Epidemics & Economics

A few weeks ago, Asia's leaders thought SARS would pass. Now, they are settling in for a long, bitter struggle. At risk is the dynamic economic model that made the region such a production powerhouse.

As he sipped a cappuccino at a Hong Kong Starbucks in late March, Li & Fung Ltd. Managing Director William K. Fung was calm about the impact of the disease that had just started spreading concern in East Asia. Sure, more than a dozen Hong Kong residents already had died of the mysterious pneumonia, and hundreds more were hospitalized. But in its 97 years in South China, Li & Fung, one of the world's biggest garment traders, had weathered revolutions, riots, financial panics, and epidemics far more deadly than severe acute respiratory syndrome. And there were signs that new SARS cases were tailing off. With luck, Fung figured, SARS would soon turn out to be "just another new disease" that the world would learn to live with.

Fung's optimism didn't last long. Two weeks after that Starbucks meeting, he was taking dramatic steps to contain the damage. With few foreign customers willing to set foot in Hong Kong, he has moved half of his top management team to the U.S. and Europe. Fung is dividing foreign customers' work among several Chinese factories in case one of them has to be shut down because of SARS. "I don't think things can return to normal until at least June," Fung says. While Li & Fung, with $4.8 billion in annual sales, is big enough to ride out the storm, Fung fears thousands of smaller traders will go under. "Hong Kong is in a very tough situation," he says.

That grim assessment is spreading across Asia as executives hunker down for what is fast shaping up as a new economic crisis. The buildup to the war in Iraq may have been the biggest drag on the global economy for the past few months. But in Asia, the real "shock and awe" has been wrought by the microbe behind SARS, an illness that as of Apr. 16 had infected 3,293 people worldwide and killed 161.

It took three to six months after the July 2, 1997, crash of the Thai baht for the financial contagion to spread through East Asia. By contrast, three weeks after the first SARS-related death was reported in Hong Kong on Mar. 4, travel, tourism, and retail industries were in a tailspin from Singapore to Shanghai. Now, a pillar of Asia's economy -- the idea that astute buyers and sellers can roam the region, meet swiftly, cut deals, and make profits -- seems much more threatened than in the dark days of 1997. "Trade is the locomotive for growth in Asia, and that is done on a personal basis -- not by pressing buttons," says Chief Economist Bob McKee of London-based Independent Strategy, which advises investment banks and hedge funds. "All this is crashing to a halt." And the fount of Asian growth -- mainland China -- now faces the formidable task of containing a disease that could hammer its credibility among investors.

Perhaps, by summer, these fears will diminish. But for now, the fallout from SARS is reaching scary new dimensions. One spark was an Apr. 2 World Health Organization advisory that warned against travel to Hong Kong and South China. "We saw the impact of the WHO advisory immediately in the form of hundreds of cancellations," says Nigel Roberts, general manager of Hong Kong's 487-room Great Eagle Hotel, where occupancy is now about 10%. That advisory is likely to stay in effect for at least another month. Disclosure that the epidemic is still growing in China, and that previously healthy victims in their 30s and 40s are dying, has added to the panic. Governments in Singapore, Thailand, and elsewhere have compounded fears by imposing harsh policies that allow officials to quarantine even travelers who show no signs of the disease.

Health experts still debate the danger of a global epidemic. But for business, that debate is almost beside the point. The fear factor alone is enough to inflict economic devastation. Hong Kong and Singapore, Asia's two premier international business hubs, are nearly paralyzed. In China, the Canton Trade Fair, which opened on Apr. 14 and last year boasted $17 billion in deals for mainland manufacturers, is a bust. Hong Kong watch sellers lost $1.2 billion in orders, they estimate, when they were denied entrance to a Swiss trade fair. Meanwhile, economists are shaving up to 1.5 percentage points off their annual growth forecasts for Hong Kong, Singapore, and Malaysia. Even countries that thus far have had few if any SARS fatalities are feeling the pinch. Air travel from Japan to other Asian destinations has plunged by 25%, and Indian companies from technology service providers to jewelry makers say foreign customers are canceling visits. Samsung Electronics says SARS is sure to hurt sales of its mobile phones, TVs, and other consumer products in China and Hong Kong, which accounted for 20% of its $32 billion in revenue last year. "We'll have to adjust production and marketing plans if this continues for another month or two," says Senior Vice-President Chang Il Hyung.

The hardest-hit companies are resorting to measures not seen in decades. Near-empty luxury hotels in Hong Kong are closing entire floors. Cathay Pacific, Singapore Air, Qantas, and other battered air carriers have grounded up to 40% of their flights. Cathay, hemorrhaging $3 million a day, hinted it might suspend operations, though it later downplayed that threat. Thousands of small Taiwanese, Chinese, and Hong Kong manufacturers, who depend on orders placed in the spring, face bankruptcy. Even for multinationals that can get by by trimming costs and ordering staff to telecommute, the prospect of another month or more of restricted travel hurts. "Business really stinks right now," says an executive of a U.S. multinational with its regional headquarters in Singapore. "Between the war and SARS, every buyer in the world has an excuse not to make a commitment, especially for big projects."

Meanwhile, the government of Tung Chee Hwa, Hong Kong's chief executive, is under fire for waiting months after the first SARS cases before quarantining the disease's carriers. Foreign businesspeople in Singapore grumble that the government there has made travel so difficult that the city is putting its value as a regional hub at risk. The stakes are highest for China, whose economic boom has been fueled largely by foreign investment and trade. For weeks, Beijing insisted it had no SARS epidemic and even stonewalled a WHO fact-finding mission. For the future, says the Beijing manager of a U.S. multinational, the main worry isn't the disease itself, but "whether the government will continue to hide things." President Hu Jintao now says halting SARS's spread is a top priority. But China's health-care system remains dangerously overstretched.

Getting SARS under control fast is essential because it is attacking the central nervous system of Asia's economy. The success of Hong Kong and Singapore revolves around their value as highly accessible centers for international trade, finance, and multinational manufacturing. The airports of Hong Kong and Singapore hosted 34 million and 29 million passengers, respectively, last year. Singapore alone is the regional headquarters for 200 multinationals ranging from DaimlerChrysler (DCX ) to GlaxoSmithKline PLC (GSK ), while 6,000 others have offices there. Of course, such corporate giants aren't about to bolt overnight. "Taking your business elsewhere really requires a lot of consideration," notes Landis W. Hicks, president of the American Chamber of Commerce in Singapore, who lauds the government's firm moves to contain the virus.

But if the tight restrictions last into the summer, doing business will be tough. Singapore-based businesspeople were especially unnerved by an Apr. 10 government decree that all expatriates who leave Singapore and reenter from a SARS-afflicted country -- including Canada -- must be quarantined for 10 days. That makes frequent business travel impractical. "We can't do our business over the phone because it requires you to be on the ground interviewing people, making judgments, looking at their body language," says Zafar Momin, Singapore Director for Boston Consulting Group. "Staying put for 10 days would just kill us." Officials will only say the travel controls will remain in place "for the long term."

Asian businesspeople still have hope that if the crisis ends soon it can make up for lost time. The choice offered exhibitors of the postponed Hong Kong Gifts & Premium Fair, which last year drew 51,000 foreign buyers, illustrates the dilemma. Manufacturers could either display their wares at an event rescheduled for Apr. 28 -- too soon for many foreigners to risk attending -- or at a show in late July. "We'll definitely lose business because July is too late for us," says Esmond Yau, who runs a $2.5 million company making plastic doctor kits and other toys, and for whom the Christmas trade is crucial. Doing business online isn't an option because "toy buyers want to see real products in their hands," Yau says.

But here is where Hong Kong's ingenuity could be put to the test. Many orders could be placed with Western traders -- or with offshore offices of companies such as Li & Fung, which operates in 37 countries. Buyers and sellers could grow more comfortable working through the Web and videoconferencing than they originally thought. And multinationals may reassess how much business really must be conducted in Hong Kong and other Asian hubs. "At what point do people say: 'We have to rethink how we do business?"' asks consultant James B. Haybyrne, chairman of Hong Kong-based Strategic Thinking Group. That point hasn't arrived yet, but as SARS spreads fear across Asia, it could come soon.

By Pete Engardio, with Mark L. Clifford in Hong Kong, Michael Shari in Singapore, and bureau reports

— With assistance by Mark L Clifford, and Michael Shari

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