China SME 2021 Business Compliance as Uncertainty is the New Normal

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By Vivian Mao, Partner, Dezan Shira & Associates Shanghai

China SMEs should note that labor cost management, supplier contracts, examining sales channels, and investment in IT will all be critical components of business management in 2021.

2020 has been a very special year, and 2021 is consequently full of many unknowns. At the year end, through numerous conversations with multiple foreign investors, business owners, and managers, it is apparent that many do not know where to start for 2021 financial planning. In fact, over the past 10 years, black swan incidents have continued, from the 2008 financial crisis, the 2009 European debt crisis, the 2011 Fukushima nuclear power plant leak, the 2014 Ebola virus, to the global COVID-19 outbreak in 2020. For businesses, uncertainty has become the new normal. How to make use of uncertainty and gain competitive advantages in the face of adversity is an important challenge for enterprises.

At Dezan Shira & Associates, as a major professional services firm in Asia, we believe that among all the uncertainties, we still need to have a grasp on key factors as market and sales, cost management, cash flow, and analyze the impact of the COVID-19 on these key factors to dispel the clouds and see the sun. I will address some of these issues as follows:

Sales and marketing

In 2020, many business’ sales performances fell off the cliff due to the pandemic. However, by properly examining these results, businesses should be able to analyze and be clearer about the behavior of their sales figures, and determine which customers are more stable and less affected by market changes, which business sectors have seen an increase in market demand, which businesses have been more affected by the global epidemic, and which business opportunities have even been overlooked.

In 2021 financial planning, business development and support for market sectors with strong stability and growth potential should be strengthened. For business with a small risk resilience, it is sensible to re-examine the reasons, such as over-reliance on a single type of customer, focusing too much on overseas markets, only using your business entity as a sourcing center while overlooking the local domestic market, or whether the source of clients or sales channel was too narrow. After identifying the causes and gaps, appropriate measures can be taken to adjust the marketing and sales strategy.

We have seen a lot of foreign invested companies in Asia taking proactive actions, such as renegotiating with distributors, restructuring their business models and the relationships with their local business partner, developing e-commerce channels and so on, to increase the proportion of domestic sales. This is especially true in China and India with increasing numbers of foreign companies eager to exploit these markets. China itself remains a hugely buoyant market, so selling to China and investing in structures should be a key component of any corporate 2021 sales and growth budget, with considerations for India 2021 not far behind.

Cost management

Any of the above sales and marketing strategy changes in 2021 will affect the related cost reallocation and adjustment. For example, if the business model is changed, the pertinent business license may require adjustment and the relevant tax implications may also change. Have various types of e-commerce platform management and promotion fees been fully taken into consideration?

During the 2021 financial planning, a thorough cost analysis is necessary, to list which costs are essential, which can be reduced, and which are now redundant. During COVID-19, the two most influential aspects of cost management have been supply chain management and staff management.

Production capability

Businesses should keep track of whether their supplier’s production ability is affected by COVID-19 and if this varies in different regions. If the pandemic situation is still serious in certain areas, enterprises should find new supplier channels to back them up. From Q3 2020, we have seen increasing numbers of foreign companies transferring their sourcing center to China, as production and work have quickly resumed in the country. On the other hand, due to the current state of US-China trade relations, some businesses and especially American ones, are considering the relocation of their sourcing and manufacturing operations to ASEAN. Our three offices in Hanoi, Da Nang, and Ho Chi Minh City processed a record number of foreign invested businesses setting up in Vietnam during 2020.

Long-term supplier contracts

When reviewing and structuring 2021 financial planning, businesses can also revisit the pricing of long-term contracts, and conduct a new round of selection, evaluation, and negotiation with long-term suppliers. A routine and regular supplier selection system should be established and implemented, so as to remain consistent with the market, industry, and company development trends.

Labor cost management 

In terms of labor cost management, many businesses in China and their respective Asian locations should be able to take advantage of social insurance exemption policies granted by several governments in 2020. This has meant considerable savings in payroll costs in 2020. It remains uncertain for how long these policies will extend to, in 2021 or even beyond. When conducting financial planning for 2021, this difference should be highlighted so any reinstatement of normal employers’ costs will not come as a surprise.

Labor retrenchment

While planning adjustments to the overall scope of work and corporate direction in 2021, and anticipating the regional market demand, businesses whose market demand is declining or unstable, or those maintaining unsaturated workloads, there are also remedial steps to consider. These include adjusting the compensation structure, replacing long-term employees by outsourcing, or introducing temporary staff and flexible employment methods. This can help reduce long-term fixed costs, reduce excess labor costs not matching any business recovery capacity, and future operational demand.

Your HR department may prepare a list of employees whose employment contracts are about to expire or are about to be converted to open-term employment contracts in 2021, which employees are underperforming, and then make advance preparations for changing the employment relationship. For businesses whose prospects are more favorable, proper compensation structures and incentive programs should be designed to better motivate the staff.

Investment in IT processes and administration

Through working through the challenges of COVID-19, businesses will have realized that it is especially important to create a solid base for remote work and continuing the smooth exchange of internal and external information and establish the company’s IT platform to better handle these new administrative demands. While conducting your 2021 financial planning, attention needs to be paid to planning for investment in IT systems, not only to meet their own operational needs, but also to integrate IT with the business. This means using technology solutions to better develop sales channels, improve transparency and communications efficiency with customers, provide customers with low-cost but higher-quality products and services, enhance your customer experience, increase customer stickiness, and improve operation management.

Transfer pricing

Multinationals typically set transfer pricing policies for the new year’s financial planning, and set a reasonable sales price based on the budget analysis. However, if the company’s budget costs deviate from the actual costs, the actual profit situation may differ from the group’s transfer pricing policies. Therefore, enterprises’ budgeting figure should be as close to the actual amount as possible.

Cash flow

Cash flow management is critical to the survival of any business during a crisis. Therefore, 2021 financial planning must include a cash flow budget, which can give businesses control over their registered capital and any shareholder loans. We urge foreign investors to provide short-term and long-term funding plans as well as income repatriation options in their businesses for the coming year.

Vivian is a Partner at Dezan Shira & Associates Shanghai office. She has a law degree in International Economic Law from East China University of Political Science and Law, holds the Certificate of Lawyer’s Qualification and is a member of the International Bar Association. Apart from her strong domain knowledge and experiences in the legal and human resources fields, she possesses a comprehensive understanding of key tax and accounting concerns related to foreign direct investment in China. 

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About Us

China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so 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 china@dezshira.com. 

We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, Thailand, United States, and Italy, in addition to our practices in India and Russia and our trade research facilities along the Belt & Road Initiative.