(This article was originally published on January 27, 2020 and was last updated on August 31, 2020. For all coronavirus updates in China starting September 1, 2020 as well as our related business advisory content, see here.)
The novel coronavirus that has leapt to prominence in the past few weeks is slowly becoming better understood as doctors and virologists start to identify its characteristics.
On January 27, China’s National Health Commission stated that “based on current epidemiological investigations, the incubation period is generally 3-7 days, with the longest no more than 14 days”.
While there are some concerning signs – a non-symptomatic incubation period making immediate diagnosis difficult – it should also be remembered that this is the annual flu season in China, and thus far, the virus appears to be survivable among the young and healthy. Most colds or coughs will turn out to be seasonal, ordinary bugs.
However, the mortality rate of the coronavirus appears to be far higher than is normal; the method of transmission is mainly through respiratory droplets and China’s health minister Ma Xiaowei has stated that people can spread it before showing symptoms. Until the situation can be brought under control, the virus will affect your business in China.
At Dezan Shira & Associates, we have several hundred staff on the ground, just as many other foreign-invested businesses do. We also worked through the SARS experience back in 2002, giving out advice and bulletins to concerned readers in China and beyond.
This article will be updated as the situation unfolds. For updates on government imposed restrictions in China, please refer to this article: Latest Emergency Measures Announced by PRC Government.
The obvious, immediate impact is that some staff will not be able to return to work on the intended date – this coming Friday, January 31. Although this week is still officially a national holiday, it is recommended that senior management in China take a headcount and establish exactly where staff are and are in direct communication with them. The extension of the national holidays to Monday February 2 should be treated as annual leave and recorded by HR as such.
However, our opinion is that the February 2 return to work may be further extended, possibly until February 9 or even later, as the virus appears to have a two-week incubation period. This means that offices and factories should prepare to be understaffed until that time. It should also be noted that even if staff are able to return to work next Monday, transport services can be expected to be severely disrupted, and other services, such as delivery canteens, cleaning, and so on may also be curtailed. For offices, this means staff may be able to work from home. Factories will likely experience down time.
To action: Conduct an immediate headcount to ascertain where staff are and establish direct communications with them. When possible, arrange for staff to work from home.
Should staff become ill, employers must ensure their employees can receive their paid statutory medical leave. If an employee needs to take time off work due to an illness and the employee is eligible for statutory medical leave under the law, the employer must provide the leave in accordance with the national and local law, and the employee’s employment contract. The minimum pay standard varies across China but is typically about 80 percent of the total. However, note that if your employee handbook provides for a company medical leave program more generous than the applicable law, you must follow your own internal rules and regulations.
It is important to understand the potential impact an enforced slowdown could have on your business. This will vary from sector to sector; however, being aware if your major customers are also under stress is a prerequisite, and especially if your total sales exposure is to companies in China or dependent upon China-based suppliers. Additionally, if your China customer base is exposed, you are likely to face a sales downturn. In our business opinion, China Q1 sales figures are going to be affected, and it may be difficult for businesses elsewhere to obtain fulfillment on orders originating from China.
To action: Conduct an inventory of planned shipments from China and establish whether or not these could be impacted. Open communications channels with suppliers to discuss delivery problems and be prepared to re-source from alternatives elsewhere. China sales will be hit in numerous sectors, so examine your business plan, budgets, and cashflow to be prepared for a hit.
There is simply no need for receivables to be beyond 90 days. Now is the time to examine sales contracts and credit terms already given, and to see what can be done to bring these under better credit control. 60 days is reasonable, 45 days even better. Remember if your customer goes bankrupt while in possession of your goods, it is going to be a devil of a job involving court procedures to get them back. It is far better to manage your receivables before goods shipped become a potential asset in somebody else’s insolvent warehouse.
To action: Examine cashflow and attack your receivables. The coronavirus should not become an excuse to delay payments due to you.
It is a good idea when tough times lie ahead to examine the exact status of your stock. Is your stock secure? An empty or undermanned warehouse can be tempting. Do the inventory’s contents really add up according to the balance sheet? Now is a good time to conduct internal audits to ensure your inventory is where it should be.
It is usually a good idea to maintain at least three to four months’ worth of total operating costs in China. This is especially true when times are tough, as contingency financing is more likely to be called upon at short notice. Your China operations may require a cash injection to help them overcome what may be a difficult Q1. If, on the other hand, you are fortunate to have excess cash in China, now may be a good time to repatriate it.
Reducing head count is one effective way to cut costs in China should your bottom line come under strain. Fortunately, the overall behavior of Chinese staff is conducive to this. As we enter the new year with many contracts coming up for renewal, options include non-renewal, as well as offering deliberately low or no salary increases to non-essential staff. This does need to be conducted in line with China’s fairly strict employment laws, but that does not mean a managed staff reduction plan cannot be put into operation. Downsizing a China business by laying off staff is one way to better manage expenses when the going gets tough. Seek assistance with China’s employment laws if you intend to conduct staff layoffs.
Now is an ideal time to conduct a health check on your business as it is impacted by China. Businesses in China should be prepared to revisit their 2020 budgets and downgrade their Q1 sales forecasts if dependent upon sales in China.
Global businesses should check on the viability of receiving shipments on time and make contingency plans if in doubt.
Finally, it may not all be bad news. There are always winners and losers during difficult times. Well prepared and managed businesses will survive and ultimately gain market share in the longer term. A Q2 or Q3 bounce back is also entirely feasible – and it makes sense to bear in mind the need to cater for that eventuality as well.
Meanwhile, for advice or medical and regulatory updates as issued by the Chinese government, please contact our China offices at firstname.lastname@example.org.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, and Thailand in addition to our practices in India and Russia and our trade research fa
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