According to a World Resources Institute White Paper issued in the fall of 2010, China faces a number of supply chain challenges. First, the recent spate of reports alleging employee labor and environmental violations can place manufacturing partnerships with global corporations at risk. According to the report, Chinese suppliers that are unable to meet the environmental performance standards of green supply chain companies may not be able to continue to do business with such firms. Wal-Mart has already gone on record, announcing that it will no longer purchase from Chinese suppliers with poor environmental performance records. In order to be a supplier to Wal-Mart, Chinese companies must now provide certification of their compliance with China’s environmental laws and regulations.
Wal-Mart, like many other IT and apparel manufacturers also conducts audits on a factory’s performance against specific environmental and sustainability performance criteria, such as air emissions, water discharge, management of toxic substances and hazardous waste disposal. These actions are extremely significant as Wal-Mart procures from over 10,000 Chinese suppliers. This increased scrutiny on environmental and corporate social responsibility through supplier scoring and sustainability indexing, says the WRI report may trump price, quality, and delivery time as a decisive factor in a supplier’s success in winning a purchasing contract.
Chinese Government Stepping Up Enforcement
Finally, what good news I hear about the depth of environmental regulations on the books in China is buffered by the apparent lax enforcement of the rules and regulations. That is however appearing to change. The WRI report indicated that the Chinese State Council is directing key government agencies, including the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Environmental Protection to prohibit tax incentives, restrict exports and raise fees for energy intensive and polluting industries, such as steel, cement, and minerals extraction. Also, it’s been reported in the past years that the People’s Bank of China and the Ministry of Environmental Protection are also working with local Chinese banks to implement the ‘Green Credit’ program, which prevents loans to Chinese firms with poor environmental performance records. In addition, the National Development and Reform Commission and the Ministry of Finance have issued a notice to all Chinese central and local governments to purchase goods from suppliers that are ‘energy efficient’. Finally, on a local level, governments have developed preferred supplier lists for companies producing environmental-friendly products for their purchasing needs.
Supplier Challenges Are Not Just Environmental
A China Supply Chain Council survey conducted in 2009 identified a huge gap in knowledge between (1) clear understanding of which environmental issues posed the greatest risk (2) what to do to manage significant environmental risks. Also, nearly 40% of the company’s surveyed thought sustainability to be cost prohibitive, too complicated or where particular expertise was lacking don’t have the expertise (on the other hand 60% did!). Two- thirds of respondents did consider sustainability to be a supply chain priority, although many were not confident of the return on investment. However, more than half of the respondents reported that they had begun collaborating with their larger supply chain partners. In fact, according to the World Resources Institute White Paper, despite increasing pressures to improve their environmental performance, Chinese suppliers face many financial challenges to operating in a more sustainable manner
World Resources Institute White paper notes increasing non-environmental pressures, including:
Leveraging the Supply Chain to Gain “Reciprocal Value”
Leading edge, sustainability –minded and innovative companies have found “reciprocal value” through enhanced product differentiation, reputation management and customer loyalty. I recently highlighted the model efforts that GE has implemented with its China based suppliers to implant responsible and environmentally proactive manufacturing into their operations. GE’s comprehensive supplier assessment program evaluates suppliers in China and other developing economies for environment, health and safety, labor, security and human rights issues. GE has leaned on its thousands of suppliers to obtain the appropriate environmental and labor permits, improve their environmental compliance and overall performance. In addition, GE and other multi-national companies (including Wal-Mart, Honeywell, Citibank and SABIC Innovative Plastics) have partnered to create the EHS Academy in Guangdong province. The objective of this no-profit venture is to create a more well-trained and capable workforce of environmental, health and safety professionals.
Many of my prior posts have highlighted the critical needs for increased supply chain collaboration among the world’s largest manufacturers in order to effectively operationalize sustainability in Chinese manufacturing plants. This is especially evident for large worldwide manufacturers operating subcontractor arrangements in developing nations and “tiger economies”, such as India, Mexico and China (and the rest of Southeast Asia). Global manufacturer efforts underscore how successful greening efforts in supply chains can be based on value creation through the sharing of intelligence and know-how about environmental and emerging regulatory issues and emerging technologies.
Suppliers and customers stand so much to gain from collaboratively strengthening each other’s performance and sharing cost of ownership and social license to operate. But as I have stated before, supply chain sustainability and corporate governance must first be driven by the originating product designers and manufacturers that rely on deep tiers of suppliers and vendors in far-away places for their products.
Note: This piece is adapted from a recent article that I wrote, “Navigating China’s Green Road” that appears in China Sourcing Magazine