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INSIGHT
COV I D -19 : INTO THE UNKNOWN
The Journal of the American Chamber of Commerce in Shanghai - Ins ight March/Apri l 2020
FEATURES P.15Automation in China
POLICY P.29The tech trade war after the phase one deal
MEMBER NEWS P.33Member companies donateto fight Covid-19
AmCham surveys member companies on the impact of the coronavirus, and the Brookings Institution’s David Dollar looks at the virus’s effect on China’s economy. Plus, HR compliance during the outbreak and what the virus means for the healthcare industry.
TIMES WHEN OUTPLACEMENT WOULD BE APPROPRIATE
• Realignment of resources requires the adjustment of staff to meet reduced workload.• Economics requires the reorganization of one or more business units.• Leadership recognizes the need to make team adjustments for or function.• Individual or individuals no longer the future corporate direction.
5 REASONS WHY COMPANIES ENGAGE CORNERSTONE
1. Cornerstone provides experienced Career Consultants & Career Transition Manuals in either Chinese or English for affected employees. 2. Increased employee engagement. When the remaining employees see that a company cares for its people the employees perform better. 3. The company reputation goes with the employee and his circle of friends. What will they say about the way they were treated?4. Protection for your company brand in the marketplace. 5. Cornerstone offers a variety of programs to meet an employer’s needs. Programs can include Individual tailored Executive Level Outplacement & Professional Level Outplacement.
CONTACT US:Simon Wan, Chief ExecutiveEmail: [email protected] International Group - Career PartnersWebsite: www.cornerstone-group.com & www.cpiworld.com
OUTPLACEMENTCAREER TRANSITION COACHING
Organizations engage Cornerstone to transition employees out with dignity and coach them through the job search process.
REPUTATION ARE WORTH THE INVESTMENT
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FEATURES
AMCHAM SHANGHAI
PresidentKER GIBBS
VP of Administration & Finance HELEN REN
Directors
Committees JESSICA WU
Communications & Publications IAN DRISCOLL
Corporate and Commercial KAREN YUEN
Government Relations & CSRVEOMAYOURY "TITI" BACCAM
Trade & Investment Center LEON TUNG
INSIGHT
Editor in Chief RUOPING CHEN
Editor KATE MAGILLContent Manager
IRIS FUDesign
GABRIELE CORDIOLI
Printing
SNAP PRINTING, INC.
INSIGHT SPONSORSHIP
(86-21) 6169-3000Story ideas, questions or
comments on Insight: Please contact Kate Magill
Insight is the bi-monthly publication of The American Chamber of Commerce in Shanghai. Editorial content and sponsors' announcements are independent and do
not necessarily reflect the views of the governors, officers, members or staff of the
Chamber. No part of this publication may be reproduced without written consent of the
copyright holder.
27F Infinitus Tower 168 Hubin Road
Shanghai, 200021 China tel: (86-21) 6169-3000
www.amcham-shanghai.org
Special thanks to the 2020 AmCham Shanghai President’s Circle Sponsors
INSIGHTThe Journal of the American Chamber of Commerce in Shanghai - March/April 2020
FEATURES
Impact of the Coronavirus on Businesses AmCham Shanghai surveys member companies on how the virus has affected operations
Economic Fallout from Covid-19 The Brookings Institution’s David Dollar on how the country is managing economically
What’s Next for the Healthcare Industry How the coronavirus will shape the sector and market going forward
Automation in China How automation will change China’s labor market landscape
The Business of Giving BackThe rise of individual and corporate philanthropy in China and the regulatory framework
Goodbye Dumplings, Hello SamosasWhat to expect when shifting your operations from China to India
POLICY PERSPECTIVES
HR Compliance in China during the Coronavirus OutbreakAn expert from Dezan Shira & Associates lays out frequently asked questions
The US-China Tech War in the Aftermath of the Phase One DealBoston Consulting Group’s insights and advice for impacted companies
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29
MEMBER NEWS
AmCham Members Contribute to Covid-19 ReliefWhat member companies have pledged to help fight the outbreak
Healthcare Committee ReportThe committee highlights how their industry has been affected
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AmCham members are a resilient crew.
That’s a good thing, because working in Chi-
na tends to bring all manner of surprises. The
speed at which our community has adjusted
to the changing conditions of the last several
weeks is nothing short of spectacular.
First, I want to assure our members that
the Chamber remains strong. Like most
companies, particularly the SMEs, we will
take a financial hit, but our staff is in good
health, our systems are working properly
and the Chamber is functioning as it should.
Just as many dine-in restaurants have
become food delivery companies and brick
and mortar retailers shifted to e-commerce,
the Chamber too has been quick to pivot.
From the moment we learned that Wuhan
was locked down and the coronavirus was
becoming a broader threat, the Chamber be-
came a platform to guide members toward
reliable and timely information. The staff
worked hard to monitor WeChat groups, dis-
tribute announcements from official sources
and debunk rumors.
Members have sent dozens of notes
thanking staff and fellow members for play-
ing a helpful role in this critical time. Speak-
ing on behalf of our team, I want you to know
how deeply meaningful these messages
have been. Times like these remind us how
much we rely on this great community and
how important our work is to others. Am-
Cham is a platform for members to help one
another. Today, that means sharing informa-
tion and pulling together as we get through
this difficult time.
Our member companies have also re-
sponded to directly combat the virus. We are
all moved by the heroic efforts of the health
care workers in Hubei and elsewhere. Am-
Cham members have donated hundreds of
millions of RMB and contributed even more
in products and services to fight the epidem-
ic. In the months to come we will see more
such extraordinary demonstrations of coop-
eration and selflessness as we all work to get
the economy moving again.
As we go to press, the business situation
in China is quickly returning to a new normal.
Factories have faced the most difficult chal-
lenges, trying to move their workers back
into position safely, while complying with
new regulations. Most locations are now up
and running, with many at near capacity.
There is lost ground to make up.
The two AmCham surveys conducted in
February gave us a snapshot of the economic
situation, although it continues to change rap-
idly. As of February 6th, our members could
already predict the impact of the epidemic on
China’s GDP, with 16% of members forecasting
a 2% decline or more, while others respond-
ed that the impact would be less significant.
Today, the conversation has turned toward
the impact on global GDP. In the same Am-
Cham survey, about a third of members said
their headquarters did not fully understand
the potential economic impact of the virus; in
the weeks since, those offices have learned to
better grasp the consequences, with the virus
now hitting doorsteps everywhere.
The Chamber has moved from emer-
gency to recovery mode, and we are al-
ready planning for the months ahead. Our
major events have not been cancelled, just
postponed. The WeForShe conference is
already back on the calendar for June 5th.
Naturally, this is subject to regulations and
guidance from the authorities, but at this
point we plan to go ahead and look forward
to a successful event.
Smart companies are using this crisis to
move their organizations in a positive direc-
tion. IT projects and “digital transformations”
that may have seemed easy to put off before
are now an integral part of every business
continuity plan. The Chamber was already
working on its digital transformation; we now
have a new impetus to accelerate imple-
mentation.
Since the beginning of the outbreak, the
Chamber has hosted dozens of online train-
ings, webinars and conference calls. These
virtual meetings foster discussion, informa-
tion sharing and learning in this new fully
online environment. We’ve also published
a daily briefing for members, rounding up
the day’s most relevant and insightful eco-
nomic, health and policy headlines. Finally,
we’ve used social media and our revamped
website to keep members informed with the
latest news on Covid-19, policy changes and
other fast-changing developments.
The US-China relationship has taken a hit
during this time. The “decoupling” conversa-
tion now has a new twist, with global com-
panies re-evaluating the concentration risk
in their supply chains. Adding to this, we’ve
heard unhelpful rhetoric from both govern-
ments. Still, for the most part, the crisis has
brought out the better side of people. Neigh-
bors are helping neighbors, and members
are supporting members. The Chamber will
continue doing what we do for the continued
success and good health of the American
business community here in China. I
PRESIDENT’S LETTER
KER GIBBSPresident of The American Chamber of Commerce in Shanghai
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FEATURES
In February, the Chamber conducted two surveys of member
companies in the manufacturing sector to gauge the impact
of the coronavirus. Both surveys provided important snap
shots of on-the-ground conditions, and the second survey
garnered worldwide press attention as it signaled that restric-
tions on worker mobility would severely impede production
and supply chains.
With operating conditions now improving, it will be enlight-
ening to look back later this year and see, among other things,
how accurate the respondents’ estimates were of anticipated
revenue shortfalls. However, the worldwide spread of the coro-
navirus may mean that we are now entering a simultaneous de-
mand and supply crisis, further complicating members’ ability
to forecast revenues.
Business Impact Survey(127 respondents, conducted February 4-6)
What impact will the coronavirus have on your estimated 2020
revenues?
Over 45% of respondents estimated that their 2020 revenues
would fall greater than 11%, nearly a quarter of whom projected
that the shortfall would be 16% or more. Only 12.6% saw little or
no impact from the coronavirus on their earnings.
IMPACT OF THE CORONAVIRUS
ON BUSINESSESAmCham Surveys Member Companies
What impact will the coronavirus have on your estimated 2020 revenues?
30
25
20
15
10
5
0Down 6-10% Down 11-15% Down 1-5% Down >20% Down 16-20%Very little, or not at all
What impact do you estimate the coronavirus will have on
China‘s GDP in 2020?
A small majority of companies (27.6%) estimated that China’s
2020 GDP would fall 1.1%-1.5%, although about 31% saw it drop-
ping by more than 1.6%. Less pessimistic economics forecasting
companies are projecting China’s GDP growth to be about 5.4%
in 2020, down from 5.9%. We shall see.
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What were your company‘s 2019 China revenues?
Twenty of our respondents had annual China-sourced rev-
enues of over $500 million, while another 27 earned $101-500
million dollars.
Supply Chain Survey (109 respondents, conducted February 11-14)
Does your company have sufficient staff to run a full produc-
tion line?
Almost two weeks after the end of the Chinese New Year holi-
day, only 22% of companies had enough staff to run a full produc-
tion line, a sign of serious understaffing. In the technology hard-
ware sector, major MNCs began issuing earnings warnings that
blamed lower production output on staff shortages.
What are the reasons for your staff shortage? Please rank 1- 4,
with 1 being the biggest reason.
Almost 62% of companies ascribed their primary reason for
Does your company have sufficient staff to run a full production line?
Despite many factories having already opened, extensive travel restrictions and 14-day quarantine periods remain in place to curtail the spread of the coronavirus. As a result, only a quarter of companies (21.8%) have sufficient staff to run a full production line.
NO YES
21.8
78.2
What are the reasons for your staff shortage? Please rank 1-4, with 1 being the biggest reason.
How would you describe your local government’s process-ing of factory opening approvals?
As expected Slower than we expected Quicker than we expected
59.1
28.2
12.7
What were your company’s 2019 China revenues?40
35
30
25
20
15
10
5
01-10 milion USD 11-50 milion USD 51-100 milion USD 500+ milion USD101-500 milion USD
*Figures shown represent the actual number of companies with the desig-nated revenues. Figures are not percentages.
What impact do you estimate the coronavirus will have on China’s GDP in 2020?
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25
20
15
10
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0Down 1.1-1.5% Down 0.6-1.0% Down >2.0% Down 0.1-0.5% Very little, or not at allDown 1.6%-2.0%
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FEATURES
having insufficient staff to the coronavirus-related travel restric-
tions in place across China. Another 38% said 14-day quarantine
rules were the primary cause for the staff shortage. Even by early
March, some employees were still unable to leave their home
cities, towns and villages due to ongoing restrictions.
How would you describe your local government’s processing
of factory opening approvals?
Companies were broadly satisfied with their local government’s
efforts to open factories, though 28% said factory openings were
slower than expected, versus 12.7% who said they were quicker. In in-
terviews, several industrialists said that decisions on factory openings
should have been more centralized. Regulations often differed within
a city’s industrial zones, leading to confusion.
What can your local or provincial government do better to
speed up factory opening approvals?
Asked to rank government actions to speed up factory opening
approvals, over a third chose “clearer explanation of requirements”
as the most important factor, followed by “open traffic for supplies
and workers” (20%). Another 17% of respondents selected “faster pro-
cessing times.”
What do you expect demand in the next few months for your
products to be:
Most respondents (58.2%) anticipated that demand for their
products over the next few months will be lower than normal,
with a fortunate 17.3% expecting greater demand. With the coro-
navirus now coursing its way through Europe and the United
States, demand for many products will likely remain muted or
shrink further than our members anticipated.
What will be your biggest challenges in the next 2-4 weeks?
Please rank 1-5, with 1 being your biggest challenge.
A lack of staff (41%) and logistics issues (30%) were considered the
two greatest challenges to manufacturing companies. This has been
borne out over the weeks since the survey was taken, with many
large MNCs, particularly those in electronics manufacturing and as-
sembly, struggling to staff production lines or find ships and aircraft
on which to export their goods. A lack of truck drivers has contributed
to the logistics hold-ups, as many remain quarantined in their provin-
cial homes following Chinese New Year.
What can your local or provincial government do better to speed up factory opening approvals? Please rank 1-7, with 1 being the most important.
What do you expect demand in the next few months for your products to be:
In a sign that the Chinese economy will see significant first quarter decline as a result of the coronavirus, 58% of respondents expect demand for their products to be lower over the next few months. Interestingly, 17% anticipate greater demand.
Lower than normal Normal Greater than normal
24.5
17.3
58.2
GOVERNMENTACTIONS 1st 2nd 3rd 4th 5th 6th 7th
Clearerexplana@onsofrequirements 34.5% 10.9% 14.5% 13.6% 18.2% 7.3% 0.9%
Opentrafficforsuppliesandworkers 20% 20% 30% 16.4% 8.2% 5.5% 0%
Fasterpermitprocessing@mes 17.3% 20.9% 16.4% 15.5% 21.8% 6.4% 1.8%
Providematerials(masks,safetyequipment) 16.4% 23.6% 13.6% 17.3% 17.3% 10% 1.8%
LiTquaran@nerestric@onsonhealthyworkers 8.2% 20.9% 18.2% 18.2% 15.5% 12.7% 6.4%
Other 1.8% 0% 0.9% 0.9% 0.9% 9.1% 86.4%
What will be your biggest challenges in the next 2-4 weeks? Please rank 1-5, with 1 being your biggest challenge
BIGGESTCHALLENGES No.1 No2. No.3 No.4 No.5Lackofstaff 40.9% 19.1% 16.4% 15.5% 8.2%
Logis=cs 30% 34.5% 22.7% 6.4% 6.4%
Findingalterna=vematerials/goodssupplies 16.4% 30.9% 22.7% 24.5% 5.5%
Inventorymanagement 7.3% 10.9% 24.5% 37.3% 20%
Cashflowmanagement 5.5% 4.5% 13.6% 16.4% 60%
Lack of staff (41%), logistics (30%), and the need to find alternative supplies (16%)
were ranked as the top three challenges in the next 2-4 weeks by respondents.
Logistics continues to be a major concern for companies as roadblocks and
other Covid-19-related bottlenecks are making it challenging to move goods and
supplies around China.
GOVERNMENTACTIONS 1st 2nd 3rd 4th 5th 6th 7th
Clearerexplana@onsofrequirements 34.5% 10.9% 14.5% 13.6% 18.2% 7.3% 0.9%
Opentrafficforsuppliesandworkers 20% 20% 30% 16.4% 8.2% 5.5% 0%
Fasterpermitprocessing@mes 17.3% 20.9% 16.4% 15.5% 21.8% 6.4% 1.8%
Providematerials(masks,safetyequipment) 16.4% 23.6% 13.6% 17.3% 17.3% 10% 1.8%
LiTquaran@nerestric@onsonhealthyworkers 8.2% 20.9% 18.2% 18.2% 15.5% 12.7% 6.4%
Other 1.8% 0% 0.9% 0.9% 0.9% 9.1% 86.4%
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Do you have any contingency plans for production and supplies in other regions of China or outside China, if you are unable to open your factory?
Thirty percent of companies say if their factories are unable to open, they will move operations out of the country, 61% say they will wait until their China factories open, and 9% percent will shift production to other provinces.
No, will wait for factory to open
Yes, move operations out of China
Yes, continue to operate in China but in different provinces with less strict policies
30
9.1
60.9
If the shutdown continues, how long before it seriously impacts your company’s global operations?
Forty-eight percent of respondents say the shutdown has already impacted their
global supply chain, while almost all others expect an impact within the next month.
Already impacted 48.2
11.8
15.5
21.8
2.7
Already impacted
Already impacted
Already impacted
Already impacted
0 10 20 30 40 50 60
If the shutdown continues, how long before it seriously im-
pacts your company’s global operations?
This data was popular with the media as it showed the speed at
which supply chains were hit: 48% of companies said that their global
supply chains were already impacted.
Do you have any contingency plans for production and supplies
in other regions of China or outside China, if you are unable to
open your factory?
While anonymity precluded us from knowing which of our
respondents are “in China, for China” or export-driven, this data
points to a weakness in companies’ supply chain strategy:
60.9% appeared to have no contingency plans in the face of the
coronavirus. I
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By Kate Magill
THE ECONOMIC FALLOUT FROM
COVID-19
How effective have the Chinese
government’s immediate econom-
ic policies in reaction to the epi-
demic been in supporting econom-
ic growth and mitigating damage?
What will they do next? Will we see
corporate tax cuts or more interest
rate reductions?
It is too soon to tell what the hit
to growth will be, but probably we
will see a sharp slowdown in the first
quarter. I support the government’s
moves to keep banks lending, es-
pecially to SMEs that are hard hit
by the temporary shutdowns. There
are likely to be further bankruptcies
and defaults in 2020, so the author-
ities are walking a fine line between
excessive largesse and excessive
stringency. In the short run, with the
risk of this turning into a much more
serious recession, the smart move is
to err in the direction of largesse.
David Dollar is a senior fellow in the John L. Thornton China Center at the Brookings Institution. He is a leading expert on China’s economy and US-Chi-na economic relations. From 2009 to 2013, Dollar was the US Treasury’s eco-nomic and financial emissary to China, based in Beijing, facilitating the ma-
croeconomic and financial policy dialogue between the United States and China. Prior to joining the Treasury, Dollar worked for 20 years for the World Bank, serving as country director for China and Mongolia, based in Bei-jing (2004-2009).
* This interview was conducted in late February
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What do you predict the impact of
the virus will be on the Chinese and
global markets in 6 months, 1 year?
The most likely scenario is that
the authorities get the virus under
control in the next few months and
the economy returns to normal. GDP
growth in Q1 will be off sharply but
will bounce back in the second half
of the year. In this optimistic sce-
nario, the authorities can then tight-
en monetary and fiscal conditions.
However, there is a downside risk
that the virus turns into a global pan-
demic in the next couple of months
and that it takes much longer to get
it under control. At this point public
health measures and cooperation to
control the virus are more important
than economic stimulus.
How will the virus impact global
companies’ view and trust of Chi-
na as a market and producer of
goods in the longer term? Will the
government’s slow response to the
virus outbreak undermine confi-
dence in its role in global supply
chains?
At this point it looks as if the
government was slow to recognize
the epidemic but then took force-
ful measures to control it. If they get
it under control
quickly, by March
or April, then on
balance this will
reinforce the idea
that among de-
veloping coun-
tries China has a
relatively compe-
tent government.
What needs to be
done to address
this kind of epi-
demic is clear, so
it is mostly a mat-
ter of implement-
ing a well-known
playbook. If China
fails to bring the
virus under con-
trol quickly, that will feed the narra-
tive that President Xi’s centralization
plus lack of transparency makes it
hard to implement sensible policy.
The top leadership has a big stake
in getting this right, one more reason
that they probably will succeed.
What actions should the Chinese
state take to attempt to restore
faith in its market?
I am of the view that crisis is al-
ways a good time to accelerate
reform, even though government
instinct is usual-
ly the opposite.
If the epidem-
ic raises some
concerns about
China’s reliability
as a production
hub, then I would
counter that by
opening up the
economy more –
further unilateral
reductions in tar-
iffs and in restric-
tions on foreign
investment in the
remaining sectors
that have such re-
strictions. As the
impact of the vi-
rus fades, you want to advertise that
China is open for business.
What is the impact looking like on
global supply chains? Which in-
dustries are being hardest hit by
the epidemic?
We knew about China’s key role
in auto and electronics value chains.
I am surprised by China’s central
role in pharmaceuticals, including
generics from India that depend on
inputs from China. One thing to keep
in mind is that China is a big, diverse
Rows to yourself
China’s growth will contract
sharply in Q1 and imports will
go down. Energy use is off
sharply, Chinese tourism to
the US is down, many Chinese
students were not able to get
back to US universities— all
of these are export areas that
were supposed to go up.
Probably the smart move for
the US administration is to use
the virus as an excuse for not
meeting the purchase targets.
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FEATURES
country. New cases outside of Hubei
province seem to be on the decline.
If production can be restored quick-
ly in most of China, then one lesson
will be that diversification within Chi-
na is a good strategy. China plays
such a central role in global value
chains, with about one-quarter of
all global manufacturing value add-
ed produced there, that it is hard to
take seriously the idea that produc-
tion will leave China in a major way.
Value chains are always shifting and
if more labor-intensive production
shifts to Southeast Asia or Mexico
that can be a win-win, as long as
Chinese production is moving up
the value chain and producing more
sophisticated components. The vi-
rus and the trade war may acceler-
ate economic shifts that are desir-
able in the long run.
How could the virus impact China’s
ability to fulfill its portion of the
US-China trade deal? Do you see
any forbearance on the part of the
United States?
The National Security Advisor has
already speculated publicly that the
virus may make it difficult for China
to meet the phase 1 purchase agree-
ments. Those agreements essential-
ly require China to increase imports
from the US this year by about 40%
over 2019 levels, and then a further
40% in 2021. Normally we do not see
jumps like this in macroeconomic
variables, so I have been skeptical
from the start that the targets are
realistic.
Now add in the virus: China’s
growth will contract sharply in Q1
and imports will go down. Energy
use is off sharply, Chinese tourism
to the US is down, many Chinese
students were not able to get back
to US universities— all of these are
export areas that were supposed
to go up. Probably the smart move
for the US administration is to
use the virus as an excuse for not
meeting the purchase targets. Giv-
en the fragile US and world econ-
omies, escalating tariffs to punish
China would be a risky strategy in
an election year.
What could be done to mitigate
any potential damage to the deal
if China can’t uphold its end of the
bargain?
It would be good economics and
politics for China to drop all special
tariffs introduced during the trade
war and to further reduce its general
tariff levels. The structural measures
in the phase 1 deal such as opening
financial services and autos were
things China has long planned. The
authorities should make a point of
moving quickly and decisively in
these areas. There is still a certain
cynicism in the US as to whether
the openings will be real. China can
fight that cynicism by demonstrating
quick results.
While the origin of the coronavirus
is still being debated, what actions
do you think the Chinese govern-
ment will take to avoid similar out-
breaks in the future?
It seems likely that the virus orig-
inated at an animal market in Wu-
han at which wild animals were for
sale. China should ban such mar-
kets. It also needs to invest more in
public health and create incentives
for local officials to be more open
and transparent about sharing in-
formation.
Thus far, how does the economic
impact of the coronavirus and the
government’s corresponding eco-
nomic policies compare to those of
the SARS epidemic?
In the case of SARS there was
an even longer delay in reporting
on the new disease and sharing
information internationally, so I
would say that there has been at
least some improvement in Chi-
na’s response this time. SARS had
a high death rate, but it turned out
not to be that contagious. There
is still uncertainty about the new
coronavirus but it appears to be
more contagious with a signifi-
cantly lower death rate than SARS.
More contagious means more
cases, so this has become a big
challenge for China’s public health
system. One lesson the authori-
ties should take is that they need
to invest much more in the public
health infrastructure.
In terms of the economic impact
of SARS, GDP growth dropped by
2 percentage points in the second
quarter of 2003, but then bounced
back so that the full year number
was barely affected. That bounce-
back was easier when China was
more manufacturing and export
dependent. Factories could run
at triple shift over the summer to
make up for lost output. Now that
the economy is more consumption
and services based, the bounce
back will probably be less strong.
People are not going to rush to
make up the lost movies, restaurant
meals and vacation trips that were
disturbed by the epidemic. Still, if
the government does a good job,
the loss in full-year GDP growth
should be on the order of half a per-
centage point. I
Spot the workers
12
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What does the experience of the corona-
virus epidemic in China and the govern-
ment’s response to it, especially in Hubei,
say about the state of healthcare in the
country and China’s preparedness for fu-
ture emergency situations?
I would say that the response system
has greatly improved in general, both in
terms of competency and speed, and le-
veraging past experience in handling the
SARS epidemic back in 2003. We can see
that the Chinese government has orga-
nized a series of actions at both the local
and national level.
Take for example centralized patient
management and building the makeshift
hospitals in days in Hubei. These are expe-
riences learnt from SARS. China’s National
Medical Products Administration (NMPA)
and its equivalent local administrations
also accelerated their registration and ap-
proval processes for drugs and medical
equipment related to the epidemic, such
as providing a green channel for Gilead’s
Remdesivir to head start phase III clinical
trials in China, using international phase I
& II clinical data. Municipalities also acted
quickly to include relevant drugs in their
local reimbursement systems.
Moreover, technology advances also
helped the government to contain and
analyze the epidemic situation and main-
tain undisrupted healthcare services to the
public. These were measures not available
back in 2003 to contain the epidemic. For
example, using big data to track potential
patients or, say in Shanghai, issuing person-
al QR codes with quarantine status to limit
potential virus carriers’ access to buildings
or public areas. Patients with chronic ill-
nesses can now have online consultations
and medicine delivered to monitor their
illnesses, instead of going to the hospitals,
which would increase their infection risk.
What are the key weak points of the
healthcare system that, in light of this
epidemic, need to be addressed imme-
diately?
One issue is about coordination within
the healthcare system. There needs to be a
more standardized procedure in relation to
patient treatment and incident escalation.
The epidemic will likely push for better
contingency planning within hospital sys-
tems to cover medical materials supplies
to better prepare for future epidemic out-
breaks.
Another issue may be around testing ca-
pabilities or allocation of testing resources.
On the one hand, we have seen news re-
ports saying hospitals have limited testing
Evan Zeng is a principal based in L.E.K.’s Shanghai office. He has extensive management consulting experience in the life sciences sector, serving China and global clients in the fields of pharmaceuticals, medical technology and health and wellness. Evan has an MBA degree from Kellogg School of Management and an MS from Stanford University.
THE FUTURE OF THE HEALTHCARE INDUSTRY Q&A with L.E.K. Consulting’s Evan ZengBy Ruoping Chen
* This interview was conducted on March 12
13
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resources or testing kits due to the sudden
surge of infectious incidents. On the other
hand, there were reports on idle testing
capacity from third-party testing agencies,
such as BGI, which is one of the 35 qualified
3rd party labs in Wuhan. For example, news
mentioned that BGI’s daily testing capacity
was 10,000 cases in Wuhan, but the actual
daily sample volume was only over 1,000.
There could be more discussion on how
to better utilize external third-party testing
capacities, so that public hospitals will not
be overloaded in emergency situations.
Do you expect an acceleration of invest-
ment into public hospitals and epidemio-
logical disease research?
If we look at what happened after SARS
in 2003, the central government and local
governments significantly increased in-
vestment in the healthcare sector. They in-
vested around RMB 10.5 billion to establish
the provincial, city and county 3-level dis-
ease prevention and control systems be-
tween 2003 and 2006. They also spent an-
other RMB 16 billion to build an improved
emergency medical service system cover-
ing both urban and rural areas. So based
on this history, I believe the government
will continue to make similar investments
in the healthcare sector in the future.
May this crisis cause the government to
liberalize more sectors of the healthcare
market to foreign and private investment?
Yes, the government has already been
encouraging private investment and I be-
lieve this trend would continue even with-
out this epidemic. During this difficult time,
we can see that private hospitals are taking
on increased responsibilities. For example,
statistics from the Private Hospital Branch
of the Chinese Hospital Association show
that as of February 7, 633 non-public hospi-
tals participated in the fight against the ep-
idemic in 13 provinces. In Hubei, about 10%
of designated medical institutions are pri-
vate medical institutions. The development
of private investment in the healthcare
market will likely be further encouraged.
What areas of the healthcare sector will
see increased demand and growth in the
coming months?
Many areas will see increased de-
mand and growth in the short term. One
is the pharmaceutical industry. Of course,
anything related to anti-viral medication,
including traditional Chinese medicine
(TCM), is already seeing a significant de-
mand increase. Compelling growth is wit-
nessed especially in specific medications
such as Ribavirin and Chloroquine that the
government has emphasized for treating
the coronavirus.
Medical protective devices, such as
masks and anti-virus protective clothing,
and ventilation devices, whether for profes-
sional usage or personal use, also had de-
mand increases. The same goes for med-
ical equipment used for testing, whether
it’s testing kits or IVD (in vitro diagnostic)
devices.
Other areas include personal health
products, such as nutritional supplements
and other supplements perceived to
strengthen the immune system, as well as
medical and life insurances.
What production challenges is the
healthcare industry facing now due to the
coronavirus, and are they similar to those
other industries face (staffing issues, sup-
ply chain disruption, inventory manage-
ment, etc.)?
The healthcare industry is facing many
production challenges similar to what oth-
er industries are facing.
One of the challenges is the addition-
al cost burden. For example, labor costs
will rise given a temporary labor shortage.
Other related costs, such as accommo-
dation costs, will also increase. I imagine
that those factory owners may want their
workers to live near the plant, or they will
need extra workers, given the increased
demand. There is added pressure on the
availability of raw materials and other ma-
terials needed in production. Costs for
some raw materials, such as those needed
for anti-viral medication or TCM (Traditional
Chinese Medicine), have gone up because
of the short-term demand surge. These are
all additional costs that players in health-
care sectors need to resolve.
Overall production efficiency is still low-
er than normal. There is still a shortage of
labor as some workers may be still under
quarantine at their home city after they re-
turned home for Chinese New Year. Supply
chains are also affected, particularly for
some medical device industries. For ex-
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ample, the production of hospital-grade
air purifiers requires hundreds of different
components. Can supply and logistics of
all suppliers for the device adapt to the
recent change in the short term? That is a
question. They might need half a month or
a full month before their production returns
to normal.
On the upside, the fact that this epidem-
ic coincided with Chinese New Year when
workers were already on holiday for the
week, dampened the impact a bit. A lot of
plants had already accumulated stock in
preparation for that. Many seem to have al-
ready resumed production since February
10. That is a positive sign.
What is the global impact? Many of the
key ingredients of pharmaceutical prod-
ucts are made in China. Do you think that
there will be a drug shortages risk as a
result of suspension of production lines?
Indeed, China is the world’s biggest
producer and exporter of pharmaceu-
tical raw materials. Our current outlook
on global supply impact is pretty neutral.
Multiple media sources have mentioned
that currently pharma companies are not
facing shortage issues, as companies have
stocked up before the Chinese New Year
holiday, so there is some leeway. You may
also have read statements from the US
FDA and the India Pharmaceutical Alliance
saying that at the moment there are no key
shortages reported in drugs, devices or
APIs in general. Many Chinese companies,
whether they are upstream or downstream
companies, have already resumed opera-
tions in early February.
The market does harbor some worries,
particularly if the epidemic prolongs caus-
ing further production interruption. We do
see concerns from certain companies in In-
dia, which imports around 70-80% of active
pharmaceutical ingredients from China.
But overall, our outlook is neutral. Com-
panies see that they have enough stock to
last two to three months. So if production in
China can fully get back to normal by this
time, there shouldn’t be a problem.
Will risks such as this compel more
healthcare companies to shift their sup-
ply chains away from China?
It is still a sensible choice to have supply
chains based in China. There are many other
aspects to consider in supply chain-related
decisions, such as proximity to the market,
market size, cost advantage, technology,
talent pool and favorable government pol-
icies. These are all important factors for the
CEOs and procurement managers to think
about for long-term strategy and daily op-
eration. The epidemic is just one of these
many factors.
Another point to note is that China is the
“world’s factory” with an entire industrial
chain. Material and services suppliers or
vendors are linked up like a package. It is
not easy to shift your supply chain out of
the country for healthcare industry players;
same for other industries.
Under the influence of the epidemic,
it’s rather important for companies to ask
questions on how to improve their con-
tingency planning in terms of inventory
management, logistics and supply chain
agility. I
IMAGINECHINA
IMAGINECHINA
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By Kate Magill
AUTOMATION IN CHINA
In settings ranging from restaurants
and hospitals to cars and factory
floors, robots are cropping up in more
and more spots all over the world, per-
forming tasks previously handled by
humans with greater efficiency and
accuracy than ever befor e. The capa-
bilities of robots and AI have surged in
recent years, with the US, Japan and
more recently, China, competing to be
the global leader in automation.
With an enthusiasm for automa-
tion that begins at the top—Xi Jinping
called for a “robot revolution” in a 2014
speech— the Chinese state is throwing
itself fully behind a push for automa-
tion across its vast economy, looking
to revolutionize everything from ag-
riculture to assembly lines. Beijing’s
spending on smart manufacturing
has surged year-on-year; in 2018 in-
vestment shot up 46% to RMB 69.9
billion, according to the Beijing-based
research firm Marketing Intelligence
Resource. The sector has received
priority in the Made in China 2025 plan
as well, with targets to boost China’s
manufacturing capabilities and grow
the number of domestically made ro-
bots.
Automation looks to solve a com-
plex set of problems in China, with the
possibility to not only propel China
forward as an innovative and indus-
trial leader, but to solve the country’s
growing demographic problem. China
is headed for a massive labor shortage
in the coming years, an issue that offi-
cials hope automation can solve with
its efficient—and cheap—manufactur-
ing capabilities.
China has been automating across
industries at a staggering rate in recent
years; Chinese companies installed
154,000 industrial robots in 2018, beat-
ing Japan at 55,200 and the US at
40,400, according to the International
Federation of Robotics. The push for
automation is part of China’s goal to
become a “hub of innovation.” Matched
with government education policies to
encourage more science and engi-
neering graduates and financial incen-
tives to invest in robotic manufactur-
ing, China is on track to be a leader in
industrial automation.
In the short-term, the swift tran-
sition to the new highly-automat-
ed economy, however, is creating a
growing number of displaced workers,
pushed out of work by robots that can
complete their tasks more efficiently at
lower cost. Workers now face compe-
tition for increasingly technical jobs for
which they lack the training. The prob-
lem begs the question—can China
forge ahead as an automation leader
without leaving its workers behind?
A Sharp Pivot to the Future
China’s desire for automation is large-
ly rooted in the technology’s ability to
solve its lack of labor. The national birth-
rate hit a nearly 60-year low in 2019 of
only 14.6 million babies, according to the
National Bureau of Statistics, at the same
time as China’s population continues to
age out of the workforce. Younger work-
ers, meanwhile, are more educated than
previous generations and are looking for
higher-earning jobs beyond the factory
floor. Automation could eventually be
the answer to both problems by replac-
ing labor and providing more lucrative
jobs.
AI and automation have the poten-
tial to create as many as 297 million jobs
over the next two decades, according
to the 2018 PwC report “What will be
the net impact of AI and related tech-
nologies on jobs in China?” However,
those labor gains come at the cost of
up to 204 million jobs displaced by new
technology, leaving millions of people
searching for work in a new economy.
Further complicating this problem, the
transition from job losses to job gains is
likely several years into the future, ac-
cording to Osea Giuntella, an assistant
professor of economics at the Universi-
ty of Pittsburgh and one of the authors
of the working paper “Is an Army of Ro-
AI and automation have the potential to create as many
as 297 million jobs over the next
two decades, according to a 2018 analysis
from PwC. However, those
labor gains come at the cost of up
to 204 million jobs displaced by
new technology, leaving millions of people searching for work in a new
economy.
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16
bots Marching on Chinese Jobs?” with
Yi Lu and Tianyi Wang.
Labor displacement rates vary
across industries, with the greatest risk
in the industrial sector, where more
than 35% of jobs could be lost to au-
tomation in the next two decades,
according to PwC. The service sector,
which is still a burgeoning industry for
automation in China, is less at risk, with
closer to 20% of jobs susceptible to
displacement and the potential for up
to a 29% net job increase. The biggest
losses could hit agriculture, where
workers are generally less skilled; the
industry is set for a net loss of 10%.
The issue for China, according to
Matthew Funaiole, a senior fellow with
the Center for Strategic and Interna-
tional Studies’ China Power Project, is
to balance the long-term need for au-
tomated labor with the current need to
keep people employed. China needs
to be looking towards the future and
how it’s going to be a leader in the next
economy.
“How can we create transitional
periods that aren’t too disruptive in the
short term, but are needed for the long
term?” Funaiole said. “The number of
people who can be in manufacturing
is going down, costs are going up,
people want better jobs. How do we
mitigate the medium term and short-
term disruptions?”
Automation LeavesSome Laborers Behind
The disruption in the workforce has
been compared to a rise in labor un-
rest and social inequality in China. The
number of labor strikes and protests
drastically shot up between 2011 and
2016, from just 184 recorded events to
2,664, according to Giuntella’s working
paper. In cities with a higher degree
of automation penetration and more
labor market problems, Giuntella said
the degree of unrest is particularly ap-
parent. Labor strikes and protests were
often caused by disputes over layoffs
and wages, both of which are impact-
ed by automation.
Major corporations have been mak-
ing the shift to automation for years.
An often-cited example is Foxconn,
the Taiwanese mega-corporation re-
sponsible for producing iPhones and
other tech products, which replaced
400,000 human jobs with robots be-
tween 2012 and 2016, according to
the working paper, and the company
plans to reach 30% automation in its
factories in 2020.
Such swift and massive displace-
ment has highlighted one of the un-
derlying issues in China’s battle be-
tween labor and automation, which is
a lack of infrastructure for retraining
laborers who have been displaced by
new tech. Many of the positions cre-
ated by an increase in automation are
those working heavily with data sys-
tems and other new technology, such
as data tagging or software develop-
ment for AI algorithms, according to
James Chang, a leader at PwC’s China
consulting practice and one of the au-
thors of PwC’s 2018 report. Such jobs
include skills that would require more
training and education to master.
Faster than the ambidextrous
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FEATURES
Despite the need to retrain labor-
ers, many of whom have worked in
manufacturing for decades, to take
on new more tech-savvy jobs, the
country’s vocational schools and con-
tinuing education programs are rela-
tively weak, particularly compared to
other automation leaders. The Econ-
omist Intelligence Unit ranks China’s
workforce transition programs for vo-
cational training at 21st place globally,
far behind competitors like Singapore
and Germany.
China’s vocational schools are
particularly inadequate. The state
has been making some curriculum
changes to these schools to include
more focus on roles related to auto-
mation, such as the Industrial Robots
Technologies and Smart Product De-
velopment program established in
2015, but enrollment in the schools,
according to the China Power Project,
is actually declining. In 2018 national
enrollment was 15.5 million, down 31%
from 2010, though Beijing announced
plans last year to increase enrollment
by one million.
The country’s continuing educa-
tion and training programs to combat
the labor skills gap are still in their
early phases. In April 2019, Beijing
announced new plans to use RMB
100 billion from the balance of its Un-
employment Insurance Fund to offer
15 million training sessions to help
workers transition jobs or upgrade
their skills.
Educating an AI Generation
While support for current workers
may be lacking, Beijing has put an
emphasis on educating its young stu-
dents, attempting to yield a generation
of great automation innovators. China
has launched large-scale education
campaigns aimed at preparing the
country’s students to take on roles in
designing and maintaining automation
technologies and artificial intelligence.
Key among those programs is the
state’s National Medium- and Long-
term Education Reform and Develop-
ment Plan. Now in the final year of the
decade-long plan, the initiative created
new education targets and increased
education spend-
ing across the
country. In high-
er education, the
country has placed
a greater focus on
science and engi-
neering degrees;
in the last 20 years,
the number of Chi-
nese students that
earned science
and engineering
degrees increased
by more than 450%,
according to the
US’ National Sci-
ence Foundation’s
Science and Engi-
neering Indicators
2018 report. Other
plans aim to bring
back scientific talent from abroad. The
Thousand Talents Program, launched
in 2008, offers incentives to foreign and
Chinese experts to work in the country,
and has lured back 7,000 researchers
and scholars.
No matter how much more edu-
cational focus is put on automation
however, Funaiole said there is a
larger societal hurdle blocking Chi-
na’s pursuit of innovation. Scientists
and researchers, he said, will be
challenged in their ability to truly in-
novate unless there’s a larger socie-
tal shift to allow for greater academic
and scientific freedom.
“China can build all of the STEM
grad schools in the world, but if you
really want to be in a place where
you’re encouraging innovation, you
have to allow people to express
themselves, to be creative and to fail.
And China’s not really a culture where
failure’s seen as acceptable,” Funaiole
said. “It’s a bigger societal question
than just, can we train students to
innovate and automate. Yes, you can
teach them to operate a robot, but are
you going to innovate the robot?”
Return on investment?A major aspect of the automation
shift is the state’s push for a greater
proportion of domestically produced
robots. Currently, China purchases
many of its robotics from foreign com-
panies, but under
the Made in China
2025 plan, Beijing
wants to see 70%
of industrial robots
made in China by
2025, up from just
30% in 2017. Such
a massive under-
taking has global
automation com-
panies taking note
and rushing to
invest in the sec-
tor, particularly as
China aims to raise
its robot density
(the number of in-
stalled robots per
10,000 workers),
an area where it
still lags other ro-
botics leaders like Singapore, South
Korea and Germany.
Major robotics companies includ-
ing Japanese companies Fanuc Corp
and Yaskawa Electric Corp, German
firm Kuka Corp (owned by China’s
How can we create
transitional periods that
aren’t too disruptive in
the short term, but are
needed for the long
term?” Funaiole said. “The
number of people who
can be in manufacturing
is going down, costs are
going up, people want
better jobs. How do we
mitigate the medium
term and short-term
disruptions?
“China can build all of the STEM
grad schools in the world, but if you really want to be in a place where
you’re encouraging innovation, you
have to allow people to express
themselves, to be creative
and to fail. And China’s not really
a culture where failure’s seen
as acceptable,” Funaiole said. “It’s
a bigger societal question than
just, can we train students to innovate and automate. Yes,
you can teach them to operate a robot,
but are you going to innovate the robot?
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18
Midea Group) and Swiss robot mak-
er ABB have poured money into the
blossoming Chinese robotics market.
Other foreign companies are also
investing in industries which they
believe will be greatly impacted by
where automation is headed, such as
healthcare.
Despite the high degree of in-
vestment in industrial robotics in
China, Funaiole said that the shift to
higher-end, domestically produced
robotics is still in the early stages.
Much of the automation is still rela-
tively basic and focused on replacing
workers on the factory floor rather
than higher-end automation and ar-
tificial intelligence.
“Where I think there’s a bigger
question under the heading of auto-
mation is where you get into AI. The
higher end jobs where people want
to be not just maintaining a robot,”
Funaiole said. “You’re going to want
people who are also working on AI
and that’s where there’s promise for
the future economy.”
Whether the massive amount of
public and private investment into
automation will yield fruitful results
for China’s labor market over the
long term remains is questionable.
The state’s prioritization on AI and
automation makes it all but certain
that in absolute terms, China will see
a rise in the number of automated
and other jobs created as a result,
but what impact that has on overall
human employment rates remains to
be seen.
“Are they going to be able to ben-
efit from the job creation that will
come from this wave of automation?”
Funaiole said. “I think we are in such
an integrated and globalized econo-
my that I don’t know if jobs created
will be proportional to the size of the
economy.” I
Despite the need to
retrain laborers, many
of whom have worked
in manufacturing for
decades, to take on new
more tech-savvy jobs,
the country’s vocational
schools and continuing
education programs
are relatively weak,
particularly compared
to other automation
leaders. The Economist
Intelligence Unit ranks
China’s workforce
transition programs for
vocational training at 21st
place globally, far behind
competitors like Singapore
and Germany
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Amid China’s rise in wealth over the
past several decades, a new gen-
eration of citizens and a slew of
companies with cash to spare have created
a massive increase in philanthropy. China
is discovering both the joys and benefits
of giving back, with nonprofits multiplying
and the country’s first slate of billionaires
leading the charge. Chinese corporations
meanwhile are creating more sophisticat-
ed and transparent corporate responsibility
programs, looking to inform the world about
how they’re helping others.
Philanthropic donations have ballooned
in the last decade, with total nationwide
donations quadrupling from 2009 to 2017
to surpass $23 billion, according to the
Asian Venture Philanthropy Network’s 2018
“Philanthropy in China” report. At the corpo-
rate level, which accounts for the majority of
donated funds, domestic companies are in-
creasingly stepping into a space once dom-
inated by foreign multinationals.
The Chinese government is reacting
to the expansion of philanthropy with new
regulations and legislation aimed at creat-
ing greater public trust and transparency
in a sector that has often lacked both. The
new legislation, which has created signifi-
cant obstacles for foreign actors in the field,
has highlighted the state’s oversight of the
sector and the need for foreign companies
looking to get involved to consider China’s
unique political context.
Leading by ExampleThe increase in giving is due in part to a
shift in the government’s view of philanthro-
py as a tool to help solve societal problems.
China’s rise in wealth has highlighted gaps
in government support, pushing the state to
slowly admit that it cannot conquer all of the
country’s problems on its own, according to
Tony Saich, director of the Ash Center for
Democratic Governance and Innovation at
Harvard University.
“Generally, the whole art of giving has ex-
panded. The government itself has moved
to recognize philanthropy as a legitimate set
of activities,” Saich said. “The government
has accepted that it doesn’t have the ca-
pacity to fully enact everything it would like
and that mobilizing resources from society
actually helps them reach their objectives
rather than detracts from them.”
The act of charitable giving in China is
rooted in the belief in the need for a har-
monious society, which is one of the tenets
of Confucianism. Since 2004 the state has
promoted social harmony as the “dominant
socioeconomic value of China,” a value that
has also planted itself in the motivations of
Chinese citizens, who listed their desire to
create more harmonious living as a driver
of their charitable giving, according to Sa-
ich and Paula Johnson’s 2017 article “Values
and Vision: Perspectives on Philanthropy in
21st Century China,”
Billionaires like Tencent co-founder Chen
Yidan and Alibaba’s Jack Ma are among
a new wave of high-level philanthropists
leading the charge for giving; in 2015 the top
100 philanthropists accounted for roughly
a quarter of the total of all individual dona-
tions. Among the top 100 philanthropists in
China in 2018, the average amount donated
was RMB 47.7 million, according to the Ash
Center’s 2018 China Philanthropy Project
report, “China’s Most Generous.” Philanthro-
pists cite motivations such as a desire to
“create goodwill and trust” as reasons for
their charitable work.
Leaders like Ma have looked to the West
for ideas on how to structure philanthropic
activities; the Alibaba founder created the
Jack Ma Foundation in 2014 and has cited
the Bill and Melinda Gates Foundation as
inspiration for his work. When Ma officially
stepped down from Alibaba, the billionaire
announced his commitment to furthering
causes such as education.
At the more local level, philanthropic
leaders like Frances O’Rourke, chair of the
education charity Shanghai Sunrise, have
seen a change as well. O’Rourke said she’s
seen a particular uptick in the number of
volunteers ready to donate their time to
help others. Founded in 1995, Shanghai
Sunrise raises funds to help Shanghai stu-
dents in need to cover school costs, and
currently sponsors nearly 500 students.
“I think [philanthropy has] definitely ex-
panded. The good news is that there are
By Kate Magill
THE BUSINESS OF GIVING BACK
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20
thousands of small grassroots orga-
nizations, local and foreign, and that’s
been a big change,” O’Rourke said. “A
lot of younger Chinese people are
saying, ‘Well, what else is there to
do?’ Philanthropy in terms of giving
time has become more important;
the impact of foreigners and multi-
national companies’ CSR has been
quite a lot. And seeing other people
giving has had a profound impact on
a lot of people.”
The Internet of GivingIndividual charity received a sig-
nificant boost from the invention of
online donation channels through
platforms like WeChat. Campaigns
such as Tencent’s “9.9 Charity Day”
each September raise massive
amounts for popular causes; in 2019
more than 48 million individual do-
nations contributed RMB 1.783 billion
during the campaign.
The dominance of WeChat as a
giving platform, however, means that
its operator Tencent
has great control
over which orga-
nizations receive
significant atten-
tion, said Edward
C u n n i n g h a m ,
director of China
Programs at the
Ash Center. This
limits the number
of causes that
benefit, with a few
major organiza-
tions, such as The
One Foundation,
receiving a large
proportion of donations.
“When you look online, it’s kind
of a microcosm of larger trends. Yes,
the sector’s growing, but in some
ways while it’s growing, it’s in some
ways becoming less diverse, less
resilient. It looks quite diverse, but
over time you see a narrowing of the
platforms, how many platforms are
actually dominating the channel,”
Cunningham said. “Even though the
internet is boundless, if you look at
giving, Tencent and WeChat really
dominates online giving. The prob-
lem with that is the algorithms, the
way that they use their real estate
that you’re looking at, it’s really just
a few foundations that are actually
receiving.”
Codifying CompassionTo match the rise in donations, the
Chinese government in recent years
passed two major laws to regulate
the sector. The first, 2016’s Charity
Law, makes it easier for nonprofits to
legally register with state agencies
and raise public funds, as well as re-
quires transparency on how founda-
tions spend money, including caps
on administrative spending at 10%.
The Charity Law, seen as watershed
legislation in the fast-growing sector,
aims to provide both greater regula-
tion and a tool to stop corruption in
charity spending, according to Bies
and Kennedy.
The second major legislation,
the “Law of the People’s Republic
of China on Administration of Activ-
ities of Overseas Non-Governmen-
tal Organizations in the Mainland of
China,” commonly known as the ‘for-
eign NGO law’, was enacted in 2017
and creates high barriers for foreign
NGOs to successfully register in the
country, including a mandate that a
Chinese partner take responsibility
for all of the foreign entity’s work in
the country. The effect of the legis-
lation has been to massively reduce
the number of foreign NGOs and
their representative offices in the
country, as they have struggled to
comply with the new requirements
for registration and operation.
The legislation, Saich said,
showed the government’s desire to
both promote domestic giving and
have more oversight over foreign
groups. They were also seen as nec-
essary steps to help build public trust
with charity institutions, which have
often been seen as lacking in ac-
countability. While the laws do cre-
ate hurdles for foreign organizations
in China and are more restrictive, he
said they have helped to clean up
and properly register NGOs in Chi-
na and provide “rules of the road”
and a legal framework for operators.
The new regulations have also made
clear what areas are not acceptable
under the Chinese government, such
as dealing with marginalized groups
or advocacy.
The Nature of Corporate Giving
Corporations in China dominate
giving, making up nearly 70% of
donations, according to Saich and
Johnson. Companies including the
state-owned China Three Gorges
Corporation and private real estate
company The Evergrande Group
lead corporate giving, with foreign
firms also making significant con-
tributions. Corporations in highly
regulated industries that require
government approvals for work are
often the biggest givers, Cunning-
ham said.
“That’s why you often see real es-
tate ranking number one in terms of
local giving,” Cunningham said. “It’s
not because they’re trying to influ-
ence the regulator, but they’re defi-
nitely trying to get approval at the
local level.”
Corporations also tend to limit
their donations to only a few caus-
es. Among the top 100 organization-
Philanthropy in terms of
giving time has become
more important; the
impact of foreigners and
multinational companies’
CSR has been quite a
lot. And seeing other
people giving has had a
profound impact on a lot
of people.
-Frances O’Rourke
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FEATURES
al and individual philanthropists in
2018, nearly 30% of donations went
to poverty alleviation, and nearly
25% to education, while sectors like
the environment lost out, receiving a
mere 0.22% of donations, according
to the Ash Center. These trends also
align with state policy priorities to lift
citizens out of poverty and focus on
education, and reflect the fact that
donors give to causes where they
already have a greater amount of
expertise.
Given the use of charity to curry
favor with regulators, much of char-
ity in China is local, within the same
province as a company’s head-
quarters, which means money from
more prosperous regions tends to
stay in the same areas, Saich said.
The major exception is Beijing,
where donations are often made by
companies vying for goodwill with
the central government; among
2015’s top 100 philanthropists, 15%
of donations went to Beijing, even
though many are headquartered
elsewhere, according to Saich and
Johnson’s report.
The Changing State of CSR
As philanthropic giving grows,
corporate responsibility is also taking
on a more major role in China among
both foreign and domestic firms. One
of the most successful foreign cor-
porate responsibility campaigns in
China was conducted by cosmetics
brand L’Oreal, which has had a pres-
ence in China since 1996. The com-
pany has multiple CSR initiatives,
including the sustainability program
“Sharing Beauty with All,” launched
in 2013 and the “L’Oréal China Wom-
en Empowerment Fund” that was
launched to celebrate the brand’s
20th anniversary in the country.
More companies are now disclos-
ing public CSR reports; in 2016 3,043
reports were released in China, up
12% from the previous year, accord-
ing to a 2017 report from the Golden
Bee Corporate Social Responsibility
Index, which has been tracking CSR
data since 2009.
For PwC, its CSR initiatives have
become increasingly focused on
capitalizing on its own strengths, said
Doug Johnson, senior manager for
corporate respon-
sibility at PwC
Mainland China
and Hong Kong.
The company has
a well-developed
set of CSR initia-
tives, including
the PwC Foun-
dation, which
engages staff in
volunteering ef-
forts, rural educa-
tion support with
charity partner
Adream and more
recently, pro-bo-
no work for local
NGO groups to
help improve their
practices and provide open source
resources to help groups better re-
port their philanthropic information.
While PwC Mainland China and
Hong Kong is part of PwC’s global
network, its China offices are a sep-
arate legal entity, and the company
operates here as a local firm. As with
any of its endeavors, Johnson said
the company chooses its partners
What is different here is
you have a much more
restrictive set of actors
that you can work with.
You have to come with
a different mindset, that
this is not an open playing
field and if you have your
CSR person, you’re not
going to let them run
around looking for what
might be considered
worthy causes in America.
-Tony Saich
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and causes to support carefully,
making smart financial and ethical
choices.
“It’s grown and changed so much.
In the early days it was all about a
very philanthropic traditional CSR
approach, but over time it became
a lot more about putting procedures
in place, policies for volunteering,”
he said. “And now it’s become much
more focused on using our core skills
and resources to help the NGO sec-
tor, quite broadly, and specifically fo-
cusing on the kind of skills we have
in-house, like reporting, risk man-
agement [and] governance. It’s been
a journey, like for most organizations.”
How to Navigate Philanthropy
The new regulatory framework
means the government is more
heavy-handed in
directing char-
itable efforts to
causes and sec-
tors it favors. Mar-
ginalized groups
or issues such as
race relations for
instance, accord-
ing to Saich, are
not causes that
can easily gain
attention, a notion
that he said is crit-
ical that foreign
companies wish-
ing to do philan-
thropy in China
understand.
“What is dif-
ferent here is
you have a much
more restrictive
set of actors that
you can work with. You have to come
with a different mindset, that this is
not an open playing field and if you
have your CSR person, you’re not
going to let them run around looking
for what might be considered wor-
thy causes in America. You’ve got to
be much more strategic and much
more integrated to priorities either of
the local government or the nation-
al government agencies,” Saich said.
“So, I think you have to understand
the politics and the relations of pol-
itics here much better than perhaps
in other countries. You can’t afford to
make mistakes here.”
Overall, Cunningham and Saich
said MNCs face tough challenges
when it comes to philanthropy in
China, including being restricted in
what causes they choose and which
other players they can collaborate
with. One of the biggest practical
challenges is a lack of personnel
talent with a proper understanding
of Chinese regulations to lead CSR
and philanthropic work. This is com-
pounded by the precarious situation
many MNCs face in attempting to
straddle Chinese state expectations
with their own native cultures.
“You have to balance what is be-
ing said and done in China with your
global markets. You can imagine as
an MNC you might be
giving money here,
and people in Ameri-
ca or Europe could be
criticizing you, asking
why are you giving
money to that rich
country doing X, Y and
Z?” Saich said. “I would
not be surprised if that
is making MNCs cau-
tious about what they
give to and the kind of
publicity they want to
give to it. On the oth-
er side, of course, you
might think, well, they
might think they want
to throw a boatload of
money to something
to get back in some
good graces.”
Global GivingFor foreigners in China look-
ing to make a difference, O’Rourke
suggested that they find the areas
where a genuine gap and need ex-
ists. With a diverse and still growing
philanthropic sector, she also en-
couraged companies to locate and
help organizations already engaged
in charity work.
While the state of philanthropy
in China is tipping towards domestic
NGOs and corporate giving, Saich
said there is still space for foreign
players. One of the advantages for
foreign companies in China is that,
because the local activities are just a
portion of their entire supply chains,
Cunningham said it can be easier to
make changes to production in Chi-
na, such as making supply chains
greener. There’s also been a shift he
said in foreign corporate donations
to industries that have become more
popular with Chinese consumers,
such as health care.
At the corporate level, Saich
suggested foreign companies look
for more niche areas that the Chi-
nese government has outlined as a
priority, but which aren’t being ad-
dressed by a domestic firm or SOE.
Contributing to those areas could
help firms more clearly define their
philanthropic identity. One possibil-
ity could be to find program-related
approaches that benefit Chinese
society, rather than relying solely on
monetary donations.
“It’s been overwhelmingly domes-
tic dominated but that doesn’t mean
there isn’t a role for [foreigners],” Sa-
ich said. “If it’s a larger company with
good experience with CSR, it can still
be beneficial.” I
Even though the
internet is boundless,
if you look at giving,
Tencent and WeChat
really dominates
online giving. The
problem with that Is
the algorithms, the
way that they use
their real estate that
you’re looking at,
it’s really just a few
foundations that are
actually receiving.
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On a macro-level, what are the biggest
differences and similarities between
China and India?
China is more homogenous in terms of
language. Even though there are dialects
throughout China, Mandarin is clearly the
mother tongue and national language. Cultur-
al differences between north, south, east and
west China are not disappearing, but the ma-
jor differences are starting to dissipate.
In India, you deal with completely differ-
ent cultures and languages, not dialects.
And the people don’t really like each oth-
er, and they like people in Delhi even less.
Indians also detest federal control; it’s more
like the United States, with more state than
federal power. In China, Beijing has more
control over things that in India the states or
municipalities would control.
And at the factory level?
Production equipment at factories is often
top of the line and new. The physical envi-
ronment of factories varies widely, but I have
found significantly more examples of hygiene
issues in India - ranging from birds and rodents
to insects and dust. Indian factories tend to be
less flexible in dealing with smaller orders or
making compromises and sacrifices for the
sake of the bigger picture opportunities.
How do you select the factory or factories
that you work with?
Previously, some purchase orders were
placed directly from our US headquarters,
but no one from our company had been to
India. We did due diligence, but we bought
on reputation and trust. Suppliers sent in
certificates proving ISO standards and food
grade standards – issued by third parties
such as Intertek and SGS – and we used
Datamyne and other US customs stats to see
who was selling to whom in the US.
On my first trip, I visited an existing vendor
and blacklisted the factory. It was a sweat-
shop, and we sell to blue-chip companies and
the last thing they want is a scandal.
Today, we don’t place an order unless I
have visited a factory. We get quotes to see
prices and lead times, we get samples to
check quality. Once I am satisfied, it could
be the next day that we place an order, but
it may be four to six weeks from pre-produc-
tion to completion. They already have the
raw material – polypropylene or polyeth-
ylene – and they have the capital equipment
for extrusion, weaving, sewing and packing.
Things do improve. Around six months
after I blacklisted that factory, they called us
back and said they had hired a CSR vice pres-
ident. We had an independent auditor visit
them, and their business has since grown and
is near to becoming SA8000 compliant.
How do labor costs and material costs in
India compare with China? Does manufac-
turing in India save you money?
About two years ago, a blue-collar worker
in a good quality Chinese sewing facility cost
roughly $1,000 per month, and that’s compa-
ny cost, not what goes into a worker’s pocket.
In India, it was $250, so a quarter of the cost.
However, the productivity of the Chinese work-
er was roughly 40 bags per day; the Indian
worker, around 15. But it’s not a science, and we
discovered that comparing the same spec on
a consistent basis, including cost of materials,
GOODBYE DUMPLINGS, HELLO SAMOSAS
SHIFTING OPERATIONS FROM CHINA TO INDIA
By Ian Driscoll
Dan Krassenstein is a seasoned multilingual executive. As the global supply chain director for Procon Pacific, a US-based manufacturer of bulk packaging, he is responsible for production facilities, order expediting, quality and logistics throughout India, China, and Vietnam. His career base has included Shanghai, Taipei, Jakarta, Panama, Mexico City and the US, in industries ranging from ocean container carrier management to forwarding to contract manufacturing. Krassenstein earned both his MS Global Supply Chain Management and his Black Belt in Lean Six Sigma from USC Marshall.
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India was roughly 30% cheaper. A $10
bag in China was $7 in India.
But productivity in India has im-
proved dramatically in the past year,
and that same worker is now making
about 25 bags per day. China is prob-
ably at its peak, and costs continue
to rise here. Cost differentials were al-
ready causing a shift, but resin is also
subsidized by the Indian government.
Second, the imposition of punitive du-
ties on China [during the trade war],
meant that importers who were pay-
ing 8.4% on our product now had 15%
punitive damages in addition. Adding
[extra] duties to costs that were already
30% higher made China unsustainable.
The punitive additional tariff did
later get cut to 7.5% and the RMB has
depreciated back above the 7:1 level;
however, it’s still not enough to bring
the business back to China. VAT re-
funds from the government in China
could also make a difference to help-
ing Chinese manufacturers stay alive.
What should companies anticipate is
the biggest disparity between China
and India’s operational capabilities?
Overall, the biggest disparities in
China and India’s operational capabil-
ities are related to communication and
coordination issues. In general, I’ve
found China vendors eager to learn
best practices and implement these
improvements. The China factory
managing directors/owners are more
hands-on and the lower level manag-
ers/staff obediently follow the instruc-
tions from the director.
On the contrary, I’ve found many
India vendors to be more stubborn
and unwilling to make changes –
sometimes at a director level and
sometimes at the lower levels. Ad-
ditionally, sloppiness in production
is more common in India, thus being
very hands-on with quality audits
and training is essential in India. Is-
sues of strikes, riots, natural disasters
and other disruptions (e.g., electricity
outages) are more common.
Companies often laud China for its
infrastructure. How does India’s in-
frastructure compare?
The highways, warehouses, air-
ports and seaport infrastructure are
dramatically better in China.
The ocean container carrier
capabilities in Eastern India are
challenging as there are no direct
line-haul services to bring con-
tainers to the US market—every-
thing must relay over Colombo, Sri
Lanka – the transit time is longer
and the dependability is weaker.
On the contrary, the northwestern
Gujarat port of Mundra is a world-
class, deep-water facility run by
the powerful and politically con-
nected Adani group, and it has de-
pendable direct linehaul service to
New York through the Suez Canal
in three weeks. In general, the to-
tal delivery time (from order place-
ment to US door delivery) is 10-12
weeks in China and 14-18 weeks
in India. Lead times from a port in
China could be two weeks; from a
port in India, four to six weeks.
How can India improve its appeal
to US and other Western manufac-
turers?
First, have an Alibaba-like easy re-
source to help people figure out which
are the top 10 suppliers. In India, it’s not
easy to know who to partner with; it’s
a labyrinth. In China they have figured
that out, not just through Alibaba, but
through trade shows and industry or-
ganizations. The India Trade Depart-
ment could do a much better job of
targeting American companies in in-
dustries they wish to grow.
Second, showcase the profession-
alism and cost benefits – by which I
mean use professional organizations
like ISO that certify standards to show
to American buyers the level of pro-
fessionalism in India. India has been a
supplier to Europe for decades, now
it’s the US market they need to devel-
op. Play up the similarities – similar val-
ues, strong democracies, English-lan-
guage, etc. Advertise the low costs
and the infinite supply of blue-collar
labor. Labor costs in Singapore and
Hong Kong grew quickly because
they exhausted their labor supply; that
won’t happen in India.
Third, remove the fear. Americans
no longer fear coming to China. It’s
clean, there’s good infrastructure.
Most Americans are scared of going
to India. Partner with American hotels
and airlines to promote the country,
so that a trip to India becomes not just
a buying trip, but a vacation opportu-
nity. Create familiarity.
On a more granular level, it could
improve issues such as:
a) Kolkata & Chennai – There are
many quality, low-cost manufacturers
in Eastern India. However, the logis-
tics challenges are difficult. I recently
completed a Lean Six Sigma Black
Belt analysis of our India->US total
lead time, from order placement to
Chicago delivery (105 days to Chicago
with a lot of variability), as compared
to China->US total transit times (84
days to Chicago, quite dependably).
I was able to attribute most of our
delivery time failures due to these
two ports. Kolkata is a river port that
has unpredictable water levels, as
well as congestion. Sometimes the
feeder vessel operators simply can-
cel the sailings. Additionally, both of
these ports are reliant on a smooth
relay transshipment at the Sri Lankan
Loaded ship in Kochi port harbor, India
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FEATURES
port of Colombo – however, frequently it fails
due to either a missed connection (causing
a week’s delay) or it fails because there’s no
space on the line-haul vessel (also causing a
week’s delay).
b) Payment Terms – Most Chinese facto-
ries self-finance. That means that when they
give us, say, 60 days from sailing to pay their
invoices, they do so without the bureaucrat-
ic involvement of a bank or factoring agent
who will delay the documentary release of
the cargo to my company. Indian suppliers,
on the other hand, mostly use these 19th
century type of financial intermediaries and it
causes more work and timing challenges for
our company to deal with.
Concerns about corruption and trans-
parency are often raised by foreign firms
looking to invest in India. What’s been your
experience?
Part of the problem is the perception of cor-
ruption and what to do about it. Americans are
hypocritical when it comes to corruption. If you
are a business in the US and want to make a
sale to a customer, don’t tell me that 50-yard
line seats at an expensive football game or
center court seats at a basketball game don’t
play a role. Let’s not be hypocritical; America
still has corruption.
The difference in other parts of the world
is that if you want to get a good parking spot,
or a nice seat at a restaurant, the low-level
employees [who help you] are not making
enough money to survive. Unless you pay
higher salaries in these countries, they will
seek other sources of income. In the US you
have a minimum wage.
On a higher level, we have FCPA, so
shame on you if you do something stupid in a
white-collar business deal where you are put-
ting money in someone’s pockets. Where do
you do draw the line? Often the primary source
of corruption in a company is the employee
who is choosing suppliers, so you must do due
diligence to root it out. Know your employees
very well. You must control your own house;
don’t always point our figure outward.
Based on your experience setting up
production in India, what would you now
do differently?
Not much; it was a learning process.
We had to figure out which vendors were
like-minded potential partners. You can only
do that through trial and error, seeing who’s
trainable, who has a good attitude, seeing
who will compensate you when you have
claims due to quality issues and knowing if
they will keep working with you.
I knew early on that I wanted to find a
cluster of companies in Gujarat state, be-
cause I’m in love with the port of Mundra (as
mentioned above). So, I want to manufac-
ture in that area. But because of labor cost
concerns, you can’t avoid Kolkata or Chen-
nai. Labor in those places is skilled, plentiful
and lower cost, but you must relay through
Colombo, Sri Lanka. Kolkata has the poten-
tial to create a deep seaport, but it will take
a least a decade.
Any other sage advice you would like to share?
A first-time American visitor to India can
be easily fooled into complacency, as En-
glish is commonly spoken and many suppli-
ers have experience in dealing with Europe-
an or North American customers. However,
their standard operating procedures do not
necessarily match with nor are adaptable to
your own needs. I
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Dezan Shira & Associates has nearly
30 years of experience in China, with
13 regional offices, several hundred
staff on the ground and our online platform
China Briefing. We receive numerous daily
requests for advisory services across all sec-
tors of business operations in China.
Below is a condensed version we received
of frequently asked questions related to HR
compliance during this coronavirus outbreak.
If an employee is infected with the novel
coronavirus pneumonia, does the company
have the right to terminate the labor rela-
tionship with the employee?
According to Article 42 of the PRC La-
bor Contract Law, “Under any of the fol-
lowing circumstances, the employer shall
not terminate a labor contract pursuant to
the provisions of Article 40 and Article 41...
during the stipulated medical treatment pe-
riod of an employee suffering from illness or
non-work-related injury.”
Article 40 clarifies three circumstances
where the company is able to terminate the
employee who does not commit a breach of
internal rules and policies. Article 41 stipulates
details concerning economic redundancy.
Therefore, if your employee is infected with
the novel coronavirus pneumonia and he/she
is either at home or in the hospital, by law they
are classed as being under medical treat-
ment, and the company is unable to terminate
the labor relationship with this employee.
If an employee’s labor contract has expired
during the medical treatment period or
quarantine, how do we deal with the labor
relationship?
According to Article 45 of the PRC La-
bor Contract Law, “where a labor contract
has expired under any of the circumstances
stipulated in Article 42, the labor contract
shall be extended and be terminated upon
extinguishment of the corresponding cir-
cumstances.” This means the labor contract
between the employer and employee shall
be extended automatically until the medical
treatment or quarantine is over.
The Ministry of Human Resources and
Social Security (MHRSS) of the PRC issued
a notification on January 24, 2020 to empha-
size that “for patients who are infected with
novel coronavirus pneumonia, suspected
patients and close contacts during the quar-
antine or medical observation period and
the employees who are unable to provide
normal work to enterprises due to the iso-
lation measures and emergency measures
taken by the government, enterprises shall
pay remuneration to employees during the
above mentioned period, and shall not ter-
minate the labor contract with employees
on the basis of Article 40 and Article 41 of
the PRC Labor Contract Law.
During this period, if the labor contract
expires, it shall be extended to the expira-
tion of the medical treatment period, the
expiration of the medical observation pe-
riod, the expiration of the quarantine or the
HR Compliance in China During the Coronavirus Outbreak By Allan Xu
Allan Xu is a member of Dezan Shira & Associates‘ Business Advisory team in Shanghai. She has a degree in Law from East China University of Political Science and Law, and also holds the Certificate of Lawyer’s Qualification. She also sits as an arbitrator in a district Arbitration Institute in Shanghai and has dealt with more than 2,000 labor arbitration cases in China.
* This FAQ was contributed in late February
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termination of the emergency measures
taken by the government.”
What are employee obligations during the
medical treatment period/observation
period/quarantine period?
If the employee has a medical certificate
issued by the qualified institution under
above mentioned circumstances, the em-
ployee shall send the medical certificate to
the company for filing. If the employee does
not have the medical certificate, he/she
shall inform the company of their situation in
a timely manner.
If this is abused, the employer should in-
sist a medical certificate is provided or obtain
valid reasons why this is not forthcoming, pri-
or to commencing disciplinary procedures.
Common sense applies.
Due to the coronavirus outbreak, the com-
pany has suspended its business opera-
tions. How can the company pay salaries
and so on to employees under these cir-
cumstances?
According to Article 12 of Measures
for the Payment of Wages by Enterprises
in Shanghai Municipality (Revision 2016),
“Where an enterprise suspends business or
operation during a wage payment cycle, it
shall pay wages to its workers pursuant to
the agreement. Where the suspension ex-
ceeds a wage payment cycle, the enter-
prise may pay wages to its workers based
on the new agreement between both par-
ties in accordance with work rendered by
the workers, but the wages shall not be less
than the minimum wage standard stipulat-
ed by the Municipality.”
Some other cities also follow Shang-
hai’s legislative spirit to pay wages to em-
ployees during the business suspension
period, such as Xiamen. In other provinc-
es, such as Jiangsu and Guangdong, the
same rule is applicable where the sus-
pension happens within a wage payment
cycle. However, where the suspension
exceeds a wage payment cycle and the
company is unable to arrange employ-
ees to work or employees are unable to
provide normal work to the company, liv-
ing expenses shall be paid to employees,
which shall not be less than 80% of the
minimum wage standard.
The local policy in different cities may
differ, so please check and follow the local
requirements. Your China advisers should
be able to assist.
If an employee has traveled to Wuhan or
other cities in Hubei recently, is it possible
to ask the employee to isolate himself/
herself at home for several days before
resuming work? How to do that in compli-
ance with the law?
According to the Law of the People’s Re-
public of China on Prevention and Treatment
of Infectious Diseases (Revision 2013), infec-
tious diseases governed by this law are di-
vided into Classes A, B and C.
Based on the latest announcement is-
sued by the National Health Commission
of PRC, novel coronavirus pneumonia has
been treated as an infectious disease under
Class B, but the measures for Class A shall be
taken. The medical agencies shall keep the
persons in close contact with the patients,
pathogen carriers or suspected patients in
medical agencies under medical observa-
tion at designated places and to take other
necessary preventive measures.
Although there is no specific rule to
define the period and legal procedures
of requesting employees to isolate them-
selves at home for a certain period before
resuming work, according to the latest
feedback from MHRSS, it is recommend-
ed for businesses to take the necessary
measures subject to local policies and ask
employees returning from other cities to
do self-isolation to prevent the spread of
epidemic in this way.
Companies can follow the recommen-
dations below to ask that employees isolate
themselves for a certain period at home be-
fore resuming work:
1. Define the scope of work of the employ-
ees who need to be isolated at home;
2. We recommend discussing the isola-
tion period, wages, or living expenses during
this time with affected employees;
3. If an agreement is unable to be
reached between the company and the
employee, the company is able to request
the employee to work from home – based
on the legislative spirit of relevant laws and
the wage shall be paid to the employee as
if they were in normal attendance; and
4. If the employee refuses to be isolat-
ed and work from home, the company may
report this to the relevant administrative
organization to seek assistance on com-
pulsory isolation.
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If employees refuse to cooperate with the
company during the extended isolation pe-
riod, what should the company do?
Should employees refuse to cooperate
with the company, for example, in providing
support to clients, it is not suggested to give
immediate disciplinary punishment as this
can lead to arguments.
Instead, this situation should have been
preempted, as every company in China
has the autonomy to define its own per-
formance review system. The performance
review system should be designed and im-
plemented by the HR department based
on the nature of business and the position.
Reviews can be conducted monthly, quar-
terly and/or annually.
Normally a performance review and
related stipulations shall be included
in labor contracts, the employee hand-
book/bylaws, or specific regulation with-
in the company. Providing that the em-
ployees refused to cooperate with the
company during the above mentioned
period, the company shall discuss the sit-
uation with employees. If both parties are
unable to reach an amicable agreement,
the employees’ performance may be re-
viewed according to companies’ internal
rules and policies.
Having a performance review system
should be an integral part of any foreign-in-
vested company’s HR policy, and these
should be contained within the company
Employee Handbook.
Since the central government announced
the Spring Festival Holiday was extended
and local municipal governments also is-
sued notifications to determine the date
of resuming work respectively, if the em-
ployee already applied for annual leave
during what became an extended period,
how does the company classify this leave?
Our understanding is that the cornona-
virus is an unexpected emergency. If the
employee had already applied for annual
leave prior to the announcement of the
holiday extension, we recommend dealing
with this situation on the principle of bene-
fiting the employee.
In Shanghai, since the extended holiday
was treated as a weekly rest day, it is pref-
erable to allow the employee to withdraw
the annual leave application and enjoy
the extended holiday following the local
municipal government’s announcement.
In Beijing, since the local municipal gov-
ernment encouraged employees to take
annual leaves during this period, it is not
necessary to allow the employee to with-
draw the annual leave application during
this period. The local situation can vary.
If my company is registered in Shanghai
and it has subsidiaries in other cities,
which policy shall be applicable to local
employees?
If the company has employees based in
different cities, local employees shall follow
the local policies of their workplace related
to extended holiday, time of resuming work,
remuneration, etc.
Are consumer-facing companies of certain
sectors still restricted from operating (e.g.
stores, restaurants)? How may they apply
for resumption of operation?
In accordance with the guidelines is-
sued by the central government, consum-
er-facing companies are able to resume
operation as long as certain requirements
can be fulfilled. The basic requirements are
listed as follows:
1) Set up a prevention and control work-
ing group, formulate emergency plans,
collect information in a timely manner,
and establish a reporting system;
2) Be prepared with protective materials,
such as surgical masks, disinfectant/al-
cohol, infrared thermometers, etc.;
3) Obtain approval from the local authori-
ty before resumption of operation;
4) No large-scale promotional activities
or exhibitions shall be organized without
permission from the local authority;
5) Use disinfectants in strict accordance
with usage methods;
6) Adjust business hours flexibly accord-
ing to local conditions;
7) Actively cooperate with relevant de-
partments in the follow-up investigation
of confirmed or suspected cases.
This article was first published by China
Briefing, which is produced by Dezan Shira
& Associates. The firm assists foreign inves-
tors throughout Asia from offices across
the world, including in in China, Hong Kong,
Vietnam, Singapore, India, and Russia.
Readers may write [email protected] for
more support. I
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FEATURES
Raj Varadarajan is a senior partner and managing director in the Dallas office of Boston Consulting Group and leads its Global Advantage practice in North America.
Antonio Varas is a senior partner and managing director in the firm’s Silicon Valley office and is a core member of its Technology, Media & Telecom-munications practice.
Iacob Koch-Weser is a knowledge expert in the firm’s Boston office and manages the research team focused on trade and geopolitics topics.
Michael McAdoo is a partner & associate director in the Montreal office of Boston Consulting Group and leads the firm’s Global Trade & Investment group.
THE US-CHINA TECH TRADE WAR
AFTER THEPHASE ONE DEAL
By Raj Varadarajan, Antonio Varas, Michael McAdoo and Iacob Koch-Weser
Over two long years, companies
across the world have dealt with
the uncertainty of the US-China
trade war. The world’s largest economies
have blanketed tariffs on most of their two-
way trade flows. The US has also imposed
export controls that restrict access to US
technology for Huawei and other Chinese
companies. Finally, after months of start-
and-stop negotiations, the US and China
signed a partial deal on January 15, 2020.
This Phase One agreement does not, in fact,
immediately remove any tariffs already in place
(But both sides trimmed some tariffs on Feb 14).
Nor does it lift the US export controls on Huawei.
Further negotiations toward a more compre-
hensive deal will continue over the next months,
overlapping with the 2020 US presidential elec-
tion campaign. So it is important for companies
to have a clear understanding of the underlying
issues, how the Phase One deal may – or may
not – change these dynamics and, most im-
portantly, what actions they should take now to
build resilience amid what we believe is really a
new geopolitical paradigm.
Beyond Trade Deficit andTariffs: What Lies Beneaththe Surface in the US-ChinaFrictions
The technology industry is center-stage
in the US-China frictions. In 2018, technol-
ogy products accounted for around 40%
of the $434 billion US bilateral trade defi-
cit with China, which the US administration
wants to slash nearly in half. To a large ex-
tent, the massive value of US imports of
technology products from China simply
reflects the global nature of the technology
supply chains: many global device makers
have their products assembled in China us-
ing components from the US, Europe, South
Korea, Japan and other regions. By our esti-
mate, measuring imports in terms of a value
added by China rather than the full value of
the device shipped from China would re-
duce the US deficit in technology products
by some 70%.
While the trade deficit and tariffs may
be the most visible topics, there are also
more deeply-rooted issues at the core of
the US-China frictions (see exhibit). They in-
clude US concerns about intellectual prop-
erty (IP) protection, access to digital ser-
vices markets, and government support of
national champions in strategic industries,
often in technology sectors such as semi-
conductors.
Even further “beneath the surface” are
rising cybersecurity concerns and the race
for global leadership in new technologies,
such as 5G and artificial intelligence, which
are considered critical for national defense
and economic competitiveness.
Does the Phase One DealMeaningfully Change These Dynamics?
A prime focus of the Phase One deal is
to reduce the bilateral US trade deficit with
China. Over the next two years, China has
agreed to purchase $200 billion more US
goods (including agriculture, energy and
manufactured products) and services (in-
cluding IP royalties and cloud services) than
POLICY PERSPECTIVES
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it did in 2017, before the trade war began. If
this target is met, the additional annualized
US exports would equal approximately 25%
of the US trade deficit with China in 2018. But
the agreement falls short of securing con-
crete measures from China to meaningfully
open its services sectors, such as removing
barriers to foreign cloud providers in China’s
cybersecurity and telecoms regulations.
The deal does offer some promise on IP
protection. China has pledged, among other
things, to allow foreign companies to license
technology on market-based terms, lower
the threshold for criminal prosecution in IP
infringement cases, and to protect confi-
dential business information from unautho-
rized disclosure to government authorities.
Such measures could substantially improve
the conditions for foreign firms to operate
in China, and facilitate more US services
exports to China. But they will require rigor-
ous enforcement. The agreement includes
a new Dispute Resolution Arrangement, but
making this bilateral mechanism work ef-
fectively is expected to be challenging, and
procedural details are still to be defined.
However, the Phase One deal does not ad-
dress the deeper-rooted issues on the bottom
two levels of the exhibit. The term “cybersecu-
rity” does not appear at all in the agreement.
And some well-documented US concerns in
this area, such as allegations about cyber-in-
trusions contained in the USTR’s Section 301
reports from March 2018 and November 2018,
or potential threats associated with Chinese
equipment in global telecommunications
networks, are not addressed.
Furthermore, the deal does not go to the
heart of US allegations about state interven-
tion in strategic sectors that are linked to
China’s aspirations to become a self-reliant
technology superpower. The agreement in-
cludes a pledge to limit China’s acquisitions
of foreign technology assets, but it does not
require China to meaningfully alter its ‘Made
in China 2025’ policy or stop its subsidies to
certain technology sectors. In fact, the re-
strictions on access to US technologies im-
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posed on Huawei and other Chinese compa-
nies included on the US Entity List may have
reinforced China’s recognition of the need to
promote indigenous innovation and reduce
dependency on foreign technology vendors.
Building Resilienceamid a New GeopoliticalParadigm
As its name indicates, the Phase One
deal is just one step in a long process of
working through geopolitical tensions in a
context of growing strategic competition
between the two superpowers, for which
technology leadership is seen as a critical
advantage. The long negotiation period that
it required also illustrates how complex and
deep-rooted the underlying issues are. So a
return to the status quo that existed prior to
2017 is unlikely.
Given the uncertainties, we believe it is
key for companies to think proactively and
start taking steps to adapt to the new en-
vironment. The objective is not to predict a
specific future state. It is rather to create al-
ternative coherent future scenarios for each
of the company’s businesses and identify
actions to mitigate risk, make their organi-
zations and supply chains more resilient to
shifts in the global macro context, and de-
velop strategies to preserve or seize com-
petitive advantage.
In our experience with clients across
multiple sectors, we have found that com-
panies that take the following actions can
reduce their risk and maximize their oppor-
tunities in the new global environment:
1. Engage to shape policy. Companies
should identify policy outcomes that can
create relative advantage versus their glob-
al competitors, build a coalition and create
opportunities to educate policymakers on
the root causes behind the relevant issues
and the expected consequences from al-
ternative policies under consideration.
2. Develop a deep understanding of trade
regulations. Trade norms are complex, and
typically the “devil is in the details.” Com-
panies should diagnose the implications at
“item code level,” as it is not uncommon for
individual products in the same product line
to be classified in different export/import
item codes and treated differently under
trade policy. In addition, they should explore
alternative business models that may be
less exposed to trade barriers (i.e. integra-
tion into “modules” or “systems,” or licensing
designs to third parties instead of selling a
final physical product to end customers).
3. Prepare playbooks for adversity scenar-
ios. Companies should run stress tests on
business continuity and financial stability,
and reevaluate investment plans. Aligning
the leadership team on a playbook of ac-
tions to take under certain conditions in
each scenario will help a company to adapt
quickly when actual change comes.
4. Enhance protection of IP. Heightened
US-China frictions and potential restrictions
on exports of advanced technology products
may significantly increase the risk of IP in-
fringement or leakage. Therefore companies
should revamp their cybersecurity practices,
reinforce direct control over their product
delivery channels, limit the need for physical
transfer of critical IP (such as through “as-a-
service” business models) and strengthen
their enforcement capabilities.
5. Transform the supply chain for com-
petitive advantage. Rising cybersecurity
concerns and expanding trade barriers are
increasing the complexity of global supply
chains and their level of scrutiny. Compa-
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nies must re-examine their supply chain
footprint taking into account the incremen-
tal costs of these externalities. In doing so,
they should also carefully consider the
medium-term evolution of capacity bottle-
necks and factor costs in potential alterna-
tive locations that may not be able to scale
rapidly enough to meet a surge in demand.
To overcome these constraints, evolving
towards a more modular supply chain that
reduces the complexity in the final integra-
tion step – similar to the approach of the air-
craft and automotive industries – can also
increase geographical flexibility and overall
resilience. In addition, companies seeking
to thrive in this “new normal” should invest
in technologies such as IoT and blockchain
to enhance the flexibility, transparency and
integrity of their end-to-end supply chain –
both physical and digital.
6. Win with the winners. The ongoing
frictions may restrict the ability of US and
Chinese companies to serve customers in
each other’s domestic market. For example,
Chinese companies facing restrictions to
access US technology will have to replace
their US suppliers with alternative non-US
sources, which may lead to significant mar-
ket share shifts amongst component suppli-
ers. Companies should look downstream in
their value chain to develop a clear under-
standing of how their customers, and their
customers’ customers, are impacted by
tariffs and reciprocal export/import restric-
tions. Based on these insights, they should
redirect resources to expand their share of
wallet amongst those customers who are
likely to benefit from the substitution efforts
taking place further down in the value chain.
7. Reshape the business portfolio. Some
sectors in which China accounts for a large
share of global consumption and produc-
tion such as smartphones, computers or
consumer electronics devices, are heav-
ily exposed to US-China frictions. Other
end-markets such as the automotive and
industrial equipment sectors are less ex-
posed. Companies should therefore re-
balance their medium-term strategies and
investment plans across businesses to
modulate their overall risk exposure.
8. Monitor new emerging technology
standards. Given the potential restrictions
on accessing US technologies, China is like-
ly to further accelerate investment in alter-
native standards and architectures that are
not controlled by US companies. As a result,
some technologies that currently seem
“niche” or “experimental” may gain traction
much faster than originally anticipated if
they are adopted to serve the needs of Chi-
na’s domestic market.
The US-China frictions are not a passing
phenomenon, and their fundamental driv-
ers are not based on the policy agendas
of specific administrations in Washington
or Beijing. The dynamic is driven by major
technology trends and geostrategic con-
siderations shaped over years. Firms that
understand this and act accordingly now
will be best positioned to navigate the un-
certainties in the coming years, thrive in the
“new normal” context and secure long-term
competitive advantage. I
Rising cybersecurity
concerns and expanding
trade barriers are increasing
the complexity of global
supply chains and their
level of scrutiny. Companies
must re-examine their
supply chain
footprint taking into
account the incremental
costs of these externalities.
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FEATURES
AmCham Shanghai and its member
companies are playing an active
role in supporting the Chinese gov-
ernment’s efforts to combat the coronavi-
rus. Member companies have pledged or
donated over 270 million RMB in cash and
equipment to local governments and char-
ities, based on social media postings and
discussions with member companies. As
of mid-February, more than 60 AmCham
Shanghai member companies from various
sectors including finance, healthcare, man-
ufacturing and consumer products and ser-
vices have donated money or equipment.
Nine companies have donated at least RMB
10 million, with large donations from Wyeth,
GE and Abbott of 27 million, 20 million and
18 million RMB respectively. In addition,
Wyeth established a 24-hour medical ho-
tline.
Most donations are cash or in-kind.
Burger King provided free burgers for
hospital staff for a month. While the me-
dia have reported 3M’s donation of masks,
Honeywell also rushed to ship more masks
to China and supplied air and water purifi-
cation equipment. Cargill donated infrared
imaging thermometers, disinfectant gel and
cleaning wipes. Healthcare companies have
been active in providing medicine and spe-
cialized medical equipment.
The Coca-Cola Foundation, the phil-
anthropic arm of the Coca-Cola Company,
provided two $500,000 grants to the non-
profits MedShare and the Shenzhen One
Foundation to purchase medical supplies
and other resources for China’s fight against
the pandemic. Previously, Coca-Cola’s Chi-
na system donated $650,000 in cash dona-
tions to support relief efforts. Coca-Cola’s
“Clean Water 24” initiative has also donated
more than 1,000,000 bottles of water and
other beverages to those on the front lines
fighting the coronavirus.
On January 23, Thermo Fisher an-
nounced a donation of RMB 1 million worth
of masks, goggles and other personal pro-
tection equipment to the Hubei Charity
Federation. To support the CDC and hos-
pitals across China, Thermo Fisher formed
an emergency response team of 150 pro-
fessionals to provide 24/7 service during
the Spring Festival and beyond. In response
to the emergency situation, ThermoFish-
er quickly developed nCoV detection and
prevention solutions. This includes sample
preparation and nucleic acid extraction for
testing and diagnostic use.
On January 27, Bristol-Myers Squibb
committed to making a series of donations
in money and vitamin products equivalent to
AmCham Shanghai Members Contribute to
Combating Covid-19
MEMBER NEWS
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a total value of RMB 5 million to Wuhan and
Hubei province through the Shanghai Red
Cross Society in order to support China’s re-
sponse to the coronavirus. The donation was
split as follows: RMB 1 million for the pur-
chase of medical supplies urgently needed
in Wuhan and Hubei province, supporting
the protection of frontline medical profes-
sionals in treating patients; vitamin products
(Theragran) equivalent to a value of RMB 4
million, in order to aid the people in Wuhan
and Hubei province to prevent and fight
against the virus.
Independent of the above contribu-
tions, the Bristol-Myers Squibb Foundation
worked with MAP International and Proj-
ect HOPE for a coordinated and speedy
international response to 2019-nCoV. As
the result, the Hubei Provincial Center for
Disease Control and Prevention (Hubei
CDC) received urgently needed medical
supplies on February 4, including 220,000
medical N95 masks, 280,000 pairs of pro-
tective gloves and 10,758 protective suits,
which were distributed to frontline medi-
cal professionals who are treating patients
in key Wuhan hospitals by the Hubei CDC
with ground support and coordination by
the Project HOPE Wuhan staff.
AmCham Shanghai has been connect-
ing companies to local government agen-
cies and acts as an information source for
members. AmCham has forwarded dozens
of requests for medical equipment dona-
tions from local governments to member
companies. In one case, Celanese, a mem-
ber company in Nanjing, met a request
from the Nanjing government and provid-
ed 3,000 masks and 100 bio suits. I
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AmCham Shanghai’s Healthcare Com-
mittee held a conference call on February 14
to discuss how the coronavirus epidemic has
impacted healthcare businesses and the key
challenges facing companies during this un-
certain time. Ten top executives from member
companies participated in the call to share their
insights and experiences. The discussion was
moderated by Greg Scott, the Chair of Am-
Cham Shanghai’s Healthcare Committee.
Executives noted that in the pharmaceu-
tical sector, distribution had become diffi-
cult in recent weeks as travel restrictions and
staff shortages have disrupted supply chains.
Among them, one pharmaceutical company
shared that delivering products to other cities
and provinces, including Wuhan, has become
especially difficult due to travel closures. The
problem is also compounded by a lack of staff;
the week of February 10th, this company’s dis-
tribution center had only 15% of its staff working.
Leaders from major Shanghai hospitals
noted that patient volume has dramatically
dropped since the outbreak and that some
hospitals have faced staffing constraints and
currently offer reduced hours and/or have
closed some facilities. The major priority for
healthcare providers has been to keep staff
morale up and ensure they continue to have
adequate personal protective equipment.
On the patient side, elective surgeries have
Covid-19’s Impact on the Healthcare Industry
been postponed, and many in need of care
for chronic illnesses or other non-acute medi-
cal needs have avoided going to the hospital,
reducing patient volume significantly. Both
hospital and pharmaceutical leaders said
they have been working to determine how
best to support these patients who may need
access to health care services and medicines
but do want to go to the hospital for fear of
cross-contamination.
Companies that produce medical sup-
plies, in particular protection items such as
masks and gloves, are seeing a significant
increase in demand, impacting manufactur-
ing and distribution globally. They have come
under greater spotlight and government
oversight since the outbreak began. At the
local level, government control of production
and inventory has left less control to compa-
ny headquarters. One of the resulting issues
is that companies are not always in control of
where their products are ultimately delivered
to patients.
Like companies in other sectors, many
healthcare businesses have implemented
flexible working schedules for sales and other
office staff to allow people to work from home,
where practical. Unfortunately, in healthcare
services and medical product distribution and
manufacturing, there is generally a require-
ment that the staff be on site.
Looking at their revenues, multiple exec-
utives noted that they expect to take a finan-
cial hit in the first quarter, with some saying
the pain could last further into the year and
significantly impact 2020 forecasts. Howev-
er, some leaders noted that they remained
optimistic that revenues would bounce back
later in the year. Despite the clear challeng-
es created by the outbreak, many said that
there remained opportunities for new ways to
serve customers, including increased forms
of e-commerce in healthcare and for doctors
and nurses to give online consultations or to
speak on social media.
Throughout the recent Covid-19 epi-
demic, AmCham Shanghai has remained in
constant communication with top-line ex-
ecutives in healthcare and other sectors to
offer up to date information and policy and to
learn more about the challenges companies
are facing. I
AmCham Shanghai strives to bring you insightful news and content
relevant to your industry. Follow us on social media to receive our
latest features and interviews, along with events announcements
and membership promotions.
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