Maybe an acquisition has resulted in overlapping assets. Or China is no longer a focus due to a shift in business strategy. Or perhaps it is more cost-effective to outsource China operations. Regardless of the reason for a China wind-down, there are many hurdles and regulations that are critical when divesting of your China assets, buildings, and most importantly—your people—of which you’ll want to be aware.
The horror stories are many. Employees have gone on strike and limited a company’s ability to get things done. In more extreme cases, disgruntled employees have locked management in a facility and won’t let them leave. The news of these risks can quickly go viral—globally—and be very damaging to a company’s reputation.
Communication is a huge part of the process and needs to happen in a timely and effective way. There are many stakeholders to account for, including employees, customers, and government…just to name a few. Timing of communications is key to avoid disruptive and damaging situations.
First the employees. As we start to divest there is a certain amount of fear that starts to creep in. For those who have put in their heart and soul into building the business, naturally they will be concerned about their future.
Fair compensation and equitable severance are top priorities. We execute a study to discover what employees are lawfully due as well as market rates for severance packages. We take this body of knowledge to employees (and regional government leaders). The study helps us position our plan in a responsible, dignified way, and sets the tone for how we start to extract ourselves from existing operations. In our experience, it pays off in the long run to compensate fairly for work done as well as for severance…and maybe a little bit more.
Tax benefits and other incentives are typically in play as companies enter China. Wrapping up tax payments takes time, persistence, and patience. In situations where taxes have not been paid, the government can come in and take documents, including a passport from the legal representative, and prevent this person from leaving the country until liabilities are taken care of. For somebody who is resident in but not a citizen of China, this can be a scary process.
Some companies have found themselves in situations where customers know an entity is closing, there is a time window to close it, and they think they can get away with not paying, simply if they drag their feet. If not careful, companies can end up with lots of outstanding receivables.
Executed well, a China company wind-down closure should take about 12 months. The challenge lies in accounting for loose ends, which can drag out the process from 12 months to 18 to 24. It’s not unusual to hear of wind-downs even taking three to five years to wrap up.
Wind-Down Successfully…for Good
It’s hugely important that stakeholders are on our side as we start divesting. Without them, the chaos and additional expenses created from court cases, labour disputes, collections, government red tape, and more—can drag on endlessly.
In our experience it makes sense to do a little bit of planning, rely on experts to navigate hurdles, manage regulatory requirements, do things with dignity, and to pay a little bit more for severance than the law requires. In the long run, these practices will save time and money.
Get the Checklist
Avoid risks and headaches that can drag on for years. Use this checklist to manage a China company wind-down as efficiently and as effectively as possible.