Taiwan's SARS Luck Runs Out

The disease arrived late, but the economy will be hit hard

At first, the outbreak of SARS seemed to bypass Taiwan and create a political windfall for Chen Shui-bian, its independence-minded President. In March and April, governments in Hong Kong and Singapore struggled to contain the disease. In Beijing, leaders stonewalled investigators from the World Health Organization. Taiwan was the lucky exception, with just a handful of SARS cases. Sensing an opportunity to break out of its diplomatic isolation, Chen's government highlighted the sharp contrast between Beijing's intransigence and Taipei's transparency.

Taiwan's luck has long since run out. In late April, the number of SARS cases there rose sharply and now stands at over 200, with more than 20 deaths. Fearful Taiwanese consumers are avoiding shops, restaurants, and cinemas. Like leaders elsewhere in Asia, Chen has announced ever-more-drastic measures, including a ban on visits by noncitizens from other parts of Greater China. The government organizers of Computex Taipei, Asia's biggest electronics exhibition, have called off the show, scheduled for June. And in early May, the WHO slapped a travel warning on Taipei. "Everyone has canceled their trips," says Alex Hsia, president and CEO of Altek Corp., a Hsinchu-based contract manufacturer that makes digital cameras for the likes of Eastman Kodak Co. and Hewlett-Packard Co. Customers, he says, "are very nervous."

Economists are nervous, too. Already, Deutsche Bank has trimmed its estimate of growth in Taiwan's gross domestic product to 2.7% for this year, from 4% before SARS. Export growth is now expected to be just 4.1%, down from a projection of 7.4%, while unemployment may jump to 4.8%, the bank says. To ameliorate the pain, Chen has proposed a $1.5 billion economic-stimulus package.

SARS, though, may have a political upside for Chen. His Democratic Progressive Party has long wanted to establish Taiwan as an independent country, not -- as Beijing insists -- a province of China. Since mainland China joined the U.N. in 1971, Taiwan has been barred from the organization and all of its agencies, including the WHO. But Chen scored a small victory in early May, when WHO doctors broke Taiwan's isolation and visited the island. Now, Chen is pushing hard for observer status at the World Health Assembly, a WHO meeting scheduled to convene in Geneva on May 19. And on May 1, the U.S. Senate approved a nonbinding resolution supporting Taiwanese membership in the WHO. "We have the right and need to speak for ourselves in the international community," says Tsai Eng-wen, who heads Chen's Mainland Affairs Council.

SARS may also make it easier for Chen to resist the business lobby's calls to lift Taiwan's decades-old ban on direct links with the mainland. It's unclear, says Tsai, whether China "can control disease and other risks well enough to justify direct links." In recent years, Taiwanese industrialists have ignored the government's warnings about getting too cozy with China. More than 3 million people travel between Taiwan and China each year, and Taiwanese electronics outfits such as consumer-electronics manufacturer BenQ and PC makers Quanta Computer and Wistron Corp. have invested billions of dollars in the mainland.

Now, those companies are having second thoughts about their decision to move so much production to China. "We will reconsider whether to diversify our manufacturing base," says Eric Yu, chief financial officer for BenQ Corp., which makes two-thirds of its goods in China. Quanta, which produces about half of its computers in Shanghai, has put on hold plans to shift even more of its production to the mainland. "We need that capacity [in Taiwan] in case something happens in Shanghai," says Quanta Chairman Barry Lam. Both BenQ and Quanta are also thinking about opening factories in Eastern Europe as an alternative to China, while other manufacturers are looking into opportunities in Southeast Asia.

Still, most electronics companies prefer China. Altek, for instance, has sent scouts to Malaysia and the Philippines, but CEO Hsia is hoping he won't need to move production there. Costs in those countries are still much higher than in China, and they don't have nearly as many component suppliers. "China is the long-term goal," says Hsia. The government says that it may soon ease its travel restrictions, and Quanta's Lam comments: "Sooner or later, this problem will be over." Unfortunately, no one knows when that will be.

By Bruce Einhorn in Hong Kong

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