China’s Coronavirus Impacts Everything: What Your Business Should Do NOW

Our international dispute resolution lawyers are involved in multiple cross border litigation matters hit hard by the coronavirus.  By way of one example, depositions scheduled for Chinese witnesses are having to be cancelled for the following reasons (among others):

  1. The coronavirus is impacting pretty much everyone in China.
  2. Travel within China is impossible for some and nearly impossible for others. This makes getting to international airports difficult or impossible. This makes going to the United States for depositions pretty much impossible.
  3. Whole cities in China are closed off, including at least one (Shantou) that locked itself down without approval from Beijing. If you cannot leave your Chinese city you cannot leave China. If you cannot leave China you cannot come to the United States for your deposition.
  4. Foreign governments are arranging evacuation flights from China for their own citizens and foreign government officials are among those being evacuated. Foreign embassies and consulates in China are being pared down to only essential personnel, with plans to eventually evacuate them as well. It is becoming nearly impossible for Chinese citizens to get foreign visas quickly.
  5. People are afraid to leave China for fear of not being accepted into the country to which they might go. This fear is not unfounded. By way of one example, U.S. politicians are starting to publicly call for banning people from entering the United States from China.
  6. People in China are afraid to leave China for fear of not being able to return to China or — more likely — not being able to return to their place of residence. With domestic travel difficulties and locked down cities, this fear is completely legitimate.

The above not only impact international litigation, they impact international business. Most particularly, they impact pretty much every aspect of doing business in China and doing business with China.

Add in the below and it becomes apparent why doing business in or with China has gotten tough and will only get tougher:

  1. Doctors and disease control specialists are now saying the incubation period for coronavirus is one to 14 days, but it is infectious during that period. This means people who appear completely healthy are spreading the virus. This also means we should expect  the virus to spread incredibly rapidly going forward. There are also reports that the virus itself is growing in strength and in lethality.
  2. The official death toll in China is about 60 right now, with almost 2,000 people infected. Virtually nobody believes these official numbers because virtually nobody trusts the veracity of the Chinese government or its ability to get a handle on things. Leaked reports from Wuhan and the number of coronavirus cases outside China also render these official numbers impossible. Even if the official numbers were true, the numbers tomorrow will be way higher than today. This very recent epidemiological study predicts more than 190,000 infections in Wuhan alone by February 4.
  3. Chinese hospitals are experiencing shortages of testing kits and other medical supplies. Sick people are being turned away from hospitals and told to go home. Coronavirus cases and deaths are being called pneumonia or other sicknesses because without the testing kits, there is no way to know.
  4. Schools and universities in China and Hong Kong are being closed. Ditto for public attractions such as Hong Kong Disneyland, which it is closed indefinitely.
  5. Cities are prolonging the current holiday by a week and we expect the entire country will soon do this as well. In other words, the odds are good that virtually nobody but essential medical and governmental personnel will be working again until February 8, if then.
  6. We are hearing reports of massive layoffs and furloughs without pay. All of this is going to be disastorous for China’s economy, which was in bad shape before the coronavirus hit.

I could go on and on, but that is not the point of this post.

The point of this post is to convince you that things are really bad in China now and will only be getting far worse very soon. And your business must do something about it. Actually, the ideal time to have done something about your China business was weeks or even months ago, but there is little point in going into that now. See China and the West Are Decoupling: Please Act Accordingly.

Your business should do the following:
1. Recognize the situation in China. Recognize your company’s situation in or with China.
2. If your company has its widgets made in China, you need to realize that your Chinese factory might shut down tomorrow or next week or next month. If your Chinese factory is within or near ground zero for the virus, it has probably already shut down. Even if your factory does not shut down, you should expect some or many of its employees not to show up for work because they can no longer get there or because they do not want to work cheek by jowl with 3,450 other people, some of whom might be spreading the coronavirus. Even if your Chinese factory continues to produce your widgets, you should consider its diminished ability or complete inability to get those widgets seamlessly transported from the factory to a port or airport and then from there to your preferred destination. There will invariably be slowdowns.

You also need to realize that even if your widgets keep getting made in China and shipped to you, your chances of factory problems have shot through the roof. Just last week, in Manufacturing in China: Minimizing Your Risk by Doing Things Right, we wrote how our international manufacturing lawyers have been seeing massive increases in China factory problems, and the potency of that post should be doubled or tripled now:

Chinese factories are hurting these days. Bad. Their sales are way down, especially to the United States. In China’s Manufacturing Exodus Set to Continue in 2020, the South China Morning Post made this starkly clear with statistics:

Tariffs saw China’s trade in goods surplus with the US fall by 7.9 per cent in November, according to data released by the US Census Bureau on Tuesday. This was amid a 20.84 per cent fall in Chinese exports to the US from a year earlier, including items like cellphones. US purchases of Chinese goods are now at their lowest point since March 2013.

Of equal importance is that China factory exports are expected to dip even more in 2020:

For every foreign company that left China in 2019, there were two to three more seriously contemplating doing so and we expect more companies to leave China in 2020 than in 2019.

Chinese factories are well aware of these numbers, and they are terrified by them. Chinese factories see American companies reducing their purchases to buy their products elsewhere. “Compared with June 2018, the month before the trade war began, US imports of goods from Vietnam have soared 51.6 per cent, Thailand 19.7 per cent, Malaysia 11.3 per cent, Indonesia 14.6 per cent, Taiwan 30 per cent and Mexico 12.7 per cent.” This massive downturn in American companies manufacturing in China has greatly impacted Chinese factories and greatly influenced how they see things.

Chinese factories believe their existing American clients will be leaving China in 2020, and they also believe their newest American clients are using them as “test kitchens” to develop products and then move production outside China once the product is developed and selling. Our China lawyers know this because Chinese factories have told us this and because we see what Chinese factories are doing.

What exactly are Chinese factories doing? They are getting aggressive with requirements to get started on manufacturing with them. They are getting less concerned with the quality of goods they make and sell. And they are stealing IP (especially trademarks) far sooner and far more often than even a year ago.

Let me explain….

Chinese factories that used to help American companies develop their products without any written guarantee regarding product purchases by the American company are seldom doing this any more. Chinese factories no longer believe it makes economic sense for them to spend time and money developing a product for an American company that may never produce that product in China or will produce it there for only a short time. What our China manufacturing lawyers are seeing now is Chinese companies helping American companies develop their products and then claiming the developed product belongs to the Chinese company, not to the American company. In other words, the American and the Chinese company work together on developing the product and then once the product is developed, the Chinese company refuses to make it for the American company, choosing instead to sell it under its own brand name. The best way to prevent this  is with a China Product Development Agreement.  See also China Product Development: Manufacturing Rights are Key.

Chinese factories have also become much sloppier in terms of product quality. Why should a Chinese factory bust its butt making high quality product for an American company that will likely move its manufacturing to Vietnam or Mexico or Thailand no matter how well it performs? The best way to prevent quality problems with your China factory is with a Manufacturing Agreement that is clear about quality requirements and clear about the damages the Chinese factory must pay if the contractual quality standards are not met.

Perhaps most chilling is how Chinese factories are stealing IP so often and so quickly. In the good old days, Chinese factories typically would wait until their relationship with their customer had declined before selling their customer’s products and registering their customer’s trademark in China as their own. Now, our China lawyers are constantly seeing Chinese factories going off and registering those trademarks literally days after they first learn of them. We are seeing American companies send an email to a Chinese company inquiring about the possibility of having that Chinese company make widgets for it and that Chinese company a day or two later filing to register the American company’s trademark in China. We are seeing Chinese companies sell foreign company products worldwide before they even sell one to their foreign company customer.

What should you do about all of this?

If you are thinking about moving your production out of China, NOW is the time to go from thinking to doing. See Moving Your Manufacturing Out of China: The Initial Decisions and Moving Manufacturing from China: Where you Gonna Run? But do it the right way. See THE Rules for Manufacturing Overseas.

3. Coronavirus likely will constitute a force majeure event for your Chinese counter-parties and this will mean they can breach their contracts with you without much if any legal repercussion. This also likely means some Chinese companies that are not yet truly impacted by the coronavirus will seek to use the virus as a basis for terminating or breaching or revising their contract with you.

4. If you have people in China, bring them home. NOW. If you were planning on sending people to China or even to Hong Kong, DON’T.

5. If you have an office or offices in China, figure out the local situation and start devising contingency plans. If your business depends on people in China, find new people outside China for help. Our law firm long ago made the decision to base most of our China lawyers outside China. We believed then and we even more believe it now that our people would be safer outside China and freer of local threats/politics/influence/pressure and therefore better able to provide objective legal advice. We have also always been concerned about data security in China. China’s New Cybersecurity Program: NO Place to Hide and China’s New Cybersecurity System: There is NO Place to Hide. We set ourselves up so we can fully function even if all our people are expelled from or have to leave China. I am not going to claim our law firm saw the coronavirus coming — because we obviously did not — but I am going to say that we years ago became wary of putting too many eggs into the China basket, and this has informed the legal advice we give our clients.

In early November last year,  in How to Conduct Business with Chinese Companies That See a Dark Future, we outlined the many China risks and called for companies to — if possible — lessen their China exposure:

For some companies, China’s increasing risks now exceed its rewards, but for others this is not at all true. Do you really need a legal entity in China with Chinese employees or might your company be better off with no operations in China beyond a third party distributer or reseller? Our China lawyers have been doing a lot of work in the last six months helping our clients reduce their China footprint and thereby reduce their China risks. No matter what you are doing in or with China, now is a good time to look at how you too can reduce your risks. The following posts are relevant for this:

Bottom Line: China in the last year has become far riskier on nearly all fronts. It is important you recognize this and act accordingly.

6. Move your people and your offices out of Hong Kong. Now. This will likely be the final blow for Hong Kong as an international business center as companies come to realize that basing operations in a city that is unable (on so many levels) to protect its citizens no longer makes sense. See Hong Kong for International Business: Stick a Fork in It. See also Macau vs. Hong Kong: And the Winner is Singapore.

7. Stay abreast of the virus and what can be done to try to avoid contracting it. See e.g. The Wuhan Virus: How to Stay Safe.

8. Stay abreast of the laws relating to the coronavirus. On Friday, Grace Yang, our lead China employment lawyer, wrote about  Beijing’s just issued employment rules for dealing with the coronavirus. Grace’s post concluded with the following:

If you are an employer in Beijing, be sure to comply with the above. If you are an employer outside Beijing, you should monitor notices from your local employment bureau, stay in good touch with your local employment bureau, and be very mindful of any employment decisions you make during this time.

No sooner than the next day (Saturday/yesterday), Grace was out with a new post alerting everyone to new nationwide employment laws for dealing with the coronavirus, BREAKING NEWS: China Issues New Employment Rules For Dealing with the Coronavirus. Grace concluded that post with the following:

If you are a China employer, note the key words from these notices: “enhanced employee protection and enforcement.” And be very careful with any employment decisions (especially any employee terminations) you make during this time. And, as always, monitor notices from your local employment bureau and stay in good touch with your local employment bureau.

Good advice overall for dealing with the coronavirus, not just on the employment law front. Monitor. Stay in touch with those who know what is happening. Be careful and be thoughtful. And being thoughtful should include the realization that it is human beings on the front lines of this crisis and the human side of all this should predominate.

May this horrendous virus end quickly and the deaths cease.

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