Knight Ridder - Tuesday, April 29, 2003

The Dallas Morning News

By Alan Goldstein

The SARS outbreak is starting to affect U.S. businesses, while forcing them to consider how reliant they have become on China.

With its low labor costs and efficient work force, the world's most populous nation has evolved into a manufacturing center for the electronics, garment, furniture and toy industries. But the growing affluence of its people also makes China a significant market for consumer products.

SARS could change the way international corporations view China. The country's misstep _ initially under-reporting the extent of its outbreak _ serves as a warning sign of the dangers of investing in China and the importance of a diverse manufacturing base, said Sung Won Sohn, an economist at Wells Fargo & Co.

"U.S. firms are thinking twice about putting so many eggs in one basket in China," Sohn said.

Severe acute respiratory syndrome, which is often fatal, has infected 5,000 people worldwide.

The outbreak has been most severe in Asia. More than 90 percent of the cases have occurred in China, Hong Kong or Singapore, according to the World Health Organization. The WHO said the disease appears to have peaked and that it's in decline in Canada, Singapore and Hong Kong and gone from Vietnam.

The group also lifted its warning against travel to Toronto, following pressure from the Canadian government.

But Chinese authorities said they expect SARS to be a long-term problem.

The biggest impact of SARS, thus far, may be in the electronics sector. China is a major supplier of components to manufacturers in Taiwan, Japan and the United States. If parts get stuck in the supply chain because of factory shutdowns, some products may not be able to be built.

"In China, they might not make a finished laptop, but they make a motherboard or power supply converter," said Hugh Bishop, senior vice president of research firm Aberdeen Group. "If you don't have a power cord, a laptop is useless. It may seem like only a $5 item, but a $1,500 laptop is unusable and unsellable without it."

Such interruptions have already occurred. Motorola Inc. shut down a cell-phone plant after a worker came down with a case of SARS.

Intel Corp. warned Tuesday that SARS could hurt semiconductor sales if it isn't contained soon.

Many global companies have sought to isolate their Asian operations from other parts of their businesses. Texas Instruments Inc., for example, has asked employees to postpone nonessential travel to China, Hong Kong and Singapore. TI employees who have traveled to countries with a high risk of SARS are being asked to work from home for 10 days before returning to the office, though fewer than 20 employees have been affected.

Alcatel is having a difficult time installing its gear in China, said Serge Tchuruk, chairman and chief executive of the French telecommunications equipment manufacturer with U.S. headquarters in Plano, Texas.

"Some of the projects that are in the normal course of being implemented are lagging because our people can't travel to the sites," he said Tuesday in a conference call with analysts.

SARS could have a potentially severe impact on the wireless industry, which now counts China as its biggest market. The country has more than 200 million cellular subscribers, compared with 140 million in the second largest, the United States. China's market is also growing much faster than North America and Europe, where most people already have mobile phones.

Already, wireless distributors in China face excess inventory of handsets, said Brian Modoff, an analyst at Deutsche Banc Alex.Brown. Exacerbating the problem: Many manufacturers were counting on a weeklong May Day holiday for new product launches. As a result of SARS, the government has shortened the celebration to three days.

If the epidemic continues, SARS could cause a major headache for U.S. retailers. Normally, buyers for department stores and other retail outlets should be in Asia now ordering apparel for the fall and holiday seasons.

"If things go on, they are worried and concerned they will not be able to place orders," Sohn said.

So far, retailers and manufacturers are saying they haven't experienced production bottlenecks or disruptions in shipments.

Some retailers are substituting technology for travel. At J.C. Penney Co.'s Plano headquarters, product development people are staying later for live video conferences with counterparts in sourcing offices in Hong Kong and Singapore, said Tim Lyons, a Penney spokesman. "And people in Asia are having to come into work very early, practically the middle of the night."

Product samples arrive by mail, and Penney sends back disposable face masks. "They've been having shortages, and we can get supplies easily from (Penney-owned) Eckerd," he said.

Dallas-based men's apparel maker, Haggar Corp., is restricting travel to Asia, Hong Kong and Canada, "but business continues as usual," a spokeswoman said

"If the outbreak continues, Haggar is prepared to use alternative communication with suppliers in order to maintain effective business _ video conferencing, more conference calls, e-mail," said Angie Frey, the Haggar spokeswoman.

Clearly, SARS is curtailing overseas travel for everyone, and that's having an impact on the already battered airline sector.

"Our clients are definitely being very cautious with sending people to Asia. Many of them are choosing not to go," said Stephen Chipman, regional managing partner at Grant Thornton in Dallas.

The Air Transport Association said trans-Pacific traffic is down as much as 40 percent compared with the same period last year.

Fort Worth, Texas-based AMR Corp. said it hasn't been affected by the disease, though it mentioned in its earnings report that lower demand for overall flying can be linked to fear of contracting SARS.

The parent of American Airlines added more face masks to its flights to Toronto and to Tokyo for crew and passengers, but hasn't changed other procedures, said spokesman Todd Burke. American has said it would cut its international schedule in May by 13 percent, though it blamed only the Iraq war for hurting demand.

Meanwhile, Cathay Pacific Airlines has cut flights and said it would buy fewer planes because of the diminished outlook for Asian travel. United Airlines said it would cut its international trips in May by 12 percent. Northwest cut its schedule 12 percent and cancelled several flights to Asia.

At best, the economic impact of SARS may be akin to a crippling ice storm, though no one can know for sure.

"We really don't know until we get more information from the epidemiologists," said Donald Straszheim, an independent economist in Santa Monica, Calif. "To date, the damage is modest."

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