China Warns Foreign Companies
A manufacturing client of ours that is in the process of setting up shop in China sent me this article and asked me what I thought of it. You regular readers just need to read the article to know.
The article comes from the AFP wire and is appropriately entitled "China warns foreign polluters." The thrust of the article is that China issued a warning to foreign companies that "it will impose equally harsh penalties on domestic and foreign" polluters. This warning came after inspections "earlier this year found "Unilever China and the China branch of Hitachi Construction Machinery Co. were discharging wastewater with higher chemical content than permitted." An official with China's State Environmental Protection Administration expressed his surprise at finding "both companies had environmental pollution problems since they were the only two foreign companies selected at random for the inspection." and he vowed to "strengthen our supervision."
The article quotes "analysts" as saying "such a warning was likely to be driven by rising domestic concerns that foreign polluting industries were finding their way to China, thanks to lower costs and the country's pressing need to create jobs." Andy Xie, a well known economist out of Shanghai, is then quoted as saying,
"There is a widespread concern that international polluting industries are moving to China." Xie goes on to say "it is no longer an urgent priority to attract foreign funds, just as the need to create jobs is felt less keenly, and therefore China now is able to say no to this type of industry if the cost is deemed too high." Xie sees these recent actions as a "signal that China no longer welcomes foreign industries which provide only limited job opportunity or low technology."
I completely agree with Mr. Xie.
China has always and will always (at least for the foreseeable future) enforce its laws more strictly against foreign companies than against domestic companies. I am constantly writing about this not to complain about it, but simply to point out the reality. Just because your domestic competitors are getting away with something does not in any way mean you will be allowed to do so.
Beijing is also now at the stage where it is pretty much neutral about all but the largest foreign companies remaining in China. I am not saying it is neutral about foreign direct investment (FDI) in general, but I am saying that it really could not care less about whether your individual business stays in China or goes. And if your business is a polluter, it actually would probably rather see you leave.
Lastly, going after foreign companies is politically popular.
A year and a half ago, I did a post, entitled "Is China Going Green," in which I noted the following:
We are aware of a large Fortune 500 retail company that is opening units in China that meet or exceed the toughest United States environmental laws. I estimate this company's environmental sensitivity will cost them at least an additional $25,000 per unit, yet I am firmly convinced this company is doing the right thing. This company's actions make sense because the odds are good that China's environmental laws and enforcement will get tougher over time, and building environmentally sound units now will almost certainly cost less than having to retrofit existing units a few years from now. On top of this, people often get very emotional about the environment and I can see Chinese citizens getting very angry at a foreign company whose units in China are less environmentally sound than their units in the United States or elsewhere. This is obviously even more likely to be the case if there were to be some sort of environmental disaster.I expect we will be blogging frequently on China's changing environmental enforcement.
Bottom Line: Obey the law, particularly the environmental laws. It is good business.
http://www.chinalawblog.com/cgi-bin/mt/mt-t.cgi/2179
» China's environmental law policy: two standards of enforcement? What About Clients?
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Comments
As foreign companies are enforced against more strictly than domestic ones, do you also see a range of enforcement in between? Say, a spectrum of enforcement with WOFEs at one end, domestic firms at the other, EJVs in the middle with greater foreign equity shares pushing the EJV to the WOFE side of the spectrum and lesser equity towards the domestic side, and a bump towards one end of the spectrum or the other for EJVs and CJVs depending on who your domestic partner is. Or is all foreign investment being targeted heavily? If not, might we see a decline in the popularity of the WOFE, and an upswing in JVs?
Posted by: William Lewis | October 5, 2007 7:39 AM
And when these foreign companies leave China if they don't like the new regulatory climate, can they take their production lines, money and other hard assets with them? This is an important question to ask. William Lewis also brings up an important point in that perhaps Beijing would like to see foreign companies with advanced technology forced into JVs with Chinese companies.
Here's another; forcing foreign companies to abide by a higher standard forces them to bring more advanced pollution removing and modifying equipment with them from their home country (the West, SK, Japan). Whether or not said company is a WOFE or JV is not important, China getting a good look at advanced environmental technology without having to buy licenses or buy the equipment. And more JVs make getting the look-see even easier.
Posted by: nanheyangrouchuan | October 5, 2007 8:10 AM
I'm not sure about the claim domestic companies are treated any better when it comes to environmental regulation.
I have personal experiences with local PCB manufacturers in Shenzhen who had to clean up their act after being pressured by the government (non-renewal of lease, rezoning to technology park with waste treatment, relocation process requiring environmental impact statement.)
Never the less, it might be time for China to stop trading enviornment for econmy, and take the logical step the 1st world had taken to slow down growth and start clean up pollution.
Posted by: Charles Liu | October 6, 2007 3:30 PM
I expect that more and more, foreign companies with pollution issues will move their operations outside of China. Or, just as likely, outsource to Chinese subcontractors - if Chinese land and labor continue to be cheaper than in the rest of East Asia.
Another issue with the inspections is this - is it possible that the Chinese companies inspected paid off the officials involved, whereas the foreign companies refused to do so? Between Chinese corruption and xenophobia, it's not surprising to me that the two foreign companies chosen would be flagged. This is what I would call a dog-bites-man situation - an expected outcome.
Posted by: Zhang Fei | October 6, 2007 7:19 PM
1. Is the same Zhang Fei as on SP?
2. Beijing inspectors of any kind earn crap salaries and easily bought due to the necessity to survive, so these "crackdowns" are very small baby steps. And it is too late for China anyway.
Posted by: nanheyangrouchuan | October 7, 2007 12:53 AM
The cynic in me still believes that the PRC government's treatment of foreign companies on the pollution issue is rooted in the desire to go, "See? See? It's not just domestic Chinese companies with pollution problems." Sort of a PR diversion tactic, if you will.
Criticizing a foreign company also allows the PRC's environmental agencies to keep up the appearance of vigilance while not threatening the illicit revenue stream that domestic Chinese companies provide.
On the positive side, at least the PRC government is taking an interest at all in environmental protection. This kind of thing used to be a "foreign problem."
Posted by: Glen Wilkins | October 8, 2007 12:03 PM
The cynic in me still believes that the PRC government's treatment of foreign companies on the pollution issue is rooted in the desire to go, "See? See? It's not just domestic Chinese companies with pollution problems." Sort of a PR diversion tactic, if you will.
Criticizing a foreign company also allows the PRC's environmental agencies to keep up the appearance of vigilance while not threatening the illicit revenue stream that domestic Chinese companies provide.
On the positive side, at least the PRC government is taking an interest at all in environmental protection. This kind of thing used to be a "foreign problem."
Posted by: Glen Wilkins | October 8, 2007 12:04 PM
I actually visited the Hefei Unilever plant in April, and spent a long time discussing pollution issues with the management, so I found the fine quite surprising. I'm not sure when the alleged discharge was meant to have taken place, but given what we discussed it all seems slightly odd. I won't go into the details, but the local management and the company as a whole seemed to be very focused on the issue of environmental standards & emissions. Local officials were reportedly paying more attention to this also, but as of April didn't seem to have moved beyond "visible" emissions like smells and plumes from stacks, although the guy I spoke to said he thought that toughening of regulation was likely to continue. It all smacks of punish the foreigner to make a symbolic point to me...
Posted by: Duncan | October 9, 2007 2:42 AM