Just a couple of months ago, executives at Ningbo Bird Co. were crowing that they couldn't expand fast enough. The up-and-coming mobile-phone maker had just opened a new industrial park with two factories in the eastern Chinese city of Fenghua, where 5,000 men and women toiled in three shifts to meet booming demand for Bird's cell phones. Today, the workers are still there, but many of them hang around the complex with little to do. By mid-April, it had become clear that because of the epidemic of severe acute respiratory syndrome (SARS), Chinese customers would be in no mood for shopping over the May Day holiday. So the company pulled the plug on round-the-clock production. "We have adjusted to no more than two shifts," says Deputy General Manager Ma Sitian. "Sometimes just one."
The scene in Fenghua is being played out across China as the SARS epidemic spreads. Despite the approach of May Day -- usually a boom time for retailers -- glitzy shopping districts such as Beijing's Wangfujing and Shanghai's Nanjing Road are nearly empty. Sales of cell phones have dropped by 40% in SARS-hit cities such as Guangzhou, according to J. P. Morgan Chase & Co. (JPM ). The Shanghai Auto Show -- which expected to draw 450,000 visitors -- pulled in a mere 120,000 and closed on Apr. 24, three days early. On Apr. 29, Motorola (MOT ) shut its 18-story Asia Pacific headquarters building in Beijing after one employee came down with SARS-like symptoms. And China plans to close down the Shanghai and Shenzhen stock exchanges until May 12.
China's SARS-related business slowdown has economists scrambling to revise estimates. Citigroup (C ) China economist Huang Yiping expects the falloff in retail sales and export orders to force companies to scale back new investments; he has trimmed his 2003 growth estimate by nearly a full percentage point, to 6.7%. In private, government economists say the rate could be closer to 6%, and Merrill Lynch & Co. predicts China could actually contract in the second quarter. After a blockbuster first quarter, when Beijing says the economy surged 9.9%, some cool-off was expected. But few envisioned things could change so abruptly.
A big hit to Chinese consumption would send ripples through the rest of Asia. When SARS struck Hong Kong and Singapore, the damage was largely limited to retailers, hotels, regional airlines, and small manufacturers who depend on big trade shows to book new orders. But slower growth on the mainland could hurt everyone from Japanese machinery makers to Korean electronics producers to Australian mining concerns, all of which see China as a vital market. China accounted for half of Korea's export growth last year, and Daishin Securities Co. figures SARS already has cost Korea $2 billion in exports. Similarly, sales to China made up 75% of Singapore's export growth last year, 40% of Japan's, and all of Taiwan's, according to CEIC Data Co., a provider of Asian economic statistics. "Before SARS, everyone thought China was a safe haven," says Citigroup's Huang. "Now, any company and industry having something to do with China will be hit."
Japanese manufacturers, for instance, are adding SARS to their long list of woes. In a survey of 243 major companies by Tokyo's Nihon Kezai Shimbun newspaper, 9% said China sales already have dropped because of SARS, and two-thirds say they expect business to suffer if the outbreak becomes a long-term problem. Consumer electronics giant Matsushita Electric Industrial Co. (MC ), which has shifted considerable production to the mainland, saw its stock drop by 5% after a SARS scare caused it to halt a Beijing assembly line (it turned out to be a false alarm). Honda (HMC ), Toyota (TM ), and Nissan (NSANY ) also have a lot at stake. China's passenger car market was expected to leap by 25% this year to 1.4 million vehicles, and all three are in the midst of major expansions there. Although China has been a bright spot for Japan Inc., "SARS is going to squelch that," says Barclays Capital director John Richards.
Taiwanese electronics manufacturers may be in an even tougher spot. Companies like Hon Hai Precision Industry, BenQ, and Compal Electronics use China as a production base for notebook PCs, monitors, and other products that often sell under big Western and Japanese brand names. On Apr. 27, Taiwan's government banned visitors coming from China and Hong Kong and said it would impose 10-day quarantines on Taiwanese arriving from there -- whether or not they have the disease. That will make it more difficult for engineers to monitor new product lines. SARS jitters also are adding to the costs of manufacturers who had become accustomed to just-in-time delivery. For example, Lite-On Technology Corp., which makes printers, PC components, and mobile phones for Sony, Hewlett-Packard, and Dell at a massive plant in Guangzhou, is now stocking two weeks of extra inventory for some products -- and is asking its Chinese suppliers to do the same.
How long the ill effects last will depend on how quickly China can rein in the outbreak in major cities -- and whether officials can keep SARS from spreading to the impoverished countryside, where medical care is poor. If the disease were to spread -- and growth continue to slow -- it could upset China's precarious social balance as migrant workers find themselves jobless.
Developments in Hong Kong and Singapore, where new cases have begun to taper off, offer some hope. Stock markets in both business hubs have started to rebound as investors dare to hope the worst is over. And in both cities, residents are starting to venture out of their homes, prompting a slight uptick in sales at stores and restaurants.
There's evidence that the mainland might follow a similar pattern. Hong Kong clothing retailer Giordano International Ltd. (GRDHY ), for instance, got one-quarter of its $436 million in revenue last year from its 550 mainland stores. When the magnitude of Beijing's SARS crisis became public in mid-April, traffic at Giordano outlets there plunged by up to 80%, says Chairman Peter K.K. Lau. But Lau says sales have almost recovered in some of the chain's stores in Guangzhou, where new cases have dropped. And in Hong Kong, Giordano has begun offering "SARS-buster" sales giving buyers 50% discounts after they spend their first $125. Sales tripled the first day of the promotion. "We're staying optimistic," says Lau. "My guess is that people will come out and spend."
That's a hope shared widely across Asia these days. With most of the region now looking to China as its economic locomotive, recovery may well depend on whether Chinese consumers can be coaxed out of their SARS-induced hibernation and back into the shopping malls.
By Pete Engardio and Bruce Einhorn in Hong Kong, with Alysha Webb in Shanghai and Irene M. Kunii in Tokyo