Tech companies cut pay to stay alive during the coronavirus epidemic
Startups hit hard by Covid-19 say layoffs are a last resort as it could hurt long-term development
For serial entrepreneur Li Haoyang, 2020 was supposed to be a year of rapid growth, with sales surging 50 to 70 per cent from 2 billion yuan (US$287.4 million) last year. Then the novel coronavirus hit.
“For many people, the impact of the epidemic is far-reaching but to companies it boils down to life or death,” the founder of Shanghai-based education startup Squirrel AI told the South China Morning Post.
“I haven’t felt so miserable since I started my businesses,” he said. The company, which provides AI-personalized lessons through online courses and at bricks-and-mortar learning centers, temporarily closed 2,000 offline schools and moved 200,000 students to online classes within 15 days.
“In order not to be squeezed out of the industry we needed to respond quickly,” he added.
Not long ago, Li had poached Chen Guohuan, a former Alibaba executive and serial entrepreneur, to lead its operational efforts amid a newly-hatched plan to open 20,000 schools in the coming three years. Now all that is on hold.
For Li, who also ran an education institute amid the Sars outbreak in the early 2000s, the stakes this time are higher because Squirrel is a unicorn – a private business valued at more than US$1 billion.
Rather than lay off staff, Squirrel implemented a 65 per cent pay cut for five months. The move, which Li announced via a live-streamed meeting, prompted some employees to quit but less than 10 per cent were affected.
“I have been forthcoming with staff about why the decision was made … everyone will suffer if our company closes down,” he said, noting that capital needs to be set aside to prepare for what he expects to be an “explosive recovery” in the education sector that will come by June. “More businesses may close than we expect … cash flow is extremely important and we must remain in crisis mode.”
Squirrel is among a growing number of Chinese tech-related companies that have adopted “self-rescue” plans as the coronavirus epidemic disrupts business operations across the country.
It started with a lockdown in the epicenter of Wuhan and the rest of Hubei province, extending to stringent home quarantine rules across the country for those who returned from their hometowns after the Lunar New Year holiday, followed by wider recommendations to work from home to avoid people to people transmission.
From ticketing and hotel bookings to online auto sales, companies in almost every industry are frantically coming up with strategies to survive the epidemic.
Before the outbreak, China’s tech industry was already under pressure from the ongoing trade war with the US, which has seen expansion plans crimped by a tighter funding environment and macro economic slowdown. A rapid rise in the number of unemployed could pose a big challenge for the world’s second-largest economy which has seen growth rates already slow to near three-decade lows.
That is why Beijing has called for stabilizing job markets and preventing large-scale layoffs. “An urgent task of fighting the virus is to stabilize employment,” China’s tax administration said in a post on its website.
“Layoffs are only one of the measures for self-rescue,” Hongtai Fund founder Sheng Xitai told local media. “It may not solve the fundamental problem but could hurt long-term development.”
Sheng, who has invested in AI and big data startups including Trio.ai and FaceUnity Technology, believes talent is the most valuable asset for tech companies and layoffs should be the last resort, even amid the coronavirus crisis.
Nasdaq-listed Uxin, a Beijing-based second-hand vehicle trading platform, refuted reports that it would lay off staff and suspend business. “We have decided not to let go of staff,” Uxin said in a post on its WeChat social media account.
Instead, it said it has implemented “flexible” staffing arrangements to ensure cash flow was “running at a safe level” as business was expected to be hurt in the first two quarters despite showing a slight recovery at the end of February as the pace of new coronavirus cases in China slowed.
Uxin said in the post that it has requested that some employees take temporary leave with a “cost-of-living allowance,” while some others have taken a pay cut since February 15.
The company did not reply to an emailed inquiry asking the percentage of staff affected by the cuts.
Liang Jianzhang, the chairman and co-founder of Ctrip, China’s largest online travel services provider, was quoted by Beijing News in February saying “layoffs and salary cuts will never be the first choice for the company to fight the crisis.”
Ctrip, whose bookings have plummeted due to travel restrictions imposed during the health crisis, is testing a “cloud traveling” business model, according to Liang, where customers can explore destinations using online maps, video and audio. It is also offering online multimedia “exhibits” from museums for those who cannot travel to the location.
Live streaming is becoming more commonplace in the country’s tech sector amid the ongoing coronavirus crisis. In February Chinese retailer Suning provided live-streaming training classes to all its 250,000 employees and at the same time requested its management to double up as front line sales staff.
But live streaming and other online tools are not as much help in the offline world where a long-standing labor shortage had seen many business owners scrambling to hire thousands of temporary workers – until now.
Instead, a new practice of shared employees is emerging because couriers cannot satisfy the increasing consumer demand for online grocery deliveries as people stay home to avoid catching the virus. Ecommerce unicorn Meicai, grocery retail chain Freshippo and JD Logistics, a unit of JD.com, have all hired part-time staff that are temporarily on leave from small firms and restaurants whose businesses have slowed dramatically amid the health crisis.