SARS Shakes Asia's Wireless Industry
By Eric Ransdell, Tue Jun 10 10:34:05 GMT 2003

Short-term implications of SARS have been bad, but now many people wonder if the long-term effects will be worse.

It may have been a Himalayan masked palm civet, a 13-pound relative of the mongoose that ranges from Pakistan to Indonesia. It may have been a raccoon dog, "a dog resembling a raccoon" as the New York Times aptly described it. Or it may have been a Chinese ferret badger, a relative of the weasel and the wolverine. Whichever Asian mammal is ultimately determined to have caused the outbreak of Severe Acute Respiratory Syndrome, or SARS, its grim legacy will be felt long after the last patients have been released from hospital and the World Health Organization announces the epidemic has come to an end.

With new cases showing a steady downward trend and life slowly returning to normal, the SARS virus finally appears to be under control throughout Asia. But the full economic impact from SARS has yet to be felt. In terms of Asia's wireless industry, the SARS outbreak has resulted in plummeting sales, the postponement of new projects and product rollouts, disruption of the supply chain and the cancellation of major trade shows. As anyone in the Asian wireless industry will tell you, SARS' short-term effects have been bad. But with the outbreak winding down, the question now facing the Asian wireless industry is this: Will SARS' long-term effects be even worse?

In terms of handsets, the answer is almost certainly a yes. Though Japan and South Korea have seen almost no drop-off in domestic sales over the last few months, China, Hong Kong and Singapore have all been hammered by consumers staying at home for fear of contracting the virus. In China, the country hardest hit by SARS, analysts estimate that sales dropped 20-30 percent for April and could plummet even further once the figures for May become available.

That would be bad news under any circumstances, but the problem in China - the world's largest mobile economy - is that the country was already facing an oversupply of handsets before the extent of the nation's SARS problem was ever revealed. The oversupply is the result of China cutting import duty on handsets from 3 percent to zero in order to conform to the terms of the World Trade Organization. Most manufacturers waited for the zero tariff to go into effect at the first of the year before shipping their new models. Consequently, mainland cities such as Shanghai saw a five-fold increase in handset imports in the first quarter of this year.

For domestic manufacturers and foreign vendors such as Nokia and Motorola, with facilities in China, the timing couldn't have been worse. For 2003, the government was already predicting a demand of only 130 million handsets out of a production capacity of 200 million. "It's a vicious cycle," says Dongming Zhang, an analyst with BDA China in Beijing. "The market was already very crowded in China with more than 30 licensed manufacturers. What's going to happen is that they're going to have to cut prices to clean out inventory, which will make the market even more competitive."

The Outbreak Spreads

A price war, falling demand and a more competitive market in China are going to have a ripple effect throughout the Asian handset industry. Companies in Japan and Taiwan that produce components for mainland-manufactured handsets are already feeling the repercussions. But it is South Korea where SARS has had its worst impact. Han Wa Telecom, a company that sells components on an SKD (semi-knock-down) basis to Chinese manufacturers, has already declared bankruptcy and other small- to medium-sized South Korean manufacturers are expected to follow suit.

"SARS made things go from bad to worse and what I think it has done is to create the first recession China's wireless industry has really seen, which has implications for the entire region," says Kenneth Leung, chairman of Hong Kong's Irwin Capital. "I think we'll come out of this recession fairly quickly, but I think the market will have been transformed from a buyer's to a seller's in the space of just six months."

The delay of new product rollouts - from Hong Kong PCCW's Bluetooth hot spots to China Netcom launching its PAS service in Beijing - only promises to make the market more competitive in SARS-affected countries The fear is that once the all-clear is sounded, companies that have been waiting 2-3 months to launch new products or services will flood the market with their offerings and overwhelm consumers.

Given the speed of technological change in Asia and a cultural predilection for face-to-face business meetings, one of the most incalculable aspects of SARS' economic impact has been in terms of the wireless trade shows and industry conferences that have been cancelled or postponed.

"The wireless industry is a standards-driven industry and when you don't have vendors, operators and manufacturers coming together in these face-to-face meetings you get people going off in different directions," says Daniel Kirwin, Managing Director for Asia for the Institute for International Research, whose 3G World Congress in Hong Kong scheduled for June has been moved to Bangkok in November. "There's certainly been a loss of revenue for companies like mine as well as airlines, hotels, and restaurants - yet it's very difficult to put a cost on a lack of communication in the telecom industry, but I'd estimate that cost is far higher than people anticipate."

Survival of The Fittest

While analysts agree that SARS probably won't pitch the industry into anything more than a very short-term recession, many believe that SARS' broader economic impact could have long-term repercussions for Asia's wireless industry. "What may happen in the longer term, is sort of a chain-reaction that goes beyond wireless business," says Connie Hsu, a manger with Pyramid Research in Hong Kong. "SARS will have a serious impact on the economy as a whole for China and the entire region. And that, in turn, will have an impact on the amount of money people will be spending on mobile services and telecom. On top of that, you've got a market that's becoming even more competitive."

"If a person isn't strong enough when they get SARS, they're finished - and it will be the same thing with the industry," adds Irwin Capital's Ken Leung. "If your company can't handle the economic impact from SARS and the fierce competition, it's not going to survive."

Eric Ransdell is the former Silicon Valley Bureau Chief for US News and World Report magazine. Now living in Shanghai, he covers mobile technology in Asia.