As of April 23, at least 251 people worldwide had died of severe acute respiratory syndrome (SARS). That is far, far fewer than the number who die from the flu, accidental falls or car crashes each month in the United States. Yet, since SARS first came to public attention in March, the mysterious illness has disrupted global business and vacation travel plans, prompted downward revisions to economic forecasts, jeopardized the health of thousands of small businesses in Asia, and placed the response of the governments of China, Hong Kong and Singapore under intense scrutiny.

How SARS Presented a New Corporate Risk Management Challenge

Managing risk is something companies do all the time. In that sense, one of the corporate world’s responses to the new strain of pneumonia – curtailing travel by employees to affected areas, for instance – is prudent and rational, say Wharton faculty members and business executives.

Why a Disease Outbreak Presents Unique Challenges to Businesses

Several factors, though, make SARS different from other potential sources of harm to employees, markets and the bottom line alike: It is something new, has spread in confined places like airplanes, has leapfrogged from continent to continent, and has no cure. Although the number of deaths attributed to SARS is tiny – the death rate among those infected is about 5%, according to the World Health Organization (WHO) – no one knows how many will eventually become sick and die.

“Fear is much more related to uncertainty than it is to the actual magnitude of what the risk is,” says David Asch, professor of medicine and executive director of the Leonard Davis Institute of Health Economics at Wharton. “The magnitude of risk is probably very low [with SARS]. The real chance that someone would contract SARS and die from it is relatively low considering the attention it’s receiving. We have less uncertainty about influenza, even though tens of thousands of people die from the flu every year. But they tend to be the elderly and sick rather than business travelers.”

Global Scope

Of the 4,288 probable cases of SARS reported in 25 countries as of April 23, most of the cases have occurred in China (2,305), followed by Hong Kong (1,458), Singapore (189), Canada (140), Vietnam (63) and the United States (39). Most deaths have occurred in China (106), followed by Hong Kong (105), Singapore (17), Canada (13), and Vietnam (5). No SARS-related deaths have been reported in the United States.

Travel Restrictions

The WHO announced on April 23 that it was adding new areas to its list of locations that travelers may wish to avoid. It said people should consider postponing all but essential travel to Beijing and Shanxi Province in China and to Toronto. The WHO said this advisory, which is an extension of travel advice previously issued for Hong Kong and China’s Guangdong Province, would be reassessed in three weeks. It was in Guangdong that SARS is believed to have originated last November.

Corporate Travel Curtailed: More Videoconferencing?

SARS has had a particularly devastating effect on business travel to Asia. According to MeetingNews.com, an online trade publication, half of corporate travel managers who took part in a survey by the National Business Travel Association said that SARS had caused a reduction in travel at their companies. (The war with Iraq and the sluggish economy were two other major factors cited in reduced travel.) More than half the respondents said they expect their total travel spending to be down in 2003. Three-quarters of those responding said the business travel industry would not recover until 2004 or later.

Three multinationals, General Electric, IBM and Wal-Mart, told Knowledge at Wharton that they have halted all non-essential travel by employees to China, Hong Kong, Singapore and Vietnam. Wal-Mart has included a fifth location on its list, Toronto. The companies say they have not compiled figures on the number of business trips that have been cancelled due to SARS.

“We require that any proposed travel to one of these countries be cleared with a senior officer,” says Wal-Mart spokesman Bill Wertz. “I don’t think we have any hard and fast criteria for [what constitutes non-essential travel], but it is something we would discuss as to whether it’s needed or not.”

The giant retailer also is asking that business people who have traveled to those affected areas wait 10 days before calling on one of Wal-Mart’s operations in case they develop any symptoms of SARS. Wertz says this stricture is primarily intended to apply to suppliers, but would also include Wal-Mart employees who had obtained permission for on-site trips to the SARS-affected locations.

It may turn out that some curtailment of business travel will become permanent as a way to save money. “In typical Wal-Mart fashion, we’re trying to use this situation to explore greater use of electronic communication, e-mail and video-conferencing,” Wertz says. “Perhaps we will learn through this experience that some [air travel for face-to-face meetings] isn’t as necessary as we thought.”

All three companies stressed that their ability to procure supplies, parts and other essential items for their businesses has not been disrupted by the outbreak of the illness. “We’re seen no disruption in our supply chain, nor have we taken any action to close facilities,” says IBM spokesman Brian Doyle. “We do business in 170 countries and we have tens of thousands of vendors and suppliers. We have not seen a ripple in that supply chain.”

The SARS Outbreak’s Impact on Asian Economies

SARS has clearly taken an economic toll on Asia. Louis M. Bowen, managing director of Asia Capital Management Limited, a private equity management and corporate finance company in Hong Kong, says few businesses in Asia have been left untouched by SARS. “I would find it extremely difficult to believe that there’s been any business that operates in Asia, especially a business in and around greater China, that hasn’t been impacted by what’s going on,” says Bowen. “I’ve been in Asia 25 years and I’ve been through several business cycles, including in Hong Kong, where we were going through a downturn [even before SARS came to public attention in March]. SARS has accelerated that downturn and spread it to many other countries in Asia. This is about the worst I’ve seen it.”

Asia Capital Management makes private equity and venture capital investments, manages private equity assets for other investors and provides corporate finance and mergers and acquisitions services. Bowen says SARS has affected his firm’s holdings, which represent “a microcosm of what’s happened in the region.” He says export-oriented businesses have been affected the least. But firms that depend on consumer spending have been hit hard because tourism is down sharply and local people have been reluctant to go shopping and mingle in public places.

“People just don’t want to go out and spend,” Bowen says. “It’s like Asia has put itself in self-quarantine, and the effect has been catastrophic.” Especially devastated, he adds, are sole proprietorships like clothing stores and restaurants. “We will see high rates of failure in these businesses,” he predicts. “Much of Asia is mom-and-pop oriented. There are 400,00 retail shops in Hong Kong. You’d find similar numbers in other Asian economies.”

Bowen sees Asia Capital Management’s holdings being affected in the longer-term as international investors think twice about investing in the region and as multinationals have a change in “attitude” toward Asia as a market.

Hong Kong Hardest Hit

Howard Kunreuther, co-director of the Risk Management and Decision Processes Center at Wharton, made a similar point in an interview with BusinessWeek Online. “We are dealing with something new,” Kunreuther said. “[SARS is] rapidly spreading, unlike AIDS. And it’s affecting a fairly wide region, one that has [competitive] alternatives. [Foreign companies] don’t have to deal with Hong Kong. There are options here.”

Paul Cheng, a retired executive who serves on the boards of various Asian companies as an independent non-executive director, said in an e-mail interview that he took his family to Hawaii at the beginning of April to “get away from SARS.”

“I believe Hong Kong and China will be hard hit by the SARS outbreak,” adds Cheng, who serves on Wharton’s Executive Board. Hong Kong will be hit even harder “because, unlike China, she is already suffering from deflation and a host of economic problems. In addition, tourism is one of the major economic pillars. China will experience slower growth but should weather this crisis partly because it would not be easy for most of the multinationals to relocate their manufacturing facilities from southern China.”

Kunho Cho, managing director and head of Asia Pacific investment banking at Lehman Brothers, said in an e-mail interview that SARS has “taken its toll on the region and contributed to a general weakening of consumer confidence and slower economic environment.” He adds: “As with many other companies with businesses stretching across boundaries, we have had to experience certain inconveniences associated with travel restrictions and the like, but we have managed well against a background of heightened risk and uncertainty. The safety and well-being of our employees remains our utmost priority and we will continue to monitor the situation very closely.”

In an April 4 research report, Lehman Brothers lowered its 2003 GDP forecast for nine Asian countries (excluding Japan) from 5.7% to 5.5%. “The biggest economic impact is likely to be in Hong Kong and Singapore, the two countries that have suffered the most infections relative to size of their populations,” said the report. The researchers predict that Hong Kong’s gross domestic product in 2003 will be 2% instead of 2.5% and that Singapore will see a growth rate of 3% instead of 3.5 %. The likely impact on China isn’t as clear. China’s economy is less dependent on tourism than Hong Kong’s or Singapore’s, but there is a risk that foreign direct investment in China could be postponed, according to the report.

Analysts at Citigroup have also issued revised GDP forecasts for Asian countries for 2003 that were more pessimistic than earlier estimated. In a report released to clients on April 22, Citigroup says China will see growth of 6.7% instead of 7.6%. Hong Kong’s GDP will grow at a rate of 1% instead of 2.8% and Singapore’s growth will be 2.4% rather than 3.5%.

Of all the industries affected by the illness, airlines are perhaps the most visible and most vulnerable. W. Bruce Allen, professor of business and public policy and director of the Wharton Transportation Program, says it is easier for airlines to win back leisure travelers than business travelers. “You can try to divert vacationers to other locations, but you can’t do that with business travelers.”

Allen notes that Cathay Pacific Airways, a highly respected and profitable airline, has been significantly harmed by SARS. On April 22 the airline announced further temporary cuts to its flights in response to a plunge in passenger numbers resulting from SARS and the war in Iraq. The announcement marked the fourth round of cuts the airline has been forced to make since March 31. In all, 23 destinations will be affected and 218 weekly services cut, which amounts to 45% of the airline’s normal weekly schedule. Augustus Tang, Cathay Pacific’s director of corporate planning, said in a prepared statement: “Unfortunately, demand has continued to drop, mainly due to the impact of the atypical pneumonia outbreak, and we have had to make further cutbacks to our services. We will continue to review the situation and make schedule adjustments as and when necessary. At the same time we will strive to maintain our network.”

Allen points out that SARS and the Iraq conflict are not the only reasons airlines are suffering. “Yes, these things are bad. But the reason the carriers are drowning is the economic situation. The leisure travelers aren’t traveling as much because they don’t have jobs [or] they are worried about whether they are going to have jobs. Transportation is what economists call a derived demand. When income goes up, people say, ‘Let’s go and visit Aunt Tillie.’ Once the economy turns around, people will travel. This has always been an incredibly cyclical industry and when the cycle ends, as it always does, then we’ll see air travel pick up.”

Meanwhile on April 23, the online edition of The Straits Times in Singapore reported that China dispatched “special squads” to round up sick people. In Singapore itself, where several thousand people have been quarantined, Prime Minister Goh Chok Tong vowed to push for legislation allowing the government to jail people who break isolation orders, the newspaper said. In Hong Kong, the April 23 interactive edition of The South China Morning Post reported that the government plans to allocate US$1.5 billion to boost an economy weakened by SARS.

Are Press Reports Exaggerated?

Some business people say the extent of the economic damage done by SARS has been overestimated.

James Sim, head of financial services in the Singapore office of Egon Zehnder International, an executive search firm, says the news media gives “the impression that it is worse than it actually is.” Sim does not think that the press is intentionally blowing things out of proportion. But he says “a picture is worth a thousand words. People see pictures of hospitals and [people wearing surgical] masks. How will viewers in the West react?”

Sim adds that the business community in Singapore is handling SARS as well as can be expected. “Over the last two weeks to about six weeks, a lot of companies have set up contingency teams so that businesses can carry on … Singapore has coped very well because most of the people who were infected have been contained. With the population at large, I’m quite confident things are under control.” Sim notes, for example, that officials in Singapore closed a wholesale fruit and vegetable market on April 20 following detection of a cluster of three SARS cases linked to the market. According to the WHO, eight probable and 14 suspected SARS cases have been linked to the market.

Another executive who says the risk of SARS has been overplayed is David Chun-Yee Pong, director of Shiu Wing Steel Limited, a steel manufacturing and trading firm in Hong Kong.

“The actual health risks are not nearly as deadly as reported by the press; as always, these things are vastly exaggerated by the media,” Pong says in an e-mail exchange. “People die from pneumonia and even flu everyday all over the world … Our government understands SARS is a serious threat but it is crucial to avoid panic and paranoia. Our authorities are working hard behind the scenes with experts around the world to contain and control SARS. If the disease is contained by June, the economic damage to China, Hong Kong and other parts of Asia will be negligible … At this point, SARS’ real impact on the economies of Asian countries is minimal. While there may be a temporary slow down in certain industries, there are no signs of lasting damage. This view needs to be re-assessed if SARS is not contained within a couple of months.”

Pong does say, however, that the airlines, hotels, restaurants and retail stores in Hong Kong are suffering. “The effect of SARS on these particular industries in Hong Kong (less so in China) has been very serious indeed.”

Pong adds that SARS has not had an inordinate impact on his company. ”Our steel mill and other facilities and our headquarters in [Hong Kong’s] central business district are all operating under normal conditions. However, there are some companies which have taken measures — such as splitting departments into different areas — to avoid mass contamination. I would emphasize these are all preventive measures. The actual risk of mass contamination in a single working area is minimal.”

Bowen of Asia Capital Management says that SARS is another in a long line of health crises that pose major challenges to public-health officials. And even though the number of SARS cases is small relative to other illnesses, the proper response to any risk-assessment analysis has to be caution. “From my layman’s perspective, the caution that has been exercised so far has been warranted,” according to Bowen. “You read about viruses that have caused global problems, like AIDS and the Ebola virus, and one has to be concerned that the world be able to deal with a new viral predator. I think it’s essential that until the world can figure out how to deal rapidly with new strains of viruses, one has to be on guard. It can be quite serious. In the end, SARS will be dealt with and it will not be as significant a problem as we thought it might have been at one stage. That will be good news.”

How Governments Responded to the 2003 SARS Outbreak

The Beijing government has been criticized for trying to sweep the extent of SARS under the rug. It was not until April 20 that officials in China acknowledged that the number of people with the disease was much higher than had been previously admitted. Such a lack of disclosure can damage a government’s credibility and its attempt to manage the disease.

“China was not forthcoming, and that lack of candor is typical of its policies and its operating style of the past,” says Bowen. He says Chinese officials have come to realize “they’re living in a world where they can’t hide these problems anymore and they are moving aggressively to deal with the problems.”

Lessons Learned to Prevent or Adapt to future Outbreaks

Cho of Lehman Brothers agrees that “transparency and swift action from the authorities are key to addressing” SARS.

For his part, Pong says governments “can learn from this episode and be better prepared to react quickly and decisively in future outbreaks. There will no doubt be such outbreaks again. It is quite possible that SARS will not be completely eradicated but will become a preventable, containable and treatable disease. And most important of all, the general public, travelers and companies around the world will look back and see that life goes on, as it always does. We adapt to changing times and move on with our lives.”