China losing cost advantages which made it factory of the world

Poor environmental awareness and data blamed as Chinese companies face fierce competition from other developing countries.

SGS China is a third-party certification body. Xin Bin is northern China director of the international certification department and Chang Jiansong senior project manager.

chinadialogue: How have attitudes towards green development evolved among Chinese companies?

Xin Bin: The first Chinese firms to worry about this were manufacturers working for export markets.

Those companies were supplying overseas brands, and had to meet the needs of their customers. About 20 years ago, such requirements were about the quality of the product itself, but by the mid-1990s they covered workplace health and safety, treatment of employees, community relations and environmental policies, and later we saw a series of environmental and social guidelines issued both inside and outside of China.

Concern about carbon emissions is a more recent phenomenon. Three to five years ago, many international brands had low-carbon requirements. Most Chinese firms didn’t think those standards were anything to do with them, but they very quickly started to affect procurement decisions.

Before the 2008 financial crisis, low-carbon was a big thing. Afterwards, as the economy slumped, companies started to worry more about economic pressures, and so low-carbon demands slackened off somewhat. But pressure from the Chinese government has grown.

In 2011, China’s top economic planner, the National Development and Reform Commission, released a document called the “10,000 company action plan for reducing energy use and carbon”. Energy-hungry companies around the country signed energy-saving commitments with local government to make sure the country can meet the 12th Five Year Plan target of a 16% drop in energy intensity [the amount of energy consumed per unit of GDP]. 

During our work we have found that more intense government pressure when it comes to energy and emissions has been a strong motivator for companies.

One thing is certain: more and more Chinese firms are realising that a low-carbon future is inevitable. In 2005, just nine Chinese companies published sustainable development reports. In 2011, the figure was 898. In early 2009, the State-owned Assets Supervision and Administration Commission required central state-owned enterprises (SOEs) to publish social responsibility reports within three years. The number of central SOEs doing this has risen from five in 2006, to 76 in early 2011 – that’s 65% of all central SOEs.

cd: Which area of your business has grown the most?

XB: We’re seeing a constant rise in demand for carbon auditing and low-carbon management. In 2011, we started ISO 14064 certification of greenhouse-gas emissions in the property and dairy sectors. Subsequently, business around carbon and water footprints and transparency developed, with companies or their investors or customers making more detailed and specific requests. That’s a natural trend.

cd: What motivates Chinese firms to save power and cut emissions?

XB: There are two key motives. One is the pressure to improve that comes from being part of an international supply chain, and the other is government policy. 

Twenty years ago, only the first of these was pushing Chinese firms to become greener. But since the 12th Five-Year Plan got under way, the second has become more and more important.

The firms listed in the National Development and Reform Commission’s action plan account for 60% of total energy consumption. State-owned companies have no choice but to comply with government demands – they have to act. In some sectors, emissions reduction isn’t even a matter of debate any more. In the power sector, for example, all new power stations are using the most advanced technology available. There is very little left to be done on the technology front, and attention now needs to turn to management. That means Chinese companies need to increase their overall efficiency.

If China goes on to impose a carbon tax and mandatory carbon inventories, that will be a massive spur to small and medium sized firms.

cd: What are the biggest obstacles to Chinese firms becoming more sustainable

Chang Jiansong: The first is awareness. Many Chinese firms aren’t aware of carbon inventories, and have no clear understanding of what carbon audits or carbon management are. Low-carbon is still a phrase for marketing materials, rather than an opportunity to save energy or cut emissions, take action and achieve effective carbon management.

Also see: China’s low-carbon zones lack motivation, guidance and ideas

Next is a lack of data. In our carbon inventory projects we have found that almost every firm lacks detailed and comprehensive data on carbon emissions. If we ask how much power they’ve used they can tell us what the meter says. But how much was used at each stage of their business, which part uses most power – they don’t keep track of that. In the end, it’s very difficult to ascribe power use per final product. You can’t manage what you don’t measure, and if companies aren’t gathering carbon emission data, you can’t start to talk about cutting those emissions, much less effectively meet the government’s target of a 17% cut in carbon intensity [carbon emissions per unit of GDP].

There’s also a lack of an accepted methodology. Greenhouse-gas inventory methods designed for the company or organisation level vary. In some sectors, or with some processes, there are no accepted methodologies, and so no way for calculations to be widely recognised.

The government could do more on this by providing data on sector averages so that companies can compare themselves both horizontally and vertically. There’s little chance of industries doing this of their own accord, it needs to be done on a single platform.

cd: How are Chinese firms responding to a greener market environment?

XB: At the lower end of the industry chain, they face more environmental and social problems. Most Chinese firms today are low-end manufacturers, and they can’t compete on efficiency and added value. In the future they will face more competition over standards. Simple expansion, as happened in the past, was actually an over-reliance on cost advantages, and that’s no good for the company’s long-term development.

China is also facing competition from neighbouring developing countries. Many emerging economies are building factories with advanced equipment and processes, and the EU and US are exporting some new technologies to those countries, not China. China is losing the cost advantages which made it the factory of the world.

Chinese companies have no choice but to become more efficient.