Update by Dezan Shira & Associates, Russell Bedford KTC summarized and illustrated for businesses.
Update from China Briefing by Dezan Shira & Associates.
- Russia stops issuance of electronic visas to all Chinese nationals, to completely close border with China from midnight tonight, January 30, 2020.
- Emergency meeting of WHO viral experts being held today. WHO says, “The whole world must be on alert to deal with the spread of coronavirus”.
- Leading virologist in Thailand says vaccine could take a year to develop.
- Central Commission for Discipline Inspection (CCDI) announces that “anyone found not effectively carrying out President Xi’s instructions in the fight against the virus or misappropriate rescue funds and materials will be punished”.
- Ikea, the Swedish furniture giant, is temporarily closing all 30 of its stores in China.
- The Guardian reports that Air Canada is suspending all flights to Beijing and Shanghai from January 30 to February 29. The last flights from the two cities back to Canada will take off on January 30.
- People’s Daily report that China will resume production of face masks on February 3 (first working day after the national lunar new year holiday extension), and produce 180 million masks per day by the end of February.
- Jiangxi Province, Shandong Province, and Anhui Province are delaying resumption of work for non-essential enterprises to February 9. Hubei Province announced that enterprises in the province will be closed till February 13.
- The WHO will meet Thursday, January 30, to make a decision on whether the coronavirus constitutes a global health emergency. Infections have now been confirmed in at least 16 other countries.
- 7,711 confirmed cases reported by the BBC as of January 29, infections spread to every region in mainland China with a confirmed case reported in Tibet. Death toll has reached 170; The Guardian reports that 162 of the deaths are in Hubei province, where the outbreak originated.
- WHO estimates mortality rate at 2 percent, less than 10 percent attributed to SARS, but warns the coronavirus could spread globally.
- UAE confirms four cases in Middle East.
- British evacuees face two weeks quarantine on UK military base upon arrival back to Britain.
- Suspected cases in Africa yet to be confirmed.
- China National Health Commission states “Infections will peak in ten days”.
- Washington has advised US airlines they are considering the suspension of all US-China flights.
- Australian researchers have recreated the novel coronavirus in a laboratory, hastening the development of a vaccine.
- British Airways has suspended all flights to mainland China. Several countries begin evacuation of their citizens from China. Australia to quarantine evacuees on Christmas Island.
- Guangdong Province issues mandatory order for citizens to wear face-masks in public. Offenders can be arrested and removed from public areas.
- Kazakhstan has suspended visa on arrivals for passengers arriving from China and requires Chinese nationals to have medical certificates certifying fitness prior to entry.
- Hong Kong has eight confirmed cases. It has announced suspension of all ferries and rail services from mainland China from this Thursday and has cut by 50 percent all inbound China flights.
- The Philippines has cancelled all visa on arrival facilities from China; other visas issued in China remain valid.
- WHO expresses ‘confidence’ China can contain the spread of the virus. Indications are infections will peak in the next seven days.
- The new coronavirus appears to have an incubation period varying from three to seven days and up to two weeks but can spread before symptoms show.
- Chinese New Year Holidays extended until February 2, 2020
- Chinese staff may not be able to return to work immediately.
- Serious interruptions and cancellations of transport reported across China, expect this to continue for the next two weeks.
- Mongolia has closed its border with China.
Impact upon businesses in China
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.
Chinese labor law as concerns staff illness
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.
How exposed are you?
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.
Cash in hand
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.
Preparing to downsize
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.
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