Crisis management

The Sars crisis has had a big impact on the working policies of many foreign companies doing business in China. While some will be tempted to speed up localisation, there are risks in rushing the process.

At the start of 2003, companies doing business in and trading with China were anticipating another bonanza year. The factors that made China the world's favourite destination for foreign investment in 2002 were more pertinent than ever: political stability, post-WTO accession market opening, a top notch manufacturing base and dynamic growth in domestic output.

As an added bonus, China offered a benign security environment with little of the anti-Western attitudes, Islamic extremism, war and terrorism that has recently soured investor sentiment towards other emerging markets and shaken the international community. With such formidable credentials, what could go wrong?

China's status as a safe haven was shaken by the unfolding of the Sars epidemic, first in Guangdong and Hong Kong, then in Beijing and other parts of the country. Sars illustrated how quickly new and unforeseen risks can emerge to test companies' resourcefulness. It inflicted considerable disruption to commercial activities in affected areas and transformed the operating environment for foreign business and expatriates. The government's mishandling of the crisis, not least its concealment of the extent of the problem, provided a timely reminder to any executive who might have become complacent about the limitations of China's political system.

Corporate travel

China's importance to the global economy meant that few multinationals could afford to ignore the epidemic. The World Health Organization's (WHO) unprecedented issuing of a travel advisory on April 2 cautioning against non-essential travel to Hong Kong and Guangdong created an immediate dilemma for companies: how to fulfil their duty of care towards their travelling employees without jeopardising their investments. A succession of often conflicting travel advisories from national governments concerning Sarsaffected areas added to the confusion.

Companies with a pre-existing employee travel policy adjusted it according to their assessment of the situation, usually after much deliberation. On April 9, US retailing giant Wal-Mart announced that it was restricting travel to China, Hong Kong and other Sars-affected areas. This stance by a corporate heavyweight influenced many smaller operators to follow suit. Companies without a co-ordinated approach to employee travel hastily formulated a policy and attempted to enforce it.

Control Risks Group advocated making a case-by-case assessment of the advisability of travel based on a number of factors. These included the importance of the visit, the current status of any WHO and national travel advisories, the extent of the infection in the specific location to be visited, the health infrastructure available, and the medical history and state of health of the travelling employee. Other factors to be considered are whether insurance, including emergency medical evacuation, will be invalidated by travel to Sars-affected areas, and whether obligatory quarantining will be imposed in any onward destination.

Companies were also advised to have a policy for travellers who return from an affected area. Plunging the employee back into the office can distress co-workers who may fear that they are being exposed to the virus. Many companies have requested that returning employees stay at home for 10 days and monitor their health.

For the plethora of companies that source components or products in China, limitations on travel were only part of the problem. Those relying on Pearl River Delta factories to supply their goods were among the first to recognise the potential impact of a mass outbreak of an infectious disease. The prospect of the virus jumping from bunk to bunk in tightly packed factory dormitories had purchasers scrambling to interrogate their suppliers about contingency planning and investigating dormant production lines in Latin America and other developing regions. Microsoft was the most high profile of those reported to be concerned.

Some companies were directly affected. Matsushita halted production on May 17 at two plants in Beijing because five of its workers were found to be infected with the virus. Like other foreign electronics groups, the Japanese company has shifted much of its manufacturing capacity to China.

Overall, however, few foreign factories were closed or quarantined and supply for the large part was uninterrupted. Essential services, such as infrastructure and logistics, did not grind to halt. The situation would have far graver had rumours that Hong Kong was to be 'sealed off' been realised. Reassurance was provided by the WHO, whose April 11 update stated there was no evidence to indicate that goods or products from SARSaffected areas posed a risk to public health.

Nevertheless, with Guangdong rendered a 'no-go zone' and face-to-face meetings out of the question, purchasers, quality checkers, technicians and sales personnel had to find alternative ways to do business with suppliers. Tele- and video-conferencing became the favoured means for both sides to interface and typified the increasing reliance on technology that will likely be a legacy of the Sars outbreak. Foreigners' reluctance to attend the important Guangzhou Trade Fair in April gave producers added incentive to become more proactive, or lose valuable business. Some producers responded by setting up virtual, web-based catalogues or despatched representatives to liaise with clients in their own market.

The Sars outbreak may cause some erosion of Guangdong's manufacturing competitiveness as companies rethink the wisdom of relying exclusively on manufacturers from a particular geographic location. However, the cost-effectiveness of Guangdong suppliers will ensure that there is no wholesale shift of production. Instead, purchasers will invest more thought into monitoring their supply chains and averting supply squeezes before they transpire.

In-country operations

Foreign investors with operations in Sarsaffected areas faced the biggest headache. Not only did expatriates become restless and concerned for their health and that of their families, there was also the prospect of having to deal with an employee falling ill with Sars and the workforce being quarantined.

Some canny corporations had procedures in place to deal with unfavourable contingencies and were able to respond in a way that minimised disruption to corporate activity. Others were panicked by headlines of rising death tolls into freezing investments and extracting expatriates. This kind of unmeasured response can damage businesses over the longer-term. Pitfalls include ceding control to joint venture partners, damage to reputation, losing face with officials and business partners, project delays, missed targets, lost contracts and erosion of market share.

Some companies introduced flexible working policies that allowed employees to avoid crowded rush-hour commuting and thus limit their potential exposure to the virus. Others permitted telecommuting or home working. Where there was a need to have employees grouped together, strategies were devised to enable operations to continue in the event that an employee fell ill. In some cases, employees were sent to a backup office in a different part of the city or even in a different part of the country.

Key executives whose ability to function is critical to operations could be separated and prevented from meeting unless essential. Where expatriates became unsettled, many companies opted to repatriate non-essential workers and the dependants. Some who took vacation were invited to extend their leave. Honda Motor, for example, withdrew its expatriates from its Guangzhou factory during the truncated May Day holiday and prohibited them from returning.

Companies may be tempted, particularly if expatriates and their families are reluctant to return to affected areas, to accelerate plans to replace expatriate managers with indigenous counterparts. Localisation is attractive because it offers apparently pain-free opportunities for trimming expenditure, such as costly expatriate relocation packages and air fares.

However, companies should be mindful of the risks of rushing the process as placing inexperienced personnel in key positions could prove a false economy if contracts are lost or trust relations with business partners are disrupted. Companies will have to offer increasingly lucrative packages as the competition for experienced and well-qualified local managers intensifies.

Long-term issues

The Sars epidemic has thrown into sharp relief some of the potential downsides of investing in China that successive years of rapid GDP growth had masked. If the epidemic is not brought under control soon, year-end growth may total as little as 6 per cent, below the minimum deemed necessary to defuse social tensions. The decline in foreign direct investment, tourism and consumer spending will force the government to ratchet up its spending, further widening the budget deficit and straining the already creaking financial system. These long-term hazards will play increasingly on the minds of corporate decision-makers the longer the Sars crisis draws out.

This article was written by Jo Carpenter, East Asia analyst for Control Risks Group, a specialist business risk consultancy. CRG has 16 offices worldwide and is opening an office in Shanghai in 2003. Its services include political and security risk analysis, confidential investigations, security consultancy, crisis management and response, and information security.