A Recessionary Tale

October 26, 2012

This article originally appeared in Agenda magazine. Check out the latest issue here. Note: China is not exactly in a recession at the moment. It’s more of a slowdown, but let’s not quibble over language.

Once upon a time, there was a happy and prosperous kingdom called El Dorado. The climate was mild, the forests gave an abundant supply of unicorn and other game, and in the fields, the genetically-modified corn grew tall and pest free. The people were a contented lot, by and large, and while they may not have loved dour old King PJ, they respected his administrative and management skills.

But then one year, the West Wind blew through El Dorado, dumping cold rain on the kingdom for days on end. Trade ground to a halt, the genetically-modified corn was destroyed and, as everyone knows, unicorns can’t swim. The laobaixing cried out to King PJ for a solution.

And so the King called in his Privy Council for advice. “How do we get this kingdom back on its feet?” he challenged his advisors.

“No worries, sire,” exclaimed Prime Minister Blatheron. “The pagan tribes along our southern frontier have been quiet for a generation. We can slash our defense budget by discontinuing patrols along The Wall and decommissioning half the army. We plow the savings back into the Kingdom to tide us over until these dark times pass.”

Without a second thought, King PJ gave the green light to Blatheron’s plan, but not six weeks later, the savage Victs and Flagrantes, screaming their terrifying war cry “There Can Be Only One!” invaded, forcing an unprepared El Dorado to sue for peace and allow the marauding tribes to annex the Sudetenland. The Kingdom’s fiscal situation was dire, and King PJ once again called in his advisors.

This time, Grand Vizier Brent, an efficiency expert from Slough, spoke up first. “I’ve drawn up a redundancy plan, your Highness. Twenty percent cuts in personnel kingdom-wide, subject to your approval of course.” Brent handed King PJ a thick vellum scroll filled with names.

Without a second thought, King PJ gave the green light to Brent’s plan, but not six weeks later, problems arose. Quality control in the royal kitchens suffered after the head cook was sacked, and seven members of the Chancery succumbed to food poisoning. The Chamber of Commerce complained bitterly to the King after cuts in the royal constabulary led to a sharp increase in property crimes. And perhaps worst of all, the closing of the royal courts had led to creditors taking matters into their own hands; the incidence of broken legs and kneecaps had skyrocketed.

El Dorado was in disarray, and King PJ, in a panic, did what he always did in an emergency: he went to the castle’s tailor for a new set of robes, knowing this would cheer him up. The King was a bit of a clothes horse, you see. Arriving at the tailor’s workshop, King PJ was dismayed to see his tailor nailing boards on the windows and locking the door. Demanding an explanation, the tailor told the King: “After you fired half of the staff, demand for my wares plunged. I’m busted. Frankly, sire, I’m surprised that you approved such a hasty and ill-conceived economic recovery plan. Everyone knows that you must measure twice and cut once.”

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Recessions can lead management into making very poor, knee-jerk decisions. A common problem for foreign companies in China is to import austerity plans from other business units abroad, assuming a “one size fits all” approach. Take for example a typical layoff plan. During downtimes, when labor markets are usually slack, it may make sense to furlough part of your staff, knowing that it should be relatively easy to recruit when business picks up again. This has certainly been the case in the United States and many parts of Europe in the past few years.

However, although China’s economy is slowing down, the labor market has shown surprising resiliency. Companies in China that adopt a cookie-cutter approach to downsizing may realize, a year or two later, that they will have to pay a premium to bring back experienced staff. Obviously targeted cuts may minimize this problem. If instead of firing his head cook, King PJ had sacked Bojangles, his jongleur, or Schtickle, his fool, he could have avoided those costly wrongful death lawsuits from the families of deceased Chancery officials.

Legal budgets are often savaged during hard times, and while I would not presume to argue for blanket protection of in-house counsel, there are some choices that are better than others, particularly in the China market. First, business disputes are often allowed to fester. Surely it does not make sense to disrupt your joint venture in the middle of a recession by taking your partner to court, does it? Actually, it might. Not only is it a bad idea to allow business disputes to worsen over time, but during a slowdown when your staff is not working 25/8 filling orders, the effects of a management fight might be somewhat lessened. Is it preferable to disrupt the company when business is booming?

Second, putting off registration and enforcement of intellectual property rights can be short-sighted. These processes often require several years to complete as it is, and any delay might mean that even after the recession is over, the company will still be without enforceable IP for a long time. Similarly, the decision to temporarily overlook infringement can be a disaster, allowing the bad guys to consolidate their market share and do lasting damage to brands in the meantime.

Third, I would reiterate generally what I said in my previous post: The DIY China Lawyer. There are many things that can be done in the name of cutting costs, but each and every one has potential risks. Cutting corners on contract review and due diligence, for example, may be very attractive in the short term when budget pressures loom large, but eventually conditions will improve, and those poor decisions may impede the rebuilding process.

Hard choices need to be made during economic slowdowns, but these should not be undertaken without considering negative consequences and local market conditions. Think twice and cut once.