29 January 2020

China’s Coronavirus – How it affects your business

I lived through SARS in Beijing in 2003 and was, perhaps foolishly, never worried about catching it: there were fewer than 800 deaths from SARS in China in the whole year, compared with 700 deaths per day in road accidents.

The 2019 Wuhan coronavirus appears to be worse. So far the death toll is over 140 and is rising (and indeed may already be much higher). Estimates, as opposed to officially confirmed cases, are that over 100,000 may be infected. The new contagion is spreading more quickly than SARS because its incubation period can be up to 14 days and during that period the bearer might show no symptoms and therefore be impossible to spot.  Some large cities in Hubei province have been locked down, meaning that entry and exit is not possible without a permit.

What does this mean for your business and any dealings you have with China? What should you do?

1. Force majeure

If you have a contract with a Chinese company, check the force majeure clause.  Coronavirus is likely to constitute a force majeure event in contracts with Chinese companies and they may feel they can breach their contracts without legal consequences, or may use this as an excuse to renegotiate contracts or terminate them.

2. Workplace shutdown

If your company has products or materials made in China, the Chinese factory might shut down any time. For cities further from Wuhan, this is not likely to be until next month.  Even if your factory does not shut down, many of its employees won’t go to work because the workplace is a good place to catch illness. Cautious people will be staying at home, so production capacity will be reduced.

3. Travel restrictions

Chinese people may be unable or unwilling to travel. Some cities are locked down, allowing no-one in or out and preventing people going to work or to school.  Chinese citizens can’t easily get visas to leave even if they’re not from affected areas, because foreign visa staff have left China. Those who already have visas are reluctant to visit foreign countries, where they will be shunned.  People are afraid to leave China for fear of being unable to return to their families if their home city gets locked down in their absence. This affects hotels and the travel/leisure industry because tour groups won’t show up.  Chinese trial witnesses, academics, business representatives will mostly stay in China.

4. Employees

New employment rules are emerging, to help deal with the virus, so if you have employees in China keep on top of the rules. In practical terms:

  • Advise employees to stay at home and avoid using public transport or going anywhere with numerous people.
  • If an employee gets the virus, you are legally required to keep paying him or her.
  • Ask your foreign employees to leave China if they can. You should ensure they are not financially motivated to stay there.
  • Send face-masks, medical gloves, disinfectant and handwash, if needed. Supplies in some parts of China are becoming scarce.

5. New sanitary rules

The Chinese government is likely to promulgate new sanitary regulations in the food and medical sector. This sounds like a good thing, but the downside is that rules promulgated in response to a crisis are often kneejerk legislation (as we saw with the IMF milk powder crisis a decade ago) and make things difficult for food companies. The governments of importing countries might also impose strict rules for products from China, with or without a solid rational basis.

6. Changing your suppliers

If you have not yet planned diversification of your supply chain, it will be difficult to do so now, especially if your orders are not huge. You may need to either pay a much higher price, otherwise in the short term you will probably not find good alternatives as many manufacturers in the alternative countries cannot take any more business. If however you are already in negotiations with suppliers in other countries it might be worth accelerating those talks, especially if those alternative suppliers are not in countries bordering China.

Legal and commercial issues are the least of your concerns if you have staff, friends or relatives in China. They deserve our support and help, and we hope and pray that the virus is contained soon.

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About the Author
Nicolas Groffman, Partner, Head of International Team

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