The SARS Fallout: Sourcing Goes Cyber, Economic Fears Grow

The SARS outbreak in ASIA is causing numerous headaches for global fashion companies, but so far hasn’t impeded production in the region.

NEW YORK — The SARS outbreak in China is causing major communication headaches for global fashion companies, but so far it hasn’t impeded production in the region, and firms say they’re still pressing ahead with plans to open stores there.

Most apparel firms that have canceled all travel into China have implemented contingency plans to communicate with their factories and employees via teleconferencing, e-mails and telephone calls. So far, none of the companies contacted has had to shift any of their production away from their usual Chinese factories.

This story first appeared in the April 29, 2003 issue of WWD.  Subscribe Today.

But the outbreak could have major negative long-term implications as the latest blow for the global economy. Economists estimate the epidemic already has cost the world economy $30 billion, while many predict growth in Hong Kong and China could stall this year because of SARS. There also are the first rumblings from economists that SARS could nudge U.S. retail prices upward because of production bottlenecks and other disruptions — representing yet another possible pothole for retailers already struggling with poor consumer confidence and a lackluster economy.

Meanwhile, retailers in Toronto are reporting sales declines of up to 30 percent as a result of declining tourism to the area, and those in Hong Kong are beginning to pressure landlords for rent concessions. And while companies from Giorgio Armani SpA to Carrefour contend they are pushing ahead with their plans to open stores in China, they admit their businesses are being hit by the epidemic.

While businesses are coping, no one pretends the adaptations are easy. Not being able to travel to China makes quality control more difficult, can slow the design process and raises the possibility that, if the epidemic drags on, alternative production sources might have to be found.

“The biggest problem is in communication. Work is getting done, but reports are slower,” said Wendy Chivian, president of Anne Klein, which does a significant percentage of its production in China, adding that so far, things are proceeding on schedule. “The e-mail is slow, and they’re communicating by phone five times a week, up from once or twice a week.” Some of the administrative people are making calls from home, rather than from the factories, she said.

“To date, our business has not been impacted by SARS,” said a Liz Claiborne Inc. spokeswoman. “None of our people have contracted the disease. None of our factories have reported unusual levels of absenteeism. None of our production schedules have been compromised. As such, we have no plans to adjust sourcing configurations at this point in time.

“We are being inconvenienced by the lack of travel to and from Asia, so we are relying more heavily on faxes, e-mails, phone calls and video conferencing,” she continued. “All of our Asian offices are taking appropriate precautions, for example, wearing masks, staggering hours to avoid rush-hour travel, holding fewer meetings and not eating at restaurants. Moreover, each office has a well-developed contingency plan that includes telephone trees [a phone chain], alternative work sites and sufficient computers and fax machines to facilitate telecommuting.”

Nike has a moratorium on U.S. employees traveling to Asia, but plans to discuss lifting it as early as next week, said Vada Manager, director of global issues management. Teleconferencing, videoconferencing and overnighting samples are some of the substitutes the company is using while the ban on Asian travel is on.

The company produces about 60 percent of its apparel and athletic equipment in Asia, although shifting production is not an issue at this stage. Nor is it for footwear, since more than 85 percent of its shoes are made in four countries — China, Indonesia, Thailand and Vietnam. Asia accounts for the production of 180 million pairs of shoes each year. “The production capacity isn’t there outside of Asia for us,” Manager said. “Asia is where the game is located for us.”

About 350,000 factory workers and managers are involved with Nike’s production in Asia. That represents about half its worldwide production workforce.

In Nike’s Hong Kong office, face masks are available and offices are sprayed with antibacterial disinfectants, in line with recommendations from the World Health Organization and the Centers for Disease Control and Prevention in Atlanta.

Major U.S. retailers don’t attribute any slowdown in their businesses to the SARS scare yet. A Wal-Mart Stores Inc. spokesman said SARS has yet to slow down the retailer’s business. “It hasn’t really had an impact at this point except in the sense that some people have concerns,” he noted.

In addition to self-imposed quarantine measures for recent business travelers from SARS hot spots, Wal-Mart has limited nonessential travel to those areas and turned instead to videoconferencing and the shipping of samples.

Wal-Mart, which has 26 stores in China and 14,000 associates in the country, has had only one case of SARS. The associate, who worked in the receiving part of a store, was diagnosed two weeks ago and is recuperating.

But some European designer brands admit the lack of tourist traffic in China is hurting their retail businesses in the region. Giorgio Armani said there’s an even bigger problem looming.

“SARS has affected travel in Asia, so all of our retail businesses there are suffering from lack of tourism traffic,” said a company spokesman. “The thing that will have a bigger impact on Armani is that in a few weeks’ time, buyers are expected from those parts of the world — and I am mainly talking about Hong Kong and mainland China —to buy the collection, so we may have to find a way to present the collection locally, which we have done in the past when air travel was impossible.”

Abe Chehebar, chairman and chief executive officer of Accessory Network, an accessories firm here, said, “The main issue is the lack of personal communication. Right now, I would usually have 15 to 16 people there developing and negotiating price points for next season’s product line, which hasn’t happened because they haven’t been traveling. The good news is that we have been able to do the best we can with our systems. We have been using video conferences, but there is definitely a big difference from a face-to-face meeting. We are sensing a slowdown to a certain extent in the ability to execute.

“So far, we haven’t shifted anything because of SARS,” Chehebar said. “If the situation continues to develop, that is something we need to look at. Shipments are not being affected. Because of the overall slowdown in the orders they are getting in China, they have more availability, so it has actually been easier to place goods. The factories are hungry for orders. We stopped travel to Asia about six weeks ago and we are also not allowing our Asian employees to come here because of the concerns,” said Chehebar.

Tesa Totengco, vice president of Rafé New York, said, “We produce our handbags out of China, and we have an office in Hong Kong. We have an agent there, so fortunately for us, he is working on our behalf to make sure we are getting things out on time. So far, we are on schedule for all our fall shipments, and we don’t see any problems in terms of deliveries.

“There is no need for us to do video-conferencing. We send photographs through the Internet and if need be, we send samples,” she said. “SARS is not a hassle for us, and it has had a low impact on our business, since we all communicate in the same way we did before, via fax and e-mail. So far, none of the people in our factories have gotten sick. We are not bailing out or changing any of our production there. I think they need our support right now.”

European designers also appear to be staying the course, as well, sticking to their plans to open stores in China and the surrounding region.

Chanel, for example, said it would open a boutique at the Hong Kong airport toward the end of the year. A spokeswoman added that its strategy in the region has not been altered, although it is polling clients and editors there to see if they will travel to Paris for upcoming markets and the July couture.

Louis Vuitton, which just opened its eighth boutique in China, in Shenzen, at the end of March, said it plans to press ahead with three others this year: a boutique in Harbin in mid-July and locations in Dalian and Quiangdao slated to open before the end of the year. In disclosing its first-quarter results earlier this month, LVMH downplayed the impact of SARS and said sales of Vuitton were still advancing at a double-digit pace, even in Hong Kong.

A spokesman for French retail giant Carrefour said it’s not planning on slowing down its ambitious China expansion. Carrefour has opened 35 hypermarkets in China since 1995 and plans to expand with about 300 discount units, primarily selling food, through 2006, as reported.

On Monday, the Carrefour spokesman said sales in China so far have not been affected by the SARS epidemic, since the bulk of its business is essential foodstuffs. He noted, however, that shoppers are spending less time in the stores, as well as in its restaurants and other amenities.

“China remains a market with a lot of growth potential,” said a spokesman at Marzotto, which owns Valentino. He said Valentino is proceeding with its original plan to open franchised stores in Taipei and Taichung in Taiwan, as well as Singapore and Jakarta in 2003. But he could not be more specific on the timing.

Tod’s has stopped traveling to the region and it has given its three Italian employees based in Hong Kong the possibility to return to Italy on a short-term basis until things blow over, but no one has taken them up on the offer so far. Meanwhile, the company’s plans to open a store in Singapore come September are still a go.

Some economists, though, expect SARS-related hang-ups in China to move U.S. prices upward. The spread of the disease and efforts by China to contain any outbreaks could slow production and shipments of products to the U.S., said Sherry Cooper, executive vice president and global economic strategist at BMO Financial Group, who described upward pricing pressure as “imminent.”

How much pressure will be brought to bear, though, depends on the lasting power of the disease, she said. Factors seen as disrupting to production include absenteeism, employees suffering from SARS and a trepidation surrounding travel to China. Theoretically, a plant could be shut down for a quarantine period if one employee was found to have been exposed to SARS, she noted.

“I’m not concerned about big price pressure in the U.S.,” said Cooper. “At the margins, these things matter. It’s just part of the fallout of SARS. It does mean that for American businesses there will be delays in terms of receiving the goods that they ordered.”

“It’s another knock. It’s a serious negative exogenesis shock,” she continued. “We just get over the war and consumer confidence picks up again and you think we’re all clear and this happens.”

On the other hand, J.P. Morgan Chase & Co. economist James Glassman maintained that SARS “is not going to have an effect that’s visible to anybody in this country in terms of slowing things down. There’s plenty of flexibility in the system to keep producing.”

Also helping to offset any production roadblocks, he said, manufacturers in China might have to make price concessions to keep U.S. retailers buying.

“The anxiety about this is starting to slow down a bit,” he said. “I doubt it’s a price event. The number of cases is so small as a part of the population — it makes me think that it’s not the kind of thing that’s going to cause factory shutdowns.”

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