Deadly Virus

The economic toll: Delayed deliveries, closed factories, and the specter of recession

For days, Shani Brownstein brushed off her husband's pleas that it was time to bolt Hong Kong. Brownstein wanted to make sure that development of new products for the couple's toy-manufacturing business, Branford Ltd., stayed on track. Then came word that a store employee in their building in the teeming Tsim Tsa Tsui district had contracted "severe acute respiratory syndrome," or SARS, the dreaded mystery infection that has hospitalized more than 700 people in Hong Kong and killed 16. She was especially jolted by the sight of office workers in her building suddenly donning face masks for protection.

That was enough to give her the same jitters her husband was feeling. Brownstein banned her 48 staff members from traveling to China, where the disease first appeared in November. She signed a stack of checks so bills could be paid in her absence. Then, on Mar. 30, she flew to Thailand with her family. Brownstein, a Canadian, says she knows at least a dozen others, including bankers, traders, and managers of companies from France, the U.S., and South Africa, who have done the same. "People are freaked out," Brownstein says over her cell phone from Thailand. "I'm worried about how long we'll have to lay low."

The epidemic is, first and foremost, a source of suffering and death, as many Asian families -- especially those of health-care workers -- are discovering. But as more businesspeople put off cross-border trips or flee Asia's cities altogether, the economic toll threatens to escalate as well. Anxiety is rising among everyone from manufacturers such as Brownstein to top executives of multinationals. "The SARS situation is causing greater concern for us right now than the war is," says Irwin M. Jacobs, CEO of phone-technology giant Qualcomm Inc. (QCOM ) "It has the potential to seriously disrupt business."

It's a disruption that could deliver another major blow to a global economy already reeling from war, fragile stock markets, and stagnant demand in the U.S. and Europe. Indeed, in its own perverse way, the microscopic organism behind the disease owes its rapid spread to globalization -- and epidemiologists warn that it could be a harbinger of even more devastating epidemics to come. SARS started in China's Guangdong province, now the world's workshop, and soon crossed the border into Hong Kong. As investors, managers, and workers flowed in and out of the city, the virus traveled to the rest of Asia, to Europe, and to North America in a matter of weeks. Such a chain of transmission could not have happened so swiftly even 20 years ago, before ubiquitous air travel and the relentless movement of commerce brought China and other developing nations out of relative isolation.

Just as SARS spreads from person to person and region to region, the disease is feeding an economic contagion. The initial hit was to the travel, tourism, and retail industries of Hong Kong and Singapore. Airlines have canceled scores of flights in Asia due to plunging traffic. Hotels report falling occupancy, business conferences have been canceled, and stores and restaurants are almost empty at peak hours. On Apr. 1, rumors that Hong Kong was about to close its borders triggered a panic as residents rushed to stock up on everything from produce to toilet paper. Investment bank Morgan Stanley predicts that the outbreak will shave 0.2% to 0.5% off Hong Kong's output for each month that it rages.

Now, SARS is starting to touch sectors that are the real economic lifeblood of East Asia. Taiwanese electronics companies are forbidding staffers from traveling to vital factories in southern China, and the island suspended an important new direct shipping link to China. A big mid-April World Economic Forum event in Beijing -- meant to showcase China's emergence as a modern economic power -- has been postponed. And Switzerland banned Hong Kong exhibitors from a major jewelry and watch fair that opened on Apr. 3 in Basel and Zurich. The ripple effects have prompted Morgan Stanley to scale back its growth estimates for all of Asia (except Japan) to 4.5% from its earlier forecast of 5.1%.

Also in jeopardy is the $1 trillion-dollar global electronics industry. Over the past five years, China has emerged as one of the world's leading manufacturing centers for everything from computers to cell phones to cameras, as well as myriad parts and materials. A major disruption could paralyze just-in-time supply chains of electronics makers and retailers worldwide. "If we have to close factories and ports, and if chips can't be moved on airplanes to meet inventory needs, things fall apart very quickly," says Peter S. Kastner, executive vice-president of tech researcher Aberdeen Group. One upshot: U.S. companies may have to rethink their heavy reliance on China as a production base.

The good news about SARS is that as a killer, it doesn't pose the same threat as a full-blown flu epidemic. Already, authorities in Hong Kong, Vietnam, and Singapore say new cases may be tailing off, and so far, only 3% to 4% of those infected have died. "If this were influenza, you'd have seen 100 times the infection rate and many more deaths," says Julie Hall, a member of the World Health Organization's global-response team for SARS.

Another bit of good news: China seems to be coming around. On Apr. 2, after months of what appeared to be an effort to conceal the true extent of the outbreak, Beijing finally agreed to disclose more details and to allow WHO investigators to visit hot zones in the south. Although China now admits it has had 1,190 cases of SARS and 46 deaths, Chinese officials insist the outbreak is under control. "The Chinese government has not covered up," says Foreign Ministry spokesman Liu Jianchao. "There is no need."

Still, the disease continues to spread. So far, more than 2,200 people worldwide have contracted SARS, and at least 78 have died. As cases started to appear in Singapore, the government for the first time invoked its Infectious Diseases Act, ordering more than 1,500 people to quarantine themselves at home for 10 days. Both Singapore and Hong Kong shuttered all public schools as a sort of firebreak to stop the spread. And across the region, authorities are vigorously spraying disinfectant, scrubbing down sidewalks and floors in hotels, offices, and markets, and wiping down elevator buttons and door knobs in a bid to rein in the contagion.

But like something out of a Michael Crichton thriller, the disease keeps cropping up ever farther from its source. Travelers brought the disease to Canada, where more than 160 people have likely been infected, and six have died. Another six people in Toronto have been placed in isolation, including Dr. Donald E. Low, a microbiologist who had headed Canada's effort to control the disease. The U.S. has 85 suspected cases in 27 states. Germany has five, Romania three, Ireland two. By Apr. 2, SARS had reached 18 countries, up from just seven two weeks earlier, and the WHO issued an unprecedented recommendation against travel to Hong Kong and Guangdong.

Even if the worst-case scenario doesn't play out, fear of the disease is taking a toll. On Apr. 1, an American Airlines Inc. (AMR ) jet from Tokyo was held on the tarmac in San Jose, Calif., as health authorities decided what to do with five passengers who showed symptoms of SARS. In the end, none turned out to have the disease. Hewlett-Packard Co. (HPQ ) told its 300 workers in Hong Kong's 21-story Cityplaza IV tower to work from home after one employee showed SARS symptoms. In Singapore, a night-shift worker at Motorola Inc.'s (MOT ) cell-phone factory came down with SARS on Mar. 20. Seven days later, the Environment Ministry shut down the plant for one night and quarantined 305 of the 532 workers on the shift. Singapore has called off dozens of business conferences, including an international aviation-industry confab in April that was to draw 800 visitors. "Everybody is scared," says Gernot Ringling, managing director for conference organizer Messe Düsseldorf Asia in Singapore.

Canceled meetings. Postponed sales trips. Eventually, that will start to eat into the region's economy. A barometer of how badly confidence has been shaken will be the Chinese Export Commodities Fair, better known as the Canton Fair. The annual five-day fest, which starts on Apr. 14 in the Guangdong city of Guangzhou, usually lures throngs of foreign buyers of everything from garments to electric fans to machine tools. "The fair is dead," predicts one Western trade expert. "Thousands of businessmen who would have placed orders and visited factories are not going to come." Guangzhou officials say the fair will proceed as scheduled.

The longer-term threat to China is that executives of multinationals could start to view the country as a riskier place to invest. Heavy inflows of foreign direct investment, which passed $50 billion last year, are a big reason China was able to keep growing after the financial crisis that swept through Asia five years ago. If Beijing is seen as unable to manage a disease such as SARS -- and concern over the epidemic starts to affect supply lines -- investors might come to regard China as unreliable. "The important thing is that companies trust the government's ability to respond to crisis," says Andy Xie, chief economist for Morgan Stanley Asia. "There is a risk that trust is eroding."

There is, though, a more optimistic scenario of how the epidemic may unfold. People are being "overly cautious," says one Canadian health official. "The concerns are overblown." Within a few weeks, some say, control measures imposed in Hong Kong, Singapore, Canada, and elsewhere could start to show results, with the number of new cases slowing dramatically. WHO inspectors could verify that SARS is under control in China. Scientists might also announce progress in finding a treatment, which could change the public perception of SARS from mystery killer to just another nasty infection that runs its course in a few weeks. That, in turn, might well kick-start commerce in Asia once again. So far, though, SARS has proved an unpredictable foe. Global business can only hope the optimists are right.

By Pete Engardio in Hong Kong, with Michael Shari in Singapore, Arlene Weintraub in Los Angeles, Cathy Arnst in New York, and Dexter Roberts in Beijing

    Before it's here, it's on the Bloomberg Terminal.