China has been suffering from the effects of the coronavirus for nearly two months now. The Chinese government has taken drastic measures to prevent the spread of the virus. Some cities are still completely under quarantine, while many companies are still not working. The economic impact is consequently enormous. So the question is, what can a Belgian company still expect?
First the bad news. Many Chinese citizens are still scarcely going out of the house. Everyone is still taking the appropriate precautions and avoiding contact with others as much as possible. Places where many people can gather are particularly shunned. As a result, streets are still largely empty, and shops and restaurants are usually closed. This of course has had a huge impact on the service sector, which now accounts for 52% of China's economy. Almost all 70,000 Chinese cinemas are closed. Disney has closed its parks in Shanghai and Hong Kong. Starbucks has done the same at 2,000 of its 4,100 Chinese locations. According to a survey by the University of International Business and Economics in Beijing, 40% of Chinese SMEs cannot survive more than three months without a constant source of income. More than 50% of state-owned enterprises, on the other hand, can survive another year. As a result, a large proportion of Chinese companies could be wiped off the map.
The tourism sector worldwide is also taking a beating. Foreign tourism has virtually come to a standstill. With 150 million trips from China every year, this is a big blow for many countries. Since Chinese consumers spent more than €100 billion on luxury goods (one third of the world market) in 2018, this also has consequences for companies in this sector.
The good news is that the measures taken by the Chinese government are now starting to produce results. The number of new cases of the coronavirus is no longer rising so sharply. That is why the Chinese government has called for a return to work. Slowly the country is returning to normal, albeit in a new guise. Business as usual, but with a mouth mask on. 98% of the Chinese Manufacturing 500 companies have been back to work since 20 February. However, they still often work at lower capacity because many of the more than 220 million so-calledmigrant workers have not yet returned from the extended Chinese New Year period, or have to undergo the two-week mandatory house quarantine after returning to the city where they work. This means that only two thirds of the workers are actually at work, which translates into a total production capacity of 59%.
Any company that imports from China had therefore still better prepare for long delays, or even no deliveries at all. And almost every company with operations in China is going to face declining sales figures. A return to business as usual may therefore still take months. The virus is not yet under control, and as long as people continue to spread it, certain measures will remain in place. The coronavirus crisis shows the extent to which your company is dependent on production and sales in China. Even though China is only a cog in the logistic wheel of a number of companies, a disrupted link can upset the entire chain. The Chinese government has also already started issuing special force majeure certificates to protect companies against lawsuits from their customers. In other words, the damage that Belgian companies potentially incur as a result of not being able to meet certain deliveries, will almost never be recovered from Chinese suppliers. Relocating production or looking for suppliers in Vietnam, for example, is an option, but may not be very effective. Factories in Vietnam are also very dependent on China for many products.
That said, once the current crisis is over, China will rebound like never before. China accounts for 17% of world trade and has an economic model which enables it to react quickly to certain events. China has unique power to combat the virus and is using it. At the moment, the economy -exceptionally- is not the priority, but the Chinese government wants to regain control of the crisis situation as soon as possible. The Chinese economy - and the Chinese in general - are masters in recovering from a setback quickly. But once this epidemic is over, the country will be overrun by positive feelings and emotions, and money will start rolling again. In the medium term, the outlook remains the same and China will pick up the thread again. The message is: Don't panic. That is why it is important to continue doing business with China in spite of everything during the coronavirus crisis.
What is more, this crisis offers new opportunities
- Of course, there are opportunities for companies in the medical/medtech/biotech sector. Doing business ethically, with a long-term vision, is important here.
- Everything will be even more digitized and new trends will emerge, including contactless food deliveries, i.e. deliveries without physical human contact. Digital marketing strategies for companies active in China are therefore more important than ever.
- Schools are now closed, so e-learning and virtual classes are getting hot, even virtual gyms.
- More use of online streaming and movies.Purcahses of VR houses are booming, gaming, etc...
- Drone developments (drones are already being used to decontaminate areas)
- Logistics solutions that can shorten delivery times from China
- All products associated with purity, health and safety. These three qualities cannot be emphasized enough by companies exporting to China.
- In the short term, car sales may grow again as people want to avoid public transport.
- We can also expect a boom in birth rates in 9 months.
The coronavirus is definitely a crisis. But it also offers new opportunities in a country that still has very strong assets.
About the author: Sven Agten
Sven Agten has lived and worked in China since 2004. His is currently the CEO for Asia-Pacific for a German multinational and a Managing Partner at Agio Capital & Business Solutions. He is the author of the book ‘Hoe maak ik het in China’ [How to make it in China] (Lannoo, 2017) which describes modern Chinese economic, social, technological and political trends, and clearly shows how the country is changing the world.
With Agio Capital & Business Solutions, he is a partner of the Technology Clubs.