By Ashish Monga
Owing to increasing clamor over air pollution, over the past few years China has been making increasingly earnest attempts to control its pollution. This year marks the fourth year of the Environmental Inspection (name TBA), and industries have been hit hard.
This is serious business – a couple years ago, this inspection resulted in 3,000 officials being disciplined and 198 million yuan ($29,860,651.26) in fines being levied. So what is this check about, how does it work, and what are the ramifications?
When and Where
This year, the Fourth Environmental Inspection went from August 11th to mid-September, covering the provinces of Jilin, Zhejiang, Shandong, Hainan, Sichuan, Tibet, Qinghai, and Xinjiang. The basic description requires some unpacking to fully understand.
First, the timing: The timing of the inspection is completely random, but in general, an announcement will be made one month prior to the beginning of the inspection, giving industries nationwide a chance to prepare. But the dates themselves are misleading – these dates are simply the official dates the Chinese government has set for this inspection period.
It should be noted that inspection teams have significant flexibility to continue their inspections beyond the official end, and furthermore, this time window has cascading effects on manufacturing that began prior to August 11th and are still ongoing as of September 27.
The provinces chosen for the inspection are also completely random. China’s perspective is that it either doesn’t have the resources, or cannot afford a nationwide industry shutdown, and so they only check a select few provinces every year. So it is that while factories this year were closed all around the Ningbo region in Zhejiang, factories in Guangdong had nothing to fear.
But before you breathe a sigh of relief because your factory is located in Guangdong, it’s not as simple as that. In most cases, factories in Guangdong, have sub-suppliers based in one of the effected provinces, and therefore are also experiencing production delays.
The Inspection and its Effects on Factories
This inspection aims to check industrial production throughout China and ensure factories throughout are compliant with all appropriate environmental regulation. These environmental inspection teams will take tipoffs from almost anyone, effectively meaning that all active factories will receive scrutiny.
However, very few suppliers are compliant with any appropriate environmental regulation, as the investment to ensure compliance is too large for most small to mid-sized factories. So for these factories, it makes more sense for them to suddenly close down then try to become compliant.
Obviously, they don’t plan on remaining closed, but the government doesn’t know that, and they can’t be inspected in the first place. There are also a non-compliant few who will chance it by ceasing operations during the day and working overnight.
Ultimately, this means that industries throughout China are facing bottlenecks, with the exception of state-owned enterprises and big factories with capital to invest in environmental regulation.
For industries, the heavier the pollution, the more they are affected, as controlling the costs on these becomes increasingly prohibitive. These industries include paper, plastic, metal, coating, and spraying, but the truth is that most all suppliers in China are heavy polluters, and many outside those industries choose to close down anyway.
This year, we’re aware that even cardboard packing industries (that’s packing, not packaging) even chose to shut down rather than risk government wrath.
For those that aren’t shut down, their source of raw materials may nonetheless be shut down, rendering them completely inoperative until the end of the inspection. This includes factories in provinces unaffected by the inspection, as many provinces specialize in producing certain raw materials.
Thus, even factories outside the affected provinces may even be forced to shut down, depending on the raw material in question.
What is clear is that suppliers everywhere are affected, and obviously, importers are also going to be affected.
Ramifications for Importers
Even for a company like IMEX Sourcing Services, which has connections with suppliers from around China, and a team on the ground in China to regularly follow-up with suppliers, we have seen delays across the board.
For one, if we already have an agreement with a supplier (or a suppliers sub-suppliers) that goes dormant, there’s nothing to be done until they come back online. We could also reach out to suppliers in other provinces, but that doesn’t change that there’s going to be a hit in terms of production cost and/or timelines.
For some clients, this means a spike in manufacturing costs. Raw materials, particularly plastic and paper, go way up during this time. We’ve seen, on average, increases of around 10-20%, regardless of industry, but expect it to be higher for higher pollution industries.
Batteries are definitely up in price, lead is at $3080 per ton, and aluminum is up.These prices increase may stick around for some time after the inspection period, too, as the market needs time to stabilize.
But for most clients, this means delay. Not just a one month delay during the inspection period, but potentially more.
The reason for this is that factories need time to re-establish after their closing. Some factories choose to wait for some time after the inspection period, as the inspection period is not firm – in theory, the inspectors can return at any time and target their factory, and thus it’s best to only open once others feel comfortable doing so.
Secondly, these factories need to re-gather their employees (this is a whole together different challenge as many of them would have switched jobs by the time they re-open, especially the blue collar workers), source their raw materials from other factories, and deal with a huge surplus in order volume against their relative scarcity of resources.
All in all, it could be a wait of two months for the dust to settle.
What’s An Importer to do?
It’s best to simply pad your expectations for time and wait out the storm. Many importers may have no choice but to wait anyway if they have an agreement with a supplier that’s gone dormant.
If you happen to be unfortunate enough to be on a time crunch, it may be worth having some flexibility with your supplier and accepting the higher cost of production throughout this time.
In the future, ideally, when learning of the environmental crackdown, it’s best to place your orders early (especially final Christmas orders) and then still expect a significant padding on your expected timelines.
Try to communicate with your suppliers/China team regularly to see if there is any change in timelines so you can plan your operations accordingly.
Have you seen delays with your shipments due to the environmental crackdown in China? How have you dealt with it? Please share your stories in comments.
Ashish Monga is the founder of IMEX Sourcing Services, a sourcing & Quality Control company helping people importing from China manage their costs & risks as well as develop new products. Ashish also does consultancy work in the field of international trade & import risk management. He is also the author of The Sourcing Blog, a blog focused on sourcing advice for importing from China.