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Business trends

China's pollution controls catch foreign companies flat-footed

Fines and suspensions show days of 'rules but no crackdowns' are over

China has been tightening its environmental regulations in the face of alarming air pollution that often blankets cities such as Beijing. (Photo by Akira Kodaka)

TOKYO -- International companies with seemingly sterling environmental credentials are being caught off guard as China rapidly tightens its green regulations. Some have been hit with fines or orders to shut down, forcing them to either retreat or spend heavily on upgrades.

"China now has the toughest emissions standards in the world," said an official of Japan's Toppan Printing. "We have introduced environmental measures, but the regulations have been tightening faster than expected."

The company was fined 2.35 million yuan ($368,000) in March 2017 for violating China's air pollution standards at its Shanghai wrapping film plant, which was ordered to partially suspend operations. It has since spent several million dollars to introduce a new emissions treatment system and other upgrades, resuming full operations in April this year.

Toppan is not the only major player to find itself in hot water in China. Plants or affiliated companies of Toyota MotorAsahi KaseiDaikin Industries and Mitsui Chemicals have been fined or ordered to suspend operations. German auto parts maker Schaeffler, which does business with the Chinese joint ventures of automakers like GM and Volkswagen, faced a crunch last September when a supplier was hit with a shutdown order. 

There has been an "about-turn" from the days when China was said to "have rules but no crackdowns," said Takahiro Honma, a lawyer well-versed in the country's environmental regulations. In the first 11 months of 2017, nearly 8,000 orders to restrict or suspend operations were issued to manufacturers, according to Chinese government data.

China began tightening its environmental regulations in January 2015, overhauling its environmental protection law for the first time in about 25 years in the face of alarming air pollution.

The new law was designed to give the government a larger role in protecting the environment. For example, the government is now required to draft mandatory emission standards. The new law has also removed a cap on how much noncompliant companies can be fined.

The law also has a mechanism to allow environmental groups and others to sue companies for damages caused by pollution.

China's laws have been strengthened in a number of specific areas, such as air pollution, water and soil contamination, and the disposal of solid waste. The country has introduced regional controls on total volumes of pollutant discharges. In January, the government began collecting a tax based on the amount of pollution discharged.

Of 190 Japanese companies operating in China, around 37% received guidance on environmental regulations during the preceding 12 months, according to a survey conducted in December by the Shanghai office of the Japan External Trade Organization.

About 80% of the companies found the regulations "strict," and 4% said it was difficult to continue doing business in China because the regulations were "too strict."

"Some companies, especially small and midsize ones, have retreated from China," said a lawyer who has advised Japanese companies operating in the country.

This raises the question of why some companies have been unable to keep pace with China's tightening regulations, even though they have been proactive in introducing environmental protection programs.

In many cases, Japanese companies tell their Chinese subsidiaries to address the regulatory changes, leaving them to respond accordingly, said Yasumasa Shimizu, CEO of Sustainable Technology of Ecology, a Shanghai-based environmental consulting company. But leaving the local subsidiaries to handle the problems on their own often exacerbates the issues, Shimizu said.

In 2015, a Chinese executive at a joint venture with a Japanese logistics equipment maker in the city of Dalian, near the Korean Peninsula, was sentenced to a year in prison for serious violations of environmental rules. But according to a company representative in Japan, the head office did not know the details of the case, as it had left the management of the plant to the joint venture.

The plant of another manufacturer in Shanghai was fined for faulty waste storage in 2016 and 2017. Although the company had instructed its local unit to comply with regulations, the measures proved insufficient. As a result, the company has begun issuing instructions directly from head office.

Multinationals need to effectively respond to the stricter regulatory environment, including collecting relevant information and making necessary investments. Such initiatives need to be spearheaded by head offices, rather than left to the local units, experts say.

"Time, effort and cost are needed to deal with the rapid strengthening of regulations. So it is essential that corporate headquarters are involved," Shimizu said.

"The assumption that Chinese regulations are sloppy, and that Japan's environmental measures are perfectly fine, is causing a delay in the response," he added.

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