China: Continuing Problems from Sars

Economic news from China on the SARS front continues to look a bit grimmer than I expected. Let's see how it works out over the year.

Instead of the usual delivery trucks, an ambulance pulled up to a Matsushita factory in Beijing's dusty north and unloaded seven white-coated medics. Their job: to check the quarantine. Two Matsushita factories in Beijing shut down last week, idling nearly 6,000 workers, after Chinese employees fell ill with SARS -- the second time the Japanese electronics maker was forced to suspend production. Ricoh Electronic Technology, the Japanese office equipment maker, also had to close a Beijing factory temporarily this month after an employee came down with SARS. U.S. mobile phone maker Motorola briefly closed its Beijing offices after a case was found there. Such closures highlight the outbreak's mounting impact on export industries that drive China's economy.

Even as reports of new cases decline, the potential for longer-term damage is rising as businesspeople avoid China and precautions within the country interfere with work and deliveries. "The production system is seriously affected. Goods, materials and supplies are not being delivered," says Chen Xingdong, chief economist in Beijing for BNP Paribas Peregrine Securities Ltd. "These problems will surface more in June, July or even August," Chen said. China's leaders have told officials to do their best to minimize the disease's economic damage among Chinese companies and are promising subsidies for the hardest-hit industries. And any fall in Chinese economic output will come from a level of growth that would be the envy of other major economies. Before severe acute respiratory syndrome spread in earnest, China's economy grew by 9.9 percent in the first three months of this year -- its fastest quarterly growth in seven years. Industrial output rose 14.9 percent in April, according to the government. Retail sales were up 7.7 percent, even though many families in Beijing and other cities are avoiding shops and other public places.

But more economic pain is likely even after the outbreak passes. Foreign companies, heeding advisories not to travel to the mainland, are putting off launching new products, opening new factories or starting new joint ventures. A survey of 29 major multinational companies by Deutsche Bank found that 88 percent expected delays in business travel to affect investment plans. In Japan, a major investor in China, a survey of 2,015 companies by the Japan External Trade Organization found that 70 percent said SARS was affecting operations. Three-quarters said business negotiations stalled, while one-third said they suspended production because of limits on travel by their staff, according to the agency.

Work stopped last week at Beijing Matsushita Color CRT Co., which employs 5,200 people producing television picture tubes, and Beijing Matsushita Lighting Co., which employs 400. The two facilities had five SARS cases and four suspected cases, with 28 more employees reporting fevers. The medical workers who were dropped off outside the factory tied on white surgical masks as they walked to factory dormitories where several dozen employees who had close contact with people who had SARS are quarantined. The balconies of the high-rise buildings were hung with bedding put out to be aired. A Matsushita spokesman in Tokyo, Kunio Ishikawa, said he expected the factories to be closed for at least 10 days -- the incubation period for the flu-like disease. ASIMCO, an American company with joint ventures in China's beer and auto parts industries, is hindered by SARS at every turn -- even though it hasn't seen any outbreak among its employees -- said Henry Huang, its manager of public and government affairs.

"Delivery people sometimes cannot send goods to certain areas," says Huang. "Some markets for components are half-closed, some totally closed. It's affected some deliveries and some sales, but it's not like a fatal problem." Chinese airlines have been hardest hit, with passenger traffic reportedly down more than 80 percent this month. Also hurting are China's textile producers, whose sales depend on visits by foreign buyers. After a 25 percent jump in the first three months of the year, sales for the rest of the year aren't expected to rise at all, the China Textile Industry Association said. "Exports this month have been hit badly," said Gao Yong, the association's deputy director. Japanese automaker Honda Motor Co. says that after sending 100 Japanese engineers home as a precaution it may delay production of a subcompact car in China planned for summer. In the eastern province of Shandong, an area with few SARS cases, a survey estimated the outbreak would cost at least $3.6 billion in lost industrial output, according to Chen of BNP Paribas. "If it's translated into the whole country, it will really add up," Chen said.
Source: Newsday
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