President Xi Jinping recently spoke to the 19th Congress of the Chinese Communist Party about protecting the environment and declared it as one of his top priorities for China. He mentioned that while there has been plenty of progress in regards to environmental protection, there is still much work to be done. He explained that the future of China is dependant on how well it is cared for. The solution, according to Jinping, is to have the strictest protection system in place. And there has been.
Government Imposed Shutdowns
While fighting back against harmful pollutants in order to promote better health is commendable, it has also affected the shipping industry. Last summer, the Ministry of Environmental Protection (MEP) began inspecting factories at random in order to ensure that they were complying with environmental laws. This enforcement has led to significant changes.
Nearly 50% of China’s factories have been temporarily shut down for inspection and over 80,000 have been given a citation with large fines attached. Some factory owners and employees have even been sent to prison. Overall, over 18,000 companies in China have been completely shut down by the Chinese government due to pollution with no word on further action or sign of reopening.
In turn, these shutdowns have had a negative impact on the economy. When the MEP does their inspections, they often have to shut off the gas, water, and electricity in order to measure carbon and emission levels. This has slowed and stopped production and even affected the surrounding population. Because these inspections aren’t always anticipated, the shutdown has led to delays, cancellations, and an increase in prices for these global shipments.
Local government authorities, particularly in smaller communities, began shutting down any possible pollutant in order to retain their factories. However, this not only falsified the information, it hurt the community. Many of the affected producers are Tier 2 and Tier 3 suppliers of major brands. Some suppliers have even moved on to other countries because of this. This could lead to higher costs and mass job losses, not just for China but on a global scale.
Effect On Shipping
Shippers that do business with Chinese companies are getting hit hard because of this. Many of these companies work with international counterparts to deliver products for the holidays, with their busy season often beginning in September. Industries being hit hard include manufacturing (especially of electronic goods), textiles, rubber, metal, leather, and plastic. Additionally, employees, businesses, and communities surrounding the factories are also affected by the decisions made by manufacturing owners.
In an informal survey, many small to medium business owners believed that growth is imminent in 2018. Some believed it would be very costly for them, especially because these new enforcements are expected to continue. Additionally, there are concerns about uncertainty in other aspects of production, such as with the supply chain.
What this Means For Your Supply Chain
Even if your Tier 1 suppliers in China are 100% compliant, your supply chain is not immune. Suppliers aren’t being regulated the way the manufacturing agents are. If a supplier shuts down or gets inundated with requests, they may not deliver and leave the manufacturer struggling to find someone new. This uncertainty can be daunting, to say the least.
Another possibility to consider is the possibility that sanctions against a supplier’s subcontractors can snowball, causing major delays in production. Being aware and prepared for the unexpected can help maintain the business and avoid negative situations.
How Shippers Can Prepare Their Businesses
There are a few things to consider in order to be best prepared for an unfortunate scenario.
Have maximum visibility into your supply chain environmental compliance. Because these enforcements carry a lot of weight in relation to President Jinping’s goals, the requirements may seem overwhelming. Having a clear channel to show your compliance with help when working with regulators and authorities (and can help offset some of the natural anxiety related to the business). Identify your worst-case scenario. Understanding what the worst possible scenario would be and how to react to it can prepare a business and business leaders for losses. It can also help with new ideas on how to identify and prevent major events from being catastrophic.
Have a backup plan. Having a contingency plan is wise for many aspects of a business. Knowing and having alternative options should something come up negatively against a business you work with can prevent delays or losses in your own business. Monitor the situation closely to help offset any surprises. Keeping track of the news and speaking to other trusted business owners can help keep the business running. Be aware though that there have been reports of falsified news being circulated and spread.
Know what needs to be done to comply. Knowledge is power and knowing what needs to be done to comply can save your business time and money.
One of the best ways to prevent a major loss or delay is to communicate with suppliers. Although it may not be customary for a business to reveal losses, having an open channel of communication may be helpful. Additionally, identify aspects of your business to determine strengths and weaknesses. Knowing what needs improvement and finding ways to improve it will be beneficial in many ways.
Unfortunately, some manufacturers have opted to leave China and manufacture their products in places like India, Vietnam, and Thailand. However, this move is a risk as it may get more costly in the long run to be working outside of China and the solid network the Chinese manufacturing industry has built. There may also be a loss of quality in the work, leading to less control and more dependence.
China is famous for having high levels of pollution. One positive aspect to consider is that China is cleaning up the environment, leading to healthier communities and in turn, healthier workers. Over a period of time, there will likely be fewer people needing sick leave (either for them or their dependents) and less money going towards government-funded healthcare.
However, this new crackdown isn’t going anywhere. With the enforcement coming from the instruction of top leaders, it is likely that these new regulations will be in place indefinitely. Understanding the law, working to meet these requirements, and having a contingency plan may be the smartest way to keep the business running.