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The impact of China factory closures

china 2

“It’s like a cultural revolution – a lot of businesses out here are pretty scared of what the future will look like, because things sure as hell won’t look like they do now.”

 

Those words come from someone who has spent more than 20 years helping to shape China’s sourcing landscape, advising Western firms on the best way to approach a country that has emerged as an economic powerhouse.

 

After largely placing sustainability a fair way down their priority lists, Chinese firms have been given a wake-up call by their own government.

 

Suddenly, one of the most polluted nations on earth is cleaning up its act. As part of this process, the government is temporarily closing down factories that fail to meet environmental standards. A Bloomberg report quoted Liu Xiaoping, the owner of a plastic-mould factory in the steel-making hub of Jinan, who said officials threatened to cut electricity to his business if he did not comply with regulations. He shut down the site before they could flick the switch.

 

Bloomberg interviewed Xiaoping in an area filled with plants and workshops, most of which were closed.

Changing landscape

 

As recently as three months ago, it was unthinkable that China would take such drastic action against the country’s worst-polluting factories and industries.

 

But after the Communist Party announced plans to cut the concentration of hazardous fine particular matter (PM2.5) from 47 micrograms per cubic metre in 2016 to 35 micrograms by 2035, this crackdown could reshape the sourcing landscape.

 

“The changes being put in place have impacted almost every manufacturing business, in some way,” says Brad Feuling of Kong and Allan (Shanghai) Consulting. “The policy execution is being phased in all over China, so every company will be affected.

 

“The impact cannot be overstated, this will influence nearly every manufacturing business in the country. We have already seen factories delaying production because they have had to identify new cardboard packaging vendors, as their previous suppliers had to halt production indefinitely.”

 

Some estimates put the number of factories affected as high as 40%, with officials at more than 80,000 facilities charged with criminal offences for exceeding emissions limits in the past 12 months.

The eye (and teeth) of the tiger

 

The scale of the actions taken by authorities is an indication of just how seriously China is tackling a problem it has been widely accused of ignoring in the past.

 

“These inspectors are going into factories for surprise inspections,” says Gary Huang of Shanghai-based consultancy 80/20 Sourcing. “The government are issuing fines on a daily basis and, in the most severe cases, people are going to jail.”

 

This no-nonsense approach is hugely problematic for companies that have relied on Chinese manufacturing for decades. Suddenly, reliability and certainty that once existed has vanished. Although the result should be a far more sustainable future, that does not make the short-term outlook any more palatable.

 

“The tiger has teeth this time,” says Huang. “Not many people saw this coming. If the people who source from China didn’t have a back-up plan then they are going to be scrambling around trying to find alternatives. This is going to be massively disruptive to supply chains across the world.

 

“This is coming directly from the top of the Chinese Communist Party and it’s reaching the municipal levels, so the power is trumping any local connections. I think this is going to be the new normal but we’re not sure what is coming in 2018.”

 

For now, though, companies need to focus on the long-term cure rather than the initial headache, though, says Scott Paull, former CPO of KLA-Tencor.

 

“Supply chain partners must focus on sustainability, not just because it is moral and just. If they don’t, they will jeopardise their business by failing to meet both customer requirements and government regulations,” he tells Procurement Leaders.

 

The shock tactics of the Chinese government have caught both manufacturing and sourcing organisations on the hop. Previous efforts to clean up the country’s pollution problem – with children in many Chinese schools being forced to play under a protective dome in order for them to escape the worst of it – have been very much short, sharp initiatives.

 

This was particularly true of the attempts made in the run-up to the 2008 Beijing Olympics. This time, though, there is no turning back. An indication of the widespread implications of the action was seen in Shanghai at a joint conference between the American Chamber of Commerce and the European Union Chamber of Commerce.

Moving on?

 

Feuling tells Procurement Leaders that 75% of the audience at the conference had been affected in some way. “From delayed production to factories closing, the ripple effects are significant,” he says.

 

Foremost among the potential changes this could bring is entire industries and supply chains moving away from China.

 

“With these new changes, we are starting to see a faster migration of supply chains to countries other than China,” says Feuling. “In specific locals in China, the government is very clear on the industries and businesses they want to keep, and those they can do without.”

 

It is not just sourcing patterns that will change as a result of China’s crackdown, the government’s policy could also cause the price of Chinese-produced goods to increase dramatically.

 

“Manufacturing in China employs about 200 million people,” says Huang. “It was the bedrock of the economy but now China has new problems. I don’t think there will be a dramatic shrinking of that supply base but there will be consolidation.

 

“There will be cost increases, though, because it’s only going to get more expensive to manufacture things more cleanly. Prices will go up. We’re already seeing this in certain products such as corrugated cardboard and paper. In these industries, costs are rising and I do anticipate more next year – particularly after the Chinese New Year. That’s something that procurement should be planning for. They have been caught on the hop after this crackdown but I think this is a good wake-up call," he adds.

 

“On the whole I think this is good news, not just for China but also for the world because pollution here has an impact everywhere. Cost increases, I think, are a price that procurement is going to have to pay.”

 

Those organisations will hope the short-term pain is worth the long-term gain.

 

This article is a piece of independent journalism, written by an experienced journalist and commissioned exclusively by Procurement Leaders.

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