By Vivian Mao and Betty Zhang, Shanghai Office, Dezan Shira and Associates
China’s 2020 Lunar New Year holiday was extended by central and local governments to contain the spread of the COVID-19. While most businesses in Hubei province, the epicenter of the COVID-19 outbreak, are not allowed to resume work until February 21, those in other regions have gradually begun restarting production and operation since February 10.
In such a situation, business owners are facing double pressures – on the one hand, they need to recoup the losses of a long shutdown and on the other, they need to carefully manage staff during the ongoing outbreak. Since offices and factories are public spaces, any infection will have serious consequences, economically or legally.
The short-term impact of the coronavirus outbreak on China’s economy is inevitable, especially in labor-intensive industries. Enterprises still have to pay employee salaries and rents during the suspension of work.
Well-known Chinese chain restaurants like Xibei Oat Noodle Village and Home Original Chicken, have come under great huge financial pressure due to the rent of hundreds of their stores across the country as well as the salaries of tens of thousands of employees.
Foreign-invested enterprises (FIEs) are affected as well. Tesla temporarily shut down its new factory in Shanghai, which will delay the Tesla Model 3 production; Apple temporarily closed all its stores in China, which will put off sales of about one million iPhones.
Despite the short-run downward pressure, on the positive side, we can expect a rebound in consumption in some hard-hit sectors, such as tourism, film and television, entertainment, catering, and retail industries, once the outbreak is over.
In addition, as central and local governments continue to roll-out policies to boost the country’s overall GDP performance in 2020, this will be a good opportunity for new companies, including FIEs, to enter the Chinese market by mid-2020. At that time, incentives like favorable lease terms are to be expected, and the second half of the year is normally a good time for companies to recruit talents in China at a relatively low cost.
Based on our observations, this outbreak is also providing opportunities for the industries mentioned below.
During the epidemic, online medical platforms, like AliHealth and Tencent HealthCare, have provided free online diagnostic services for citizens. This helps to screen out suspected COVID-19 patients from common cold patients, alleviate the shortage of offline medical resources, reduce the cross-infection risks caused by human contact, and enable more citizens to experience online medical treatment.
The outbreak also stimulates the growth of telemedicine.
Hospitals are increasingly willing to try and benefit from telemedicine. In the next two to three years, telemedicine is expected to become more widespread.
What’s more, people’s awareness of life and health has been enhanced. This will promote the development of medical equipment, medical supplies, and pharmaceutical industries and stimulate domestic demand for health care products and life and medical insurances.
During the SARS epidemic in 2003, Taobao had seized the great opportunity to grow into the largest online shopping platform in China, when the SARS virus has shattered people’s prejudice against online shopping.
Now, to avoid being infected by the COVID-19 virus, consumers who have formed the habit of online shopping are becoming more likely to order food and choose daily necessities and fresh food online instead of going to an offline supermarket. Fresh food e-commerce is seeing an explosive growth. Consumer demand for the following products has also increased significantly:
- Disinfection cabinet;
- Sweeping robot;
- Auto wash phone;
- Ultraviolet disinfection lamp; and
- High-quality imported food and health care products.
The “home economy,” indirectly driven by the COVID-19 outbreak, not only boosted online shopping but also promoted online games and live webcast. This can be seen from the comparison of the turnover of Tencent’s hit game ‘Honor of King’ – in 2020, the turnover of ‘Honor of King’ on the Chinese New Year Eve was around RMB 2 billion (US$286 million), while in 2019, the number was RMB 1.3 billion (US$186 million).
As schools will start later, they have started to introduce online teaching and clock-in programs for students so as not to delay the teaching schedule.
DingTalk, an office software developed by Alibaba group, is widely used by schools and students and has been installed 1.1 billion times during this special period. The technical team of Tencent Education also caught the opportunity. Tencent took Tencent Live Broadcast as the access entry and quickly developed an online education live port – Tencent Classroom, which timely supported the online demand of schools in Wuhan province. Data from February 10 shows that Tencent’s live streaming port carries about 81 percent of the platform’s users. In other words, 730,000 of the 900,000 primary and middle school students in Wuhan chose to learn online through Tencent’s live streaming port.
Since February 10, business operations have resumed in all provinces except Hubei and many companies have opted for telecommuting. However, the current telecommuting tools in the Chinese market do not have enough capacity to support the vast online data flow from the entire society at the same time.
This will facilitate the growth of the telecommuting related industries, including remote office tools, such as cloud services, voice over internet protocol (VoIP), web video conferencing, multi-person collaboration platform, and digital services, as well as IT staff remote services.
It should be realized that for all industries, the outbreak is both a “crisis” and an “opportunity,” bringing short-term pressure on some industries as well as opportunities to adjust the structure of the entire industry to meet newer needs. The “winter” hits some businesses, but those that survive can gain a larger market share “when spring comes”.
For multinationals with global business interests, the impact is relatively minor. Sales that cannot be completed in the first quarter will just be delayed to the second and third quarters. The multinational group can quickly shift production elsewhere and balance financial pressures internally. In the past two years, many multinational companies have set up production lines in Southeast Asia, which has greatly reduced the negative impact of the Covid-19 in China on group operations.
Under the epidemic, FIEs can take advantage of their advanced technologies, mature remote online service system, and other strengths to think about new service models and turn challenges into opportunities.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at [email protected].
We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, and Thailand in addition to our practices in India and Russia and our trade research facilities along the Belt & Road Initiative.