Shock waves in China

A German auto parts manufacturer discovers the importance of overseeing their upstream supplier’s environmental regulatory compliance in China.

A prominent German auto parts manufacturer, recently made headlines in the Chinese press, when it pleaded to local government agencies to delay the imposition of an environmental law penalty imposed on one of its key upstream suppliers.

On 18 September 2017, an urgent letter was publicly released to local governmental agencies in Shanghai to plead for a three-month stay of a shutdown penalty imposed on its metal wiredrawing supplier, Jielong Metal Wiredrawing Co., Ltd.

In this letter, the local CEO of the auto parts company explained that Jielong is their sole quill roller supplier and its sudden shutdown would break the supply chain, forcing them to take at least three months to find an equivalent supplier. The CEO described this matter as ‘critically urgent’, because the broken supply chain would negatively impact their supply to the major Chinese auto manufacturers and lead to an overall economic loss of 30 billion CNY (approximately USD $4.5 billion).

In early September 2017, Jielong was ordered by the local government to stop production and dismantle production equipment because they lacked the required Environmental Impact Assessment report. Before this order, the company had been identified by the Environmental Protection Authority in a nation-wide joint enforcement as ‘illegally established and operated’ and were required to shut down. The local government had ordered the company to stop production twice before, in December 2016 and March 2017. In September, they enforced the shutdown of the facility by cutting off their water and power. It was reported that Jielong already has a history of environmental law non-compliance, receiving administrative penalties for violating air pollution laws twice in the past, and discharging wastewater in excess of emission standards. The company is also on the list of polluters under key supervision at the county-level government.

The emergency letter triggered an enormous sensation in the Chinese press and the public opinion is divided regarding this issue. On the one hand, some commentators sympathize with the Chinese arm of the German company impacted and blame the ‘one-cut’ or ‘campaign’ form of environmental protection enforcement, which sacrifices economic growth and employment. On the other hand, many commentators also applauded the stringent enforcement action which safeguards the rule of law and ascribes the cause of the emergency to the auto parts supplier’s long-term ignorance of sustainability in supply chains and failure to live up to their own corporate responsibility.

Governmental responses to this development remain consistent. The local government has declined the plea from the German auto parts supplier and explained that during a nine-month period, Jielong had been given sufficient time to inform their customers of the issue. Those customers should have taken their supplier’s legal compliance into account. The Ministry of Environmental Protection also firmly supported the local government by declaring “pollution control with an iron fist” and the irreversible trend of strengthened environmental supervision.

In the past, enforcement had been regarded as the weak link in implementation of Chinese environmental law, largely because Chinese environmental protection agencies lack sanction tools with sufficient deterrence, and local governments give more emphasis to economic growth. However, due to severe environmental pollution, the situation has changed in recent years with increasingly stringent sanctions on illegal polluters.

For example, Chinese environmental protection agencies can impose daily-based continuous fines on polluters if they refuse to correct non-compliant activities after being ordered to do so. In May 2017, the Ministry of Environmental Protection further strengthened this rule by enabling environmental protection agencies to impose continuous fines more easily and without a ceiling. From January to July 2017, 622 cases emerged with imposed continuous fines amounting to in a total 761 million CNY (approximately USD $114 million).

Environmental protection agencies can also directly order companies discharging pollutants in excess of emission standards to reduce or suspend production, while in the previous regime they could only adopt these measures if polluters did not correct non-compliant activities within a time limit.

To strengthen enforcement at the local level, the Ministry of Environmental Protection has waged a strict one-year inspection, starting in April 2017, over air pollution prevention and control in northeast China (including Beijing, Tianjin, and major cities such as Hebei, Shanxi, Shandong, and Henan). This is described by the press as ‘the largest national-level inspection on record’ or ‘an environmental protection storm’ as many non-compliant companies were ordered to be shut down. While there is discussion about the ‘one-cut’ form of campaign-like legal enforcement, there is an obvious signal that the Chinese government is treating environmental compliance seriously and will switch from a highly polluting economic growth pattern.

Apart from administrative penalties, companies and their liable executives (such as CEOs and legal representatives) may face more stringent criminal and civil sanctions. For example, with the introduction of public interest litigation brought by civil organizations or prosecutors, the number of environment-related lawsuits increased and criminal penalties had been imposed on approximately 27,000 people between July 2016 and June 2017.  The most expensive ecological damage compensation case arose in August 2017 because eight polluting companies were illegally dumping waste in the Tengger Desert. They agreed in a judicial mediation to pay 569 million CNY (approximately USD $86 million) to restore contaminated land and another 6 million CNY (approximately USD $903,433) for a public fund.

With this strengthening of environmental law enforcement, foreign companies with facilities in China should take legal compliance seriously and commit to their corporate responsibility of overseeing sustainability in their supply chain.