China's pollution crackdown hits supply chains

20 December 2017

China has announced plans to roll out a nationwide system that will force polluters to repair damage to the environment or pay compensation by 2020. 

The Communist Party of China Central Committee and the State Council issued a document on its website, which stated that it would establish a comprehensive damage-compensation system to protect its environment in the next three years. 

It said individuals or companies that cause environmental damage would have to help restore the environment or pay compensation if the damage is beyond repair. 

It did not give details on the amount of compensation that would be due but added that the penalties were aimed at holding companies accountable for the clean-up costs and restoring the ecological balance after major accidents. 

The move extends a scheme already piloted in seven provinces and marks the latest step in a crackdown on pollution that has been ramped up by the government this year. 

Many areas of China suffer from severe levels of pollution and there have been a series of major toxic chemical spills that have contaminated rivers and killed fish in recent years.

Under the leadership of president Xi Jinping the country initiated several crackdowns on heavy polluting industries that were non-compliant with current environmental regulations, shutting down some factories and holding officials accountable after central inspections. 

The measures have affected businesses in various sectors and have had a rippling effect throughout the economy. 

The sectors most severely impacted by the anti-pollution drive have been textiles, energy, heavy metals, coal and gas, mining, automotive and consumer goods, with the impact also expected to shock international supply chains due to disruption in exports from China, according to China-Briefing.

German vehicle parts supplier Schaeffler Group, which supplies both locally owned and joint venture carmakers in China, suffered a temporary supply chain crisis in September after local authorities shut down a key supplier due to environmental violations. 

Schaeffler were only notified the day after local authorities cut off power and water to their only supplier of needle bearings, Jielong Metal Wire Drawing

A letter leaked online, which Schaeffler later confirmed was legitimate, showed Zhang Yilin, Schaeffler Greater China CEO, pleading with authorities to reverse the closure, claiming it could take three months to replace the supplier, leaving 49 automobile producers in China without key parts and preventing 3m vehicles from rolling off the lines as planned, with an estimated economic impact of US$43bn. 

In response, the Shanghai Pudong New Area Environment Protection Bureau told Xinhua that the company’s supplier should have advised their customers earlier given that letters were sent in late 2016 and early 2017 giving notice of the final shut-down action. 

“Jeilong and Shaeffler had nine months to communicate and adjust, so they should not feel this is has been sudden,” it said. 

“When choosing a supplier, the German company should consider whether it obeys China’s environmental rules.”

It added that the supplier was on a list of known violators of environmental regulations and was therefore operating illegally. In addition to cutting power and water, authorities demanded the company dismantle production facilities to ensure the plant could not return to illegal practices.

Schaeffler have since announced the company would re-route sourcing from its India arm INA Bearings—a supplier of engine, transmission and chassis components including needle bearings.

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