China crackdown on environmental regulations hits global supply chains

Coal barges on the river in the Shanghai smog
CC BY 2.0 Peter Dowley

Observers are calling it a "new era" for environmental regulations in China.

China used to top the lists of examples given when critics would cite lax enforcement of environmental regulations as unfair business practice, even going so far as to suggest that Western governments should back off a bit to level the playing field. So shock waves shot through the business sustainability community when a leading German automobile parts supplier found itself in a social media crisis after China's local authorities cut power to a key supplier.

The excitement started with the leak of a letter from the CEO of the Schaeffler China pleading with authorities to reverse the closure of a key supplier due to environmental violations. Schaeffler had been notified of the regulatory problems only the day after the local authorities cut off power to their only supplier of needle bearings, Jielong Metal Wiredrawing Co., Ltd.

Schaeffler claimed it could take 3 months to replace the supplier, leaving 49 automobile producers in China without key parts, preventing 3 million vehicles from rolling off the lines as planned, with an estimated economic impact of 300 billion RMB (over 43 billion US dollars). By the time the leaked letter went viral, Schaeffler had begun to organize a contingency plan and was able to calm down their customers with news that the impact would be manageable because Schaeffler could re-route sourcing from outside of China.

The response on social media was divided, with some urging a short reprieve to allow the supply chain to be re-organized and voicing concerns about the impact of such enforcement campaigns on competitiveness. Others celebrated the firm actions as the only way to achieve needed change.

The response of the authorities was not divided. They pointed out that the supplier should have advised their customers earlier, and that Schaeffer anyhow had a responsibility to audit the compliance of their suppliers. Letters sent in late 2016 and early 2017 gave plenty of notice ahead of the final shut-down action from their point of view. In addition to being on a list of known violators of environmental regulations, Jielong Shanghai had failed to submit a required environmental impact assessment and was therefore operating illegally. In addition to cutting power and water, the authorities demanded the company dismantle production facilities to ensure that the plant could not return to illegal operations.

The message has reinforced the importance of supply chain audits to global business sustainability, a topic most global companies take very seriously but struggle to implement successfully. In the wake of this high-profile case, the sustainability community has learned that the incident is not a one-off, but does represent a "new era" of balance in the struggle between economic growth and environmental quality.

This will fuel the need to further develop the technologies behind supply chain audits, where the large networks of globally distributed suppliers make it nearly impossible to ensure that all actors in the supply chain achieve compliant and sustainable standards. There is already talk of adopting approaches like block-chain to replace the current systems relying either on arduous independent audits that capture only a moment in time or trusting the promises of the supplier in their self-audits.

China crackdown on environmental regulations hits global supply chains
Critics used to call China's ease on regulations unfair. Now crackdowns in the face of popular concerns about pollution ripple through global supply chains.

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