China Is Cracking Down on Environmentally Unfriendly Factories

China 1

Supply chains world-wide have been disrupted as the Chinese Ministry of Environmental Protection (MEP), eager to meet air quality targets and reduce water and soil contamination, started to shut down thousands of factories in China. The shut downs (whether complete or temporary) are taking a toll on multiple industries; frontrunners: automotive and electronic components (finished and semi-finished metal components, plastic and rubber injection molding), chemical and textiles. Tier 1,2, and 3 suppliers are being affected equally.

Analysts are also debating the introduction by the end of the year of an Emissions Trading Scheme (ETS) similar to that in the European Union where companies under the carbon pollution cap will be able sell credits to those going over the cap. No matter what the form of the ETS will be, smaller companies will be at a net disadvantage. Not being able to invest in new and more efficient equipment with the cost of the credits, they will lose any competitiveness they had to begin with. The credits will surely affect commodity prices, especially aluminum and steel based ones.

The uncertainty surrounding the resolution of the problems, the resuming of production as well as the anticipated backlogs are interfering with planning across the world and becoming an operations nightmare.

The provinces that have been most affected by the MEP inspections are Jilin, Shandong, and Zhejiang, and the cities of Chengdu and Chongqing while Guangzhou will soon follow.

While larger Western companies have audit systems in place that verify environmental compliance at the time of qualifying suppliers, smaller companies are widely exposed, not knowing in some cases who their suppliers actually are, where they are located and whether they are compliant or not with national legislation, environmental or otherwise.

Over 60% of MES’ supplier base is located in China, mostly concentrated on the East coast. In the wake of this crisis, we have been able to avoid delays in the supply chain for our clients mainly because of the tight and honest partnerships we have with the Asian factories. The audits performed by MES at these facilities have always included a wide range of issues that go beyond the processes in place, price or quality issues but deal with environmental and social issues as well.

Our audits are performed to US standards and anticipate potential issues that might affect not only the production of our clients but also their image. Our clients are also welcomed to perform their own audits with the suppliers and always have access to their certifications and licenses. We are aware, however, that no amount of control can fully safeguard us and our customers from the unpredictable and what is ultimately country (governmental or economical) risk. That risk is mitigated at MES through diversification of suppliers and supplier location. We have the flexibility and the infrastructure necessary to move tooling and production within weeks, from one supplier to another, from one country to another, sometimes, at no additional cost to the customer.