After speaking to other industry experts on the ground in China, here are some important takeaways that we would like to share with you especially if you have a business that is sourcing products from China. This article was reposted with permission from 80/20 Sourcing.
As you may have heard recently in the article from last month, November 2017, China’s Environmental Protection Administration has shut down tens of thousands of factories with no end in sight.
Two readings that can help you better understand the issues we are talking about:
The good news is that China is cleaning up its manufacturing.
This is positive for both China and the rest of the world. Beijing is known for its legendary levels of pollution. In China, lung cancer rates are climbing astonishingly fast. Also, the impact of the pollution can be felt as far away as Japan and even North America! So all in all these stricter environmental regulations are a positive development.
The air seems to be cleaner these days in Shanghai, Shandong, Guangzhou, and Shenzhen. Some have told me that they “can’t remember the last time the skies were so blue!”
Previously it was cheaper for factories to pollute than to clean up.
In the past the main problem was compliance. Because fines were small and loosely enforced, from a business perspective it was cheaper for a factory to continue operating and paying a small fine than to rehaul their operations and invest in new equipment and processes to clean up.
But this time the new EPA laws have TEETH.
Local leaders are pressured to force local factories to comply or face stiff fines and penalties. These may include daily fines, cancellation of business licenses, and even criminal enforcement.
What does this mean if you’re sourcing from China?
Unlike before the new laws are here to stay
In the past, these cleanup efforts were temporary due to large socioeconomic and/or political events such as the 2008 Beijing Olympics, 2010 Shanghai World Expo, and 2012 Hangzhou G-20 Economic Summit.
The difference now is that the government leaders have issued direct orders from the top down. We understand that the environmental cleanup is as important as the anti-graft campaigns in China. This is serious stuff folks.
Factories that have been closed may stay closed
I have heard reports of dying mills that have been shut down by the dozen because they cannot comply with the new EPA laws. In other cases, factories have been shut down indefinitely.
On the other hand, other factories have gone through their audit and passed inspections with a minimal disruption to their operations.
The takeaway is that it depends on your industry, your product, as well as your factory’s operations and level of pollution.
Even if your factory wasn’t affected, their subcontractors may be shut down
One important note is that if your factory wasn’t affected you’re not out of the woods yet. This is because their subcontractors may be affected by the crackdown. This means that if your product is dyed or treated with chemicals – this part of the production process may become a bottleneck that may delay your delivery.
Or some factories may even switch out or even eliminate certain processes altogether.
I’m not necessarily saying that factories are dishonest. But desperate times call for desperate measures and for some factories it’s a fight for survival. It’s not unheard of for factories to forego a certain chemical treatment when that treatment may jeopardize the shipment’s delivery date.
Perhaps more importantly, it boils down to Chinese culture where social harmony is more important than speaking up and causing problems. Often times these problems will be kept to themselves and only brought up when the sh*t hits the fan.
China is moving up the value ladder
On a macro level, China is moving away from the low end and super cheap products that take a significant toll on its environment. This makes sense as pollution levels have skyrocketed in the past 20 years since China’s economy has boomed.
To put it bluntly, China is willing to let the “dirty” business go to other countries such as India, Bangladesh, and Southeast Asia. At the same time, China is focusing on more valuable products whose manufacturing processes depend more on skilled labor and automation. Case in point the Apple iPhone.
What can you do? The three C’s
Communicate with your supplier
Remember don’t expect your supplier to give you an advance notice. Remember Chinese culture does not encourage one to make waves. So it’s your job to be proactive in checking with your suppliers if they’re impacted by the new environmental laws.
It’d be smart to check if your delivery schedules are guaranteed as well because you don’t want to miss out on Q4 and the holiday shopping season.
I recommend also asking how long they expect the closures to last so you can plan ahead.
Don’t put all your eggs in one basket. It makes sense to have backup suppliers to refer to if your primary supplier goes offline. These can be either other suppliers in China or in other countries.
Contrary to popular belief, not all products are made in China these days. Other countries such as India, Bangladesh, and SE Asia may not be prone to these increased pollution laws.
I recommend also sourcing new suppliers as a long term strategy.
In fact, we are in the middle of trade show season right now. I’ve written several articles about how to attend a trade show like a pro. Trade shows are a great way to meet suppliers in person, kick the tires and get your hands on a sample right away so you don’t have to wait for weeks for it to be shipped to you, as well as learn about new product trends and spot new product opportunities.
Change – learn to embrace it
A wise man once said, “The only constant thing in business is CHANGE”. So learn to embrace it.
One must adapt quickly or be left behind. If your factory is affected it’s up to you to find a supplier that can deliver the right product, at the right price, at the right time.
Short-term outlook – Longer lead times
In the short-term, I expect longer lead times during the shakeout since certain factories are being closed indefinitely.
Long-term view – Prices to rise
In the long-term, expect prices to rise. Just as California has stricter tailpipe emissions laws which resulted in higher car prices and gas prices, so will China’s stricter environmental laws result in increased costs on suppliers. And these costs will be passed down as price increases on to you the buyer.
It costs more to get clean and expect the price increases to be passed on to you sooner or later.
Moreover, raw material prices are rising as well.
But on the bright side, the cost increases will affect everyone equally so you will not be at a disadvantage.
Quick favor for the author Gary
He is doing an informal survey of businesses who’ve been affected by the China EPA factory closures.
Author – Gary at 80/20 Sourcing
Gary is based in Shanghai since 2008. He has managed multimillion dollar China sourcing campaigns for international clients. He created 80/20 Sourcing to teach online sellers, especially Amazon’sellers, and small business importers how to source from China like a pro and avoid common mistakes.
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Diane de Beaudrap
Sales & Marketing Director @Steel Available