Although promulgated in the late eighties, China’s environmental law had been until recently, very loosely applied. This was partly due to the overlooking of local governments and the low punishment scheme. But since the release of the latest five-year plan, and in an effort to tackle the growing pollution issues, China has been putting a lot of efforts in ensuring a strict enforcement. As a direct consequence, Central government inspections have led to over 80 000 factories to shut down across the country in 2016 and 2017 and the recent involvement of the tax bureau in the process should strengthen it further. The remaining factories were pushed to equip with air and water treatment equipment, which represents up to several hundred thousand dollars of investment for the owners. To go even further some local governments have simply forbidden polluting process in their district such as metal processing or electroplating.
Towards a dismantling of industrial clusters
Traditionally, informal industrial clusters have grown in China to integrate complementary activities. Manufacturers used to rely on familiar partners for their spare parts and materials. Even though they were sometimes only simple workshops, the proximity enabled factories to remain flexible and keep control on the quality.
“There used to be mainly iron casting manufacturers here, but last year the environmental bureau decided that this process should not be done in the region anymore, so they tore down all the factories”
says a teapot factory owner in Yongkang (Zhejiang), while looking at the rumbles. His factory is one of the only one still standing in the neighborhood because he is only handling enameling and finishing processes.
“We use to work with an iron casting partner close by, but since it was shut down, we now have to source from a manufacturer in Jiangxi”.
This is a drastic change for the owner which used to collaborate with family members to handle the different part of the process and still expected that everything could be manufactured in-house in the future.
From integration to externalization
Indeed, over the years, many manufacturers made the strategic choice to integrate the different production stages of their products. This enabled them not only to lower their costs but also better manage the quality.
However, with the reinforcement of the environmental and social monitoring, it became too costly or too risky to maintain some sensitive processes in-house. Thus, some factories decided to back down:
“We made the choice to focus our expertise on assembling. We now subcontract wood cutting, gluing and plastic shaping process to our suppliers” a vanity case factory owner in Guangdong.
Coastal provinces with major wealthy cities are particularly targeted such as Zhejiang, Guangdong, Jiangsu. Whereas less developed provinces are still relatively spared and benefit from a more flexible implementation of the regulation.
The risk linked with subcontracting
If subcontracting decreases the legal risk for direct suppliers, it also makes it much harder for them to ensure the monitoring of the operations in term of quality and environmental practices of course, but also social practices. This is especially true for the factories that need to look for distant partners due to geographical restrictions. In that case, most of the time, they know little about them and have lower control on their activities.
On procurement teams’ side, the opacification of the supply chain also makes traceability and therefore due diligence process significantly more complex. Not only monitoring becomes more difficult, but as the responsibility is pushed further away in the supply chain, it becomes difficult to hold people accountable for their practices.
Still, some forward-thinking factories see the reinforcement of the supervision as an opportunity to position themselves as local green leaders with the government, investing in treatment facilities to benefit themselves and the surrounding factories. Thus, let’s hope that the overall effect of the regulation reinforcements, will act more as a positive driver for improvements, supported by oversea clients, than an excuse to shift responsibilities for the actors in the supply chain.
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