

War, terrorism or public health issues could disrupt supply, delivery or demand of products which could negatively affect the Company's operations and performance.

…The Company and some of its manufacturing vendors and component suppliers

have significant operations in various locations throughout Asia, including locations in mainland China, the Hong Kong Special Administrative Region, and Singapore, all of which were subject to the World Health Organization and Centers for Disease Control and Prevention severe acute respiratory syndrome (SARS) travel advisories at times during the second and third quarters of fiscal 2003…Should the severity of the SARs threat increase or other public health issues arise, the Company could be negatively impacted by the need for more stringent employee travel restrictions, additional limitations in the availability of freight services, governmental actions limiting the movement of products between various regions, delays in production ramps of new products, and disruptions in the

operations of the Company's manufacturing vendors and component suppliers.

Source: Apple’s Annual Report on Form 10-K

…and Apple’s Consumers (2019)

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2019 2018 2017

Net sales (millions):

U.S. 102,266 98,061 84,339

China 43,678 51,942 44,764

Other countries 114,230 115,592 100,131

Total net sales 260,174 265,595 229,234

Source: Apple’s Annual Report on Form 10-K

…and Apple’s Consumers (2003)

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2003 2002 2001

Net sales (millions):

U.S. 3,627 3,272 2,936

Japan 698 710 713

Other foreign countries 1,882 1,760 1,714

Total net sales 6,207 5,742 5,363

Source: Apple’s Annual Report on Form 10-K

Luxury Goods, the Tourist…

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Luxury Goods, the Tourist…

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…and the Supply Chain

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• Many Italian and French luxury brands continue to do most of their manufacturing in their home countries

Pharmaceutical Supply Chain: India & China

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• Ninety percent of factories making active pharmaceutical ingredients for the U.S. market are located outside U.S. and 60% manufacturing the final product are outside U.S.

• FDA announced in early March that a drug manufacturer alerted the FDA of a drug shortage due to COVID-19

• Since January, FDA has communicated with over 180 drug manufacturers about potential supply disruptions

• India announced last week it would limit exports of 26 drugs or drug ingredients, including several antibiotics and acetaminophen, so it would have a sufficient supply for its domestic population• India, which supplies 40% of U.S. generic drugs, relies on China for

nearly 70% of its active pharmaceutical ingredients

What Risks, Responses, Risks of Responses?

• Hand Hygiene and Respiratory Etiquette• Social Distancing– Quarantines and lockdowns

• China, first in city of Wuhan, then all of Hubei province, 60 million • Italy—17 million in Milan, Venice, Parma, and other towns first, now

the whole country

– Cancellations and closures • Sports (e.g., BNP Paribas Open, Golden State Warriors vs. Brooklyn

Net)• Festivals, concerts, cultural institutions (e.g., Coachella, South by

Southwest, Ultra)• Conferences (e.g., Game Developers Conference, Facebook’s F8

Developers Conference) • Schools (e.g., Italy, University of Washington, USC, UCLA)

– Working remotely• Amazon, Facebook, Microsoft, Salesforce, Twitter

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Will the U.S. Look Like This in April?

Coronavirus from Space

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Coronavirus: A Black Swan?

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Source of Images on cover page and this slide: WHO image of COVID-19: https://www.who.int/csr/sars/coronavirus/en/; Black swan from cover of Nassim Taleb’s The Bllack Swan

Sources• Apple Computer, Inc. (2003, December 19). Annual Report on Form 10-K. Retrieved from:

https://www.sec.gov/Archives/edgar/data/320193/000104746903041604/a2124888z10-k.htm.

• Apple, Inc. (2019, October 31). Annual Report on Form 10-K. Retrieved from: https://www.sec.gov/ix?doc=/Archives/edgar/data/320193/000032019319000119/a10-k20199282019.htm.

• Belluz, J. (2020, March 5). Why there’s still no single, accurate coronavirus death rate. Vox.com. Retrieved from: https://www.vox.com/2020/3/5/21165973/coronavirus-death-rate-explained.

• Chatterhee, P. (2020, February 29). Indian pharma threatened by COVID-19 shutdowns in China. Lancet. Retrieved from: https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)30459-1/fulltext.

• Del Rio, C. and Malani, P.N. (2020, February 5). 2019 Novel Coronavirus—Important Information for Clinicians, Journal of the American Medical Association. Retrieved from: https://jamanetwork.com/journals/jama/fullarticle/2760782.

• Gorman, J. (2020, March 6). Coronavirus by the Numbers. The New York Times. Retrieved from: https://www.nytimes.com/2020/03/05/health/coronavirus-deaths-rates.html.

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Sources• Haren, P. and Simchi-Levi, D. (2020, February 28). How Coronavirus Could Impact the

Global Supply Chain by Mid-March. Harvard Business Review. Retrieved from: https://hbr.org/2020/02/how-coronavirus-could-impact-the-global-supply-chain-by-mid-march?ab=hero-subleft-1.

• Hayat, R. (2020, January 29). Economic implications of the coronavirus. Raboresearch. Retrieved from: https://economics.rabobank.com/publications/2020/january/economic-implications-of-the-coronavirus/.

• IHS Markit (2020, February 18). Impact of COVID-19 on the Chinese and global economy. Retrieved from: https://ihsmarkit.com/research-analysis/impact-of-covid19-on-the-chinese-and-global-economy.html.

• Kirby, J. (2020, March 9). Could the coronavirus spark drug shortages in the US? Vox.com. Retrieved from: https://www.vox.com/2020/3/9/21163356/coronavirus-drug-shortage-potential-fda-china-india.

• Lee, Y.N. (2020, February 4). 5 charts show why the global economy is more vulnerable now than during SARS. CNBC.com. Retrieved from: https://www.cnbc.com/2020/02/05/coronavirus-how-china-economy-has-changed-since-sars.html.

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Sources• McKinsey Global Institute (2019, July)., China and the World: Inside the dynamics of a

changing relationship. Retrieved from: https://www.mckinsey.com/~/media/mckinsey/featured%20insights/china/china%20and%20the%20world%20inside%20the%20dynamics%20of%20a%20changing%20relationship/mgi-china-and-the-world-full-report-june-2019-vf.ashx.

• Mickle, T. and Kubota, Y. (2020, March 3). Tim Book and Apple Bet Everything on China. Then Coronavirus Hit. The Wall Street Journal. Retrieved from: https://www.wsj.com/articles/tim-cook-and-apple-bet-everything-on-china-then-coronavirus-hit-11583172087.

• Koettl, C. and Felling, M. (2020, March 4). What the Coronavirus Looks Like from Space. The New York Times. Retrieved from: https://www.nytimes.com/video/world/asia/100000007013566/coronavirus-satelliteimages.html?te=1&nl=coronavirus-briefing&emc=edit_cb_20200305&campaign_id=154&instance_id=16521&segment_id=21919&user_id=aca77221ba8d1b8006c71fe357eccb31&regi_id=99166731.

• Roland, D. and Hinshaw, D. (2020, March 7). Social Distancing Is New Coronavirus Buzz Phrase. Does It Work? The Wall Street Journal. Retrieved from: https://www.wsj.com/articles/social-distancing-is-new-coronavirus-buzz-phrase-does-it-work-11583524419.

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Sources• Ryan, C. (2020, March 6). Luxury’s Next Coronavirus Problem Is Made in Italy. The Wall

Street Journal. Retrieved from: https://www.wsj.com/articles/luxurys-next-coronavirus-problem-is-made-in-italy-11583489087?mod=searchresults&page=1&pos=3.

• Sylvers, E. (2020, March 6). Coronavirus Hits Heart of Italy’s Famous Cheese, Wine, Fashion Makers. The Wall Street Journal. Retrieved from: https://www.wsj.com/articles/coronavirus-hits-heart-of-italys-famous-cheese-wine-fashion-makers-11583356058?mod=searchresults&page=1&pos=2.

• Taleb, N. (2006). The Black Swan: The Impact of the Highly Improbable. New York, NY: Random House.

• World Health Organization (2004, April 21). Summary of probable SARS cases with onset of illness from 1 November 2002 to 31 July 2003. Retrieved from: https://www.who.int/csr/sars/country/table2004_04_21/en/.

• Yong, E. (2020, February 28). The Deceptively Simple Number Sparking Coronavirus Fears. The Atlantic. Retrieved from: https://www.theatlantic.com/science/archive/2020/01/how-fast-and-far-will-new-coronavirus-spread/605632/.

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