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How to Downsize Company in China

How to Downsize Company in China

Companies that are undergoing reorganization have two instruments at their disposal: aggressive initiatives to drive transformation and austere techniques to save costs. Companies frequently utilize cost reduction as a technique to protect themselves from a deteriorating external environment or subpar performance. For instance, the most straightforward and popular strategy employed by Fortune 500 firms during the 2008 financial crisis and the new crown epidemic in 2020 was to cut their personnel, trying to minimize expenses in order to retain corporate existence.

China, like the rest of the world, is currently experiencing the long-term repercussions of the epidemic, unlike short-term external shocks. Downsizing and cost-cutting will still be the main strategies used by businesses in this situation. Downsizing is not sustainable, albeit businesses must be aware of this. To assist us get over the recession, we must devise more adaptable tactics.

Reducing rental costs as much as possible

Concerning the 2020 policy, 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 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.

If a company rents a state-owned house in most cities in China, it can reduce its rent for three months; if it rents a private house, it must negotiate the deal, but the government will provide a certain subsidy. For the time being, if the company does not have enough cash flow for 3 to 6 months, it may need to sublet the redundant premises, relocate to a lower-rent location, or share the office. Consider taking a lease on state property or actively applying for a rental subsidy during a prolonged recession.

Reduce labor costs when possible

As we all know, when it comes to lowering human costs, all businesses are painful. It is difficult to recruit people because training them takes a significant amount of time and effort. However, in times of crisis, this option is required. It is important to note that cutting labor costs does not always imply laying off employees:

To begin, try to negotiate a phased pay cut with your employees: this must be spearheaded by senior management and is unquestionably a must for all businesses at the moment.

Second, form employee partnerships: this is a time when we must collaborate to get through the difficult times. It is possible to convert some of the business’s senior executives, or those who are more expensive, to a higher level and share some of the risk. Naturally, as the market or the company improves, he will be required to earn more or create more value for the company than he would otherwise.

Finally, if layoffs are the only option, companies must be careful to follow Chinese labor laws. A dismissal clause, for example, should be included in the contract signed between the company and the employee. Regulating dismissal through the constraints of the employment contract benefits both the company and the employee. Furthermore, it makes the dismissal legally enforceable and avoids dismissal irregularities as well as future labor disputes.

Reduce unnecessary marketing costs wherever possible

Unnecessary marketing costs must be reduced. Of course, if it will have an immediate positive return, it should be increased; if it requires a long-term return, it may need to be reduced. To begin with, offline advertising must be discontinued because people rarely go out anymore, and with everyone’s attention focused on the epidemic, sensitivity to advertising will be reduced. The most important point is: full-time marketing. During a recession, both businesses and employees face survival challenges. Efforts are made to produce results for the company so that they can survive, so in this case, all employees should become salesmen.

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

If your company has 50 products, you must now find a way to reduce them to 10 and focus on the more core cash flow generating core products listed above. Because if your raw material procurement costs or inventory pressure is too high at this time, it will be a major issue when your cash flow is tight.

Extend account periods, loan terms and apply for subsidies

During a recession, the government provides numerous reliefs and incentives to assist businesses in surviving. There were numerous policies available at the time of the outbreak in 2020. For example, there is the Announcement on Taxation Policies Related to Supporting the Prevention and Control of the New Coronavirus-Infected Pneumonia Epidemic;Deferment of application for exemption from social security fees: 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 states that enterprises 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 period.

On February 9, the Ministry of Industry and Information Technology issued a Notice on Assisting SMEs to Resume Work and Production in Response to the Novel Coronavirus Pneumonia Outbreak, encouraging 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, as well as the “non-stop supply of unpaid fee.” Every region has its own set of policies. To alleviate cash flow constraints, businesses should actively seek subsidies and fee deferments.

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