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Sars: Coping With Contagion

NEW YORK — More than two months have passed since the World Health Organization reported the appearance of a strange new pneumonia in Hong Kong and the well-worn passports of sourcing managers are starting to gather dust.<br><br>The WHO has...

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As the SARS outbreak starts to come under control in Hong Kong, fewer people are wearing surgical masks every day.

NEW YORK — More than two months have passed since the World Health Organization reported the appearance of a strange new pneumonia in Hong Kong and the well-worn passports of sourcing managers are starting to gather dust.

The WHO has lifted its recommendations against traveling to all but two of the 30 countries that have reported cases of SARS. Unfortunately for apparel importers, those two countries are China, including Hong Kong, and Taiwan, which together supplied more than one-fifth of the apparel and textiles imported into the U.S. during the year ended March 31.

Many U.S. retailers and apparel vendors clamped down on overseas travel at the start of the U.S. military campaign in Iraq and have since extended those bans to varying degrees. None of the more than a dozen major U.S. apparel companies contacted said they were currently allowing Western employees to travel to China or other areas that the WHO has advised travelers to avoid.

That’s posed a significant logistical hurdle for companies that rely on factories in China, particularly in the apparel-manufacturing center of Guangdong province, where the disease started to spread. Companies that would normally send teams of production managers to monitor quality and manufacturing have instead been forced to turn to less-personal forms of communication, including teleconferencing, videoconferencing and e-mail.

U.S. importers have said they’ve found the model to be a workable one, but it clearly presents some drawbacks, not the least of which is the 12-hour time difference between New York and Hong Kong. There’s a reason that U.S. companies spend millions of dollars a year sending sourcing executives to visit foreign factories and it’s not just so they can rack up frequent-flyer miles.

But some Asian sourcing companies have started to admit that the outbreak is a cause of great concern for them.

“The SARS epidemic is one of the most serious challenges that we have had for a long time period,” said William K. Fung, group managing director of Li & Fung Ltd., the Hong Kong-based $4.78 billion sourcing powerhouse. “It’s as serious as the 9/11 problem in America. Though a lot of people said the export side of the Hong Kong business community was affected the least [as opposed to the tourism sector]…the impact on us is fairly severe.”

The immediate problem for Li & Fung and other suppliers in affected areas has been the dramatic decline in visits by customers. In response to this situation, the company has sent many of its senior managers overseas, to Europe and the U.S., where they can meet customers in person. It has also started to rely heavily on videoconferencing technology it put in place after the Sept. 11, 2001, terrorist attacks to handle meetings, though Fung admitted “it’s hard to see samples” on a monitor, particularly since there’s no way of feeling a fabric that way.

But Fung acknowledged the absence of customers is only a small problem in comparison to something else he worries about: What would happen if outbreaks start to crop up in factories.

“If any one of the factories we are using is hit by SARS, that will lead to a quarantine and a suspension of work for two to three weeks, maybe longer, with a very real danger down the supply chain,” he said.

Li & Fung has started to advise its customers to spread production over multiple locations and in some cases back themselves up with factories outside China to guard against this risk.

Nancy Marino, senior vice president of brand development and worldwide sourcing and brand development at Sears, Roebuck & Co., Hoffman Estates, Ill., said, “We’ve not heard of any factories having a problem, but the infections seem to be ramping up and that’s our fear.”

Santi Chong, managing director of Navarino International, a Hong Kong company that supplies fabrics to major U.S. brands, said he hasn’t seen slowdowns at his factories in the Guangdong area.

“If the number of [SARS] cases in China grows, it might have an impact on business, but for now it’s normal,” he said.

As of Saturday, there were 5,210 probable cases of SARS in China, and 282 people had died there of the illness, according to the WHO. There were another 1,710 cases in Hong Kong, where 243 people had died. More than 90 percent of the reported cases of SARS worldwide were in China, including Hong Kong, and in Taiwan.

Within China, the highest concentrations of the disease have been reported around Beijing and Guangdong. But in comparison to China’s massive population of 1.28 billion, the infection rate is infinitesimal — it represented 0.0005 percent of the population or about one case per 180,000 people.

As a comparison, the United Nations in a recent report estimated that 4.4 percent of the population of sub-Saharan Africa was infected with the HIV virus at the end of 2001— translating to an infection rate of about one case per 25 people.

Peter McGrath, president of J.C. Penney Purchasing Co., a unit of Plano, Tex.-based J.C. Penney Co., said he’s been surprised that none of the factories from which the chain buys goods have reported SARS cases.

“It could be because they’re so isolated, out in the countryside,” he said.

Today, many of China’s apparel factories are on the fringes of cities and often attract laborers from rural communities who come to work for a few years with plans of later returning to their villages. As a result, many Chinese garment workers don’t put down roots in the areas where they work, instead dividing their time between work and factory housing. The low wages paid to Chinese apparel workers also likely reduce their ability to travel, which could diminish their chances of coming in contact with the disease.

McGrath said he’s concerned that the often-informal intra-China quarantines could start to affect the flow of piece goods around the country, which would interfere with production.

“A lot of goods move in and out of a lot of cities,” he said. Something as small as one truck driver with a load of zippers sniffling at a checkpoint could easily throw a 10-day delay into an order.

Li & Fung has started to issue SARS-prevention guidelines to the factories from which it buys as part of its overall compliance regulations.

Boston-based New Balance Athletic Shoe Inc. has also started to advise its Chinese suppliers to take steps to prevent the spread of the disease. They include educating factory workers about how the disease is spread, checking workers’ temperatures daily and advising them not to go into nearby cities.

“They’re not told they can’t leave,” said a company spokeswoman, “But they are being cautioned against it.”

While U.S. sourcing executives continue to worry about the possibility of factories being closed, many privately admit the danger seems small compared with other problems they could have faced. Some executives feel like they’ve dodged a bullet in that no U.S. sourcing employees have been reported to have contracted the disease.

Given the high traffic of sourcing managers through China, Hong Kong and Vietnam, which had an outbreak but was declared SARS-free by the WTO this month, the fact that employees of American companies haven’t contracted the disease appears to be a fluke of timing.

“Because it was between buying seasons,” when the outbreak started, said Sears’ Marino, “there really were very few people there.”

That timing is another reason that ordering patterns haven’t been affected. Most executives said the disease hadn’t so far prompted them to pull orders out of China or other affected areas. But that’s in large part because much of the goods currently in the manufacturing pipeline were ordered before SARS came to the world’s attention.

The WHO now believes the outbreak started in China in November, but the government there didn’t disclose what was going on until the disease appeared in Hong Kong five months later.

Besides using telephone and video conferences, many major U.S. importers have full-time staffers at their sourcing offices in Hong Kong, Shanghai and other parts of China. Those people have also continued to manage operations.

“Our key people in Hong Kong continue to travel to our factories in southern, northern and western China, as well as Vietnam and Cambodia,” said Thomas Burns, president of Ballinger Gold, the better to bridge-price knitwear firm.

Still, Hong Kong is starting to feel unseasonably quiet to some vendors.

“At this time of year, there are usually a lot of buyers in town,” said Navarino’s Chong. “But now there is no one from overseas.”

Li & Fung said it remains to be seen what will happen if the travel restrictions are still in place in June and July, when buyers typically come out en masse to work on spring orders.

“If this problem persists, it will start to impact us adversely,” said a Li & Fung spokeswoman.

Some U.S. executives also pointed out that this isn’t the first time in recent years that they’ve had to coordinate overseas production without traveling there. Following the Sept. 11, 2001, terrorist attacks on New York and Washington, many companies clamped down on foreign travel for about three months or so, yet the import supply chain ran fairly smoothly.

Still, some importers acknowledged that not being able to travel to Asia has been a hassle.

“Production isn’t the problem,” said Gregg Marks, president of Kasper ASL Ltd., based in New York. “The biggest problem we have is the communication ability for fittings and technical aspects where our people would normally travel there extensively. Now we’re being forced to do fittings digitally and transmit them.”

He said the reliance on telephones and overnight deliveries has added time to the product-development process, which is something vendors are typically trying to take out of the cycle.

“Shortening lead time is the key to doing business today,” Marks said. “Retailers are pushing manufacturers to shorten lead times and not being able to travel is making it harder to achieve that goal because being there meant you didn’t have to spend time sending patterns and sample notes back and forth.”

Several importers said the slow global economy may have made it a little easier for them to manage the effects of SARS, which is somewhat ironic given widening concerns that the outbreak will further damage economic growth in many parts of the world.

U.S. executives said because of weak demand and fears of losing orders, Asian contractors appear particularly hungry for business and therefore are being flexible in working around the problem.

“The economy is still pretty tough worldwide and pricing is very cooperative,” said John Kourakos, president of the New York-based Warnaco Group Inc.’s sportswear unit.

Sears’ Marino said, “The vendors are becoming much more proactive and taking the responsibility of making more sample fabrics. They’re much more responsive than before.”

Some Chinese manufacturers pointed out that their foreign competitors — who have been increasingly concerned about China’s rapid growth in market share in the U.S. apparel business — have seen the SARS outbreak as an opportunity to take back some business.

For instance, Mexico’s National Clothing Industry Chamber has asked Mexican health officials to consider an embargo on imports of Chinese-made shoes and apparel, claiming there’s a risk of cargo spreading contamination. On May 5, the WHO reiterated an earlier statement that there had been no reported cases of cargo-to-person infections.

Still, many observers contended that China’s growing dominance of the world apparel manufacturing business and of manufacturing in general is unlikely to be diminished by SARS, unless the rate of infection begins to grow at an explosive pace far beyond what’s been seen to date.

“Chinese production is so overwhelmingly required today that there has to be a way to make it work because, to me, there’s no viable choices beyond China,” said Michael Fieman, of Walter Wilheim Associates LLC, a Salt Lake City-based consulting company that has traditionally focused on merchandise planning and product development, which is starting to expand its operations into sourcing and production.

But he acknowledged that if the disease continues to spread for months, companies may decide to start hedging their bets on production, and move sewing operations, which require a large and healthy workforce, outside of China.

If the outbreak continues for many more months, he said, “What probably will happen is people will start to shift actual sewing to other parts of Asia, or even the Caribbean, on a temporary basis. But I don’t think it’s going to affect the fabric supply that much. China has become the premiere supplier of fabric.”

Not all companies contacted agreed that China was such an indispensible resource.

A spokeswoman for San Francisco-based Gap Inc. said her company has sourcing operations in 50 countries and if it runs into backups in China, where it currently produces 14 percent of its apparel, “We would move to any part of the world we need to.”

Susan Young, vice president of manufacturing at Irvington, N.Y.-based Eileen Fisher, which contracts Li & Fung to handle its sourcing, said if a SARS-related delay held up one of her Chinese orders, “I’d ship the fabric to Chinese factories in the metropolitan New York area. I wouldn’t go to other countries, I’d bring the work home to the U.S.” However, she added, “The likelihood of that is very minimal.”

The disease has been brought under control in most countries where it has occurred, with the governments of Singapore, the Philippines, Thailand, Vietnam and Canada all successfully containing it. About 68 percent of the people reported to have the disease in Hong Kong have recovered, according to the WHO, and many there said they believe that as the disease is mopped up, the WHO may lift its travel advisory.

That, coupled with the still relatively low infection rate in China, with a death rate still under 10 percent, left Li & Fung’s Fung to say he hoped that people kept the disease in perspective.

“I think people are recognizing the disease for what it is,” he said. “It’s a very contagious, though not extremely lethal, disease.”

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