How Companies Can Cut Costs/Downsize in China

Usually, when facing restructuring, companies have two tools: aggressive strategies to pioneer transformation and austere strategies to reduce costs. Cost reduction is a common tool used by companies to rescue themselves from a deteriorating external environment or poor performance. For example, during the financial crisis in 2008 and the new crown epidemic in 2020, the most direct and common route used by Fortune 500 companies was to reduce their workforce, aiming to trim expenses in order to maintain corporate survival. However, unlike short-term external shocks, China, like the rest of the world, is suffering from the long-term effects of the epidemic. In this context, cost cutting/downsizing will continue to be the primary approach for companies to take. However, companies must be aware that downsizing is not sustainable. We must find more flexible strategies to help ourselves survive the recession.

Proposals on cutting costs / downsizing in China

Cut Costs Downsize in China

I. Reducing rental costs as much as possible

As far as the 2020 policy is concerned, eight ministries and commissions, namely the National Development and Reform Commission, the Ministry of Housing and Urban-Rural Development, the Ministry of Finance, the Ministry of Commerce, the People’s Bank of China, the State-owned Assets Supervision and Administration Commission, the General Administration of Taxation and the General Administration of Market Regulation, have jointly issued the Guidance on Further Assisting Small and Micro Enterprises and Individual Entrepreneurs in the Service Industry to Relieve the Pressure on Housing Rents in Response to the New Crown Pneumonia Epidemic. For most cities in China, if a company rents a state-owned house, it can reduce its rent for 3 months; if it rents a private house, it has to negotiate the deal, but of course the government will give a certain subsidy. For now, if the company does not have sufficient cash flow for 3 to 6 months, it may need to sublet the redundant premises or move to a place with lower rent, or share the office. In a prolonged recession situation, consider taking a lease on state property or actively applying for a rental subsidy.

II. Reduce labor costs when possible

As we all know, when it comes to reducing the human cost, all enterprises are painful. It is not easy to recruit people, because it takes a lot of time and effort to train them. But in times of crisis, this option is necessary. It is important to note that reducing manpower costs does not necessarily mean laying off staff:

Firstly, try to negotiate a phased pay cut with your staff: this needs to be spearheaded by senior management and this is certainly a must for all companies at the moment.

Secondly, put employees into partnerships: this is a period when we need to work together to get through the difficult times. It is possible to take some of the senior executives in the business, or those who are more costly, and see if they can be converted to a higher level and share some of the risk. Of course, when the market or the company gets better, he will have to earn more or create more value for the company than he would otherwise.

Finally, when the last resort is to go to layoffs, companies must be careful to comply with Chinese labor laws. For example, a dismissal clause should be included in the contract signed between the company and the worker. It is beneficial for both the company and the employee to regulate dismissal through the constraints of the employment contract. Moreover, it makes the dismissal legally enforceable and avoids irregularities in the dismissal, as well as future labor disputes.

III. Reduce unnecessary marketing costs wherever possible

Unnecessary marketing costs must be reduced. Of course if it is something that will have an immediate positive return in the moment, it should instead be increased; if it is something that needs a long-term return, it may need to be cut. Firstly, offline advertising will definitely have to be stopped, because basically people rarely go out anymore; and with everyone’s attention on the epidemic, sensitivity to advertising will be reduced. The most important point is: full staff marketing. In times of recession, both companies and employees face problems of survival. Efforts are made to bring in results for the company so that they can have survival funds themselves, so in this case all employees should become salesmen.

IV. Reduce all non-core raw material costs or R&D costs

If it turns out that your company has 50 products, now you have to find a way to compress them to 10 and focus on the more core cash flow generating core products above. Because at this time if your raw material procurement costs or pressure on the inventory is too large, it will be a big problem when your cash flow is tight.

V. Extend account periods, loan terms and apply for subsidies

In times of recession, the government also introduces many reliefs and incentives to help businesses survive. At the time of the outbreak in 2020, there were many policies available. For example, for taxes and fees, there is the Announcement on Taxation Policies Related to Supporting the Prevention and Control of the Pneumonia Epidemic Infected by the New Coronavirus; Application for exemption from social security fees, deferment: The Ministry of Human Resources and Social Security, the Ministry of Finance and the State Taxation Administration issued the Notice on phased reduction or exemption of enterprise social insurance premiums, which stipulates that enterprises with serious difficulties in production and operation affected by the epidemic may apply for deferment of social insurance premiums, with the deferment period in principle not exceeding six months and the late payment fee waived during the deferment period. 

On 9 February, the Ministry of Industry and Information Technology issued a Notice on Helping SMEs to Resume Work and Production to Tide Over the Difficult Times In Response to the Novel Coronavirus Pneumonia Outbreak, to promote the relevant units to implement a phased deferment of payment for electricity, water and gas required for the production and operation of small and medium-sized enterprises during the epidemic, and to implement the “non-stop supply of unpaid fees” during the deferment period. Each region has its own policies. Enterprises should actively apply for subsidies and various fee deferments to ease their cash flow constraints.

Reference

Robbins D.K, Pearce J. A. (1992). Turnaround Retrenchment and Recovery. Strategic Management Journal, 13(4): 278-309.

Ministry of Finance and State Taxation Administration. (2020). Announcement on tax policies related to supporting the prevention and control of pneumonia outbreaks caused by novel coronavirus infections. Available at: http://www.gov.cn/zhengce/zhengceku/2020-02/07/content_5475528.htm

National Development and Reform Commission, Ministry of Housing and Urban-Rural Development, Ministry of Finance, Ministry of Commerce, People’s Bank of China, State-owned Assets Supervision and Administration, General Administration of Taxation and General Administration of Market Supervision. (2020). Guidance on Further Assisting Small and Micro Enterprises and Individual Entrepreneurs in the Service Sector to Relieve the Pressure on Housing Rents in Response to the New Coronary Pneumonia Epidemic. Available at: https://www.ndrc.gov.cn/xxgk/zcfb/ghxwj/202005/t20200509_1227769.html?code=&state=123

Ministry of Human Resources and Social Security, Ministry of Finance, State Taxation Administration. (2020). Notice on phased reduction or exemption of enterprise social insurance premiums. Available at: http://www.chinatax.gov.cn/chinatax/n810341/n810755/c5144708/content.html

Ministry of Industry and Information Technology. (2020). Notice on helping SMEs to resume work and production to tide over the difficult times in response to the novel coronavirus pneumonia outbreak. Available at: http://www.gov.cn/zhengce/zhengceku/2020-02/10/content_5476684.htm

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