The Environmental Crackdown in China: Supply Chains Impacts Continue

May 17, 2018 EcoVadis ‏‏‎

More than 30,000 business have been penalized during a major campaign against environmental violations in China with companies worldwide feeling the impact. The country’s central government inspection teams have joined forces with multiple local government agencies and have run inspections across 30 provinces. And that’s not the end of the crackdown – the Ministry of Environment plans to run similar sweeps every two years, with the next round coming up next year. Are you confident that your business can withstand this kind of impact?

 

How It Unfolded

The first inspection was conducted as a pilot project in 2015 in Hebei, the most polluted province in China. Since then, a team of 5,600 inspectors was deployed to 30 provincial-level regions in four batches over 2016 and 2017. The last round of inspections, which covered Jilin, Zhejiang, Shandong, Hainan, Sichuan and Qinghai provinces as well as the Tibet and Xinjiang Uygur autonomous regions, was completed in September 2017.

With this unprecedented number of inspections across the whole country, over 30,000 companies were affected by the crackdown, especially manufacturers of textiles, heavy metals, coal and gas, automotive and consumer goods. Not only tier-1, but also tier-2 and tier-3 suppliers were impacted as the risk has extended further down the supply chain.

Thousands of factories were suspended and were unable to meet production deadlines, which had a knock-on effect on both local and international supply chains. Some factories may have been forced to move to countries with more lenient environmental regulations such as India or Bangladesh. Production delays or suspension can push up the raw materials prices and lead to depression of materials demand, which creates a vicious cycle down the supply chain.

 

Impact on the Automotive Industry

One of the companies that suffered from supply chain disruptions was German automobile parts supplier Schaeffler Group, which supplies both locally owned and joint venture car makers in China as its key needle bearing supplier had been shut down by the local authorities. The incident affected the production of over 200 car models owned by 49 foreign automobile producers and domestic car brands , with an estimated economic impact of ¥300 billion ($47 billion). The group pleaded with the authorities to provide a three-month grace period for them to look for alternative suppliers. However, the authorities showed no mercy and stressed that it is the company’s responsibility to ensure compliance of its suppliers. This also shows how important audits and CSR assessments are in supply chain management to mitigate risks arising from any supply disruptions.

 

Losses in the Global Aluminium Market

China Hongqiao Group Limited, a subsidiary of Shandong Weiqiao Pioneering Group, the world’s largest aluminum producer, is another example. The company has been publicly criticized by the Chinese environmental inspection teams for its unauthorized aluminum production, resulting in huge amounts of smog.

The production plants had been operating without environmental permits from the government. Due to the crackdown, Hongqiao Group has been ordered to shut down five unauthorized plants, leading to a closure of 2.68 million tons, equivalent to 29 percent of their aluminium production capacity. The closure of plants and decrease in production resulted in a ¥31.66 billion loss to the company and major supply chain disruptions in the global aluminium market.

 

Managing Risk in Your Supply Chain

In today’s globalized world supply chains are often stretched to their limits and very vulnerable to disruptions. China’s environmental crackdown is a good example of how these disruptions can impact businesses, leading to serious production and reputational losses. No supply chain is immune. Companies worldwide need to act to gain greater supply chain transparency.

 

 

How Can you Prepare Your Supply Chain?

After President Xi publicly announced that environmental protection is one of his top three priorities for the coming years, these intense environmental inspections are just the beginning of a new environmental era in China. China will be taking a more proactive approach in the coming years to enforce environmental laws and cut capacity of pollution-intensive industries such as coal, steel and aluminum. Despite the 10-year environmental policy action statements — “Air Ten”, “Water Ten” and “Soil Ten” to improve the air, water and soil pollution, China has also imposed an environmental protection tax effective from January 1, 2018, which is expected to increase the cost of doing business in China. Companies are urged to prepare themselves and start monitoring their own supply chain to avoid facing this situation. It is vital for companies to carry out detail risk assessments and understand the possible impacts of the new tax as well as the new Environmental Policies in China.

Environment is one of the four themes in the EcoVadis sustainability rating process, along with labor and human rights, ethics and sustainable procurement. The methodology includes a 360° Watch to collect CSR-related news to identify any violations, which may potentially lead to production plants being closed down. Suppliers are also benchmarked against the world’s industry average in order to give a comprehensive CSR rating.

Find out more about our methodology and see how you can identify and tackle hidden risks and find opportunities to innovate in your supply chain.

 

About the Author

EcoVadis ‏‏‎

EcoVadis is the world’s most trusted provider of business sustainability ratings, intelligence and collaborative performance improvement tools for global supply chains. Backed by a powerful technology platform and a global team of domain experts, EcoVadis’ easy-to-use and actionable sustainability scorecards provide detailed insight into environmental, social and ethical risks across 190 purchasing categories and 150 countries.

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