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Implications of Iraq War and SARS


1.      Introduction

It is an unpleasant year for Hong Kong.  The already slow growing economy of Hong Kong is further dampened by the US-led Iraq war and the Severe Acute Respiratory Syndrome (SARS).  With the end of the war and the SARS infection rates are down, international businesses in Hong Kong are under way to try to ease the economic damage and get back to business as usual. 

ABC-HK is located in Hong Kong and is a representative Far East office of its corporate office, ABC Industries Inc.  ABC Industries Inc is a diversified international manufacturer and wholesale marketer of branded and private label apparel for men, women and children in United States.  The functions of ABC-HK is to oversee operations of ABC-Sin (its Singapore operation office) and ABC-Phil (its Philippines factory), and subcontracting operations in other Far East manufacturing plants such as Hong Kong, China, Indonesia, Malaysia, Thailand, and Middle East, etc.  ABC-HK has over 1,000 staffs in Hong Kong, Singapore and Philippines.  The staffs are often required to travel around US and Far East offices to work with their colleagues.  Therefore, it is a company truly engaged in the international business.

The purpose of this paper is to critically evaluate the implications of the Iraq War and the SARS epidemic on Hong Kong・s involvement in international business and ABC-HK from the view of manufacturing perspective with a US customer base.  Some solutions will be suggested to counter these crises after the analysis.

2.      Implications of the Iraq war

From a location point of view, Hong Kong is quite far away from Iraq so it seems the impact is minimal.  In fact it is not.  Hong Kong is an export-oriented economy and any turbulence from the macro-environment would influence the manufacturing sector.  ABC-HK is particularly affected from the Iraq war for its US customer base.  Therefore, the implications of Iraq war are significant.

2.1    Impacts of Iraq war

The discussion of the impacts of Iraq war is focused on the US as it is the sole customer for ABC-HK and is the second largest markets for Hong Kong exports in 2002 (Figure 1).

2.1.1        Dispel uncertainties

The US consumer confidence initially dipped to lowest level before the war due to uncertainties but it has quickly recovered as the war came to a swift end.  According to ABC News/Money Magazine (cited in Reuters, 2003), the latest week・s poll of the US consumer confidence (in the week ended April 20) surged by 13 points since the war began the week of March 23.  Improved consumer confidence has a chain effect for market confidence, increase consumer spending and corporate investments.  The end of the Iraq war has also relieved the oil prices (Figure 2). 

 

Value (US$ million)

Share (%)

The Chinese mainland

71,564

39.2

US

39,274

21.5

Japan

9,821

5.4

UK

6,377

3.5

Germany

5,660

3.1

Taiwan

4,033

2.2

Singapore

3,699

2.0

South Korea

3,556

1.9

Netherlands

3,031

1.7

Canada

2,784

1.5

Middle East

2,418

1.3

Figure 1: Hong Kong・s Major export Markets (January-November 2002)
(Source: Hong Kong Trade Statistics, Census and Statistics Department, cited in Hong Kong Trade Development Council, 2003)

 

Figure 2: OPEC Basket Oil Prices
(Source: Platt・s Oilgram Price Report, cited in Tax Division Online, 2003)

2.1.2        Terror retaliation

The reasoning of US behind the war was to disarm Saddam Hussein, remove him from power, eliminate Iraq's alleged stockpiles of weapons of mass destruction, and address the causes of terrorism at their roots.  However, this pre-emptive strategy has got substantial criticisms.  Many military experts warn that this will only drive the US to confront an expanding network of enemies in the region such as Iran, Syria and Saudi Arabia.  The consequence is severe as it may heighten risks of terrorist retaliatory actions on American soil. 

2.1.3        Anti-US protests

Galston (2003) argues that international cooperation can only succeed with international law and treaties to build the institutions for administering that law.  The Iraq war displays the temptation of the US to set itself apart from the system of international law.  Although the UN is the sole legitimate body to deal with crisis, the US-led alliances bypassed it to invade Iraq for the assertions that Hussein possessed weapons of mass destruction.  Yet, as of today, the hunt for Iraq weapons of mass destruction turned up nothing.  Growing evidence shows that the US grossly manipulated intelligence about those weapons of mass destruction in the run-up to the Iraq war (Kristof, 2003).  This gives a great pressure to the US and would cause more anti-US protests.  According to LaFranchi (2003), the post-Iraq-war poll of 16,000 people in 20 countries show opinions of America's role in the world falling like a roller coaster on the descent.  If the situation is not improved, it will only hurt the future policies and strategies of US itself.

2.1.4        Geo-political stress

How US will rebuild its relationship with the other world leaders are also important.  After the Iraq war, majorities in a growing number of Muslim countries fear an American military invasion, while many Europeans prefer an even more distant relationship between their country and the US.  These conflicts could also spur the creation of protectionist trade and currency blocs.  Economists argue that the trends toward globalization will sweep away these hostilities.  But Samuelson (cited in Judis, 2003) warn that it could also turn out to be a watershed in international relations. 

2.2    Implications to Hong Kong manufacturing

There are several significant implications from the above impacts from Iraq war to the Hong Kong manufacturing sector and ABC-HK.

2.2.1        From dispel uncertainties

A dispel of uncertainties can help Hong Kong manufacturers back to normal operations such as product cost (due to reduced oil prices) to sales and profitability (resume customers・ buying).  Although the degree of impact from oil price on clothing industry is the second least significant (Figure 3), clothing items with synthetic material components is also affected by the price increases of petrochemical products. 

Hong Kong manufacturers like ABC-HK can take advantage of market developments in the US; but there should be increased emphasis on value-for-money products as the US economy is still weak.  Hence, growing pressures on prices and margins are inevitable.  The other implication is whether manufacturers like ABC-HK should put all the eggs in one basket V the US market, as it is rather fragile in view of the other impacts discussed above.  Should new market development such as Europe or China be considered would depend on the company strategies and the global economy.

2.2.2        From terror retaliation

To counter the possible risk from terror retaliation, the US government might introduce even tighter international and security strategy.  According to Hong Kong Trade Development Council (2003), one of which most influences international trade is the introduction of Container Security Initiative (CSI) from the US after 9/11.  Its purpose is to pre-screen cargo containers before they are shipped to the US.  US Customs officers are stationed at participating CSI ports.  New policies like CSI only increase barriers and costs to Hong Kong manufacturers; while frequent changes of policies and sense of insecurity will detriment business confidence and hold back investments.

Businesses can usually strike bargains based on financial calculations (Samuelson, 2003).  Samuelson (2003) argues that war and terrorism create new uncertainties that confound ordinary calculations and may deter global commitments.  In the long-term, it will only hurt the business of Hong Kong manufacturing like ABC-HK and pose challenges for their international strategies.

Export items

Degree of impact

Fine jewellery

Ö

Clothing

ÖÖ

Household electrical appliances

ÖÖÖ

Consumer electronics

ÖÖÖ

Footwear

ÖÖÖ

Spectacles

ÖÖÖ

Watches and clocks

ÖÖÖ

Gifts and premium

ÖÖÖÖ

Travel goods and handbags

ÖÖÖÖ

Household products

ÖÖÖÖÖ

Toys

ÖÖÖÖÖ

Ö = Least Significant              ÖÖÖÖÖ = Most Significant

Figure 3: Impact from Increases in Petrochemical Price on HK・s Major Export Items
(Source: Hong Kong Trade Development Council, 2003)

2.2.3        From anti-US protests

More anti-US protests will expose the staffs and the operations of US companies and those manufacturing for US products into more risks.  Yet, Hong Kong is one of the most stable political environments in the world so Hong Kong manufacturers are the least risk of such problems.  But for ABC-HK, its production places include anti-US countries like Malaysia, Indonesia and Middle East.  Should it revise its sourcing strategies, contingency plans, security plans, etc or remain the old strategies would depend on many factors such as costs and productivity of individual country.  The culture of different countries, for example pro-US or anti-US must be handled carefully to avoid any conflicts.

2.2.4          From geo-political stress

Good business environments depend on the geo-political stability.  Against this backdrop, the business interests are pressing the leaders of their countries to smooth over their differences and find common ground on economic growth, including new free-trade deals.  Whether there is new development or improvement is a rather uncontrollable factor for Hong Kong manufacturers.  All they can do is to be sensitive and responsive to the fast changing environments.

3.      Implications of SARS

The outbreak of SARS has caused pervasive impacts across many sectors and is causing significant economic disruption in Hong Kong.  The latest SARS numbers in Hong Kong are shown in Figure 4.  The numbers have been an indicator of economy recovery for the businesses.  Obviously, the impacts of SARS are more on local businesses in Hong Kong.  However, there are also insignificant implications for Hong Kong manufacturing sector and ABC-HK in the long-term.

Cases

Numbers

Total cumulative number

1753

Total number of discharged patients

1365

Total number of deaths

288

Figure 4: Latest Figures on SARS as of June 9, 2003
(Source: The Hong Kong Government, 2003)

3.1    Impacts of SARS

The SARS has several impacts on international businesses, though it is a more localized rather than an international problem.

3.1.1        Health conscious

In order to avoid breakdown due to SARS, stronger health conscious is the most agreed positive impacts from SARS.  Many international businesses and Hong Kong manufacturers have required stronger public health infrastructure in the offices for the immediate threat of SARS.  Some companies even treat this as the basis of a future safety net.  It would benefit the company indeed.  Taking ABC-HK as an example, its staffs are required to travel frequently around the world; there are also visitors from its other offices and factories from different countries.  An emphasis on personal and public hygiene can protect the staffs themselves and other people, and ensuring productivity without disruption.

3.1.2          Travel bans

There are profound negative impacts of the travel warning from the World Health Organisation (WHO).  Backman (2003) criticizes that the travel warning has contributed to the enormous damage to business and economies.  The reduction in travel (business and personal) has brought down tourism and consumer spending, especially in the infected region including Hong Kong.  This has been reflected from the GDP forecast by the Economist Intelligence Unit (cited in Leander, 2003) as shown in Figure 5. 

The consequence of the travel bans is more companies have stopped their staffs from travelling to Hong Kong.  According to Holland (2003), the number of passengers passing through Hong Kong・s airport was down by more than two-thirds compared with last April; while hotel occupancy fell to around 10% from normal levels of 85 percent.  Cathay Pacific faced with a dramatic decline in reservations has been forced to slash their schedules by almost 50% in June (Walsh, 2003).  The economic impact is severe to Hong Kong manufacturing sector with a local focus due to a fall of domestic demand; while there is less impact on those focuses on exports.

 

Best case

Base case

Worst case

Malaysia

0.23

0.90

4.05

Singapore

0.22

0.88

3.94

Thailand

0.18

0.73

3.26

China

0.16

0.64

2.87

Hong Kong

0.16

0.63

2.81

Indonesia

0.12

0.46

2.08

Philippines

0.08

0.30

1.35

Vietnam

0.07

0.26

1.18

Korea

0.05

0.19

0.84

Taiwan

0.04

0.18

0.79

Asia ex Japan

0.13

0.50

2.27

In the .best case・, SARS affects the economy until end of May
In the .base case・, SARS affects the economy until mid-July
In the .worst case・, SARS affects the economy until the end of the year

Figure 5: Reduction in GDP Growth Caused by SARS (% Changer Y/Y)
(Source: The Economist Intelligence Unit in Leander, 2003)

However, some are also citing positive impacts from SARS.  First of all, there are cost benefits and savings of travel bans.  Secondly, there is an increase of using technology in boosting efficiency such as video-conferencing technology in lieu of face-to-face meetings.

3.1.3          China situation

The China・s cover up of the SARS situation has been strongly criticized.  The latest strict measures to avoid the spreading of SARS from some provinces are too harsh for Hong Kong manufacturers that have assembling processes in China like ABC-HK.  The quarantines include clamped even on large city areas; health checks are made mandatory for travelers; rural roadblocks are built to turn back outsiders; local committees police those isolated at home; and SARS victims・ movements are carefully traced (Dolven and Murphy, 2003).  The kind of measures has crimped all its business activities.  Transport and shipping are harder, more time-consuming and sometimes more costly. 

3.2     Implications to Hong Kong manufacturing

There are several insignificant implications from the above impacts from SARS to the Hong Kong manufacturing sector and ABC-HK.

3.2.1          From health conscious

More health conscious means a development of health infrastructure is essential in the long-term for Hong Kong manufacturing sector.  Health infrastructure is certainly about money, which means the overhead costs of the company will be increased for more cleaning, staff training, cleaning equipments, more sick leaves, etc.  With the growing pressure of the production and material costs and overhead, this will only increase the burden of the Hong Kong manufacturers and their survival from international competition.

But from a more optimistic view, SARS has opened up a strategic window for clothing manufacturers like ABC-HK.  The outbreak has created a stepped up demand for protective disposable garments used by healthcare workers.  As an international apparel manufacturer, should ABC-HK grasp this opportunity would depend on its conscious, ability, costing structure, and company strategy, etc.

3.2.2        From travel bans

It is interesting to see how the SARS outbreak has changed the way of doing business.  The Hong Kong manufacturing sector has learned valuable lessons about how much time and money they can save through video-conferencing, software that allows designers to collaborate remotely, and even more frequent use of express carriers to send samples.  It has also forced the manufacturers to rethink whether employees needed to travel as much as they had been prior to the SARS outbreak.  Yet, this implication depends on the nature of the businesses.  For ABC-HK, it is an operation office so it is less likely to be benefited from these advantages.

There is another implication from the travel ban on Hong Kong.  Hong Kong is one of the worst SARS situations in the world.  Its image is still battered and bruised (Clifford, 2003).  Hong Kong faces one of the world・s biggest re-branding challenges.  But it is much depending on how China tackles SARS.  If the epidemic worsens on the mainland, Hong Kong could be at risk of a second round of infections with severe economic consequences.  Unfortunately, that is largely out of Hong Kong・s hands.  All the Hong Kong manufacturers and ABC-HK can do is to wish the outbreak will be gone very soon and by then, they can reposition themselves to restore confidence from their customers.

3.2.3          From China situation

With the China・s accession to the WTO, many international businesses and the Hong Kong manufacturing sector have taken the advantage from this global factory.  Yet, the SARS outbreak gives a very good implication that China・s infrastructure has not been well-prepared for such challenges.  For those have heavy investments or assembling facilities in China like ABC-HK should consider whether they should move some of the production or processes to other countries.  No matter how the development is, the outbreak cannot stop the growth of China.  Many Hong Kong manufacturers warn of delays in negotiating deals, which could reduce the pace of investment through the rest of the year.  Still, multinational corporations appear to retain a long-term enthusiasm for investing in China (Bradsher, 2003).

4.      Solutions to counter these crises

Some people say that the impacts of the Iraq war are more than the SARS in the long-term.  It is partly true as SARS can erode human lives, productivity and the whole economy in a very short period.  So it better says Iraq war is a human epidemic that can be avoided, while SARS is natural disastrous that is hardly to eliminate.  Hence, it is difficult for Hong Kong manufacturers to take control on these factors.  Rather, they should find solutions to counter these crises.

4.1    Crisis management

Crisis is unplanned event.  According to Remedy (2003), crisis management encompasses the activities that enable a business to plan for, respond to, and recover from an event.  

Planning

As there are no single scenarios for crisis management, planning is vital for possible solutions during sudden crises like Iraq war and SARS.  Planning should involve what, who and how to deal with crisis when there is (Crisis Management and Disaster Recovery, 2002). 

Responding

Should there be any unexpected and sudden crisis other from the plan businesses still need to respond to it.  First of all, the businesses need to do impact analysis to determine the various threats and scenarios.  Then, the survival steps can be developed to solve the problems. 

Recovering

This is the worst scenario that the businesses are affected by the crises.  Hence, it is about the short-term and medium-term of action plans for what should be done to restore the critical business functions. 

4.2    Suggestions to counter crises from Iraq war and SARS

Using the above crisis management theories, the suggestions to counter the crises from Iraq war and SARS are as following:

4.2.1        Planning

Planning for the future can minimize disruptions on operations.  The Hong Kong manufacturers and ABC-HK can plan for:

What

The analysis and assessment of threats is essential.  This includes possible wars, terrorisms, strikes, virus, fire, etc.  But it requires the management be responsive to the macro and micro-environments around them.  Different scenarios should be also analysed and assessed, for example a short or extended war.

Who

The orderly communication of information and decisions to those involved should be appointed and identified.  For example, who has the legitimate power to approve a travel trip during a SARS outbreak.

How

Based on the .what・ and .who・, the development and implementation of alternative responses based on different scenarios should be made.  Plan should also include the coordination to return to normal operations once the threat or crisis has concluded.

4.2.2        Responding

Responding is crucial to bring the company out of the epidemics.  In the case of SARS, the Project Management Institute (Wozniak, 2003) says smart companies should respond with survival steps as following:

(1)       If a staff member becomes infected with SARS, take action to minimize further infection

(2)       Issue clear instructions and guidelines on travelling to infected areas, with staff safety as the focus.  Explore non-contact ways of conducting business meetings, such as conference calls or video-conferencing

(3)       Inform clients of your risk-response plans, so that they know their services will not be affected

(4)       Discuss staff concerns and listen to their suggestions.  Show staff that the company is doing something to ensure a clean environment and cares about their health

Communication is one of most important responding in times of crises.  The Hong Kong manufacturers must communicate with their international partners/customers for their intention of investments before, during and after the crises so that they can move fast in front of the customers.  They must also communicate with their staffs as the staffs might know more about the impact of the crises as they are working in the front-line. 

4.2.3        Recovering

In case the Hong Kong manufacturers and ABC-HK are unfortunately influenced by the Iraq war and SARS, they should try to recover by short-term and medium-term measures.

Short-term measures might include focus on micro-marketing rather than mass marketing to restore confidence from the customers, negotiate trade terms with suppliers, defer all non-essential investments, reduce production capacity, etc.  For example, in the case of SARS, the image of Hong Kong is bruised.  There is negative impact on the international businesses of Hong Kong.  They need to rebuild their images by exposing more in trade shows, meeting with customers, offer more quality products, etc.

Medium-term measures might include closer collaboration with manufacturing plants, adjust staff levels to new trading levels, exit poorly performing plants, reduce working capital requirement, etc.  For the case of ABC-HK, it is likely to reduce excess plants if the negative impacts from the Iraq war are more profound or the SARS situation persists.

5.      Conclusions

As a conclusion, there are several implications from the Iraq war and SARS on Hong Kong・s involvement in international business from a manufacturing perspective.  The most significant one is that the manufacturers are less likely to avoid such kinds of human or natural epidemics.  Rather, they should keep on top of the external environments to discover the threats and opportunities around them.  They should constantly review and modify their international strategies to meet the challenges under these crises.  As crises are unplanned event, the best solution to counter these crises is to plan ahead to mitigate the losses.  Effective crisis management can build trust among consumers, employees and shareholders and cultivate lasting reputations that improve their bottom lines.


References

Backman, Michael (2003), .SARS: A WHO-Induced Panic?・, Far Eastern Economic Review, May 22, Dow Jones

Bradsher, Keith (2003), .SARS Toll on Asian Economies Will Linger・, International Herald Tribune, May 31

Clifford, Mark l (2003), .A Post-SARS Rx For Hong Kong・, Business Week, Asian Edition, June 9

Crisis Management and Disaster Recovery (2002), .Crisis Management・, [Online, accessed 11 June 2003]
URL:http://www.crisismanagement-disasterrecovery.com

Dolven, Ben and Murphy, David (2003), .Building New Chinese Walls・, Far Easter Economic Review, May 22, Dow Jones

Galston, William (2003), .Perils of Preemptive War・, The American Prospect, Volume 13, Issue 17, September 23, [Online, accessed 7 June 2003]
URL:http://www.prospect.org/print/V13/17/galston-w.html

Holland, Tom (2003), .Counting the Cost・, Far Eastern Economic Review, May 22, Dow Jones

Hong Kong Trade Development Council (2003), .Potential US Strike on Iraq: Possible Impact on Hong Kong Exports・, Trade Watch, Hong Kong Trade Development Council V Research Department, January

Judis, John B (2003), .A Case for Hell・, The American Prospect, Volume 14, Issue 4, April 1, [Online, accessed 7 June 2003]
URL:http://www.prospect.org/print/V14/4/judis-j.html

Kristof, Nicholas D (2003), .Who will Rescue America・s Spies?・, International Herald Tribune, June 1

LaFranchi, Howard (2003), .Anger at US Deepens Since War・, The Christian Science Monitor, June 5, [Online, accessed 8 June 2003]
URL: http://www.csmonitor.com/2003/0605/p01s02-wogi.html

Leander, Tom; De Ramos, Abe and Wood, Justin (2003), .Standing Up to SARS: Finance and Risk Management in the Time of Contagion・, CFO Asia, May

Remedy (2003), .Crisis Management・, [Online, accessed 11 June 2003]
URL:http://www.remedy.com

Reuters (2003), .US Consumer Confidence up Two Points-ABC/Money・, Forbes.Com, April 22, [Online, accessed 9 June 2003]
URL:http://www.forbes.com/markets/economy/newswire/2003/04/22/rtr947409.html

Samuelson, Robert J (2003), .Globalization goes to War・, Newsweek, February 24

Tax Division Online (2003), .Other Market Oil Prices・, [Online, accessed 9 June 2003]
URL:http://www.tax.state.ak.us/PRICES/mon_otheroil.htm#otherprices

The Hong Kong Government (2003), .Latest Figures on Severe Acute Respiratory Syndrome・, June 9, [Online, accessed 10 June 2003]
URL: http://www.info.gov.hk/dh/diseases/ap/eng/infected.htm

Walsh, Bryan (2003), .Running the Travel Gauntlet・, Time, May 19

Wozniak, Lara (2003), .SARS Head-On・, Far Eastern Economic Review, May 22, Dow Jones


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