SARS weighs on tech companies in Asia

Severe acute respiratory syndrome (SARS) is having a growing impact on IT companies in Asia as the disease continues to spread throughout parts of the region, particularly in China and Taiwan.

When the initial extent of the SARS outbreak in China and Hong Kong first became apparent in late March, analysts at Aberdeen Group Inc. warned that if the disease spread unchecked the result, in a worst-case scenario, would be the disruption of IT hardware manufacturing and supply chains. At a minimum, they predicted companies would see production schedules slip and their plans for expansion in China disrupted.

While predictions that SARS would bring Asia’s hardware manufacturers and IT companies to their knees have so far proven to be premature, there are signs that the true impact of SARS on companies based in or operating in Asia has yet to be felt fully.

China has been hardest hit by SARS, with 5,124 cases and 267 deaths, the World Health Organization (WHO), a United Nations agency, reported on May 14. Hong Kong has also been hit hard, with 1,698 cases and 227 deaths, while Singapore reported 205 cases and 28 deaths, it said.

Taiwan, which had initially been spared in the earlier stages of the disease’s spread, now has the third-largest number of SARS cases, with 238 cases and 30 deaths, the WHO said.

The spread of SARS has forced the cancellation of executive travel and major trade shows, such as the Computex exhibition in Taipei, originally scheduled to be held in early June, and the CeBIT Home Electronics show in Shanghai, slated for May. In addition, some companies in China and Taiwan have closed their offices temporarily in an effort to protect employees and help stop the spread of the disease.

Taiwanese chipset and graphics chip vendor Silicon Integrated Systems Corp. (SIS) closed its Hsinchu, Taiwan, research and development (R&D) centre earlier this month after one of its employees sought medical treatment at a local hospital for flu-like symptoms. The employee, who has been classified as a suspected SARS case, was released from the hospital on May 5 and is currently undergoing a 14-day home quarantine, the company said.

SIS reopened the R&D centre, which had been disinfected and closed for five days, on the same day, the company said.

SARS has also had an impact on the operations of companies in China, where fear of infection has largely emptied Beijing’s streets of people and cars. Qualcomm Inc. and Sybase Inc. are among the companies that have asked their employees in China to work from home in an effort to stop the spread of the disease.

“I care more about the people than the business,” said John Chen, the chairman, chief executive officer (CEO) and president of Sybase. “I don’t want people to get infected and I don’t want my offices to be quarantined.”

Motorola Inc.’s China headquarters in Beijing has also been affected by SARS, with 1,000 employees told to work from home and 27 employees quarantined at home after one Motorola employee was diagnosed with the disease, said Mary Lamb, a spokeswoman for the company in Hong Kong. Motorola’s factories in the northern Chinese city of Tianjin were not affected, she said. The company’s Beijing office reopened on May 12.

For companies like Sybase, which has 375 staff in China and Hong Kong, the impact of SARS on sales remains unclear.

“We have not seen a noticeable impact on demand yet, but normally the first month of every quarter is slow anyway,” Chen said. He expects to see demand to pick up after the May 1 holiday in China.

Looking ahead, Sybase will have a clearer picture of the disease’s impact in June, Chen said, reflecting a commonly held view among industry observers that the impact of SARS on sales will become clearer during the second quarter. “It will really surprise me positively if no impact on the business will be felt,” he said.

With cases of SARS on the increase in Taiwan, government-backed market researchers in the island nation have cautioned that the spread of the deadly respiratory disease and fear of infection will have a tangible impact on its IT industry.

Calling SARS a “double-edged sword”, the Market Intelligence Center (MIC), which is part of the Taiwanese government’s Institute of Information Industry, recently warned that the spread of SARS may cause shifts in procurement activities and consumer spending patterns. But there’s good news and bad news in MIC’s analysis.

On the negative side, MIC predicted the spread of SARS will hit Taiwanese IT manufacturing and research and development activities hardest. But it noted important differences between company operations in China, where many Taiwanese companies operate factories to take advantage of lower labour costs, and Taiwan.

Citing the “conservative” approach to SARS so far displayed by the Chinese government, MIC predicted that large-scale factory shutdowns would be unlikely to occur in China, even if an outbreak of SARS was to take place among factory workers. However, in Taiwan, where the government has taken a more aggressive approach to contain the spread of the disease, an outbreak of SARS among factory workers would result in the shutdown of production lines, it said.

However, the disruption of travel to Taiwan by corporate executives, many of whom have been told by their companies to avoid travel to areas affected by SARS, will have an impact on hardware manufacturers and will likely delay pilot production runs of new products, MIC said.

Concerns about travel to Taiwan got official support when the U.S. Centers for Disease Control and Prevention (CDC) and the WHO issued travel advisories for Taiwan, recommending that visitors postpone nonessential travel to the island nation.

The CDC has issued similar advisories for travel to Toronto, Hong Kong, Singapore and China. A travel advisory for Hanoi was recently downgraded following the apparent success of Vietnamese officials in controlling the spread of the disease. The WHO has only issued similar travel warnings for parts of China. A WHO travel advisory for Toronto has been lifted.

And then there’s the problem of quarantine. Taiwan’s government has stopped issuing visas to visitors from areas with large numbers of SARS cases, including Hong Kong, China, Singapore and Canada. Taiwanese residents, including executives that travel frequently between China and Taiwan, are quarantined for 10 days when returning from these areas to insure they are not infected with SARS under the new regulations.

The spread of SARS and the disruption of travel will result in fewer orders for some Taiwanese hardware manufacturers as international IT vendors cut back on visits to their Taiwanese suppliers, MIC said, adding that some orders are instead likely to go to manufacturers in North America and Europe.

But there is some good news for the IT and electronics industry in Taiwan and elsewhere. Some software and IT service companies stand to reap new orders from companies looking to avoid direct contact with their customers and suppliers for fear of contracting SARS, MIC said.

Demand for video conferencing products and related services are likely to increase due to the spread of SARS as companies seek alternatives to face-to-face meetings, MIC said.

One Taiwanese manufacturer of video phones and video conferencing equipment that has seen demand increase due to SARS is Leadtek Research Inc. The company has seen demand for video phones soar even as revenue from the company’s other products, such as computer graphics cards, has fallen as a result of SARS, said David Lin, a sales manager at Leadtek’s video phone division.

“Demand and inquiries (about our video phone products) are almost jumping up to double and even triple (previous levels),” Lin said. “And the demand and inquiries are increasing day by day, even, I can say, hour by hour.”

Most of that increased demand is coming from customers in Asia, including Taiwan. Prior to the outbreak of SARS, Taiwan accounted for approximately 3 per cent of Leadtek’s video phone sales, Lin said. The island nation now accounts for 10 per cent of sales and that figure may hit 15 per cent by the end of May, he said.

The rapid spike in demand for video phones in Taiwan is coming from three groups: governmental organizations (including hospitals), Taiwanese businesses that operate in Taiwan and China, and Taiwanese telecom operators and Internet service providers looking to tap into growing demand for video conferencing services, Lin said.

Even the U.S. government is getting in on the action. The Foreign Commercial Service (FCS), part of the U.S. Department of Commerce, is offering video conferencing services to U.S. companies as an alternative to travel to China to meet with partners and customers. The service is available at FCS offices in Beijing, Guangzhou, Shanghai and Chengdu, in Sichuan province, as well as at 100 U.S. Export Assistance Offices in the U.S., according to the Web site of the U.S. Embassy in Beijing.

Companies interested in using the service pay for line charges as well as a rental fee for the use of FCS facilities, it said.

The service is also available in Taipei through the American Institute in Taiwan, the de facto embassy that represents the U.S. government’s political and commercial interests in Taiwan.

Tom Krazit in Boston contributed to this report.