• China’s strategic war on pollution and its impact on supply chains

    06 September 2018

    Authorities in Beijing have recently announced that the city will halt operations at about 1,000 manufacturing firms by 2020 as part of a plan to curb air pollution and to boost development in neighboring regions. The plan is also part of a wider strategic approach for China to move away from ordinary and heavy industries and to focus more on the high-tech sector. As a result, around 19,500 business applications and registrations have reportedly been rejected and about 2,465 ordinary manufacturers have either been forced to shut down or have been relocated. In its effort to strengthen socio-economic development in smog prone areas of the Beijing-Tianjin-Hebei region, authorities are also aiming to build an integrated network transport system and relocate Higher Education Institutions to Hebei, which is known for its heavy industry. Despite increasing labor costs in the country, China hopes to nurture highly skilled workers in the region to attract more investors for Hebei’s new economic zone of Xiongan.

    In addition to the move by authorities in Beijing, the provincial government of Shandong on August 6 also revealed its plan to cut steel and coal productions to contribute to the nationwide anti-pollution campaign as well as to promote clean energy. In its three-year (2018-2020) strategy, it plans to cut pig iron production capacity by 600,000 tonnes and crude steel capacity by 3.55 million tonnes by 2018, while coal production is to be cut from 156 million tonnes to 140 million tonnes by 2020.

    Furthermore, media sources reported that authorities will continue imposing pollution curbing measures in smog prone regions starting from October 1 until March 31, 2019 to cut concentration of breathable particles, known as PM2.5, by 5 percent on a yearly basis during winter. As a result of this measure, output capacity for heavy industries like steel, coke, and construction materials will be cut from mid-November onwards. The government has also come up with a national-level pricing framework to be implemented by the end of 2020 as a guideline and a penalty system for manufacturing firms. The pricing system is expected to increase the cost of pollutant discharges, including water contaminations and carbon emissions, and penalize offending factories that do not adhere to the new measures.

    To date, over 80,000 factories, which account for about 40 percent of all factories in China, have been hit with hefty fines and criminal offenses due to factory emissions. Most of them have been forced to shut down or have been ordered to clean up their operations within a short span of time, which has resulted in late or missed production orders as well as increased costs. The country’s effort to address pollution has affected a wide range of manufacturing sectors, including textiles, energy, heavy metals, coal and gas, mining, cement, paper, automobile, and retail.

    The new environmental directives could mean that increasing productions costs, triggered by pollution curbing measures, are likely to hamper China’s export sector in the short run which may in turn, have a ripple effect on supply chains dependent on manufacturing activities in China. As factories in China attempt to cope with the increasing costs to manufacture goods under the compliance of environmental regulations for clean energy, consumer goods prices may be directly affected.

    Furthermore, as most factories face uncertainties over the looming fate of a forced closure or relocation within two years’ time, retrenchment of workforce is highly likely and may disrupt the manufacturing process. Reports indicate that more than 60,000 jobs have been lost as a result of factory shutdowns in the past. Although it is not common for factory workers to stage large-scale protests over job losses, customers can expect to face plant closures by employers who are unable to repay debts, environmental taxes or penalty fees. Precedents indicate that factory owners normally leave their plants closed resulting in a sudden production halt, thus disrupting the supply chain.

    Prior to reaching 2020, most small scale firms are likely to close down on their own, as it is expected they will be unable to compete with bigger manufacturing firms in efforts to adapt to clean energy measures. Due to this, the firms that manage to adapt to the changing policies will reap the benefits in the long run. Thus, customers with sub-tier suppliers in China are advised to closely monitor and liaise with local partners to keep abreast of environmental regulations to mitigate any potential disruptions, as China’s war on pollution will adamantly continue in the coming years. Customers may also consider assessing the financial health of smaller suppliers in China to evaluate which firms may be susceptible to insolvency and may struggle to meet the new environmental costs.

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